Water Heating Market Analysis

BY JOHN MESENBRINK,

chief editor

So you thought last year was a tumultuous heating season for your business? For some it was successful, for others the warmer winter temperatures and slow residential markets proved challenging. But, according to an in-depth look at the water heating market, things are going to be ok, at least from a manufacturer’s perspective.

The slowdown in the housing market is impacting general overall shipments. And, material costs have thrown a wrench into the volatility of the market. Yet homeowners still need their hot water.

It’s no shock that a slow residential market has a wide-reaching effect across all product sectors, but manufacturers are working diligently to ride current trends.

These trends will tell you that a) people tend stay at home more -- a trend industry experts call cocooning. And b) energy efficiency and the green movement is really driving newer technologies and thinking.

Phc News recently spoke to water heater industry experts. The representatives were: Stirling Boston, marketing manager, Lochinvar; David Chisolm, brand manager, A.O. Smith; Steven Grady, Buderus Heating Systems, Jim McGoldrick, national marketing manager, Bradford White;  Tim Merritt, president, Eternal Water Heaters; Ken Niemi, marketing manager, Burnham; and Scott Schreeg, commercial product manager, Weil-McLain.

1. What are some emerging, noteworthy trends/technology in the water heating industry?

Boston: Condensing technology, higher efficiencies, controls and installation flexibility are all important factors that are contributing to improvements in water heating technologies available. Additionally, green building is gaining momentum and facility owners are challenging their mep engineers to provide more environmentally friendly equipment.

Chisolm: There is an increasing trend towards higher energy efficient products. This is taking place not only in the commercial sector, but also the residential markets. As consumers are becoming more aware of their energy consumption and are making efforts to become “green,” these technologies are becoming more mainstream. The benefit to the consumer, as demonstrated with A. O. Smith’s high efficiency condensing Vertex model, is much more hot water -- enhanced performance -- while still reducing the overall utility bill.

Grady: With the standby losses and minimal insulation on direct fired hot water heaters (hwhs), consumers with boilers are opting for the indirect hwh. This product, connected to a condensing boiler, will produce lower operating cost and last two to three times longer than a direct fired unit.

McGoldrick: Tankless products, high efficiency models and, most recently, green-friendly products.

Merritt: The lifestyle trend is toward larger homes, multi-tasking, luxury baths and high performance shower fixtures that require larger capacity or even endless hot water. To meet this growing demand, manufacturers are building larger capacity tank units and endless on-demand models. The newest technology is a patented Eternal Hybrid water heater that combines the benefits of tank and tankless into one.

There are significant improvements in the distribution of hot water in the home as well. Shorter loops and manifold systems are good examples. Closed loop recircs and radiant floor heating are also options gaining popularity in custom homebuilding.

Due to rising energy costs and green consciousness, consumers now consider energy efficiency a leading factor when shopping for new domestic water heating equipment. When we speak about the Eternal Hybrid water heater, energy efficiency is the 2nd question we hear most often.

In addition, the U.S. Government expects to have criteria for Energy Star qualification in place by September 2008. Earning the Energy Star rating is a huge marketing benefit that will no doubt become a driving factor in new product designs.

Niemi: The instantaneous products seem to be picking up some interest as a new technology, but their  ability to produce enough hot water may be in question. The indirect-fired water heater market in the hydronics industry continues to gain acceptance and grow as a very viable, efficient way to obtain abundant domestic hot water.

Schreeg: The high efficiency combination boiler/water heater is one emerging trend. It supplies hydronic space heating and domestic hot water in a compact, wall-hung unit.

People seem to be using more domestic hot water as volumes continue to shift from 30- or 40-gallon tanks to 50- and 60-gallon tanks. The nice thing about the Weil-McLain indirect-fired water heater is that that if you are using a larger boiler for space heating, the recovery for the water heater also improves and a larger tank may not be needed. This is a nice selling feature because the continuous flow can be increased by using a larger boiler -- adding more Btus -- and it also has storage capacity, which you do not get with the instantaneous water heaters.

2. Do the remainder late 2007/early 2008 numbers indicate healthy shipment projections?

Chisolm: The slowdown in the housing market is impacting overall shipments; however, new construction is a small percentage of the overall water heater market.

McGoldrick: The indications are such that volume will be down compared to 2006, and the projection is that 2008 will be down compared to 2007.

