U.S. manufacturing sector in throes of turnaround mode

 

BY MORRIS R. BESCHLOSS

PVF and economic analyst emeritus

 

It was a long time in coming, but the U.S. manufacturing sector, which encapsulates the bulk of all pipe-valve-fitting activities, is in the throes of a major turnaround, after a long drought extending back to early 2007.

 

The lack of major projects and maintenance contracts in the energy industry, together with a drop in exports and especially a dearth in commercial developments, have deeply depressed the nation’s industrial activity for more than a year. However, a general economic rebound, along with an overdue inventory rebuilding effort at both manufacturing and distribution levels, has reawakened a moderate activity surge, providing a new production stimulus. Adding to the acceleration of the downturn had been inventory liquidation by such distribution giants as McJunkin/ Redman, Ferguson and Noland, which have ostensibly instigated substantially stringent inventory restrictions in light of the demand downturns earlier in the year.

 

Also adding to the deflation of inventory levels have been the PVF industry’s outstanding master distributors, who have cut back their extraordinary inventory positions. Their previous buildup had been reflective of the massive demand that existed during the PVF-inspired boom (2003-07). With foreign imports way down due to high transportation and increased per unit costs, domestic producers have benefitted by quicker availability and the “buy American” motif of the massive $800-billion stimulus plan, which has been verified by a recent survey of manufacturers and distributors concerned.

My soundings have detected increasing concerns among PVF distributors, that an expected demand increase this fall may find the cupboards bare, while “just-in-time” demand is coming back into fashion, out of necessity. This is true, especially, of mechanical contractors who are expecting a torrent of new orders from awakening projects in hospitals, assisted-living housing, schools, religious institutions and a wide spectrum of multi-storied apartment buildings, as the swing toward rentals accelerates.

 

Continuously higher steel, iron and copper scrap costs, reminiscent of mid-2007 levels, are a further sign that the PVF sector demand is on the rise. The bounce back in copper prices may even foretell an embryonic reversal of residential housing, although the slight increase in housing starts and building permits may yet prove premature.

 

More likely, the unprecedented boom of China’s manufacturing sector, encompassing its huge 1.4-billion-strong consumer sector is acting as a magnet for such commodities as oil, copper, and steel alike. It also has reinvigorated American exports, which are being benefitted by China’s call for industrial machinery, as well as a large mix of mill supply products, and an increase in the need for U.S. agricultural goods.

 

Both U.S. PVF manufacturers and distributors would be well served to strengthen their industry inventory positions, so as not to be caught short when those emergency orders come pouring onto their sales desks in the year’s final quarter.

Despite the justifiable criticism of the slow-moving and earmark-oriented stimulus plan, this omnibus opus should pick up steam in the year’s last three months, with PVF industry products providing a significant segment of the products called for by the “stimulus.”

 

Oil, natural gas price gap widens to record spread

 

What has gotten lost in the ever-increasing price spread between oil and natural gas is the disparate track both these powering elements have been on since the bloom came off the rose of fossil fuels last summer.

 

Whereas oil has more than doubled from its February low point, natural gas has continued its downward path, closing at below $3 per million Btu as the past week came to a close. This was the lowest price in seven years and registered an all-time high spread between the two fossil fuels of 24.5 to 1.

 

The ratio since the NYMEX gas contract began trading in April 1990 has historically gravitated between 6.5 to 1 and 10 to 1.

 

There are several reasons why the price of natural gas continues to lose its footing, even in a world market that has posted greatly reduced demand this year:

 

• Since crude oil is influenced by cutback strategies of OPEC, geopolitical disturbances such as the Nigerian rebellions and Iran’s political instability, not to mention diminishing reserves, oil prices continue to claw their way back to levels not seen since last October.
• The natural gas supply/demand scenario is primarily contained within the U.S. and Canada. The high natural gas pricing previously had reflected the severe natural gas shortages of five years ago, when the price reached a record $15 per million Btu. At that time, Fed chairman Alan Greenspan warned that crippling natural gas shortages were in store as the expanding electric utilities were rushing to convert that resource from coal and oil. Natural gas was also increasing its dominance in the heating and air conditioning sectors. Even the import of liquid natural gas was considered to close the gap.
• While China is fast becoming a leading buyer of crude oil, second only to the U.S., putting pressure on prices, American industry has discovered the technology of “fracking” natural gas, which forces gas out of shale rocks by shooting water and chemicals into them. This has caused a supply glut this summer as moderate temperatures have lowered the need for natural gas used for heating and air conditioning, while supply has surged.

 

Although conversion to natural gas from oil would normally be expected from such cheap gas prices, there are few installations left to convert. Besides, the newly empowered Environmental Protection Agency would likely step in and put a stop to greater use of “fracking,” proven to be inimical to climatic purity.

 

To stay up to date with my twice daily blogging, be sure to log on to my hyperlink at www.theworldreport.org and then click on ‘Morrie’s page,” announced in the middle of the World Report website. Your recommendation for my blog, as well as the individual columns will be much appreciated.

 

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