PVF sector should withstand economic, political concerns
BY MORRIS BESCHLOSS
PVF and economic analyst
While America’s overall economy braces for the worsening of an already deteriorating recession, the pvf sector will almost certainly continue the unprecedented surge that was ignited almost two years ago.
Barring the unexpected impact of a one-sided restriction of anti-business, anti-trade legislation by a one-sided Democrat majority, the pvf industrial juggernaut will continue its steamroller throughout 2009 for a few reasons:
- A $2-trillion U.S. export sector, the biggest surprise in an otherwise sagging economy, will continue to maintain its momentum. Although a stronger dollar and a temporary slowing of the developing nations’ growth may act as an inhibitor for now, there will be no appreciable downturn in the demand for the pvf sector’s products for 2009 as a whole. Two-thirds of exports are comprised of industrial products of all types.
- Mechanical contractor-related commercial and industrial construction has been adversely affected for months by the credit strangulation of businesses large and small.
Although government intervention in commercial paper availability and direct access to the Federal Reserve Board’s discount window has begun to help, the building of hotels and motels, high rise apartment buildings, and planned shopping centers has suffered. However, institutional buildings, such as healthcare and religious edifices are proceeding apace. Industrial construction is also on schedule. The need for housing technological upgrading, despite reduction in personnel, also calls for expanded facilities.
- Water and wastewater facility development is on the verge of its greatest year ever; however, federal, regional and local funding may put a cap on the extent of the growth.
- The crescendo of growth in power generation is certain to hit an all-time high, as both nuclear and conventional electrical power undergo a catch-up to close the growing gap between supply and demand. Although environmental obstacles continue to be manifested, the danger of brownouts and blackouts should pressure the relevant authorities to be more amenable, even in the area of coal-powered generating facilities.
- Alternative energy development is still in an embryonic stage. But solar and wind power, as well as greater natural gas utilization and expansion of ethanol by utilizing corn husks, feedstock and switchgrass for ethanol conversio,n should reverse the recent downturn of that questionable gasoline blend.
- Drilling may be the biggest boon to the expansion of pvf product usage. Although it’s doubtful that the new administration will get behind offshore drilling, shale oil development or drilling in the Alaska National Wildlife Reserve just yet, there is more conventional drilling in the lower 48 than in the past 20 years. The only holdback could be the further drop of already low prices that may make the current spate of drilling non-profitable.
All in all, there are only a few clouds on the horizon preventing the continuation of the pvf surge. Even the credit crunch that has inhibited the inventory development of the sector’s distribution system is thawing out as greater access to loans, as well as commercial paper availability, are facilitating the optimizing of requisite inventory levels.
$360 billion per annum needed to keep world’s energy demands satisfied
The International Energy Agency, the world’s oil watchdog, has unveiled both good news and bad news. Focusing their targets on 2030, the Paris-based global research agency believes that there will be enough oil available 20-some years from now to accommodate the world’s overall demand of approximately 100 million oil barrels a day, compared to the current 85.5 bpd. Discarding the peak oil theory, which posits a rapid supply reduction, the iea has disseminated the good news.
The bad news is that it will take a $360-billion-a-year investment to extract additional oil supplies, as mature fields are imploding faster than first anticipated. While oilfields in Norway, the United Kingdom, Russia, Mexico, India and the U.S. are headed for eventual extinction, the satisfaction of conventional demand will be met by Kuwait, Brazil, Saudi Arabia, Iraq, Eurasia (former Soviet States) and the Caspian Sea. To meet demand growth for alternative energy sources, investments are expected to be met by Canada, Saudi Arabia, China, the U.S., India and Iran.
Barring the investment of huge amounts necessary to keep both conventional and alternative energy sources afloat, the demand/supply balance will quickly fall out of kilter, instigating the quick return of exorbitant pricing.
Investment outlook turns bullish despite lingering economic pessimism
I usually spend a good part of my weekends devouring Barron’s Weekly, the Financial Times, and The Economist to unearth nuggets that may lead to interesting analyses for my expanding blog readership.
Perhaps it’s the fire sale stock prices, lowest equivalents since the 1970s, or the 11% comeback of the Dow Jones Industrial Average the last week of “Black October.”
According to Barron’s semi-annual big money poll, 50% of the responding pros consider the forthcoming stock market outlook bullish or very bullish through mid-year 2009. One major aspect of this renewed optimism is the expectation that governments around the world are mounting a coordinated effort to end the financial crisis and get lending back on track. The first step was a meeting of the G-20 (major world nations) in Washington, D.C. during November.
The big money bulls see the Dow Jones Industrial Average ending the year at 10,642, which implies a 14% gain from the current levels. Even so, this would still leave the Blue Chips down 20% for all of 2008. This cross-section of the nation’s top institutional investors sees similar moves for the Standard & Poor’s 500, and the technology laden nasdaq.
