Most people are avoiding the “R” word, recession, in describing the American economy. But Mark Leggett, director of government affairs for the Mississippi Manufacturers Association (MMA), says there is no doubt U.S. manufacturing is in a recession and that high energy costs are part of the problem.
“People think if manufacturers have to pay higher prices for fuel, they can pass those costs on to the consumer,” Leggett said. “But you can’t do that anymore because some guy in Indonesia can make it cheaper. With international competition, manufacturers can’t raise the prices of their products to compensate for higher energy costs. What’s happening is that the higher fuels costs are having to come off the bottom line. We just have so many companies that are struggling at the moment. And this is just one of the burdens they have that hurts their bottom line.”
Leggett said he can’t say for certain that high energy costs are behind the recent spate of manufacturing plant closings in Mississippi. But he believes that is a major factor affecting the bottom line when owners evaluate whether to keep a plant open or close it down.
Manufacturers can be affected in several ways by the high energy prices. First, many rely on natural gas to provide fuel for the manufacturing process. Second, higher electricity prices have resulted from the surge in prices for oil products. Third, many manufacturers use natural gas as a feedstock to make raw materials that are used to manufacture the products.
According to MMA, thus far this year in four and a half months the state has seen 31 plant closings affecting 6,000 workers in the state. That’s only five short of the 36 plant closings for all of 2000, which only affected 3,500 workers.
The peak year for plant closings was 1995 when 59 plants closed putting 9,000 people out of work. The second worst year in the past 20 years was 1985 with 58 closings affecting 6,300 workers.
“The state is on track for this to be one of the worst years for plant closings in the past 20 years,” Leggett said.
When the U.S. had an oil crisis in the 1970s, product prices went up to compensate. Leggett theorizes that because it is now more difficult to raise product prices because of world competition, instead those higher energy costs are translating into layoffs.
Sam Moore, president of Double G Coatings Inc., LP, Jackson, a continuous hot-dip galvanizing and galvalume coating operation, said most people probably don’t realize the amount of energy used in manufacturing operations. For example, Double G Coatings on average uses the equivalent amount of natural gas used by 4,400 average-size homes, and its average electricity usage is equivalent to that used by 2,100 average-size houses.
“We have seen natural gas prices rise between two to four times of what they were two to four years ago, and we have seen electricity costs rise to 20% more than what they were a year ago,” Moore said. “And we have no opportunity to pass on the extra energy costs to our customers. In fact, the prices for steel products are basically what they were 30 years ago. It is very difficult to stay in business, and that is why there are so many companies that are going belly-up right now.”
Moore said the problem with high energy costs is supply and demand. He said more energy production is needed and that while conservation is certainly a part of the equation, it is never going to be the entire solution.
“We have to have more output, which means more electricity generation and more natural gas production, and all the infrastructure that goes with it,” Moore said. “The economy has expanded faster than production, and that is part of the problem.
“Another big part of the problem is that we have employed 15,617 people plus 101 private contractors in a governmental agency called the U.S. Department of Energy that has been in business for 24 years and we have no national energy policy, nor a strategy for national long-term energy supply. That’s the crux of the issue. We have to have a plan, we have to have a strategy, and we have to implement it. And the strategy is probably going to include more nuclear generation.”
Moore said high energy prices are a significant reason that at least 19 steel producers have filed bankruptcies in the past two years.
Some people might question why foreign manufacturers aren’t being hit equally as hard as U.S. manufacturers by the higher energy costs. But State Economist Dr. Phil Pepper said the U.S. is more capital intensive in production of goods than many other countries. The U.S. uses more energy whereas other countries oftentimes use more manpower.
There were trends reducing manufacturing employment in Mississippi long before the present energy crunch. There are 25,000 fewer jobs in Mississippi in manufacturing than 10 years ago, a loss of about 10% of the state’s manufacturing jobs. Most of those jobs were lost since 1994, the post-NAFTA days.
Contact MBJ staff writer Becky Gillette at firstname.lastname@example.org or (228) 872-3457.