PVF sector continues hot growth

BY MORRIS R. BESCHLOSS

PVF and economic analyst

In conjunction with this month’s Wholesaling 100’s annual review of the PHCP/PVF industry’s leading distributors, the 50 outstanding pipe-valve-fitting specialists view their improving eminence with justifiable pride.

Among the salient factors that have catapulted this fabulous 50 into its current prominence has been the explosive end-use growth that this sector caters to. It’s no secret that all aspects of power generation, energy development, expansion of alternative sources and derivatives have propelled the products generated by PVF distribution into increasing levels of demand.

But that’s only part of the story. The internal development of this distribution sector -- and the vigor of its organizational strength -- has gone a long way toward evolving this once-obscure group into probably the hottest distribution property that PHCP wholesaling has to offer.

One has only to focus on the recent acquisitions and their value to prove my point. Wall Street giant Goldman Sachs’ purchase of a majority interest in two of the largest U.S. distributors (McJunkin and Red Man Pipe) would have been unheard of just a few years ago. Global distribution giant Ferguson directing attention to PVF distribution acquisitions, as well as setting up a separate organization to capitalize on the benefits of this subsector, is another proof of PVF distribution’s enhanced value.

The PVF Roundtable (the focus of this month’s Q&A), the ASA’s Industrial Piping Division, The Wholesaler’s PVF Hall of Fame, and the joint venture PVF panel session between this magazine and the Roundtable at the annual asa Convention all bespeak of a distribution sector that has developed a strong identity within the PHCP world.

A fitting tribute to this development came from Bill Weisberg, CEO of Affiliated Distributors, the PHCP industry’s largest amalgam of independent distribution. His interest in PVF distribution was piqued by an article I had written 12 years ago on the evolution of industrial products within our growing PHCP distribution sector. I had referred to pipe, valves and fittings as products that were becoming increasingly popular among PHCP wholesalers. Within the article I differentiated between plumbing, heating, cooling wholesalers who carried PVF as an accommodation, the growing number of importers and master distributors who had become increasingly involved in these product groups, as well as mill supply houses who offered PVF as a convenience to their industrial maintenance customers.

I also mentioned that a “specialty group” called PVF wholesalers were in the process of organizing as a separate entity. The conversation that followed was the beginning of Affiliated Distributors’ fast-growing and dominant PVF division.

Although specific figures are not readily available, the PHCP industry’s revenues at the distributor level are estimated at $75 billion. Fully one-third of this amount is encompassed by the pipe-valve-fitting sector, which includes the components now part of industry distribution giants such as Ferguson, Hajoca, WinWholesale, as well as the many regionals and independents who still comprise the bulk of the fastest growing aspect of this industry’s wholesaling sector.

High oil prices shift global economic power

Oil passed $125 per barrel recently, about 25% higher than the inflation-adjusted equivalent highs reached in the late 1970s and early 1980s. It is not the intensifying energy price rises that are of greatest concern, but rather the impact that the price of oil is beginning to have on the global system. If oil prices continue at this level, or go higher, there will be long-term shifts in how the international system works.

One of these shifts is already in play. The nations of the Arabian peninsula have accumulated a tremendous amount of cash. Most other oil producers use surplus money from energy sales largely for internal purposes. Nigeria and Venezuela, for example, are not about to become international investors. They’re hemorrhaging their cash wastefully. The situation in the Arab countries is different. Those economies can’t possibly absorb the money that is pouring in. This money is available for investment around the world. Much of that excess is coming into the U.S., and is helping to stabilize equity markets. But, as in the 1970s, economic power translates into political influence, and the Arabian influence on a wide range of countries and issues will increase dramatically. The countries of the Arabian peninsula will once again become the primary source of large-scale finance around the world.

In the 1970s, one of the consequences of Arabian oil was the creation of a bulwark against left-wing radical Arab movements, still under the Soviet sway. The money was used to immunize Arab regimes and others from the radicals’ attacks by paying them off. Whether the money will be deployed the same way against radical Islamist religious groups remains to be seen. But this much is certain: The Saudi regime, which had been under heavy internal pressure a few years ago, now has more monetary ability than ever to buy the loyalty of dissident tribes and factions.

The losers will be those countries that chose to industrialize most intensely. High oil prices have had less impact on the U.S. this time around than in the 1970s because of America’s progressive de-industrialization. Service industries use less energy than steel mills. The countries that have adopted industrialism as a growth mechanism are extremely vulnerable to high oil prices. And China, the world’s most dynamic growth engine, has industrialized the most intensely. The higher the proportion of industrial plants, the more each dollar rise in the price of oil hurts. Under pressure from high food prices as well, the Chinese economy faces the choice of raising export prices and losing market share, or subsidizing exports even more than it now does. That is the short-term solution, but it is unsustainable in the long term.

Russia, which exports energy and uses the proceeds to modernize and expand its indigenous energy industry, selectively acquires global assets and builds new businesses at home. It is also using these high energy prices to reposition itself economically. And with that repositioning, it is acting more assertive geopolitically. The Russians have also apparently built up major financial reserves in case energy prices drop precipitously. The surge in energy prices has put Russia in a position to rapidly regain its position as a regional superpower.

The leaders of the industrial world are weakened the most by their increasing energy dependence. And those countries without any substantial industry base, but with lots of energy reserves, are increasingly the big winners.

If the price of oil starts to fall, speculators would be squeezed out and the fall could become more rapid. So long as oil stays above $100 a barrel, the Arabian Peninsula will hold the whip hand in the financial world, China will be squeezed, and the Russians will get stronger. And the U.S. and Europe will be the least affected, unless they fail to reposition themselves in the ranks of this new order. This means acceleration of technological development, military power, and creation of new areas of growth as yet not even on the drawing boards.

Warner-Lieberman cap and trade bill portends disaster

In June 2008, the U.S. Senate debated S.2191, sponsored by Senators John Warner (R-Va.) and Joe Lieberman (I-Conn.) and called “America’s Climate Security Act.” This badly flawed bill would implement a cap-and-trade policy to reduce U.S. greenhouse gas emissions to 4% below the 1990 level by 2020, and to 63% below the 2005 level by 2050, according to its authors.

The bill could cap the total amount of greenhouse gases emitted in America. It would direct the government to auction greenhouse gas permits to American businesses and set a declining cap on greenhouse gases between 2012 and 2050.

In addition to setting up a slew of new organizations and programs, this new government boondoggle would cost the U.S. a trillion dollars over the next decade, according to the Congressional Budget Office.

As would be expected, the National Association of Manufacturers and the American Council for Capital formation reject this bill, claiming that Warner-Lieberman would progressively lower America’s gross domestic product by as much as $238 billion dollars in 2030 and $1 trillion in 2050, than projected if the bill was not in place.

Job losses, household income, manufacturing activity, electricity and gasoline prices would progressively bear the brunt of this Environmental Protection Agency-supported bill, which is fronted by two moderate Senators and hailed by California’s liberal Sen. Barbara Boxer.

Surprisingly, the EPA’s economic analysis committee admitted the implementation of this omnibus bill would prove very costly to the U.S. economy, but did not state specific figures.

Morris R. Beschloss, a 52-year veteran of the pipe, valve and fitting industry, is PVF and economic analyst for The Wholesaler.