PHCP Industry piping systems expand into broader markets

 

BY MORRIS BESCHLOSS,

PVF and economic analyst emeritus

 

Despite the ravages of the ongoing deep recession, which has hit the construction sector especially hard, the role of expanded piping systems continues to strengthen its importance as part of the mechanical contractor’s contribution to the current and future development of construction as a whole.

 

With accelerating technological developments imparting such diverse end-use factors as power generation, residential-commercial-industrial heating and cooling, transmission of oil and natural gas, as well as the refining and blending of gasoline, the position of the mechanical contractor will increase in relative importance to future projects and their subsequent maintenance and enhancement.

 

Despite the impact of the ongoing credit crunch on much of current commercial development, the greater complexity of piping systems can only be resolved by the expertise of the mechanically savvy industry contractor, as these systems become imperative as part of the overall project development.

 

The expertise of the plumbing-heating-cooling-piping contractor is increasingly being recognized by an expanded segment of the PHCP sector.

 

Whereas the industry’s mechanical contractor’s role was rarely recognized in the wider scope of industrial applications, especially energy, in the past, an increasing number of such well-trained experts, emanating from the commercial end of our business, are finding their capabilities sought after by a broadening gamut of industrial project developments.

 

Part of this is due to the decrease of current opportunities in available PHCP projects. But the reputation of our industry’s mechanical expertise, and its practitioners is being increasingly appreciated by such major turnkey constructors as Fluor, Bechtel, Brown and Root, and Halliburton.

 

The respect reflected in the work already performed in the industrial arena by mechanical contractors has opened doors, previously not available due to the limited understanding of the sophistication and engineering knowhow that these highly trained mechanical experts bring to the table.

 

As the economy in general evolves out of its current morass, the expansion of renewable energy programs, in addition to a comeback in conventional fossil fuels, will put an even greater demand on the capability of our industry’s mechanical experts.

 

The current malaise from which the PHCP sector is suffering may turn out to be the springboard for a more permanent position of the mechanical contractor in the growing expansion of energy usage and its increasing piping system complexity.

 

It’s a prime example of where a temporary setback has created opportunities for the superb mechanical knowhow of our industry and expanded it into arenas where their previous involvements had been few and far between.

 

Global electricity usage decline first since 1945

 

Global electricity usage, which had been playing catch-up early in this decade, will fall by 3.5% in 2009, according to the Paris-based International Energy Agency.

 

Even China, the world’s leading growth economy this year, will experience a 2% fall in electricity by 2% in comparison with 2008. This is in face of an 8% total economic expansion this year, as reported by Beijing’s officialdom. Russia, experiencing a major letdown anticipates a severe electrical cutback of 10%. Simultaneously, countries in the Organization for Economic Cooperation & Development will experience a fall of almost 5%.

 

Seventy-five percent of the global decline in consumption is accounted for by industrial, rather than household demand, reflecting China’s drop in industrial activity for export. India, which is on a solid uptick, is actually increasing its consumption by more than one percent this year.

 

Despite the volatile nature of oil demand, and that of other commodities during times of severe recession, a reversal in electrical usage has never occurred since the end of World War II. In fact, forecasts of electricity usage before the current local crisis had been projected at an increase of 32.5% between 2006 and 2015. World electricity increase actually grew by 25% between 2000 and 2006. In 2007, it rose 4.7%, and before the current financial crisis broke out, it had enough momentum to end the year with a 2.5% increase.

 

The International Energy Agency is on board with the renewable energy concept, but believes that plans in that direction by the world’s G20 nations are totally inadequate. The IEA is particularly disappointed that concern about greenhouse gas and CO² emissions by most developing nations is not even in the embryonic stage.

The Agency believes that United Nations renewable energy targets have no chance of being met under present conditions. It also predicted that a new oil supply squeeze will make itself felt by 2012. It cited a drop in availability, currently at two million barrels per day and another 4.2 million barrels per day delayed by at least 18 months.

 

Clean Energy and Security Act readied for congressional action

 

At a time when the American economy is struggling to extricate itself from its recessionary morass, Congress is moving to push through an ill-conceived, ill-considered energy bill, whose end result could become catastrophic.

 

Echoing Obama’s Chief of Staff Rahm Emmanuel’s admonition, “never miss an opportunity to take advantage of a crisis,” the President’s Administration is moving aggressively forward to turn America’s energy industry upside down to accommodate the environmentalists and would-be climatologists.

 

Key to this misbegotten bill is the odious cap-and-trade initiative, which would drive businesses and power generators to use less oil and coal to slash emissions. According to the Waxman-Markey Bill (named after its Congressional authors), it would make businesses acquire pollution permits to cover their emissions and sell any spares.

 

No less a leading economic expert than Harvard professor Martin Feldstein, has voiced his concern regarding the ultimate effect on the consumer’s pocketbook.