Merritt: Shipment statistics for the water heating market in general are down 7% for the year and the balance of this year looks flat. However, the Eternal Hybrid does continue to exceed our initial projections.

Niemi: Shipments of indirect-fired water heaters tend to be reasonably good considering the current market conditions.

Schreeg: Yes. Weil-McLain’s indirect-fired water heater shipments have continued to show significant increases over the last three years, and future projections are strong.

Many end users are realizing the features and benefits about combining an indirect-fired water heater with a boiler. Even if a boiler is being retrofitted, and the domestic water had been provided by a direct-fired water heater that is still in operation, it can easily be justified to put in an indirect-fired water heater at the same time the new boiler is going in. It really cleans up the installation and provides an efficient way to provide endless hot water, with a lifetime warranty.

3. Has the slow residential market made an impact in the water heater/boiler industry? If so, how do you counter that?

Boston: Having a diverse offering of products has been a real benefit for many manufacturers. As the economy slows in one segment, the others tend to hold steady.

Chisolm: The slowdown has impacted the market; however, since the replacement market makes up the majority of shipments, that segment remains strong.

Grady: Our sales are above last year’s and we see no change for the next 12 months.

McGoldrick: The downturn in business has affected us somewhat.  However, we have a wide range of products such us commercial, oil and hydronics products that allow us to move into different market segments that are not affected by the residential new construction market.

Merritt: It’s no surprise to anyone that a downturn in the housing market is having a wide-reaching effect across all product sectors. And crews that we speak with do report a slowdown in new projects. Because Eternal Hybrid is a specialized product for high-performance applications in new jobs and in the replacement market, we anticipate less impact than you would expect in the conventional home market.

Niemi: The indirect-fired water heater business tends to grow into a larger percentage of the hydronics (boiler) business.  Thus, even with a declining or flat boiler market, increases are being seen in indirect-fired water heaters.

Schreeg: Yes, industry sales have shown a modest decline. Weil-McLain has somewhat insulated itself from the market decline with our Ultra gas high efficiency boiler, which appeals to energy conscious shoppers who are making planned boiler/water heater purchases. Also Weil-McLain’s indirect-fired tanks are the only tanks on the market recognized as an ASME equal by the Massachusetts Plumbing Board, which increases sales.

Weil-McLain has historically had a great deal of replacement business and that is independent of new home construction. As far as new construction, shipments have continued to increase to this market due to the use of Ultra boilers in this market. The Ultra boiler is a perfect fit for residential (and commercial) space heating and domestic water production (with an indirect-fired water heater).

4. Has the cost of materials affected your business?

Boston: Material cost increases continue to be a challenge for all manufacturers. Installers today anticipate material cost increases affecting the cost of finished goods and have been really good about accepting these cost increases over the past few years. Manufacturers have been challenged to look outside of the box to improve their efficiencies in producing finished goods and have been able to maintain minimal price increases despite the heavy material cost increases that the industry has seen over the past few years.

Chisolm: Yes, the cost of materials continues to impact our business. However, compared to previous years the increased cost of materials is less significant. While we have seen an increase in raw materials and transportation costs, it has leveled off in relation to the large increases we have seen in years past.

Grady: Not to this point.

McGoldrick: The volatility of raw materials of the past several years has had an impact; However, based on that volatility, we have worked hard to improve our efficiencies to minimize the material cost impact.

Merritt: The rising cost of materials affects product cost significantly because the Eternal heat exchanger and reservoir are built with premium stainless steel. However, product cost is offset by the lower cost of installation and greater capacity so it’s a wash in the end. Because Eternal Hybrid is the only one of its kind. It’s an up-sale compared with trying to sell traditional equipment in a commodity-driven economy.

Schreeg: Yes, however, we work very closely with our suppliers to maintain accurate forecasts, which helps to manage raw material prices.

I think it is safe to say it is a hot topic in many organizations and it is very widespread, which has lead to a lot of price increases and surcharges across all industries.

5. Can you briefly talk about the different water heating selections offered? (Instantaneous, high-efficiency, stainless steel) Why would contractors choose a certain type?

Boston: One of the things that we have to remember is that at the end of the day, it’s all about the satisfying the customers’ needs. Our responsibility is to provide the best solutions available to the installers and the end users. We should always start by interviewing the customer about what they desire and then make an educated offering that will provide the solution for which they are looking. Higher efficiencies and newer heat transfer technologies in some cases meet these needs, and sometimes more basic standard efficiency products are adequate to meet the customer’s requirements.

