By Timothy Aeppel
Cheaper oil is creating winners and losers among America's
factories.
Manufacturers who use oil and products derived from it are
saving big money. But energy development has been a hot spot in the
post-recession U.S. economy, benefiting producers of everything
from steel pipes and valves to earthmovers. Those companies are now
being squeezed.
Among those feeling the pinch is Dover Corp., which earns a
quarter of its revenue from selling pumps and other heavy equipment
to energy companies.
"Clearly there are near-term challenges in front of us," Chief
Executive Bob Livingston told investors in New York on Monday.
Dover said it hasn't yet seen a pullback in oil drilling, but the
company is cutting costs and re-evaluating some investments in
anticipation of reduced oil exploration in the U.S. next year.
General Electric Co. in October cut projections for future growth
in its oil and gas business, adding it was monitoring the sector
with "caution."
Rockwell Automation Inc. also is weighing what cheaper oil means
for its bottom line. The industrial equipment maker counts on the
oil and gas industry for about 12% of its sales. CEO Keith Nosbusch
said there is a "teeter-totter" taking place across the economy as
businesses that benefit from cheaper oil prepare for more sales,
while others move to retrench.
"Everyone who uses oil as a feed stock--from chemicals to
consumer industries--are going to benefit," he said. That could
mean more sales of Rockwell's industrial controls, motors and
sensors to those industries. Meanwhile, oil drillers won't stop
investments entirely, he said, and are likely to spend more on
productivity-enhancing equipment. Rockwell, for instance, sells
devices that let drillers monitor the output from wells without
sending workers around in pickups to record measurements at each
drilling site, shaving labor costs.
U.S. manufacturing has been a bright spot in the recovery,
though it is far from booming. Manufacturing output grew 3.4% over
the past year and finally recovered this past summer to its
prerecession level, according to the Federal Reserve.
How falling oil prices impact manufacturers will depend on how
low crude goes and how long it stays there. Oil continued its slide
Wednesday after the Organization of the Petroleum Exporting
Countries cut forecasts for global demand for its oil next year.
The benchmark U.S. oil price on Wednesday fell to $60.94 a barrel,
the lowest level since July 2009 on the New York Mercantile
Exchange.
If prices fall much further and stay down, it will mean sharp
cuts in investments that reverberate through the manufacturing
supply chain. ConocoPhillips became the first oil major to announce
such a move, earlier this week saying it would cut its capital
spending to $13.5 billion next year, down 20% from this year's
level.
Still, the larger picture for manufacturers remains
positive.
"The fall in oil definitely cuts both ways, but I see the net
demand for manufacturers going up," as it stimulates more spending
in other parts of the economy, said Dan North, lead economist for
North America at Euler Hermes Economic Research in Owings Mill, Md.
He points to auto sales, which notched their strongest November
sales rate since 2003 last month.
"I don't think it's a coincidence that we're getting sharp
increases in [auto] sales at a time of sharp decreases in gas
prices," said Mr. North.
Goodyear Tire & Rubber Co. supplies tires to companies that
do oil exploration and acknowledges its sales to those companies
may decline in the months ahead. But that is far outweighed by the
benefits Goodyear gets from cheaper oil, said spokesman Keith
Price. Two-thirds of the company's raw materials are derived from
petroleum, including synthetic rubber and carbon black.
The company reported its raw material costs fell 6%
year-over-year in the third quarter, though part of that reflects
cheaper natural rubber. It takes time for lower oil prices to
filter through to its suppliers, which is why Goodyear predicts its
raw material bill will keep falling through the first half of next
year.
"But what really helps us," said Mr. Price, "is that as gas
prices fall, people tend to drive more--so their tires wear out
faster."
Don Norman, director of economic studies at the MAPI Foundation,
a manufacturing research group in Arlington, Va., agrees cheaper
oil benefits most manufacturers. "Overall it's a positive," he
said. "Manufacturers benefit because of lower prices, including
lower shipping costs. And consumers spending less on gas and
heating oil means they'll be out shopping."
The farther a business is removed from the actual production of
oil, the more clear the benefits. At Northland Aluminum Products
Inc. in Minneapolis, for instance, orders for its trademark bunt
pans and other baking gear surged in late September and CEO David
Dalquist thinks falling oil prices are to thank.
With prices falling at the gas pump, Mr. Dalquist said retailers
suddenly boosted orders for the holiday season. Business has now
surged 15% above his projections made this summer. "We see a
one-to-one relation between discretionary income and the price of
gasoline," he said. Northland hasn't seen any declines in raw
material prices, but Mr. Dalquist said he expects that
eventually.
Ted Mann contributed to this article.
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