Industrial sector maintains momentum

BY MORRIS R. BESCHLOSS
PVF and economic analyst

Although August will be remembered as the month of the sub-prime mortgage-motivated credit crunch, the July figures from the Institute of Supply Management (previously the National Association of Purchasing Agents) indicate a continued expansion that month, higher than originally expected. Although the overall economy is expected to slow down in the second half of 2007, both commercial and industrial construction plus maintenance and new projects are expected to accelerate their stride.

The U.S. economy’s comeback kid, the industrial sector, continues its unstoppable expansion. Despite a weakening overall economy, the industrial arena seems to be maintaining its two-year-long momentum and even gaining in some areas. This economic shot in the arm can be attributed to the following factors:

• With industrial demand increasing in the past year, overseas facilities cannot react fast enough to fill the many short-term orders which the various end use industries are calling for. This has meant the fastest rebound of U.S.-based facilities in almost a decade. It’s a trend that’s expected to continue.
• U.S. exports are hitting new highs every month, with no end in sight. The growth of emerging nations, as well as increased demand from Europe, plus the cheaper dollar and America’s quality reputation have all played a part. Two-thirds of America’s $1.5-trillion export revenues (annualized) are generated by the industrial sector. My sources in the industry tell me that export revenues are going out of sight.
• Productivity. A recent world-wide poll indicated that the American worker is the world’s most productive. This statistic is arrived by dividing America’s world-leading gross domestic product and services by the number of active employees. Although only 10% of America’s 146 million workers are involved in manufacturing, more than 14% of the gdp emanates from that sector. Much of this is due to the unprecedented expenditures for capital equipment, both for the shop floor and automated back offices.

Although politicians rail against the vanishing of American industry, the U.S. is still among the world’s Big Four -- right up there with world leader Japan, and just behind Germany. China is coming up fast, but owes much of its growth to American and European plans relocated on the Asian mainland.

With questions being raised regarding China’s quality, especially in consumer products, “Made in America” has again become the world’s leading cachet. With fear of further maintenance accidents in the energy industry, domestic pvf manufacturers tell me of a flood of orders for domestically-produced products.

Maybe the best-kept secret is the dynamic growth of high technology. Although India and China have been getting the most publicity, U.S. growth in this futuristic arena still leads the world. Technology, which was birthed in the U.S., will continue to develop new generations of progress that will keep America in an undisputable leadership position.

Ferguson expands PVF distribution

Kudos to Ferguson for the string of outstanding pvf distribution entities they have brought into their industrial arena, headed up by Rob Braig, vice president of Ferguson’s Commercial and Industrial Division.

Their latest acquisition is Davidson Pipe and Supply, the New York area’s outstanding full-line pvf distributor. In July, Davidson was listed No. 15 on The Wholesaler’s ranking of the nation’s largest pvf distributors. Like two other of Ferguson’s PVF distributor acquisitions -- Seattle-based Liberty Equipment & Supply and Richmond-based Frischkorn -- Davidson was among the small cadre of PVF distributors inducted into the original The Wholesaler PVF Hall of Fame in 2003.

Ferguson’s Commercial and Industrial Division, which itself became a Hall of Fame recipient in 2006, has become a formidable force in pvf distribution leadership. Although acknowledged as the nation’s leading plumbing-heating-cooling-piping supply distributor, Ferguson has committed itself to the stellar company brandnames that it has acquired. It is my understanding that it is now company policy to build on and broaden the distinguished PVF distribution leaders they have acquired.

The Davidson acquisition is one I know intimately. I believe them to have an unparalleled future in all aspects of pipe-valve-fitting, upgrading and export distribution. Peter Davidson, whom I have known since the early 1970s, is one of the savviest experts in this industry, and has had the vision to broaden into oil field tubular. His company came through the early 1980s Houston-centered pvf depression stronger than ever. Today, Davidson maintains a master distributorship for specialty items in Mineral Springs, Ohio, and Houston, Texas.

