PVF sector continues solid growth into 2007
BY MORRIS R. BESCHLOSS
PVF and economic analyst
To quote a memorable line from one of Frank Sinatra’s more unforgettable tunes, “It was a very good year.” This applies emphatically to the renaissance of last year’s pipe-valve-fitting business and its predicted momentum well into next year.
From my own personal reflection, it was the perfect year in which to celebrate my half-century mark in this industry. In that year, I was also blessed by receiving the acclaim of my college (University of Illinois Communications) with the first ever Distinguished Alumni Award and recognition by my industry colleagues at the ASA meeting in Chicago, where it all started on October 1, 1956. On February 20, 2006, I received the ultimate award -- PVF Roundtable founder Sid Westbrook’s presentation of the Lifetime Award for my services to the PVF Roundtable, as well as the PVF industry in general.
Speaking of the Roundtable, it is embarking on a bright new future under the direction of my long-term colleague and PVF industry expert Don Caffee.
At the first official meeting that he administered at the Hess Club in Houston, 140 PVF industry manufacturers, distributors, turnkey constructors, engineers, etc., showed up. We had one of the biggest assemblies ever. Robert Workman, president of Distribution Services, National Oilwell Varco, gave a superb presentation, indicating the caliber of programs to be expected in the future. Workman will be the subject of a Q&A in the June issue of The Wholesaler. The Roundtable is a must for all levels of involvement in the pipe-valve-fittings sector, which is becoming an increasingly significant factor in the $70 billion plumbing-heating-cooling-piping industry. The PVF Roundtable will also continue to join The Wholesaler in presenting a Blue Ribbon panel session at the upcoming ASA annual meeting in Anaheim, Calif., October 24-27. The exact time and place will be announced in a forthcoming issue.
With four general assemblies a year (February, May, July, October), there is no other organization close to providing the information, the involvement and the comprehensiveness of all levels of the PVF sector. For complete information, call Don Caffee at 800/364-7171.
It is incumbent on all members of the PVF sector to come together under the umbrella of the only organization that targets all facets of this fast-growing industry sector.
Will low interest rates continue their run?
Is this continuing low interest rate environment for real? And how long will it continue? While the Federal Reserve Board has increased the federal funds rate 17 times since mid-year 2004 (from 1% to 5.25%), the higher end of the yield curve has barely budged. This has resulted in a near-inverted pattern, normally associated with an anticipated recession.
This circumstance has elicited questions by many readers, amazed at the similarity of yield between two-year notes and the 30-year bond. They can hardly believe that such an ongoing run of cheap money is continuing in light of a good economy, despite recent stock market volatility. With gold, silver and interest yields down, there is a disconnect between the recent stock market correction and continuing liquidity.
The present trend is particularly puzzling since the world economy grew by 5.1% in 2006 -- the second strongest global economic performance in 25 years. Even Europe and Japan, yesterday’s weak sisters, are in a recovery mode. On top of that, tech spending, which requires plenty of capital, is on a roll, with India and China joining the U.S. in greatly boosting this economic sector.
What’s even more puzzling is the interest rate’s downward direction of the 10-year bond, on which many mortgages rates are predicated. Just compare that note’s action since the year 2000, when it stood at 6.5%, and 2003, as it plunged to 4% in light of a tech bust, low inflation, weak capital spending and steep rate cuts by the world’s central banks. Today, in a much stronger economic environment, the 10-year treasury yields have risen only three-quarters of a percentage point from their lows. Adjusted for inflation, these notes have stayed practically the same. This phenomenon is widespread throughout major world currencies, with both the Euro and British pound derivatives experiencing a similar phenomenon.
Such financially sensitive experts as real estate magnate Sam Zell and Jim Paulsen, Wells Capital Management strategist, expect this low interest rate environment to continue for the foreseeable future. Some others even predict that such a cycle could be prolonged for the long-term pull, due to the unprecedented flush of money surging through the globe’s monetary arteries.
If such a fiscal change achieves reality, the impact on the global economy would be extremely positive. With money readily available at low interest rates, corporate capital investments are much easier to come by. Private equity firms, especially, are plunging heavily into the merger and acquisitions market, by using a mountain of cheap debt to buy companies at astronomical prices.
