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Energy cost advantages could benefit local manufacturers

While there are many downsides to the soaring cost for oil and gas and the declining value of the U.S. dollar, there may also be some surprising benefits. The declining dollar makes goods manufactured domestically less expensive in other countries, and high energy costs make it more expensive for China and other countries to ship goods into the U.S.

The value of the U.S. dollar against world currencies has made the cost of Mississippi goods and services more competitive and attractive to overseas buyers, said Liz Cleveland, manager, International Trade Office, Global Business Division, Mississippi Development Authority (MDA).

“The increase in our export sales in 2007 to more than $5 billion in manufactured goods shows that Mississippi firms can be competitive in the global economy,” Cleveland said. “The continued rise in the cost of oil will certainly have an impact on this growth, but we are working to expand markets and increase the number of Mississippi exporters to keep our economy globally competitive and healthy.”

Canada and Mexico are Mississippi’s biggest customers, accounting for 39% of Mississippi’s total merchandise exports in 2007. Cleveland said both represent stable economies, and both are relatively close in proximity with established transportation infrastructure.

“Canada is also developing new routing for inbound and outbound freight with China that will offer new transportation options for mid-South exporters and importers,” Cleveland said. “With the completion of the Panama Canal expansion, ships from Asia will have direct access to the Gulf of Mexico, providing opportunities for Mississippi ports and airports and relief for exporters from high transportation costs to Asian markets.”

Increased investment could be another positive economic impact for Mississippi. Cleveland said foreign firms that have North America as a major market for their products could also be looking at the advantages of manufacturing in the U.S. to offset their rising transportation costs, especially if raw materials are being purchased in the U.S.

“Mississippi is a great location for facilities to manufacture and distribute product for the Americas,” she said. “The Global Business Division of MDA is working to maintain and increase export opportunities by providing marketing services to Mississippi firms. The MDA is also aggressively marketing Mississippi to U.S. and foreign firms as a prime location for business expansion and investment.”

Increasing transportation costs are changing the whole dynamic of world trade, said Jay Moon, president and CEO of the Mississippi Manufacturers Association. The cost of moving a container from Asia to the U.S. has gone up tremendously as the price of diesel has soared.

“As the cost of gas and diesel has gone up, it is less competitive for counties like China to move products into the U.S., and has made U.S. products more competitive and sought after,” Moon said. “It used to be the cost of moving a 40-foot container was really negligible. And since China has favored nation status, it didn’t have to pay duties. Now, the cost of transportation has escalated. It has almost doubled. If we have a barrel of oil going up to $200, it is going to cost $15,000 to ship a container from China.”

Some companies are looking at either expanding in the U.S. or opening an operation in U.S. or somewhere nearby such as Mexico, which would offer some ability to reach U.S. markets easily even though costs will be going up to ship from Mexico, as well. Moon said that is definitely something that is being looked at by manufacturers.

“Some foreign countries have low labor costs, but now that the cost of transporting products to U.S. has gone up, it really offsets the low labor costs,” Moon said. “That has been wiped out by increased transportation costs. That is why manufacturers who sell to U.S. markets are considering that it might be a good idea to build a factory in the U.S. It is a reverse investment, an investment by international customers in the U.S. to develop to sell in the U.S. market rather than manufacture foreign and ship in. This is still the biggest market in the world, and the market everyone wants to sell to.”

On the flip side, shipping costs would also go up for U.S. exporters. But Moon said that could be offset by the benefit from the weakened dollar on increased exports.

“U.S. products are more competitive in the global market,” he said. “In 2006, Mississippi exported $4.6 billion worth of products. That rose to $5.21 billion in 2007. And the state’s two biggest markets, Canada and Mexico, are accessible by other than ships. They can be moved by truck and rail.”

Manufacturers are finding major challenges in responding to the increased energy costs. In some cases, manufacturers are raising prices on their products on a regular basis to reflect high energy input cases. But manufacturers competing in the global marketplace can’t always increase their costs.

Manufacturers as a whole nationwide are consuming approximately a third of the energy being used in the country.

“They are big users of energy, and particularly use a lot of natural gas and electricity,” Moon said. “It also affects the price of their supplies. A lot of suppliers don’t have their own trucks, so they have to use independent truckers to bring in supplies and ship out product. All that gets passed along to the manufacturers, which have to see how much they can absorb and how much they can pass on to the consumer and stay competitive at the same time. Energy is a big issue for us, and it is one we are looking at very closely because of the impact.”

High energy costs combined with increased worldwide demand are also affecting greatly the cost of supplies such as steel and other metals. It used to be that foreign steel manufacturers commonly sold steel in the U.S., but now a lot of foreign manufacturers have other closer markets for their product.

“The cost of steel has gone up tremendously along with every other kind of metal used in the manufacturing process such as nickel, zinc, aluminum and cooper,” Moon said. “The price has gone up so fast because of the demand from developing markets in Eastern Europe and Latin America and Asian markets such as China and Vietnam. All of these markets are absorbing more and more of these commodities in their manufacturing processes, so there is much higher demand than every before.”

Contact MBJ contributing writer Becky Gillette at 4becky@cox.net.

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