PVF markets to continue dynamic growth

BY MORRIS R. BESCHLOSS
PVF and economic analyst

With 2006 winding down, there was a natural tendency to be concerned about the strength and length of the current pvf recovery. In fact, I received a substantial number of inquiries during December as to whether there would be a lull in the record-setting pace of the ongoing pipe-valve-fitting surge. This is in spite of backorders that indicate shipment delays of six months to a year in many product groups.

Some of this concern related to the slowdown in December orders and inquiries, which had been galloping at an unprecedented pace throughout most of 2006. Even the downturn in durable goods orders reported by the Department of Commerce seemed to worry some of the inquirers. These were largely impacted by the shrinkage of the automotive and residential housing sectors, which have little effect in pipe-valve-fitting usage.

Much of this Thanksgiving-to-New Year’s slowdown can be attributed to year-end reassessment of inventories, new order input and a balance of available inventories vs anticipated shipments.

After considerable research and year-end analyses, I’m more positive than ever that 2007 will be another banner year for the pipe-valve-fitting sector. Broad economic assessments, which signal an industrial slowdown, don’t necessarily coincide with the unique demands of the pvf end use arenas. For instance, power industry experts forecast North American power industry capital and maintenance project spending for 2007 will be $45 billion, an 11% increase over anticipated 2006 figures.

According to industry executives, whom I highly respect, there has never been such a combination of product demand from such a diversity of new projects and maintenance contracts, original equipment expansion, and mechanical contracting. These include oil and gas, electric power, water and wastewater, chemical, pulp and paper, infrastructural development, and mechanical contracting activity. The latter is particularly significant since this combination includes multi-story apartment edifices, institutional buildings (schools, hospitals and churches) warehousing and industrial building expansion.

The most progressive and aggressive pvf industry manufacturers are spending a ton of money on new capital equipment and the latest technology to bring down the cost per product unit. They would hardly make this commitment if they expected a slowdown next year.

Such leaders tell me that they are expecting the present hot cycle to extend well into 2008, abetted by the huge oil development growth north of the border, and a surge of exports never before experienced by these pvf business titans.

What most amazes them is the reawakening of “Buy American.” This is not the old-fashioned drum beating of patriotism, but the need for quicker service, the providing of short runs, larger sizes, and the quality control and new products that are increasingly being demanded as more sophisticated technology becomes a growing factor among industry clients.

Surprisingly, price gaps with offshore competitors are closing faster than expected as material costs give foreign producers no advantage and wage scales are slowly creeping higher overseas.

In a turnabout on the usual expressed attitudes by large, medium and small manufacturing companies, the largest manufacturers with whom I have talked seem the most bullish on the pvf market’s future and are laying the groundwork to be prepared for this eventuality.

Exports undergird America’s economic growth

As America’s record-setting economy nears the end of 2006, it has gained surprising strength from three major factors -- consumer spending, capital spending for industrial equipment and buildings as well as commercial construction, and exports.

While both consumer and capital spending have been given the main credit for offsetting the rapidly shrinking housing and automotive industries, not well-known is the dynamic role played by America’s worldwide exports.

With U.S. record revenues exceeding $1.3 trillion this year, 70% of this amount is comprised by manufactured goods. This has provided a major lift to a sector that had been, until recently, on a downward slide for more than a decade. Since rapidly expanding imports, however, have eclipsed exports by over $800 billion, outbound shipments have not generated the respect due them. If they were not just an offset to the deluge of imports swamping America’s shores, exports would be recognized as a leading factor in the U.S. growth strategy. Currently, the U.S. trails only Japan and Germany among the world’s leading exporters.

Despite the widening trade deficit -- which obscures export dynamics -- outward bound shipments have been a major factor in gross domestic product growth. These equal the gross domestic product thrust provided by America’s business capital spending. While other sectors have faltered, exports have been generating double-digit growth in the past three years.

Much of this expansion is due to the accelerating demand for U.S.-made goods by the newly-rich emerging nations. One has to look no further than aircraft maker Boeing, which has vastly increased its order book, and is leaving its only rival, European producer Airbus in the dust. Aiding and abetting these salutary efforts are the vastly increased profits emanating from the overseas operations of American-based multi-nationals.

While domestic demand for factory goods has slipped, this is more than being made up for by the export boom.

The 2006-2005 third quarter U.S. export pickup in major world markets tells the story graphically:

• The dynamic Pacific Rim nations’ demand for U.S.-made products has jumped from a 8.7% pickup to 15.2%
• Europe has practically tripled its demand for U.S.-made products from 8.2% to 20.7%
• Mexico has edged up to a 10%growth from 8%
• Latin America has expanded its U.S.-based imports from 20% to 25.7%
• Only exports to Canada have softened a bit, slowing from 10.2% to 9.4%.

Two other factors will impact the future growth of U.S. exports -- which will be eclipsing 10% of America’s record-setting $13.5-trillion gross domestic product this year:

• The shift toward the development of domestic growth from exports by the world’s leading emerging economies such as China and India will generate increasing demand for American-made goods. This trend is long-term in nature, and is underpinned by the permanent switch to automobiles, better housing, and a generally improved standard of living. U.S.-made goods will play an ever-increasing role in suppling these needs.
• The ongoing downturn of the U.S. dollar in relation to a basket of major foreign currencies is making a wide variety of U.S.-manufactured goods increasingly more competitive. Although trade globalization is viewed suspiciously by protectionist forces, America’s export success proves that the opening of foreign markets should top the list of future policy-making by the 110th Congress.

