America’s salvation is an industrial renaissance – Telegraph.co.uk

To describe this as a game-changer is not overstating it. The implications are
significant, not just for the US economy, but in geo-political terms, too.
What, for example, might the US’s strategic interest in the Middle East be
if its economy is no longer hostage to a shutdown of the Strait of Hormuz?

The Fifth Fleet’s protection of the sea lanes in the Persian Gulf comes with
an estimated price-tag of $60bn to $80bn (£38bn to £50bn) a year. What more
productive use might that sort of money be put to?

Shale turns on its head the entire energy debate. Ever since Shell’s M. King
Hubbert predicted in the 1950s that US oil production would peak in 1971,
energy policy has been premised on scarcity; now it’s all about abundance.
In the US, shale has positive implications for all the main contributors to
economic output: consumption (because of lower energy bills); investment (in
drilling technology and industries that could benefit from lower input
costs); and net exports (if only because of lower energy imports).

For investors, the most significant factor is the massive competitive
advantage the US has been gifted by the widening gap between the cost of
natural gas in America and the rest of the world. Gas is expected to be 50pc
to 70pc cheaper in the US than in Europe and Japan, which means lower costs
for electricity generation, cheaper fuel for industrial plants and lower
feedstock prices across a whole swathe of industrial processes from
chemicals to fertilisers, steel and plastics.

The immediate consequence of this has been a surge in investment in US
factories and the repatriation of manufacturing from lower-cost countries in
Asia and Latin America. Chemicals plants that couldn’t hope to compete when
gas was $14 per thousand cubic feet a few years ago are suddenly hugely
profitable at $2.

Whole industries like the manufacture of plastic toys, thought lost forever to
US-based companies, have been made viable once again by shale. That, in
turn, creates opportunities for other ancillary businesses.

But the winners and losers will not be evenly spread, so the importance of
research and stock-picking cannot be overstated. Likely beneficiaries
include energy explorers with significant shale assets such as Pioneer
Natural Resources; oil services companies with expertise in fracking such as
Schlumberger and Halliburton; refiners like Valero that will benefit from
cheaper feedstock; pipeline manufacturers such as Williams Brothers; and
chemicals companies like Eastman.

On our side of the pond, Weir
Group is an engineering company with interests in the hydraulic
pumps used in shale rigs, while Elementis
makes chemicals to cool drills during the extraction process.

Who would have predicted that America’s salvation would be an industrial
renaissance?

Tom Stevenson is an investment director at Fidelity Worldwide Investment.
The views expressed are his own. He tweets at @tomstevenson63