The purchase of Sam Zell’s Equity Office Properties by Blackstone Group for $39 billion would have been unheard of without the availability and low interest rates of the world’s money supply.
That’s why the rumored buyout of Chrysler by General Motors or others may not be as unthinkable as it once might have been. It could bring back the surge of leveraged buyouts that first became prominent in the 1980s. That $80-billion retail giant Home Depot is considering going private is symptomatic of this easy money climate.
This flush cash position has also cushioned the troubled housing market, which could have experienced a near crash in more normal times. It might even moderate the catastrophic impact of adjustable mortgage rate conversions if interest rates had spiked.
As this column has previously emphasized, the industrialization and simultaneous consumer sector development by China, India, Southeast Asia, Brazil, and the major oil powers such as Russia and OPEC has been the prime generator of this massive cash expansion. Although such a monetary overflow may cause some inefficiencies in how these monies get put to work, the global capital markets and the world economy as a whole, will be the ultimate beneficiaries.
Natural gas ‘OPEC’ ready to debut?
Get ready to brace for a new version of the Organization of Petroleum Exporting Countries.
But unlike OPEC, this emerging monopoly will encompass the world’s three nations that control well over half of global natural gas reserves -- Russia, Iran and Venezuela. This tight-knit troika exceeds the power of its older and larger OPEC brethren due to the control of such an overwhelming natural gas majority in a few, potentially hostile hands. Such natural gas power has already been exercised by Russia in wielding a heavy hand over the former Soviet Union satellites and others.
Although this agreement is not yet officially confirmed, Russian President Vladimir Putin called it “an interesting idea” in his annual state of the nation news conference earlier this year.
Iran’s head of the 12-man Supreme Council, the Ayatollah Khomenei, advocated this initiative in a recent discussion with a high-level Kremlin official. Despite its huge natural gas, as well as oil reserves, Iran lacks the advanced technology to extract much of its natural resources.
Although Venezuela has not yet been included in the preliminary discussions, Iran has already confirmed the plan’s essence with Caracas, which has responded positively. Hugo Chavez and company are also short on technological extraction knowhow, which is being worsened by the dictator’s threats of nationalization.
In addition to concentrating pricing supremacy in the hands of three international energy powers, whose policies are at odds with the U.S., this new triumvirate would gain new geopolitical strength, in addition to increasing its financial viability. With Russia retaining the technological capability to extract its maximum reserves, the Eurasian giant will be in a position to assist its new partners in enhancing their limited capabilities.
Once implemented, this new energy monopoly will be far more powerful and dangerous than OPEC due to its common foreign policy objectives, as well as the group’s economic needs and current budgetary shortcomings.
Although the price of natural gas stands to climb substantially, the effect will primarily be felt in Europe, the Mideast and Latin America. At present, the U.S. is relatively self-sufficient, but could eventually become dependent on liquid natural gas imports from high-price natural gas exporters. This would bring into play the Gulf State Qatar, which Putin visited on the first ever state visit by a Russian potentate. Qatar, a world leader in LNG, has shown interest in working with Russia and its partners to control world natural gas prices.
This is only the beginning of Russia flexing its economic muscles in the OPEC-controlled Mideast, previously out of bounds for the Soviet Union and its current successor state.
Turkey/Israel pipeline could shift Mideast power balance
Although regional pipelines are rarely recognized as progenitors of global power balance, the prospective agreement between Turkey and Israel to construct such a strategic connection may accomplish a seismic economic shift. Since Russia, the world’s leading oil producer and global runner-up exporter to Saudi Arabia, is asserting its energy muscle, this circumvention of Russia’s monopoly also carries geopolitical overtones.
With Russia in the process of exerting an energy stranglehold over much of the trans-Caucasian and Eastern European areas, a new pipeline could become a counterweight. It is now being considered for extension from oil center Azerbaijan’s Baku on the Caspian Sea through Georgia to Turkey’s Mediterranean seaport of Ceyhan, all of which avoid impinging any Russian territory.
