PVF sector faces 2009 with guarded optimism

BY MORRIS R. BESCHLOSS
PVF and economic analyst

Year-end forecasting usually brings out the pundits, the prognosticators and the macro-economists who lump together all business and industry into one giant crystal ball! In the $75-billion plumbing-heating-cooling-piping industry, such over-simplification becomes absolutely farcical.

This is true first and foremost in our industry’s broad-based distribution system, which encompasses both plumbing-heating-cooling, as well as pipe, valve and fittings.

Even though the upstream sector of the energy markets has become the focus of highly specialized distribution, centered in the Greater Houston area, a substantial portion of PVF commodities is still shipped by multi-branch distributors, who combine all aspects of the PHCP spectrum.

As we enter 2009 with trepidation, there has never been a greater disparity in the fortunes of the two major industry sectors. Under the best of circumstances, the phc industry component can hope for a moderation of the severe recession under which it has labored for the past 18 months; while at worst, the fast-growing PVF sector may face some cooling of the red-hot pace which has brought manufacturers, distributors and end users the greatest boom since the early 1970s.

The following points hold the answer as to the extent of the success PVF can look forward to this year:

• The direction taken by the Obama Administration in breaking the back of the economic mess in which the U.S. now finds itself. This includes the Obama approach to free trade, labor union card check legislation, and the expansion of fossil fuel production within the U.S.
• The acknowledgment that small and medium-sized businesses are at the core of America’s recovery. Additional taxation of all kinds and onerous regulation could deal a fatal blow to the survival of hundreds, if not thousands, of these establishments. This would include the bulk of this industry’s independent and privately-owned distributors.
• The recovery of oil and natural gas pricing, which has become as severely underpriced as it had run away on the upside in mid-July.
• The easing of the credit crunch that has continued to bedevil manufacturers, distributors, contractors, installers, end users and oems. New projects and maintenance operations will continue to be affected adversely as the year wears on.
• Exports, which had become the saving grace in a tottering economy, may be in a downturn. With the dollar continuing to strengthen, and foreign markets hit by growing recession, this near $2-trillion per annum sector could be on the way south, taking with it a chunk of PVF sector products. Industrial products, domestically manufactured, make up two-thirds of the red-hot export picture. Many PVF manufacturers, as well as distributors, have participated in this surge and could be hurt by its reversal.

Worldwide money glut averts U.S. financial disaster
With a $300-billion U.S. Government infusion into Citibank averting an international banking meltdown, observers remain puzzled as to how the Fed and the Treasury can keep pouring hundreds of billions into the breech without instigating runaway inflation.

And piling on a $700-billion stimulus plan, which will be getting ready for signing by new President Barrack Obama, such an accumulation of public debt would have been considered incomprehensible before this year.

The answer lies in the near panic flow of worldwide funds into U.S. Treasury bonds and bills. Although this currency stampede was first triggered by America’s abandonment of stocks and bonds, abetted by the implosion of hundreds of hedge funds, the rest of the world is following suit by piling into U.S. Government paper that has already been oversubscribed.

The Treasury bond/bill yield curve has flattened out to the point that the 30-year bond is now under 4%, the lowest return since this long-term paper was originally issued. It’s gotten so ludicrous that there is practically no return on three-month bills, and little more till you get up to the 5-year note.

The global safe haven mentality reflects the despair prevalent throughout the currency world, which makes the dollar solid gold by comparison with most of the rest of the developed nations.

While the U.S. Government is using this unexpected largesse to buttress its failing domestic financial backbone, get prepared for a new dollar swoon once the immediate panic wears off.

This will mean that hibernating inflation will once again burst forth as the world economy recovers late in 2009.

China makes trade treaties while U.S. dithers

In the wake of the G-20 meeting in Washington, D.C., recently, which accomplished little but platitudes, China’s President Hu Jintao has been on a frenetic visitation pace in Latin America, culminating with attendance at the Asian Pacific Economic Conference in Lima, Peru.

With the Obama Administration threatening to renegotiate the North American Free Trade pact, and refusing to consummate the Colombian trade pact, China’s president is making his nation available to replace the U.S. Mexico’s President Calderon has already warned Obama that reopening nafta might cause our Southern neighbor and oil provider to look to Beijing.

The same message is coming out of Colombia, which is on the verge of consummating a bilateral trade pact with China.

With a huge U.S. South Korean agreement hanging in limbo, the Asian titan will likely deal with Seoul, since the automotive industry is a big part of that deal. And the Chinese are itching to expand the mobility of their consumer sector. That is why the intrepid Chinese are attempting to beef up any oil deal that isn’t firmly nailed down.

