2012 PVF sector poised for record performance
BY MORRIS BECHLOSS
PVF and economic analyst emeritus
The 2012 PVF sector’s performance potential is poised for the best record ever generated by this energy, power and expansion-anticipated flow control infrastructure.
Never before has such a perfect storm of opportunity faced pipe-valve-fitting manufacturers, distributors, end-users and installers, as facility development, maintenance and repair, as well as expansion-in-place combine to simultaneously move forward.
The following major factors are the key to such unusually lofty expectations:
• Energy Development. All aspects of oil and its derivatives, natural gas and renewables are set to move aggressively forward, as the private sector’s investments trump the obstacles put in its way by the Environmental Protection Agency, bent on inhibiting dynamic energy development opportunities. This puts significant additional pressure on extraction, refining, and transmission.
• Power Generation. The nation’s electric utilities are in a woeful state of disrepair, anticipating a rash of brownouts and blackouts as the years wear on. These shocking shortages in upkeep and expansion have gotten worse in the wake of the Enron scandal, which subsequently cancelled new projects and relegated existing initiatives to mothballs. This critical restoration was further delayed by the jarring recession, which downplayed growth due to reduced demand. As the industrial sector leads the current economic comeback, America’s utility network is hard-put to keep up with sharp demand growth.
• Renewables. Solar, geo-thermal, wind, ethanol. Although expectations for these “green” peripherals are exaggerated by an environmentally-involved Administration, they have added to the overall impact on the wide range of pipe, valves and fittings needed to activate these added procedures. With the federal government committed to a ‘green’ strategy, the need to implement its growth will put additional demand on the PVF sector’s capability.
• Derivatives. Such consumer-oriented sectors as chemicals and plastics, as well as food, depend on PVF products to service their facilities ongoing. Already on the upswing in 2011, they are headed for accelerated expansion in 2012.
What makes domestic and export opportunities for the widening expanse of PVF products feasible is the greatest monetary liquidity ever enjoyed by America’s corporations and banks. Where previous post-recessionary rebounds have been restrained by money shortages, plentiful balance sheet cash makes simultaneous growth on all fronts readily available.
The wild card in this potential breakout to the upside is the rapid evolution of technology. This is particularly relevant to the hydraulic-fracturing (fracking) process of extracting natural gas and oil from shale. Although this process was first engendered more than 50 years ago, the high price of oil, especially, has made this constantly improving technique profitable. It has already fulfilled all domestic natural gas requirements, anticipating export possibilities in the future. As the following column points out, it’s now a real possibility in oil as well.
Total oil energy independence lurks under America’s top soil
Outside of the Middle East, only the Russian Federation has the potential oil reserves that could challenge the estimated 90 billion oil barrels trapped in the handful of U.S. regions where shale rock content has already been identified.
It’s likely that this potential could be multiplied many times over if a “full-court press” could be undertaken with enthusiastic government support.
Therein lies the problem. It’s no exaggeration to claim that the current Administration is an unwilling party to a massive drive for exploiting this unanticipated oil glut. These production capabilities, not even dreamed about a short few years ago, have been made available through the hydraulic-fracturing process.
Further enhancing an astounding reserve potential and profit-ample domestic U.S.-based oil prices are the revolutionary fracking process. This has already turned a relatively recent shortage of natural gas and sky-high costs of up to $15 per million British thermal units only three years ago, into downward cascading price levels in the $3.75 per comparable Btu into a virtual glut. This previous anticipation of liquid natural gas (LNG) to meet U.S. growing needs has, in the veritable blink of an eye, elicited a major export opportunity.
Fracking opportunities have provided a stunning turnaround in natural gas. This has already been proven in the Bakken Belt in North Dakota, and the Marcellus Range in Pennsylvania and upstate New York. In addition, new discoveries have already been found in West Texas, and there are endless acres awaiting development on federal lands.
But standing as an irrevocable barrier to a fossil fuels (natural gas and oil) breakthrough is the anti-fracking Environmental Protection Agency, and its activist head Lisa Jackson. She believes that accelerating prices of oil, her number one target, will make an evolutionary leapfrog into renewables, such as solar, wind, geothermal, hydroelectric and electric cars totally viable, sooner rather than later. She is committed to a total renewable energy replacement at any cost.