An increasing number (62%) of these big-money pundits call today’s stock market considerably undervalued, compared to only 55% last spring. However, half of this group still describes their industrial stance as defensive, while only 20% say they’re aggressive at this time. Thirty-seven percent claim that improved credit conditions, now occurring, would induce them to become more bullish about stocks in the next six months, while 25% are awaiting a better outlook for corporate profits.
However, there seems to be a new wave of optimism developing, primarily due to the almost ridiculously low prices of many seemingly solid equities. Many cite the buildup of cash on the sidelines, which is measured in the trillions. Money market assets alone accounted for $3.4 trillion on September 30, versus a $13.3 trillion of outstanding stock market evaluations. This ratio is comparable to the early 1980s, when money funds yielded returns in double digits.
Barring unforeseen developments, such as another major terrorist attack or confiscatory tax increases by a newly constituted White House, 2009 may turn out to be a much better year for the global stock markets, preceding the petering out of the current recession, a trend consistent with previous recessions, when stock market recovery preceded an economic rebound.
Global commodities endure record implosion
Global commodities, which had become the shining light of worldwide demand inspired by the unprecedented rise of the emerging nations (Brazil, Russia, India, China, etc.), experienced their worst month ever in October.
Although most of the investment community’s focus was fixated on the freefall of equities, as well as fixed income investments, the fall of the one-time darlings of hedge funds and other speculators became investment pariahs during “Black October.”
The Commodity Research Bureau index, which comprises a composite of 19 commodities, experienced its worst decline since its formation in 1961, tumbling more than 21% for the month. Only a late October rally saved the commodity index from an even worse performance.
Oil, which had reached nearly $150 per barrel in mid-July, experienced its worst month ever, sinking precipitously to the low $60s during the past month. Even gold, which experienced an 18% loss, ignored its “safe haven” reputation, with its worst monthly performance since 1980.
This commodity vertigo showed no partiality, embracing such disparate entities as wheat, copper, aluminum, sugar, coffee and cotton.
The implosion of hundreds of hedge funds, which was still in process as October ended, joined margin calls and the termination of credit lines as the main cause for this commodity depression. The dumping of their holdings flooded commodity, as well as stock market exchanges, bringing prices down to fire sale levels. With global demand and skyrocketing prices having previously spurred this bubble ever upward, the October investment disaster took no prisoners.
In the deleveraged future now facing investments as a whole, it’s almost a given that pricing of commodities, as well as stocks and bonds, will become a function of the supply/demand equation, with speculation only a shadow of its former self.
Expect a steady recovery of such overdone downsizing as occurred in October to exhibit a steady climb in the months ahead. But this will reflect a muted increase, due to the limitations of a global recession.
Unemployment casts shadow over expanding recession
With a longer, deeper recession casting its shadow over America’s immediate economic future, unemployment is now expected to be as bad as in the two previous downturns -- 2003 and 1992. Most economic observers, including myself, had expected the unemployment rate to avoid the severe (8% to 9 1⁄2%) rates reached during the last jobless peaks. However, the global scope of the current gathering recession storms will affect exports, America’s No. 1 pillar of strength during the past year of financial deleveraging.
Statistics indicate that those unemployed for more than 27 weeks have already reached nearly 23% of those registered out of a job. This approaches the peak of the 1992 and 2003 troughs. Also ominous is the number of people looking for jobs or now working part-time, which is estimated to be the highest in 15 years.
If this trend continues, expect the unemployment percentage to rise well above the 6.5% mark originally forecast. How much the Baby Boomer generation retirement will cut into the available employment pool will depend on the intensity of the global recession on America’s businesses. With 401k’s and other retirement plans severely truncated, many potential retirees will likely have to extend their working life, if the jobs are available.
Metals implosion hit by global recession
The natural resource surge that was powered by the unprecedented demand of such major emerging nations as China, India, Brazil and Russia is in the midst of a veritable freefall. Much of this reversal of fortune is due to the sharp slowdown in exports and international trade, which has been the sparkplug in generating the stupendous growth of previously agrarian-based economies.
Chief of these nations is China, where consumption of steel, copper, zinc, nickel scrap and aluminum has led to the seemingly insatiable demand for and the soaring prices of such critical resources, basic to industrial production as well as to the expanding construction sector in developing economies.
According to the Wall Street Journal, China is the primary progenitor of the downward slide, as well as having caused the previous price inflation. The financial publication claims that China has been mainly responsible for almost all of this outsized demand expansion. This includes 87% in zinc, 79% in nickel, 60% in aluminum and 59% in steel.
The abrupt halt in China’s post-Olympic purchases, as well as a government-directed restraint on real estate development, has reversed both the demand as well as the pricing of global base metals. This combination of circumstances may have instigated the resultant crunch, but it’s certainly in tandem with the global recession that most of the world’s nations are now experiencing. n
Morris R. Beschloss, a 48-year veteran of the pipe, valves and fittings industry, serves as pvf and economic analyst for The Wholesaler.