Despite concerns over economy, PVF still holds strong

BY MORRIS R. BESCHLOSS

PVF and economic analyst

With the general economy sinking into ever-deepening crisis, I’ve been getting a massive number of calls from PVF manufacturers, distributors, master distributors and manufacturers’ reps, asking whether I’m still as optimistic about the PVF 2008 economy as my January “Viewpoint” implied.

With the stock market getting off to its worst start in years, and the implosion of major financial institutions capturing the business headlines, the public mood has turned decidedly pessimistic. When relating this to the overall phcp industry as opposed to the pipe/valve/fitting sector, I’ve come to the conclusion that even the total $70-billion phcp distribution sector has become bi-polar.

We are witnessing a decoupling between those PHCP businesses primarily dependent on residential construction and maintenance, and those that focus on the PVF sector.

The key to this separation is end-use. When evaluating the boom most PVF entities are now experiencing, it’s easy to understand that segment’s unprecedented strength. Whether it’s on the upstream or downstream side of the energy subsector, or imbalance of supply versus demand in power generation, it becomes crystal clear why our industrial sector is enjoying unprecedented strength and long-term depth.

A major plus that most PVF manufacturers and an increasing number of PVF distributors are participating in is exports. Last year, U.S. exports set an all-time record of $1.8 trillion, two-thirds of which comprised industrial products, such as aircraft, heavy construction equipment, mill supplies and components needed to supply the needs of emerging nations switching from agriculture to the conversion of natural resources to fabricated goods.

Of course, the greatest opportunity that the explosive growth of end-use markets has given the PVF sector are electric power generation, all aspects of oil production, transmission and refining, and the emergence of a quickly evolving biofuels industry. In checking around the country, I hear about a record number of new projects, as well as a slew of maintenance contracts.

Another factor that is supporting a rebound of domestic demand for manufacturers and distributors alike is the immediacy of delivery. With the preponderance and diversity of PVF products never greater, shortages are cropping up that must be requited with immediate deliveries. The beneficiaries of this turnabout are domestic manufacturers and distributors who can make these products available on short notice.

A additional factor is the concern with top quality, especially in the case of critically sensitive applications such as refineries and chemical plants, gas lines, and power stations. By their very nature, these installations cannot afford anything but the highest quality, due to the consequences of potential downtime and cost, not to mention the danger to life and limb.

This has lately proven advantageous to manufacturers, master and conventional distributors, who have the facilities to inspect and certify products, no matter from where they originate. Although the vast majority of products imported from abroad -- which have become increasingly prevalent in the PVF sector -- have maintained the high standards necessary to pass U.S. inspection, some offbeat importers have brought in sub-standard goods, which have unfairly tarred other offshore products with a suspicious brush. Since an overwhelming number of products used in the PVF sector today carry respected brand names, of either domestic or foreign origins, the companies responsible for protecting their reputation have made sure their inspection and certification capabilities are up to the highest standards.

From an economic viewpoint, I can easily generate the most optimistic viewpoint possible for the foreseeable future of the PVF sector; this supports my contention of great business throughout 2008 and well into 2009. The following points would be valid even if the general economy crossed the threshold of recession, which I don’t expect.

In fact, the following major sectors could almost be classified as recession-proof:

• Electric power -- With supply being outstripped by demand in the years ahead, PVF sector manufacturers will have their hands full keeping up with the demand that will be coming at them at an accelerated pace. Although new nuclear power stations have not yet gotten off the ground, and will not be a significant factor soon, due to the ever-increasing time and cost of development, upgrading existing generators will provide plenty of purchasing power directed at both PVF manufacturers and distributors.
• Coal-fired and natural gas-powered generating stations -- These are beginning to cross the engineers’ project desks, translating into an avalanche of orders as the year progresses. To avoid blackouts and brownouts, public pressure will force the government to ease up on some of the most inhibiting restrictions or face a mounting backlash.
• Oil and natural gas -- If you have any questions about energy’s effect on the PVF sector, come down to Houston. It’s estimated that one-third of all energy development specs, contracting and manufacturing take place in a sector of Texas bounded by Corpus Christi in the south and Beaumont in the east.

