Material price havoc rattles PVF sector

BY MORRIS R. BESCHLOSS
PVF and economic analyst

By any measure of business success, the PVF sector is enjoying the most successful growth surge in its history. This encompasses manufacturers, distributors, fabricators, installers, specifiers, exporters and all those benefitting by the recent spate of insourcing.

With transportation costs from overseas surging by leaps and bounds, domestic manufacturers are benefitting from the need for expedited service and the escalating demand of all types and sizes of products in increasing demand.

However, material prices seem to have been going haywire. Although such rare metals as nickel, manganese, titanium, etc., have been in short supply and under severe price pressure for sometime now, the sector has been beset by demand and an increasingly urgently needed supply of copper, scrap iron and steel, castings of all types, and just about anything that could have been gotten globally only a few short years ago.

But in the past month, I have heard of the worst leapfrogging of steel pipe prices since the 1970s before global availability had come into fruition. In particular, I cite the late June announcement by U.S. Steel, increasing the price of a ton of steel from $1,200 to $2,000. Although subsequently moderated somewhat, such a horrendous increment, coming close to 70%, is unprecedented.

The rash of escalating commodity prices that have bedeviled quotations, contracts and deliveries have become a leading obstacle to the service that is so desperately needed to the thousands of projects emanating from the expansion of mechanical construction energy development, power generation, exports and all aspects of technology and oil derivatives, etc.

Unfortunately, this is not a short-term expedient, since, I believe, the pvf boom is one of long duration. The increasing shortage and irrational price increases could do more to put a crimp into this boom’s momentum than any other factor that is making the pvf sector one of the most successful ones in what I call a bipolar economy.

Since the distortions caused by a continuing imbalance of product and component availability is an increasingly disturbing factor in the supply chain, information made available by one of our industry’s leading manufacturers and an outstanding multi-branch distributor are adding clarity to an increasingly confusing price picture:

• Weldbend, founded by the late, legendary James Coulas Sr., and now superbly managed by James Jr., publishes one of the most informative and comprehensive letters regarding the material supply situation available. It is posted on their website, www.weldbend.com, or by calling the Weldbend offices at 773/582-3500.
• A quarter-annual overview of pricing and industry trends is published in The Wholesaler in February, May, August and November. It can also be secured by going to P&E’s website at www.pipingequipment.com or requesting a copy by e-mail to garycartright@pipingequipment.com

As this is written, my survey indicates record sales and profitability by the preponderance of those with whom I am in touch. I particularly enjoy the phone calls I get from many of you and appreciate your comments or inquiries by getting in touch with me at via e-mail at flem6609@bellsouth.net.

PVF Roundtable joint venture on tap
Since Don Caffee’s untimely death, Danny Westbrook, in conjunction with president Ron Merrick, have done a superb job in leading the PVF Roundtable. They are already planning a bang-up meeting at the Hess Club in Houston on Tuesday, August 19. The speaker is scheduled to be Bob Tippee, the editor of Oil & Gas Magazine.

The pvf Roundtable will also join The Wholesaler for the third year in a row to present the pvf Blue Ribbon Panel, focusing on the theme of “2009 Industry Forecast” during the asa Convention. The panel will be held at the Marriott Marquis, the convention’s host hotel, on Friday, October 3, from 9:30 until 11:30 a.m. Invitations for the event will be sent in early September. Anyone interested in attending may call Cate Brown at 847/564-1127.

Members of the panel will be Steve Letko of Weldbend, Bob Cooper from Smith-Cooper International, Dennis Lehman of Lehman Pipe and Danny Westbrook, representing Westbrook Manufacturing.

We hope to see you there.

Industrial sector may accelerate substantial comeback
Although the demise of America’s industrial sector has been greatly exaggerated, a combination of circumstances is developing to strengthen an already formidable position that the manufacturing sector has enjoyed despite substantial job losses in the past decade.

A major misconception about the ongoing size of America’s industrial segment has been based on its percentage within the enormous size of the U.S. gross domestic product of goods and services; and its decreasing employment position within America’s 145 million active workforce. The U.S. industrial workforce is now under 10% of that total, the lowest percentage since the end of World War II.

In the competition of the world’s overall manufacturing component, America’s close to $2 trillion generated revenue is only surpassed by Japan ($3 trillion plus) and Germany ($2.5 trillion). China is coming up fast on the outside but is still lagging the U.S.’s much more diverse manufacturing base. China’s manufacturing revenues however, will likely surpass the U.S. this year on the basis of purchasing power parity — the measure indicating what a comparable dollar will buy in China as compared with the equivalent amount of currency available.

The latest advantage accruing to the U.S. production rebound is the rising cost of shipping the huge tons of foreign products and components flowing into the U.S. on a daily basis. The cost of getting a shipping container from China to the U.S. has risen 15% this year alone, from $5,300 to about $5,600. Indications are that this number may climb to over $6,000 within the next few months, with no end in sight — as a shortage of container ships and the multiplicity of world-wide demand have collided head on. It’s estimated that transportation costs are now the equivalent of a 9% tariff on goods coming into U.S. ports.

Transportation costs are just part of a larger part of inflation sweeping global manufacturing that has been increasingly buffeted by higher costs for basic materials, such as steel and other raw materials, on top of astronomically high energy costs.

The cost of doing business in China, in particular, has grown steadily as workers there demand higher wages and the government enforces tougher environmental and other rigid controls and export tariffs. China’s currency has also appreciated against the dollar, increasing the cost of its products in the U.S.

Anecdotal evidence increasingly points to a reversal of production back to the U.S. The impact of even higher oil prices may become the tipping point, as domestic U.S. manufacturers reconsider outsourcing in the foreseeable future.

However, don’t expect these decisions to create a massive return of jobs that left the U.S. by the thousands in the past two decades.

U.S. job losses in manufacturing have averaged 41,000 a month so far this year — nearly double the pace last year. Sectors such as appliances and construction materials tied to the housing slump have been especially hard hit.

However, higher fuel costs and the need for immediate inventory replenishment may severely slow the outsourcing of goods in the future; but this will not cause a massive reversal of sectors and items that have already been outsourced.

This is best exemplified by the amount of savings that outsourcing can accomplish. When service costs fall to more than 15%, it gets harder to justify having the work done in distant Chinese factories. This could take up to 12 weeks to deliver products, observes one executive decision-maker.

The higher costs are particularly problematic for lower value goods, explains another participant. The cheaper a product, the more significant transportation costs are in the final price, he adds. That may help explain why Chinese exports of such “freight sensitive” goods to the U.S. are now falling for the first time in more than a decade.

According to Jeff Rubin, chief economist at CIBC World Markets in Toronto, the heavier and bulkier goods are, the more sensitive they tend to be to fuel costs. Rubin predicts Mexico may be “the big winner” as increased transportation costs make China uncompetitive to an ever-increasing list of businesses in North America. Even Mexico will have to hustle to outbid U.S.-based manufacturers ready to resume competition.

America’s assured quality, access to specials, and the benefits of well-inventoried local distribution could swing the pendulum back to “Made in the U.S.A.” in the foreseeable future.

Morris R. Beschloss, a 52-year veteran of the pipe, valve and fitting industry, is PVF and economic analyst for The Wholesaler.