PVF sector adjusts to depressed market levels

 

BY MORRIS BESCHLOSS,

PVF and economic analyst emeritus

 

With the prices of crude oil and natural gas hunkering down at depressed levels, the PVF sub-sectors depending on the expansion of these core businesses are obviously in hiatus at this stage of the international recession. However, offsetting this downturn is the red-hot development of power generation development that is vainly attempting to catch up with the increasing demand and the waning supply.

 

This has become of growing concern as the utilization of coal and the expansion of nuclear power stations have been increasingly curtailed.

 

However, the development of power generating infrastructure depends on a massive amount of this industry’s pipe, valve and fittings, which continues to underpin the business of most sector manufacturers as well as distributors, fabricators, turnkey constructors, and engineers.

 

Natural gas is increasingly replacing the use of both coal and the diminishing use of oil in power generation. That is a major reason that pipe in the transmission of natural gas is still exceeding the production of that fossil fuel, which has accumulated one of the greatest gluts, and lowest prices in years.

 

PVF manufacturers and turnkey constructors who have consummated available projects in the past few months, are benefitting by the resultant expanding margin of materiel costs that have plummeted dramatically since the first of the year. This will at least temporarily benefit manufacturers — and eventually distributors in their reorders.

 

Most concerning to the large group of PVF distributors and contractors who focus on commercial development and maintenance are the serious credit problems facing major developers controlling much of the new office buildings, hotels, motels, shopping centers, and multi-story apartment buildings. Although the recently conceived Treasury De­partment’s TALF program, and support from the Federal Reserve Board holds promise for future credit easing, commercial project activity has practically come to a halt. Business in this arena has effectively been reduced to maintenance and repair activities.

 

On the good news side of the ledger is the reawakening of global trade. This has resulted in an upward bump on exports in the first quarter 2009. Two-thirds of the trillion dollar plus U.S. exports are comprised by industrial products, much of which are PVF oriented.

 

My outlook at this point is that the PVF sector will continue to do fairly well, as the general world economy gropes to find its footing during the remainder of 2009. With oil, natural gas, and the shipment of coal to China and India, expect pvf manufacturers, distributors, contractors and others involved in the sector to regain momentum as the year 2010 beckons.

 

2009 economic year begins to unfold as second quarter progresses

 

As we progress ever deeper into the heart of the second quarter economic activities, it’s becoming increasingly more apparent that 2009 will be a year of stabilization at best.

 

From a gross domestic product of goods and services point of view, 2009 will be a year of contraction, probably at two to three percent.

 

Although fourth quarter 2008 came in at a severe 6.3% downward slide, this year’s first quarter won’t do much better. Weighing heavily on America’s economic viability is the disintegration of the automotive industry, sharply declining from 17 million sales of cars and light trucks in 2007, 13.2 million in 2008, and a miserable 9.3 million at the 2009 first quarter rate.

 

Sales of new and existing homes have inched higher, buffered by record low-fixed rate mortgages, and a tax credit for first time home buyers. Purchasing managers for industrial firms reported slightly better results for the past three months, but are still deeply imbedded in recessionary levels.

 

The good news is that sales from inventories are actually exceeding production results, providing a long-term stimulus for eventual pickup in industrial activity.

 

Credit markets also improved perceptibly, showing up in the closing gap between investment grade and high risk speculative bonds.

 

However, retail sales shrinkage for the year is expected to be at least one percent, while the trade deficits should come in at a multi-year low of $450 billion, generating just 3.2% of gross domestic product for the year 2009.

 

The Consumer Price Index, reported in April, was down 0.1%. Year to year, this was the first negative cpi trend since 1955.

 

Industrial production, as we predicted, came down 1.5%, with capacity utilization now running under 70%.

 

Oil conundrum becomes increasingly puzzling

 

The oil tug-of-war between supply and demand, and the increasingly diverse viewpoints of energy pundits, seem to have observers like myself scratching our heads. Since the 2008 mid-July price of oil at $147 per barrel dropped to $36 early in January (barely six months), the oil sector seems to have taken on an air of irrationality.

 

The latest prediction by the Paris-based International Energy Agency, which provides best estimates to the world’s developed nations, is calling for a 2009 reduction to 83.4 million barrels per day from last year’s 85.8 millions bpd. This is grist for the mill of bears who believe that oil prices will be mired in a $40 to $50 range per barrel for the rest of the year.

What this overlooks is the comeback of China and India, which have a combined 2.5 billion population potential evolving into the automotive age, while America’s 305 million inhabitants could likely have reached the peak of their usage this year.

 

On the supply side are two major factors:

 

1. The drastic production cutbacks by OPEC so far this year, which have been 75% effective — and could be further constrained.
2. The record oilfield shutdown of drilling rigs in the Gulf of Mexico, the Bakken Belt in the Northern U.S., and the holdup of new projects in Canada’s Alberta Province’s oil sands region. The unraveling of Mexico’s giant Cantarell oilfield is also a contributing factor, as are two of the five major Saudi Arabian production sites.

 

One thing is sure. Even if oil usage slows in the years ahead, the cost/profit breakeven will climb substantially. This is due to the prohibitive cost of deep sea, offshore extraction and the increasingly complex technology to convert Canada’s expanding oil sand potential into viable crude oil. The increasing hostility to greenhouse gases and carbon dioxide effluence (high in the tar sands conversion process) could also become an inhibiting factor for American importers, propagandized against accepting these oil products.

 

How this, and a slowly recovering economy combine to play out all these factors should provide a clearer price picture as the year progresses.

 

Is commercial real estate the next shoe to drop?

 

Like rumbling thunder portending a major storm, the danger of a commercial real estate deleveraging becomes more significant by the day.

 

Whether we’re talking about office buildings, shopping malls and specialty stores, hotels and motels, public storage, or even car dealerships, America’s current retail infrastructure is significantly overbuilt in accommodating the level of commercial activity currently taking place, or to be expected in the foreseeable future.

 

As the air continues to leak out of the consumer spending bubble, it’s becoming increasingly apparent that the vast amount of commercial real estate, accumulated over the past two decades to accommodate the unquenchable appetite of the American consumer, has led to unsustainable overbuilding. What qualified as maintenance just two years ago is now rank surplus, when measured against the drastically changing nature of consumer activity.

 

This will have left many projects in process hanging in mid-air, as commercial developers’ bank loans are being called, and new funds are increasingly unavailable. This turn of events is drastically impacting plans for commercial new construction, with the exception of healthcare or elder care new facilities.

 

Unfortunately, this turn of events may not be limited to the temporary exigencies of the ongoing recession, but will likely be impacted by the more permanently restrictive nature of consumer attitudes, as the U.S. economy works its way out of the ongoing economic downturn.

 

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