PVF sector momentum maintains intensity

BY MORRIS R. BESCHLOSS
PVF and economic analyst

Both statistically and anecdotally, the strength of the PVF sector seems to be maintaining the momentum first noticed when distributors started building their inventories in December last year. Although normally a month of liquidation for distributors, due to year-end floor taxes, this buildup turned out to be engendered by a flurry of orders from end users; abetting it was the fear of commodity price increases that were already becoming increasingly noticeable at that time.

But further investigation brought out the following salient factors that seemed to be in full tilt already by the end of last year:

• A confluence of demand comprised of delayed projects in the broad industrial arena, such as utility and refinery upgrading, oil and natural gas production and plant expansion and maintenance. In addition, the need for rental space, especially in the metropolitan areas, has rekindled the high-rise apartment demand, catering to the switch from condos.

• An unexpected export surge facilitated by a major boom in Southeast Asia, especially China and India. Comprising almost 35% of the world’s population, these two nations alone are using their trillions of surplus cash to upgrade their populations’ living standards. Both American industrial, consumer and agricultural products are benefitting, especially with a dollar that has fallen 17% since the first of the year.

• The diminution of U.S. cost margins between overseas manufacturing and transportation, especially from the Southeast Asian quadrant. By 2015, China’s labor cost increases are estimated to add on 20% per annum, while U.S. labor additions will comprise no more than 3% yearly.

• Just-in-time inventory. During the great recession, manufacturers, distributors and retailers cut their inventories to the bone and have been ill-prepared for the sudden uplift in orders, especially in items that are traditionally slow-moving. Imports necessitate long lead times and large quantities to make such orders cost effective.

• The fear of repercussion from failures on the job. Although this concern was raised to crisis proportions during the BP deep sea drilling failure in the Gulf of Mexico last summer, I have heard from a great number of contacts that they will not deal with companies that don’t give them recourse fallback. This is not necessarily aimed against imports if an American-based firm stands behind the product, with its name on it.

Although most multi-nationals will maintain or even expand overseas facilities, these will be more a matter of serving the markets in which these factories are located. Already, Caterpillar, NCR, General Motors and Wham-O, the maker of Frisbees and hula hoops, have either returned some of their facilities from overseas or are planning for further future expansion in the U.S.
This may not energize a significant number of new jobs, but will definitely curb further personnel outflow and greatly expand U.S. based manufacturing activities.

U.S. first quarter manufacturing attains sizzling pace

While America’s industrial production sector grew at an annualized 9.1% pace in 2011’s first quarter, it is showing signs of gathering even greater momentum in the future. This is buttressed by announcements from such manufacturing giants as Caterpillar, General Electric and Ford of plans for new investments within the U.S.

With industrial workers’ productivity at an all-time high, it’s anticipated that large companies’ offshore relocation, especially to China, will perceptibly slow in the months ahead. Combined with a massive labor cost increase in China, due to unprecedented wage hikes, experts indicate that, by 2015, there will be little incentive for U.S. industries to shift their operating bases abroad.

With China at its own breakneck pace to bring hundreds of millions into its middle class, that incredibly growing industrial giant will be hard-put to quench the internal demand for housing, automotive products and modern technology. Combined with a consistently upward valuated currency, this national thrust to upgrading its domestic sector in all its aspects will make it a lessening export factor but an expanding market for imports, especially from the U.S.

Professional studies indicate that Chinese manufacturing wage costs are expected to rise almost 20% a year for the next five years, while America’s equivalent will be about 3% a year for the same period.

A realistic reallocation of U.S. production efforts to more sophisticated products, such as those emanating from high technology and entrepreneurial innovation, will combine to make the U.S. among the world’s most attractive manufacturing sites. Combined with a cheap dollar, increasingly competitive on the world market, the intensity of concern with assured quality and the ready access to finished goods from distributors, contractors and retailers looking for just-in-time delivery is sure to build an ever firmer footing under America’s industrial base.
Despite a precipitous drop in employment, U.S. manufacturing revenues, abetted by an export boom, are expected to surpass the peak reached in December 2007 by the end of 2011’s first half.

Alaska pipeline, oil production in dire peril

When the largest oilfield ever was discovered within the continental U.S. in the mid-1970s, the country breathed a joyous sigh of relief that dependence on Mideast oil supplies would not deter President Richard Nixon’s 1973 call for energy independence.

Even the problem of transportation to Alaska’s “warm” seaport of Valdez was resolved with the engineering miracle of the Trans-Alaska pipeline, which reached a daily volume of two million barrels by 1990. But at a time when the only short-term salvation proffered by the administration seems to rely on lessened demand and on reaching the impossible target of 80% renewable fuels usage by 2035, the stemming of higher oil prices is increasingly weakened by the robust objections of the Environmental Protection Agency.

The Alyeska pipeline rebound, which would have allowed the Prudhoe Bay’s giant oilfield to provide all the oil needs of Alaska and much of the U.S. continent, is now in peril. The daily availability of oil has been reduced to less than 500,000 barrels, not enough to keep the fluidity of transported oil needed to withstand near-freezing temperatures. This reduction is largely due to the reserves in the largest of the Prudhoe Bay oilfields having been depleted over the past four decades.

The only alternative seems to be additional drilling in Alaska’s North Slope, but even the sound of that word (drilling) seems to arouse objections by fossil fuels detractors. With the Gulf of Mexico deep sea drilling on the American side in limbo and Mexico’s major undersea oilfields near the point of exhaustion, domestic oil availability will have to rely on shale or the reopening of small surface exploratory areas as prices climb higher later in 2011 and the years ahead.

The urgency of confronting the overall energy replenishment problem seems to have taken a backseat in the administration’s forward planning. This means greater reliance on Brazil’s Petrobras, which is benefitting from a $10 billion U.S. loan, to direct more of its high-priced production toward America’s shores. The future of global demand and the seesaw of forthcoming prices will eventually determine the ultimate seriousness of the energy equation.

Environmentalists, oil and gas producers at loggerheads over fracking

With long-term oil supply shortages and higher energy prices inevitable, the energy industry is fighting back against the wave of condemnation of “fracking” by the Environmental Protection Agency and its associated civic groups.

What is at stake is the wide-spread utilization of the hydraulic fracturing of billions of gas and oil bearing shale rock by injecting millions of gallons of water laced with chemicals into the ground to crack open gas and/or oil bearing shale rock. Environmentalist groups have warned that this procedure would contaminate water with gases or with chemicals used.

Currently, the As you Sow advocacy group is mounting an orchestrated campaign against fracking by appealing to investors of such major U.S. energy companies as Chevron, Exxon Mobil and Houston-based Ultra Petroleum. This mounting confrontation will escalate in the months ahead and will likely become a national issue. It boils such a familiar attack on fossil fuels down to the decades-long controversy as to whether the U.S. is willing to confront the possibility of some air or water pollution risks in favor of America’s greatly lessening future dependence on foreign oil sources.

While the incumbent administration is putting the bulk of its financial bets on “renewable energy,” the world’s emerging nations, including northern neighbor Canada, has no such compunctions. They are going full steam ahead to maximize production of oil, gas and coal to generate additional revenues and minimize dependence on the Islamic-controlled turbulent Middle East and Northern Africa.
With the U.S.’s out-of-control deficit continuing to mount, greater energy independence, as promised by the enhanced fracking procedure, would seem an obvious offset, both to the hiring of unemployeds, as well as to the reduction of this nation’s huge trade imbalance.

Morris R. Beschloss, a 55-year veteran of the pipe, valve and fitting industry, is PVF and economic analyst emeritus for The Wholesaler.