Electricity Demand In U.S. Manufacturing Falls: Boon Or Bane?

Economic growth of a country is generally determined through its infrastructural developments, industrial growth, foreign trade relations, agricultural capacity, technological advancements and many more. The U.S. economy has exhibited impressive growth, with its Gross Domestic Product (GDP) rising roughly 9.5% in the past five years.

The road ahead seem to be quite smooth for the country with an expanding global economy — as evident from the International Monetary Fund’s (IMF) growth projection of 3.9% for 2018 versus 3.7% in 2017 and 3.2% in 2016 — and domestic reforms — like the implementation of Tax Cut and Jobs Act in December 2017, enabling corporates to invest more in growth projects — likely being the prime accelerating forces. However, roadblocks — like import tariffs on steel and aluminium and its subsequent impacts in the form of retaliatory measures by foreign nations — cannot be completely overlooked.

The country’s equity universe has responded well to all the developments in the recent past. Major stock indexes including the S&P 500, Dow Jones Industrial Average and NASDAQ surged 10.4%, 15.2% and 18.3% respectively in the last year. We believe the country’s fundamentals are strong enough to counter challenges.

Favorable Indicators — U.S. Manufacturing in Focus

A lot of economic indicators support the country’s growth trajectory. GDP grew 2.3% year over year in 2017 while its expansion rate has been estimated at 2.7% for 2018 by the IMF.

The housing market has strengthened over time, while unemployment rate fell from 4.7% in February 2017 to 4.1% in the comparable month this year. Also, governmental investment plans for infrastructural development, when implemented, will boost growth opportunities for a number of industries.

Industrial production — a key economic indicator measuring the level of output of manufacturing, mining and utilities sectors in a country — expanded 4.4% year over year in February. This marked the highest increase on a year-over-year basis since March 2011. Mining expanded 9.7%, utilities 10.5% and manufacturing 2.5%.

Also, month-over-month growth of 1.7 percentage points in the ISM Purchasing Managers’ Index or manufacturing index for February suggests expanding economic activities in the manufacturing sector. Healthier business conditions, favorable export orders and production, solid backlog and employment growth were some of the supporting aspects. Moreover, roughly 83% of the 18 manufacturing industries flourished in February, such as machinery, print and related services, primary metals and metal products.

Electricity in Manufacturing Sector

Generally, an expanding economy tends to demand more electricity. From 2000 to 2017, electricity consumption in the United States grew 6.3%. Electricity is considered vital in nearly all the forms of manufacturing industries and in nearly all the stages of manufacturing process.

As a rule of thumb, electricity demand should have spiked in this sector as well. On the contrary, data available from 2006 to 2016 suggests that electricity demand in the manufacturing sector declined in these years. Does the fall in electricity demand suggest poor performance of the sector?

Actually, decline in electricity demand in the sector can be primarily attributed to a growing trend among manufactures to produce electricity at their operation sites. This onsite electricity generation has enabled manufacturers to satisfy their electricity needs internally to some extent — varying from 11% to 13% from 2006 to 2016. Electricity purchases from the grids have hovered around 87-89% range over the same time period.

Technological advancements as well as governmental incentives/grants have been aiding manufactures to set up electricity generation systems at their sites. Combined heat and power (CHP) technology is one of the favored means. This technology helps in efficient usage of electricity, absence of electricity lost in transmission and provides other operational benefits.

Available data suggests that nearly 97% of the total 110 million megawatt hours of electricity produced by U.S. manufactures in 2016 came from primary metals, food, paper, petroleum and coal and chemicals industries.

We believe that companies in these industries might be of interest to investors wishing to gain from the expanding manufacturing sector in the United States.

LyondellBasell Industries N.V. (NYSE:LYB) : The company, with $40.7 billion market capitalization, is one of the leading plastics, chemical and refining companies in the world. It operates in 18 countries and serves a large customer base in electronics, automotive parts, packaging, construction materials and biofuels end-markets. Expansionary projects and its frequent acquisitions will boost the company’s growth in the quarters ahead.

The stock currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

In the last year, the stock yielded 13.1% return, outperforming 5.9% gain of the industry it belongs to. Also, in the last 60 days, earnings estimates for the company improved by 12.9% to $10.75 for 2018 and by 14.3% to $10.36 for 2019.

LyondellBasell Industries N.V. Price and Consensus