Coal to oil energy independence becomes fading dream

With the Democrats taking center stage in policy making, and crude oil prices stuck in the low 60s range, the possibility of a major synthetic fuel alternative development is fading fast.

With coal to oil conversion acknowledged as the only realistic mass alternative for turning crude oil into gasoline, heating oil, jet fuel and other derivatives for powering America’s mass transportation vehicles, such a formidable undertaking is quickly evaporating.

A year ago, in the wake of the Katrina disaster and oil prices approaching $80, a “Manhattan Project” of converting coal to oil seemed in the cards. This seemed highly feasible due to the advancing technology of making this project tailor-made for easy implementation.

With Canada’s tar sands conversion project gathering full steam, America’s overabundant coal reserves, as well as scads of oil shale in the Rocky Mountains seemed ready-made for the first realistic move to decouple the U.S. from energy dependence to opec since President Richard Nixon had called for such a policy more than 30 years ago.

 

But as often happens in perilous times, political obstacles got in the way of progressive forward motion:

• President George W. Bush’s State of the Union address early in the year did not even address coal-to-oil conversion, but dwelt on ethanol, switchgrass, and wind and nuclear energy — none of which would put more than a dent into our dependence on foreign oil.
• Without a national U.S. organization to address the massive effort needed for requiting the need of hydrocarbons for gasoline and home heating oil, private companies would need a guaranteed profit incentive to launch into a landmark conversion effort.

As prices have come down considerably since mid-August due to the perceived change in geopolitical improvements, the interest by energy multi-nationals to tackle such a giant enterprise without government subsidies or guarantees has waned.

The Democrat leadership has already announced that it wants to replace oil company tax breaks worth an estimated $6.4 billion over 10 years.

Also prepared for repeal by the Democrats are tax incentives for refining expansion and for geological studies to help oil explorations.

In addition, Democrats want to chop a measure passed by Congress two years ago to promote domestic manufacturing. It allows oil companies to take a tax credit if they choose to drill in this country instead of going abroad.

Such a combination of political hostility, plus greatly reduced oil prices, are hardly expected to incite new interest in the abundant use of U.S. coal and oil shale for a move toward America’s energy independence.

Barring an international crisis of unimaginable proportions, such a move is unlikely for now. Meanwhile, the energy doomsday clock is still ticking.

Smoot-Hawley results due to reappear

The ghost of Smoot-Hawley may be coming back to haunt the last two years of President George W. Bush’s lame duck presidency.

 

This infamous legislation concocted by Sen. Reed Smoot (R-Utah) and Rep. W.C. Hawley (R-Ore.) and signed by then-President Herbert Hoover is widely blamed for ushering in a protectionist policy that cast the shadow of depression over the U.S. during the 1930s.

The big difference this time is that the party roles are being reversed. The Democrats, in a mood to pay back the newly-elected Congressmen from Michigan, Minnesota, Indiana, Ohio and Illinois, will become the new protectionists once they take power after the first of the year. President Bush already got a foretaste of this new policy when he arrived in economically dynamic Vietnam empty-handed, after his administration had crafted a bi-partisan trade pact with this formerly hostile regime, before the mid-term elections.

 

The showdown will come when Bush attempts to get a huge $160-billion addendum to a Defense Department expenditure bill to cover the cost of continuing military operations in Iraq and Afghanistan.

Private sources have already indicated that the Democratic Congress will attach a rider to that bill calling for the upper 2% of the income brackets to compensate for this additional deficit. This will force Bush to choose between a veto or bill passage, since the federal line item veto has been declared unconstitutional by the Supreme Court.

The ultimate outcome of this standoff will be the disintegration of an expanding free trade policy that had become the major hallmark of President Bush’s six-year presidency. Although the Central American Free Trade Authority passed by a narrow margin earlier this year, the Western Hemispheric Trade Authority is dead in the water. The last attempt to penetrate South America and encapsulate Latin America into a tariff-free Western Hemisphere died after a bipartite trade pact with Chile was narrowly approved. Similar pacts with Colombia and Peru are now in serious doubt.

Instead, Hugo Chavez’s energy-rich Venezuela and Ivo Morales’ Bolivia, dominant in tin and natural gas, respectively, are now actively seeking a left-leaning trade group that will encompass Brazil, Ecuador and other Latin American countries in a consortium to offset further U.S. penetration into this area. This new alliance is meant to also provide Latin America with new political clout to offset what they call “Yankee imperialism.”

If the new Democrat Congress pursues its anti-free trade strategy aggressively, this will surely result in counter measures by America’s erstwhile trading partners. With an American consumer economy increasingly dependent on cheap foreign goods, this will mean higher prices and accelerating inflation.

As has happened before, such new protectionism might give the Democrats temporary satisfaction in fulfilling their promises to their constituents, but it will not save jobs in the long run. It will, however, guarantee higher prices on most consumer goods.

A prime example of such a counterproductive policy is the continuation of high tariffs on sugar cane from Brazil, the elimination of which would substantially reduce the price of the increasingly mandated ethanol blend, now totally dependent on home-grown corn.

 

This will continue to please the shrinking farm block, already appeased by large subsidies granted by the Bush Administration three years ago.

But it has increasingly manifested itself in the higher prices of many corn products. Even with shortages in corn developing, the vote-conscious legislators seem to be in no hurry to lift farm subsidies on such farm products, which are proving redundant in both the U.S. and Western Europe, which are unwilling to compromise on these outdated farm supports.

It looks as if worldwide trade may take a totally new outlook in the years ahead.                   

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