 

A Congressional Budget Office analysis of climate change policy estimated that price increases associated with a 15% cut in carbon dioxide emissions would cost the average U.S. household about $1600 a year. The CBO analysis said low income householders would shoulder a larger burden, as would families in coal dependent regions such as the Ohio Valley.

 

Additionally, the Waxman-Markey Bill is more than just cap and trade. The proposal would establish requirements that utilities buy at least 12% of their electricity from renewable sources such as windmills, solar panels, and geothermal technology.

 

Another section of the bill promotes ‘large scale’ programs to spur demand for electric vehicles with incentives for buying plug-in cars and building charging stations.

 

The act, if approved, would order the Department of Energy to amend building codes, making new buildings 20% more efficient by 2010, and 50% more efficient by 2016.

 

If the bill is approved in its present form, get ready to pay handsomely on your future electric bills. Would you believe a possible 50% increase?

 

Energy conference exudes guarded optimism

 

A short, but productive, three-day sojourn in the world’s energy capital, Houston, culminated in a gathering of 200 manufacturers, distributors, turnkey contractors, specifiers and fabricators. this was one of four meetings a year of the Pipe-Valve-Fitting Roundtable, of which I have just been selected as board member emeritus.

 

The key event of the evening was the induction of two leading manufacturers and one outstanding distributor into the PVF Hall of Fame. This illustrious industry hallmark has chosen relatively few prestigious industry companies and individuals to focus on the significant strides made by this energy-related sector, serving all aspects of energy development, transmission, refining, construction, and maintenance. The Hall of Fame was founded seven years ago by The Wholesaler, of which I am chief economist and industry analyst.

 

The theme running through the intense networking preceding the Roundtable Hall of Fame awards, and a comprehensive presentation on export procedures and regulations, was guarded optimism regarding the increasing activity in power generation, as well as the expected comeback in oil and natural gas expansion by early next year.

 

Inventory heavy master distributors who service conventional wholesalers and the national gamut of pipe-valve-fitting specialists seemed to agree that an uptick in business was drawing more goods out of inventory than were being replenished. Among manufacturers, who admitted to substantial reduction from last year’s record revenue pace, there were practically no plans for capital expansion, due to the low capacity utilization being used at this time.

 

One exception was a fast-growing energy industry specialty manufacturer who has become active in the Canadian oil sands projects. Welding Outlets Inc. President Sheryl Michalak, who had just returned from a business evaluation in the oil-rich Alberta tar sands region, related a strong outlook for further oil-producing projects next year. At present, she commented, current projects are being maintained. But future major development awaits expected demand comeback and price increase activity, she added.

 

This coincides with announced anticipation that 25% of America’s oil needs will be met from Canada’s tar sands projects within the next three years.

 

With India’s expansion facilitated by favorable political developments, and the new Tata automobile producer, and China aggressively encompassing a greater percentage of its consumer sector into the modern arena, slackening of American demand, if it occurs, will be more than offset by the two dynamic Asian giants’ purchases.

 

Capital spending continues downward spiral

 

Despite the green shoots of recovery popping increasingly through the dark soil bed of recession, no such hope is emanating from capital spending, the real indicator of a solid business turnaround.

 

In fact, most companies are still in the process of cutting costs as they attempt to reduce production and overhead expenses to maintain meager profits, while demand is still in an embryonic recovery stage.

 

Latest statistics support this adverse reaction. After a long run of quarter annual gains, capital spending took a 20% plus dive in business outlays in 2008’s fourth quarter, and an even worse plunge of a high 30’s percentage in this year’s first quarter.

 

The reduced spending outlays for a range of products from forklift trucks on the shop floor to computers in increasingly empty office space accounted for a major portion of the 6.1% annualized decline in first quarter gross domestic product. It’s estimated that the precipitous capital spending drop since the end of last year’s third quarter is the worst since the 1930’s Depression days.

 

Hit hardest in the most recent quarter were expenditures for industrial machinery, which came close to a 50% drop on a year-to-year annualized basis. Even data processing equipment was not spared, dropping more than at the time of the technology bubble bust in 2001.

 

Also hit hard have been transportation equipment and construction machinery, reaching levels close to a 50% drop-off from a year ago.

 

Although credit availability has eased markedly since last fall, businesses are loath to tool up for expansion as they face an over capacity that will take a long time to absorb existing production capability.

 

Capacity utilization of America’s industrial plants fell to a record low 65.8% in March, far below the historical average of close to 80%. Not insubstantial as part of this current gloomy capital spending outlook is the U.S. Government’s warnings of higher taxes and a cutback in production incentives in the months and years to come.                  

 

Morris Beschloss, a 49-year veteran of the pipe, valves and fittings industry, serves as PVF and economic analyst for Phc News and The Wholesaler.