Red hot industrial sector looks good for 2007

BY MORRIS R. BESCHLOSS
PVF and economic analyst

After a thorough exposure to a macro-economist at the ASA Convention, the Blue Ribbon panel at The Wholesaler/PVFRoundtable event in Chicago, and numerous conversations at the General Assembly of the Roundtable in Houston in October, I’m convinced that the PVF sector’s momentum will accelerate right into and through 2007.

Many of the energy-oriented projects initiated in 2006 are just coming to fruition, and there are many other new initiatives coming off the boards, both in the United States and internationally.

This work encompasses all aspects of oil production, refining, transmission, and the spreading demands of alternative energy derivatives such as ethanol, tar sands and oil shale development. Also included in the mix was commercial and industrial construction that is more than making up for the slowdown in residential new construction and maintenance.

Exports, which will be hitting an all-time revenue record in 2006, will be increasing its shipping levels, especially toward emerging nations building consumer sectors. The unique capabilities of both large and small PVF manufacturers, as well as turnkey constructors and distributors, are all benefiting from the worldwide demand for American products and know how.

Although some so-called experts -- not specifically involved with our industry -- warn of a mid-year downturn, such a negative direction will not affect the resurgent PVF sector.

Even though some skeptics consider the current industrial sector’s boom a relatively short-term expedient, I believe that the long-suffering manufacturing component of America’s world-leading economy is evolving into a new dimension. It’s finally asserting its global leadership in high tech and is increasingly independent from such traditional sectors as textiles, leather, steel, foundries, and even domestic automotive manufacturing. Involvement in new product groups such as pharmaceuticals, broadband and many others that didn’t even exist 15 years ago will perpetuate a new base of activity that will continue to ensure America’s status as an industrial leader for the indefinite future.

Although economist Alan Beulieu, who provided the economic input for both the VMA Market Workshop as well as the ASA IPD Breakfast session, gave a good overview, I disagree with his forecast of a recessionary trend starting in April 2007. In fact, the full-scale recession he predicts for 2008 seems overblown when applied to the PVF sector.

One has only to look at the major end-use sector comprising pipe-valve-fittings to dispute Beulieu’s economic generalizations:

• Water/wastewater. This important subsector is on a roll, after years of neglect. This applies not only to the U.S., but trends in emerging nations coming to grips with both shortages and quality. The emergence of Watts and Mueller as major factors in leading the necessary global water upgrading is proof positive of the growing importance of this PVF arena.
• Power generation. After the Enron scandals of 2000-2001 created phony shortages, domestic power buildup has been at a practical standstill, although growth has been torrid overseas.
• With coal conversion providing the main power source as natural gas prices stay out of reach, the power industry is playing catchup, a phenomenon that will generate industry demand for years to come. Even nuclear, which came to a halt after the Three-Mile Island crisis in 1979, is due for a comeback in 2007-08.
• Oil and gas will be the PVF sector’s major driver, as production, refining and transmission will be called upon to exert major efforts in this arena well into 2010. Shortages of drilling rigs and other relevant equipment will put a cap on this critical sub-sector’s ability to mount full production.
• Maintenance and repair. These operations are predicted to grow by 10% in 2007 and 2008, providing PVF manufacturers and distributors with plenty of new business.
• Commercial and industrial construction are due for a major reawakening, adding to the business opportunities already filling the PVF sector’s order books this year. Even the chemical and paper industries, which have added little to the PVF sector’s growth earlier in this decade, are providing new oomph to the PVF sector in general.
  

All in all, expect business levels to rise from 5% in overall industrial spending to as much as 15% in water and power generation. The disparity will be in the specific end-use sub-sector. But it’s highly unlikely that there will be any perceptible slowdown in the state of the PVF sector for the remainder of the decade.

China tightens foreign investments

As China’s trade surpluses with the U.S. and other Western nations are setting new monthly records, pressure on the Asian giant’s upward currency valuation is mounting. Simultaneously, protectionist legislation in the U.S. Senate is gathering steam as fear of even greater unmanageable trade deficits is becoming a mid-term election political issue.

Even if the Chinese initiate a gradual process of currency strengthening against the dollar, this will not be enough to assuage those legislators who believe the trend toward globalization can be reversed, as happened with the Smoot-Hawley tariffs in the 1930s.

As there is no end in sight regarding the expanse of products being shipped by China to the U.S., protectionist sentiment is bound to reassert itself. The so-called Midwest rust-belt, once dominant in automotive and steel, is especially vulnerable.

With leading Senators demanding punitive tariffs on Chinese imports, nothing is being said about the damage that such legislation would cause to hundreds of China-based American facilities, as well as U.S. consumers, who have benefited by the low prices made available to them by the major chains. These offer a large variety of cost-effective goods imported from China and other global low-cost producers.

With imports now a major U.S. economic factor, a successful introduction of protectionist legislation to staunch the incoming flow of such goods would unleash inflationary factors rivaling those last seen in the 1970s and early 1980s.

Although such protectionist attempts would likely be met by a presidential veto if passed by Congress, there is no guaranty that even that obstacle would not be overridden.

As long as the American consumer, who comprises more than 70% of America’s $13.5-trillion gross domestic product, continues to demand the most cost-efficient products available, there is little chance that the U.S. trade deficit will shrink any time soon under present trade policies.

But the resolution to this problem may be coming from a radical change in China’s own open-door investment policy. With excess currency liquidity growing by leaps and bounds, China is on the verge of instituting a more protectionist investment policy themselves.

With unprecedented global investments providing the wherewithal to build the most gigantic industrial infrastructure in modern history, the Chinese leadership is about to establish a new economic world.

After 30 years of focusing on making exports the core of its incredible economic growth, the Chinese leadership is getting ready for a more balanced approach, according to Dr. Cheng Li, a China scholar at the Brookings Institute in Washington, D.C.

This new model would call for greatly accelerated domestic demand, less foreign trade, greater popular welfare, less economic growth, more inland development and less favorable policies for its heavily populated coastal regions.

According to Cheng Li, this policy will be manifested by greater support of China’s economic sector committed to the development of its expanding consumer economy. Leading Chinese officials believe that foreign corporations have reached dominant positions through mergers, acquisitions and brand management.

This new direction is also expected to rein in transplanted foreign corporations, whose main objective is to use China’s huge, low-cost labor capability as a base for stronger positions in their own global markets. This would conceivably be accomplished within the mandates of the World Trade Organization.

However, “as long as China doesn’t have real rule of law, foreign -- as well as Chinese -- business people believe they will have to rely on the power of the Chinese government to protect their interests,” lamented Andrew Nathan, a Chinese expert at New York’s Columbia University.

Morris R. Beschloss, a 50-year veteran of the pipe, valves and fittings industry, serves as PVF and economic analyst for The Wholesaler.