A trip to America’s energy capital will prove that our nation’s energy development has never been more intense, despite our almost two-thirds dependence on oil imports. According to Don Caffee, secretary/treasurer of the PVF Roundtable, headquartered in Houston, the demand for personnel at all levels have gone through the roof.

With his decades old personnel provider, ValPers, specializing in PVF executives, operating at maximum capacity, Caffee has been forced to be very selective in accepting new clients. Caffee emphasizes that today’s surge is created by an ongoing shortage of qualified personnel on both the supplier and user side of the PVF industry.

With offshore oil drilling off the coast of Florida and California and the Alaskan National Wildlife Reserve still prohibited, the U.S. is becoming increasingly dependent on shipments from Canada, especially the oil sands conversion from Alberta Province, which is comprising the major component of these shipments. An increasing number of American PVF manufacturers and distributors are participating in this mammoth project. One such company is Welding Outlets Inc., a privately held manufacturer that has been caught up in the PVF sector’s phenomenal growth, and supplies highly specialized components used in the oil sands conversion projects.

• New oil refineries -- Like nuclear-powered electric generating facilities, new oil refineries have not been developed for 30 years. However, like their electric brethren, the existing oil refineries have expanded their capacity. This has been a boon for PVF manufacturers and distributors, both in new projects and maintenance agreements. One such project is the Motiva refinery expansion in Port Arthur (Beaumont), Texas. This is a $7-billion project that is going to tie up a lot of companies and people for some time to come. They are going to have some severe problems in locating labor because there are several others going at the same time.
• Ethanol -- The controversial ethanol expedient has, nevertheless, been a boon for the PVF sector. As ethanol plants have been sprouting throughout the Midwest and even in Texas, PVF manufacturers and distributors have experienced a new source of business that had not previously existed. This has only added to the demands of America’s overall PVF capabilities, since the previous use of corn for food had little requirement for PVF products.
• Coal liquefaction and oil shale -- Although the U.S. government has not yet come to terms with this proven method of oil conversion, diverting instead into ethanol, it would seem inevitable that the U.S. leadership would eventually accept this alternative. This could only mean another shot in the arm for the PVF business interests; and it would extend the boom already enjoyed by the PVF sector.
• Commercial, institutional, industrial construction -- Although the bullish forecasts for non-residential construction are being tempered by the deterioration of the overall economy, the American Institute of Architects has predicted a softening for commercial, institutional, and industrial construction. Spending is expected to increase by 0.7% inflation-adjusted terms.

This year will reflect a slowdown in retail and industrial facilities. The institutional sector will feature continued strength, especially in healthcare and education. It’s estimated that the impact of non-residential work for mechanical contractors’ activity has greatly expanded job opportunities for these commercial and industrial contracting firms. This additional opportunity for contractors and PVF providers far exceeds what small amounts were used in residential construction during its five-year heyday.

I had occasion most recently to check in with two of the PVF sector’s outstanding privately-held manufacturing giants -- Bonney Forge and Weldbend, led by dynamos John Leone and Jimmy Coulas, respectively. Both indicated their business has never been better and continued to be on the uptick.

Also bullish were super PVF representative Ron Drews (featured in this month’s issue), who has seen his two-year-old master distribution firm of strainers grow from the start.

Next month’s interviewee for my q&a, Bob Cooper, president of West Coast-based master distributor Smith-Cooper, also indicated land office business levels.

Look for the PVF sector to maintain full steam ahead, which will make it a beacon of strength in our overall PHCP arena, but which also sees no weakness in the indeterminate future.

In my future “”On the PVF Pulse” columns, I’d be happy to answer any questions or comments regarding the PVF sector, my ongoing 51-year involvement, or any other aspects of that fast-growing sector. As one of the original organizers of asa’s Industrial Piping Division in 1970, and an ongoing activist of the PVF Roundtable, the good and welfare of our great industry continues to be foremost in my continuous career involvement that included top management at Hammond Valve, Lunkenheimer and oic, and subsequent consultancy with other industry firms.

Morris R. Beschloss, a 51-year veteran of the pipe, valve and fitting industry, is PVF and economic analyst for The Wholesaler.