The PVF pace quickens

 

BY MORRIS R. BESCHLOSS
PVF and economic analyst

When it rains, it pours. The quiet month of July featured a torrent of activity on all fronts of the PHCP industry; so much for the slow period between Memorial and Labor Days.

First came the news, which we had previously predicted, that the HD Supply component of Home Depot went up for sale and was quickly acquired by the three private equity partnerships of Clayton Dubilier & Rice, Carlyle Group and Bain llc. This despite earlier denials by HD Supply management that Home Depot had no intention of divesting the massive supply group.

Although Ferguson and parent Wolseley veteran Charles Banks is a full partner of CD&R, he has announced that he has no intention of taking an active interest in the new acquisition. It would be inconceivable that Banks would not provide guidance to the $10.3-billion acquisition. But knowing Charlie Banks and his reputation for integrity, I take him at his word.

Regarding active involvement, Gary Cartright of Houston-based Piping & Equipment called us early on July 5 to announce the sale of the last remaining P&E Group to Fairmont Supply, once owned by chemical industry giant DuPont. The other Piping & Equipment combine, The Georgia Group, went down the tubes with USFlow. This is a perfect fit since Pittsburgh-based Fairmont is a major mill supply operation with no regional and practically no product overlap with Piping & Equipment. Cartright will continue on as ceo and told us that he plans no personnel changes. Good for Gary. He has liquidated a long, hard-earned investment but maintains his active industry and company status.

That same day I learned the distressing news that my dear industry colleague, Jim Coulas Sr., had passed away at 4:00 p.m. on July 4. While in Chicago the week before, I didn’t have a chance to visit him, which foretold that he just wasn’t up to it. Fortunately, we had three long telephone conversations where we had a chance to exchange our mutual respect. My tribute to him is included with his obituary in this issue.

Inge Calderon, whom I had strongly recommended for the ASA top job about 10 years ago, resigned that post, but stays with the industry umbrella group to oversee the well-financed ASA Education Foundation.

The PVF sector continues to operate at a rapid clip and will do so well into 2008, despite a forecast by a nationally renowned economic analyst who predicted an abrupt downturn by the middle of this year to the ipd luncheon last September in Chicago.

The second annual PVF Roundtable/The Wholesaler magazine panel discussion will be held on October 26, from 9:30 a.m. to 11:30 a.m. under the auspices of the annual asa Convention at Anaheim, Calif.

Don Caffee, executive director of the PVF Roundtable, will update the attendees on the great strides that the “table” has made in the last few months. I will moderate the panel’s focus on PVF direction 2008. Panel members will be Robert Vick, vice president, Business Development Group, Legend Valve; Michael Abeling, CEO, Consumers Pipe; and Roundtable founder Sid Westbrook discoursing on the subject of unbridled expertise, “Oil Patch Dynamics.” Admission is by invitation only. But e-mails to my executive assistant Carolyn Fleming at flem6609@bellsouth.net will suffice for entrance into the presentation and the following Q&A. Refreshments will also be served.

Flynn interview discloses energy’s volatile direction

An exclusive interview with one of America’s outstanding energy gurus, Phil Flynn, in Chicago last month disclosed the hard facts that both U.S. oil producers and consumers will be facing this year.

Flynn is vice president-marketing for Alaron, a major energy trading firm. He has become the “go-to man” on most major networks, including cnbc, mcnbc, Fox, cnn, as well as to The Wall Street Journal and The New York Times. I once had the privilege of serving with him on an economics tv panel in Chicago.

Flynn has been remarkably accurate in forecasting the pricing movements of crude oil and gasoline in the past few years and the reason for their volatility. His predictions have been so uncanny that he has been approached by major publishers to write a book on the world’s worsening energy crisis.

In our dialogue, Flynn blamed the ongoing gasoline and crude oil availability pressure on the following major factors:

• U.S. refinery shortages and maintenance problems, which are due to get worse as the year progresses.
• Opec’s desire to restrict shipments on what they know is a vanishing resource. The Mideast oil monopoly is also adamant in squeezing the top prices out of their oil availability, realizing that alternative energy sources will eventually cut into crude oil demand. Saudi Arabia, the only remaining “swing” producer, could conceivably be losing production in one or more of their five major oil fields at this time.
• Although crude oil touched $70 per barrel late last week, Flynn believes it should be priced even higher since West Texas Intermediate, which is quoted on the New York Mercantile Exchange, has faced increasing refining blockage. The refinery bottlenecks have caused a crude inventory backup in Cushing, Okla., the nation’s main storage area. As refinery capacity utilization is climbing to the 90% plus level, U.S. crude prices will rise to the mid-$70 range, while London-traded Brent crude will lag by $2 to $4, the reverse of today’s circumstances. Since the latter is more difficult to refine, due to its opec-based heavy sulfur content, it will revert back to its historically cheaper price structures.
• Flynn attributes California’s high prices at the pump to the state’s multi-faceted blends, its inability to import from elsewhere and the unexpected consumer demand increase this year.
• He cites the recent $4-per-gallon prices in Chicago to the production breakdown of the major Whiting, Ind., refinery and the confiscatory Illinois state taxes. He invites consumers to check the high taxes that federal and state governments charge in these areas to ascertain what gas at the pump really costs.

Flynn believes that the present ethanol approach is an unmitigated disaster. “Without the 51-cent subsidy,” he exclaims, “this unproven energy alternative would be out of business.”