Whether this rejectionism will stop the energy revolution dead in its tracks, will depend on the outcome of the November 2012 general election.
(Editor’s note: The controversy over fracking revolves around the many proprietary mixtures of substances injected into the fuel-bearing substrates during the fracking process. Environmental groups contend these mixtures contain toxic chemicals that can find their way into water tables and waterways, depending upon the depth and location of the fracking process.)
‘Buy America’ is gathering support
The most recent attempt by both the U.S. government and the independent businesses sector to shift industry back to America’s shores seems to be increasingly resonating.
Although wrapped around the “Stars and Stripes,” Buy America’s initial objective is primarily employment-wise motivated. To put this concept into full context, this call to “Americanization” encompasses manufacturers, distributors, contractors, retailers and specifiers, who control the overwhelming employment potential in the American nation.
Even though a reversal of rampant unemployment is a major target of “Buy America,” it should not be exclusively protectionist. But it should restore a realistic global balance within the world’s largest economic giant, the U.S.A.
While the huge shift to imports has had a salutary effect on both producer and consumer costs, with a moderating impact on a potentially inflationary spiral, it may have swung the pendulum too far toward offshore dependence. Energy usage is the best example. With America’s massive business/industry community enmeshed in import/export activities, it would be foolhardy to embrace the [Republican-sponsored] Depression-era Smoot-Hawley protectionist legislation, which some economists claim exacerbated that disaster’s downward plunge.
What I have gleaned from several hundred respondents regarding a restoration of a more balanced foreign/domestic role in America’s economic future brought out the following:
• An overwhelming majority of business decision-makers believe that it should be mandatory that American business owners and managers all be totally responsible for the products of their domestic or import manufacture; whether industrial or consumer-oriented. Their point is that the highest standards of safety and performance must be assured by the progenitor to their markets, no matter where their origins.
• An attitudinal shift indicates that the runaway importation of foreign finished goods and components, in the hands of importers buying strictly on price, should be reversed.
• Higher overseas labor costs, galloping transportation outlays, questionable and untraceable foreign quality standards, and “just in time distributor inventories” have added to bringing some manufacturing back to the U.S.
In the final analysis, the legal consequences to the company responsible for installing or dispensing such products made overseas, if not controlled by a reputable owner/manager in the U.S., will provide the ultimate answer to how well the foreign/domestic balance continues to resonate.
Just-in-time distributors’ inventory restrictions mask U.S.
manufacturing comeback
In my continuous national survey of America’s manufacturing comeback, now in its multi-month consecutive rebound, I tend to dwell on the consummate amount of orders emanating from the actual product users for new projects, maintenance and repair, and internal expansion.
Since I interface with a substantial number of distributors of industrial and flow control products, I noted an October disparity between the brisk pace of new orders emanating from the field, in comparison with the inventory downturn at the distribution level, which seemed to be lagging from the brisk pace I noted from field reports in general.
The answer lies in the schism between increasingly skittish distributors, concerned about a sputtering economy and overall fears of increasing recessionary trends, and the actual usage. This has caused distributors in general to tighten their “just-in-time” inventory level, while customer orders were expanding during the month of October.
Since the bulk of distribution’s investment revenues are expended on inventory buildup, this critical segment of the business channel is heavily influenced by anticipation of future economic growth, pricing levels, and maintenance of adequate immediate service to its customers.
The thrust of my October conversations revealed strong existing demand, but increasing concern with a ‘double dip’ recession, largely influenced by Europe’s intensifying financial turmoil, and the lack of cohesive business-positive legislation emanating from the Washington, D.C. political establishment.
While energy development has reached new levels of U.S.-based dry land growth, especially in “fracking” activities like North Dakota’s Bakken Belt, and the Pennsylvania/New York Marcellus Range, in addition to onsite refinery expansion, and electric utilities’ catchup, the specter of outright hostility by the Environmental Protection Agency, and its successful attempt to stop the building of the Canadian/American oil pipeline has the distribution fraternity especially concerned about the future.