As a rare example of a fourth-generation family in this business, Peter’s partner, Stuart Krueger, has three sons working for the company. Old-timers may remember the original company, Albert and Davidson Pipe, which eventually split into now defunct Albert Pipe and Davidson Pipe.

I well remember Peter’s father, Phil, who died in a tragic automobile accident in 1978. As an industry youngster, I looked up to Phil as an industry father figure. I’ve been blessed with scores of multi-generational relationships in this business, but Peter was always among my closest. When I congratulated this young man on becoming part of the very few major industry distributor complexes, that’s “of the industry, by the industry, and for the industry,” I was astounded to learn that I was talking to a fellow grandpa. The combined strength of Ferguson’s commercial and Industrial Division, together with the fourth-generation Davidson Supply, anchors Ferguson even more as a solid mainstay in the fast-growing PVF sector.

Global liquidity energized by two-tier emerging markets

Although much has been written about the outburst of global liquidity, and its impact on the world monetary supply, little has been told as to why this surge may only be getting started. If this trend continues, low interest rates and moderate international inflation may be the ultimate result.

To grasp the enormity of this expansion, one must focus on the changing nature of nations that could best be described as the lower tier of an emerging sector. Many countries that were once considered survivalist are now becoming progenitors of trade surpluses.

Whereas world monetary power had previously been concentrated on such traditional economic superpowers as U.S. Japan, Germany, France, the United Kingdom and lately China, the Mideast oil titans have been added to this global cash register since the turn of the millennium. As the price of oil has jumped from $30 to $70 per barrel during this period, this monetary liquidity has greatly added to the global cash pool.

In addition, this global money machine has been greatly abetted by Brazil, Russia, India, Indonesia, Nigeria and Vietnam. Also beginning to generate vast monetary supplies are South Korea, Taiwan, Mexico, Canada and even South Africa. All have added either commodity extraction, extended added value productivity or both.

To put the new world leaders into perspective, it’s helpful to identify the nations that have reached an annual gross domestic product of roughly $1 trillion and the factors that have put them into this category:

• China, with a gdp of $2.682 trillion, will likely reach $3 trillion this year, surpassing formerly No. 3 Germany’s $2.6 trillion, and breathing down the neck of No. 2 Japan, currently generating a gdp of $4.6 trillion per year. As has often been detailed by these columns, this is due to the simultaneous development of producer, consumer, and export economic sectors. These successes are validated by a Chinese per capita gdp of over $2,000, unheard of as late as the turn of the present millennium; especially considering this superstar economy’s world-leading population.
• Brazil, no longer “the land of tomorrow,” has combined agriculture, major commodities such as sugar cane, and intense industrialization into a $1-trillion annual gross domestic product and an impressive $5,000 per capita income. While occupying two-thirds of South America’s land mass, and government by a business-minded president, its 180-million population is second only to the U.S. in the Western Hemisphere.
• India, while battling major social disparities, has also reached a $1-trillion gross domestic product. It’s already inching up to $1,000 per capita, despite a billion plus population that is due to surpass China in the next 10 years. While high tech has been India’s gateway to economic success, Prime Minister Manmohan Singh has broken the shackles of a Socialist government structure in freeing the nation’s major industries such as metalworking, and commodity extraction for major expansion. This has made the Asian subcontinent a rich haven of new foreign investments.
• Russia is the biggest economic surprise of all. After a disastrous post-Soviet decade of the 1990s, which saw a one-third diminution of the nation’s gross domestic product, Russia has reversed its economic direction by also reaching a $1-trillion gross domestic product and an all-time high per capita income of $7,000. This is the result of a massive commodity potential, such as oil, natural gas, manganese, titanium, tungsten and other rare metals. What distinguishes Russia from the other commodity-rich nations is their superior technology, a leftover from the Soviet Union’s concentration on military and space science. These educational talents are still retained, but are also being developed within a growing commercial and industrial arena.

Coming along in the second tier are Indonesia, Nigeria and Vietnam. All three have combined the judicious development of indigenous commodities with a highly productive population.