Flynn considers Congress’s anti-gouging legislation political grandstanding. Although no apologist for the Big Five multi-nationals, he believes that these major global oil and natural gas producers are beset by government restrictions, political propaganda and an inability to project their strategies through effective communications. Flynn believes that these international monoliths are less likely to expand refining capacity since the government is calling for less gasoline through mandated ethanol blends in future years.

He believes the world’s geopolitical situation is getting increasingly dangerous, as the natural resource-heavy nations are gaining the upper hand. Flynn cites Putin’s Russia, Chavez’s Venezuela and Ahmadinejad’s Iran as the new “axis of oil and natural gas evil.” This is not only due to opec’s price rigging but also to the loss of technological skills, as engineers, geologists and other experts flee these increasingly authoritarian countries.

Even though major new oil fields are being located, states Flynn, the costs of extraction are so prohibitive that countries like Mexico are not financially capable of exploiting them. By precluding foreign investment in their energy industry, these countries are shutting out the necessary expertise and financing.

Putting his superior forecasting record on the line, Flynn believes that crude oil will reach $75 per barrel this summer and break last year’s $78 record if the hurricane season becomes increasingly active. He adds that “if the geopolitical situation deteriorates,” the $85-per-barrel mark is a distinct possibility later this year.

With crude oil comprising at least 50% of gasoline costs, $4 per gallon at the pump won’t be far behind. “And if the ethanol scam reaches anywhere near its destructive possibilities, look for gasoline to become increasingly expensive,” he adds.

When asked what all this would mean to corn-based products in America, Flynn stipulated that such inflationary impact on consumer products would be harshly felt as the year progresses. With worldwide demand for oil at an all time high of 86 million barrels a day, according to the International Energy Agency, Flynn concludes that the supply/demand squeeze will practically eliminate the thin margin between production and usage that now exists.

U.S. economic power still rules the world

In the wake of another Independence Day celebration, we believe that this is a proper time to assess the real state of the American Union.

With political turmoil reaching its peak, as the U.S. prepares for the 2008 election showdown, one would think that America is ready to implode economically, militarily and diplomatically. Since both political parties hope to get the upper hand in proving their greater capabilities in fixing America’s perceived flaws, the delineation of America’s negatives has become the current modus operandi for Democrats and Republicans alike.

With the so-called “war on terror” tearing at the vitals of this nation’s military capability, not to mention the estimated $250-billion annual excess costs, detractors are using TV, radio, blogs and the Internet to predict gloom and doom for this 231-year-old super power. Although pessimism seems to be becoming increasingly pervasive, most facts seem to be proving otherwise.

Many economic analysts are already calling the 21st century the age of China, India and even Brazil. But this is proving a bit premature, as American consumer confidence statistics continue to show. These are reflecting an economic expansion shift that is replacing America’s traditional dependence on housing, automotive and basic steel and metalworking. One-third of the products now part of America’s overall economy did not even exist 25 years ago.

On examining the major statistics that reflect the American superpower’s inner strength, the following picture emerges:

• America is approaching a gross domestic product close to $14 trillion annualized, 30% of all goods and services generated by the world as a whole. The titanic U.S. Dow Jones Industrial Stock Index erupted from a bottom of 800 in 1982. It has now reached 13,600 and shows no sign of slowing its global liquidity-driven expansion.
• The U.S. population is now the third most voluminous in the world, having passed the 300-million mark, double that which existed in 1950. Even so, it represents less than 5% of the globe’s population. The good news is that America is the only one of the world’s traditional industrialized nations that is maintaining its population growth. Western Europe, Japan and even Russia are in an unprecedented era of population loss, due to the inability of family replacement. This could undercut these nations’ economic dynamism and force them to reexamine their bloated welfare benefits.
• Even though America occupies only 6% of the world’s surface, it has vast open productive spaces that could eventually absorb double its present population. Against all previous predictions, the U.S. has been able to absorb its excess workers, having maintained a 4.5% unemployment rate for more than a year. With a 78-million-strong “Baby Boomer” working base opting for retirement rather than unemployment, a labor shortage seems to be of increasing concern.
• Although many of the traditional manufacturing jobs have been outsourced, and although 70% of America’s occupants comprise the world’s greatest consumption sector, the U.S. leads the world at $40,000 per capita, far ahead of Japan, which occupies second place.
• Another example of America’s global economic superiority is that 40% of the world’s capital is controlled by the U.S. This includes stocks, bonds, real estate, businesses and other fixed assets and is due to this country’s unprecedented productivity and its ever greater evolution in information technology, pharmacology and modern production equipment.

With inflation moderate, interest rates steady and consumer prices mitigated by ever expanding emerging nations, U.S. consumer confidence is remaining strong. This is taking place despite a non-existent savings rate and record Federal budget and trade deficits.

A growing number of naysayers will continue predicting the end of America’s greatness. They will point to the economic steamrollers of China, India, Brazil and Southeast Asia soon leaving the U.S. in the dust. They point to the continuing diminution of U.S.-based natural resources and America’s exorbitant product conversion costs based on high wages and benefit packages. But, somehow, America continues to muddle through as the genius of America’s brainpower and entrepreneurial productivity continues to surprise the skeptics.

If we could fast-forward to 2050, we might be surprised to find out that “with all its faults, America will continue to be a global leader and still the world’s No. 1 superpower.”

Morris R. Beschloss, a 50-year veteran of the pipe, valve and fitting industry, is PVF and economic analyst for The Wholesaler.