(Editor’s note: Nebraska’s Republican governor Dave Heineman says he supports efforts to accelerate the federal approval process for a controversial crude oil pipeline through Nebraska, provided state officials agree to a new, acceptable route in Nebraska. Pipeline developer Trans-Canada agreed to divert the 1,700-mile project away from the sensitive Nebraska Sandhills that are located over the Ogallala Aquifer. Environmental groups oppose the pipeline because it would carry toxin-laden Canadian oil-shale crude oil in a 36" pipeline that could wreak environmental havoc should it rupture. The Obama administration has delayed the final approval of the pipeline’s route until 2013, following more extensive studies of the pipeline’s proposed route.)
Internal corporate capital expenditures hit all-time high
Non-defense capital goods orders, excluding military and commercial aircraft, hit an all-time high of $68.9 billion in September, surpassing the previous high of $68.5 billion in April 2008. The latter came at the peak of the pre-recession boom preceding the global financial disaster of September 2008, ushering in the most recent recession.
These numbers represent the investment dollars that U.S. companies, large and small, spent on capital equipment expansion and replacement. What makes these gross expenditures so phenomenal is that an overwhelming majority were allocated to automation, upgrading and mechanization of existing facilities, rather than expansion.
It ratifies what these columns have attested to in the past year, that business and industry is focusing on greater unit productivity, in markets that are squeezing profit margins between higher raw material costs on the one hand, and customers' static demand and non-acceptance of price increases on the other.
As often repeated here, it is also part of a widespread resistance movement against federal and even state and local governments to impose greater costs on America’s independent business sector. Since the overwhelming percentage of such non-publicly traded companies produce their goods and services within the borders of America’s 50 states, shifting production abroad is generally not an option. In fact, our surveys indicate that maintaining domestic control over quality and inventory levels ranks high in priorities that such manufacturers, distributors, contractors and retailers impose on themselves.
This ever-hardening position, in the face of perceived government hostility, has negatively impacted employment increasingly. It has further shifted the relocation within the U.S. from such high tax states as New York, California and Illinois to Texas, Nevada and the Carolinas, where state governments have made the hiring climate more propitious.
The insensitivity of U.S. government-controlled agencies like EPA, SEC and FTC, in coagulating the arteries of businesses, desperately desiring to prevail in a stagnant economy, will make it nigh impossible for America’s private employment sector to even absorb new entries into the labor pool, much less reduce the high recession level employment rate.
An American economic decision showdown will have to await the November 6, 2012, general elections to determine this nation’s future economic course.
America’s intellectual property rights thefts —
U.S. multi-national corporate victim?
Although the federal government has accused such major world powers as China, Russia and India as being complicit in the theft of America’s intellectual property rights — such as high technology, films, literature and patented medical innovations, etc.— this has not stopped such practice in its tracks.
The U.S. is obviously the leading victim in this ongoing theft, due to the prominence of its inventive exceptionalism.
While these alleged crimes are said to be committed by a shadowy group of “idea thieves,” it may come as a shock to learn that large American corporations, and even government agencies, are complicit.
With the surge by many of America’s billion-dollar entities gravitating to low-cost overseas manufacturing and service facilities having become epidemic in the past 20 years, the usurping of America’s innovative genius has become increasingly easy.
Since manufacturing facilities in foreign nations are easily accessible to local managers and engineers, such usurpation is not difficult to evolve even under the strictest surveillance by corporate U.S. headquarters.
Charges levied by legal representatives of multi-nationals, who have demanded stoppage of such practices when incurred, found little satisfaction in those accused’s national courts.
This practice has also spread to military and security-oriented equipment, either sub-contracted overseas or licensed to foreign contractors, who can “leak” such world-leading ideas as aeronautics, avionics, and missile defense technology.
Although this “leaking” of innovations is known to be a relatively ongoing practice, there is little the U.S. government or the major corporations have done to nip it in the bud.
These thefts are an unfortunate sidebar to America’s spreading dependence on its foreign affiliates. In addition to the purloining of America’s innovative genius, these ongoing idea thefts will further weaken the domestic advantage that should have accrued to the benefit of America’s business industry, and the public in general.
Morris R. Beschloss, a 55-year veteran of the pipe, valve and fitting industry, is PVF and economic analyst emeritus for The Wholesaler.