Venezuela has already shifted a portion of their oil exports to Beijing, subtracting it from the 100% volume once headed toward the U.S. Canada has already threatened to detour the U.S. if the new Obama Administration demands stricter controls on greenhouse gases and other effluence generated by oil sands conversion.

With China shifting its industrial efforts from dwindling exports to consumer development, there’ll be no letup in members of China’s governing team scouring the world for relevant commodity deals, especially during the current deflationary time frame.

Commodity implosion worse than equities’ decline
While most of the economy’s recessionary impact has been focused on the plunging stock and bond markets, the damage to commodity prices has been even worse.

The saga of oil’s demand destruction is best known to U.S. consumers, who have seen prices at the pump plunge from over $4 a gallon to $2 or even below. In the meantime, the $147.50 peak per barrel of oil on July 11 has shrunk to the low $50s. A wide range of building-related components have fared almost as badly.

Steel, copper, iron scrap, rare metals and potash, plus a raft of agricultural products, have reversed, expanding inflation into deep recession in just four months.

The most damaging impact to the 2009 U.S. economy is the global nature of this reversal. It is already starting to impinge on exports, America’s major growth sector, in the past five years. With the dollar gaining renewed strength, and overseas markets rapidly shrinking, this bedrock of U.S. industry and agriculture is bound to suffer a major retraction, going into 2009.

Although imports are experiencing a comparable shrinkage, slowing exports’ damage to America’s productive growth will likely reach its peak during next year’s first quarter.

Accelerating project cutbacks portend new oil price spike
The oil sands of Canada have long been anticipated as the ideal substitute for opec oil. Not only their proximity to American refineries and consumer markets, but with Saudi Arabia-sized reserves from a reliable ally, Canada’s Alberta Province was embraced as America’s answer to immediate oil shortages.

But with oil prices bumping along at $50 per barrel, practically all new projects in this gigantic Alberta tar sands strip are grinding to a halt. It’s estimated that the break-even point for $24 billion of planned projects by Petro-Canada, one of the leading converters depended upon to expand these operations, is calculated to need from $85 to $95 a barrel to turn a profit.

Canada is not alone. A wide range of national oil providers and refiners, such as Russia, Saudi Arabia and Kazakstan are pulling back on capital expansion of existing development, as well as initiating new ventures. Included in this group are such oil sand pioneers as Royal Dutch Shell and Suncor Energy.

Swiss banking giant Credit Suisse has estimated that up to 10% of 2009’s capital spending by the 26 largest global oil companies, as well as Saudi Aramco, and Russia’s Gazprom are due for cutbacks of at least 10%.

If oil prices don’t start moving back up by the end of next year’s first quarter, additional capital spending pullbacks are almost a certainty. With oil demand in China, India, Russia and the emerging, as well as the developed world, coming back by 2010, expect a new price spike to assert itself.

It’s anticipated that current and future cutbacks could severely reduce production capacity within five years. According to the Paris-based International Energy Agency, “the world will face a price surge that could exceed the $150 per barrel oil price reached last summer.”

And this time it’s due to stick, since extraction costs of new reserves will be skyrocketing in the meantime.

Worldwide unemployment grows as American demand shrinks
With America’s unemployment reports looking increasingly pessimistic, the rest of the world is trembling in anticipation of increasingly shrinking U.S. demand.

With this nation having generated almost a quarter of global demand for goods and commodities produced worldwide, the expected diminishing of America’s appetite for global imports could instigate an even greater employment crisis by overseas exporters.

While America is among the world’s three leading global exporters, outbound U.S. shipments represent less than 15% of the U.S. gross domestic product of goods and services.

Conversely, the leading global developing nations are dependent on exports of as much as one half or more of its goods produced. Since the U.S. is a major target of most of the world’s export trade, America’s shift away from the import habit could have severe employment consequences on much of the rest of the world.

With the average American currently committed to less spending and greater savings, it’s practically a given that the rest of the world will find its production opportunities severely limited. And this comes at a time when a major segment of the world’s agrarian population is on the verge of conversion to industrialization. This is even true of the opec nations, which were planning to use their excess billions to diversify from dependence on otherwise oil-based commodities.

This, in turn, will affect U.S. exports, the fastest-growing sector of an otherwise tottering domestic economy.

Barring an unexpected turnaround in the first half of 2009, expect such an employment retraction to hits its peak in next year’s third quarter.

Morris R. Beschloss, a 53-year veteran of the pipe, valve and fitting industry, is PVF and economic analyst for The Wholesaler.