Nigeria, despite its internal dissension, is close to $2,000 per capita, remarkable for Africa’s most populous nation, even with its massive oil riches. Indonesia, the world’s most populous Islamic nation at 265 million, depends on rubber, tin, and a dwindling surplus of oil. Vietnam owes its dynamics primarily to value added to raw materials.

With all these previously mentioned nations generating an excess of global investment income, it should come as no surprise that global money flow has reached levels of unexpected proportions. Despite the current sub-prime mortgage disruption, global monetary availability has not changed. It will, however, be rechanneled into different priorities unless the mortgage mess is cleared up in a reasonable period of time.

IEA predicts energy squeeze

According to an extensive report in the Wall Street Journal, the Paris-based International Energy Agency, which monitors energy markets on behalf of the world’s 26 most advanced economies, has released its annual medium-term forecast, projecting conditions through 2012. IEA expects oil supply to be tighter in coming years than it had forecast, with little prospect of relief unless world economic growth falters.

The industrialized world’s energy watchdog added to rising concerns in many quarters that oil and natural gas production won’t keep up with the world’s growing thirst for energy in coming years, highlighting worries over supplies and prices.

The IEA doesn’t normally forecast oil prices, but its conclusions imply that consumers should expect continued upward pressure on the cost of energy. It did not, however, project the impact of inflation on such cost.

“Oil and gas price pressures look set to remain in the coming years,” the IEA report said. “Slower-than-expected gross domestic product growth may provide a breathing space, but it is abundantly clear that if the path of demand doesn’t change on its own, it may well be driven to change by higher prices,” the report said.

The IEA forecasts that the Organization of Petroleum Exporting Countries, the cartel that supplies more than 40% of the world’s daily oil needs, will have little spare capacity left by 2012. It also expects supply increases from non-opec oil producers and biofuel producers to start flagging after 2009. Natural gas markets also will be tight because of inadequate supply increases, limiting the ability of consumers to switch between oil and natural gas. Still, demand for oil and gas is expected to rise at a brisk pace in the years to 2012.

Critics of the IEA point to the number of revisions it makes in its data and some notable misses, like a surge in demand from China three years ago that helped send oil prices surging. Still, the IEA is one of the consistent sources of data on oil supply and demand and is widely respected in the industry:

• Growing tight -- The IEA said the world could face an oil and gas supply crunch in coming years and rising demand
• Thin cushion -- Economic growth is expected to spur demand, but the IEA sees opec’s spare capacity narrowing and expects growth from non-opec sources to dwindle after 2009
• Price pressure -- The forecast adds to concerns over world oil supplies and implies continued upward pressure on petroleum prices.

It said global oil demand is projected to expand 2.2% a year, on average, reaching 95.8 million barrels a day by 2012, up from 86.13 million barrels a day this year. This forecast is based on global economic growth of about 4.5% annually. Oil demand is expected to increase most rapidly in Asia and the Middle East.

Should economic growth slow in terms of gross domestic product to an annual 3.2% in the years to 2012, the need for opec oil would be reduced by some 2 million barrels a day; but that would merely postpone by a year the point at which demand surpasses the growth in global oil capacity.

It pegged total supply growth in non-opec at 2.6 millions barrels a day by 2012, to 52.56 million barrels a day from 49.98 million barrels a day in 2007. This is slower than the rate posted so far this decade and about half the rate of future projected growth in demand.

The report said opec’s spare capacity, the safety cushion in the world system, is expected to remain constrained until 2010, then shrink to minimal levels by 2012, when the exporters collectively will be able to pump only a paltry extra amount- the equivalent of 1.6% of world demand. While the IEA didn’t say so, the shrinking of opec’s spare capacity in the past decade has made the oil market skittish about any development that could conceivably threaten supply, resulting in volatile markets and prices.

In an optimistic note, the IEA said the world’s refinery capacity is likely to increase significantly during this period.

Morris R. Beschloss, a 50-year veteran of the pipe, valve and fitting industry, is pvf and economic analyst for The Wholesaler.