Although oil and natural gas flowing through these pipelines was originally targeted for large tankers headed for Europe and elsewhere, such shiploads coming out of the Black Sea and through the Turkish Dardanelles are already overloaded. Such a glut of tanker volume has rapidly become a gigantic bottleneck, delaying badly needed deliveries for increasingly longer time periods.
Now comes news that Turkey and Israel have reached a memo of understanding calling for a $4-billion pipeline linking the Turkish port of Ceyhan and Israel’s Ashkelon seaport, also on the Mediterranean coast. From there, oil and even badly needed water for Israel could be piped to Elath, Israel’s port on the Gulf of Aqaba leading to the Red Sea. Continuing on, such varied utilities and others flowing through this multi-task pipeline could be trans-shipped to Asian markets.
With a $40-million feasibility study already underway to determine how best to implement such a titanic project in a the shortest time possible, what is most remarkable is that this giant project represents a realignment of geopolitical power as well as a circumvention of Russian hegemony.
Emanating from the oil-rich Caspian Sea, this contemplated multi-national pipeline avoids encroaching on Russian territory, thereby eliminating any attempted Moscow interference with free flow. With energy drawn from the Caspian Seas’s Azerbaijan-controlled sector, Russia’s influence and interference is effectively withheld.
It also reinforces the long standing Turkish-Israel military and economic alliance, which seemed to weaken under the current pro-Islamist Ankara regime. Although never verbalized, this Turkish-Israeli joint venture is sure to resolidify the nations’ political and economic ties.
It is also a victory for American policy, which favors a strengthening of the Turkish-Israeli alliance, while breaking the Russian monopoly over energy suppliers from the Caspian Sea. That source could potentially generate oil and natural gas volume exceeding that available from the militarily vulnerable Persian Gulf area. The successful completion of such a gigantic undertaking could also add Turkey’s considerable power to support the few moderate elements left in the Mideast.
Nuclear operators
The world’s nuclear operators have set a record for total power generation in 2006, according to preliminary data just released by Nucleonics Week, a publication of Platts, one of the world’s leading energy information providers and top suppliers of benchmark spot energy prices.
Led by notably improved output in Canada, Japan and Russia, and sustained performance in the U.S., South Korea and France, the world’s nuclear-generated power output is likely to hit 2.8 billion gross megawatt-hours (MWh), the Nucleonics Week annual 2006 survey shows. This compares to 2.75 billion MWh in 2005 and is the largest figure on record since Platts began compiling nuclear generation data in the late 1960s. Final 2006 figures for China and Slovakia are not yet available.
“This is important news for anyone concerned about the environmental impacts of electricity sources. Nuclear power plants generally run in baseload, 24 hours a day, and emit no carbon. The more power an operator can get out of each plant, the less electricity has to come from burning fossil fuels or hydro plants, the only other 24-hour-a-day sources,” said Margaret Ryan, Platts’ editorial director for nuclear. “Also, most operators say nuclear is their cheapest source of electricity, so a larger nuclear share can help to hold costs down.”
The U.S. 2006 output of nearly 823 million gross MWh was above 2005’s 816 million MWh, but fell short of the 2004 US record of 828 million MWh. On average, U.S. nuclear power plants were operating at 90% or near full capacity.
Notable productivity gains were made in Canada and Russia. The output of Canada’s nuclear reactors grew 6.2% in megawatt-hours in 2006. Aided by the return to service of the Pickering-1 reactor, Ontario Power Generation got 14.7% more nuclear generation from the Pickering station in 2006 than in 2005, while Bruce Nuclear Power got 10.7% more out of its existing Bruce station facilities. Meanwhile, Russia’s nuclear power plants gleaned about 5.3% more power, or about 9 million MWh, from their stations in 2006 than during the prior year. Both nations have been on a trend of getting more generation from their power reactors in the last several years.
Nuclear power generation accounts for about 16% of the world’s electricity output. Nucleonics Week’s 2007 annual overview of world nuclear performance will be released in February 2008.
Morris R. Beschloss, a 50-year veteran of the pipe, valves and fittings industry, serves as PVF and economic analyst for The Wholesaler.