Chisolm: There are many different types of water heaters to choose from depending on your application. A. O. Smith offers a wide selection of models that will work in a range of applications. From standard efficiency gas and electric to high efficiency condensing models, our product portfolio is one of the widest in the industry. Contractors should choose which products to install based upon what would best take care of their customers. For example, the consumer that needs more hot water is an ideal candidate for the high efficiency Vertex. Also, consumers who are looking to go “green” would be interested in the Vertex. At 90% efficiency, the average homeowner can expect to save up to 30% on their water heating bill. The Vertex truly is the best whole home option for those consumers looking for additional hot water. Homes with whirlpool tubs, body spray systems or large families are ideal candidates for the Vertex.

In addition, contractors would choose to install the Vertex over other high efficiency technologies because it uses a standard gas line, standard water connections, and vents with inexpensive PVC.

On the other hand, for homes with little hot water use -- like vacation homes or space-constrained applications -- tankless models are good candidates. However, the installation specifics make these models more applicable in new construction rather than replacement applications since they have specific requirements for gas line sizing and venting.

McGoldrick: There are a number of condensing commercial gas models with thermal efficiencies that can range up to 99%, or even higher.  These models have grown in popularity based on their incredible efficiency, which equates to an extremely low cost of operation. These units will provide the end user with a tremendous cost savings.

Merritt: We offer small and large (180,000 Btu and 236,000 Btu) on-demand water heaters with a small reservoir that offer high efficiency and stainless steel heat exchangers. By offering all the right features, contractors don’t have to give up benefits by choosing between tank or tank-less units.

Niemi: Selection is based on a variety of factors. Indirect-fired water heaters must be used in conjunction with a boiler -- but they do not have any venting needed -- and produce abundant hot water due to fact that the boiler Btu capabilities are usually much greater than those of a direct-fired tank.

Schreeg: Instantaneous water heaters, often sold through big box chains, provide on-demand hot water either to specific outlets, or the entire house. Drawbacks include limited gpm capacities, very high initial investment for a whole house application and limited longevity. Stainless steel tanks are usually indirect-fired, and they offer higher corrosion resistance, especially in aggressive water environments. Efficiency ratings vary based upon the particular unit. Product selection is based upon the goal of the installation, i.e., confined space, energy consumption, large peak demands and product longevity.

The high efficiency movement has led to the instantaneous hot water heaters being very popular, especially in applications that rely on something other than a boiler for space heating (i.e. furnace). They seem to serve a specific market but for the price the performance and longevity of a Weil-McLain indirect-fired water heater cannot be matched.

6. Do you offer indirect? If so, are they dual-coils? How about size selection?

Boston: Yes, we offer indirect water heaters in many different materials, coil types and sizes. Coil offering typically corresponds with the local codes and jurisdictions. Double wall coils, for example, offer an added level of protection that keeps boiler heating water from infiltrating into the domestic water system should a coil failure occur. Additionally, materials such as stainless steel are available that are much more resilient to the corrosiveness of both the heating water and domestic water in the indirect water heater and offer longer life of equipment.

McGoldrick: We have a wide range of indirect models. We have a single wall, double wall and stainless steel models. The heat exchanger of the single wall and double wall model is 11/2" glass-coated steel, and the tank itself is protected from the corrosive effects of hot water by an exclusive porcelain-like coating. Referring to the charts on our specification sheets can make the selection.

Niemi: We only offer indirect-fired water heaters with single coils in five sizes: 27, 35 50, 70 and 119 gallons.

Schreeg: Yes, Weil-McLain offers indirect-fired tanks in sizes ranging from 36 gallons to 119 gallons. We use a tank-in-tank design rather than coils, which improves recovery rates and reduces deterioration due to lime.

The perception of coils is that they lime up over time and while the tank may still provide hot water the efficiency of the appliance slowly deteriorates. The tank-in-tank design allows for the recovery to improve with capacity and the inner tank  to flex keeping scale and lime from forming.

7. To compete in the blossoming solar market, do you offer solar-specific models? (gas or electric back-up, etc.)

Boston: Yes, solar is a booming market and we do provide solar specific models that are adapted with controls and water connections to provide ease of installation in solar installations.

McGoldrick: We have models specifically for solar applications --open system -- and that model comes equipped with an electric element back-up as a heat source. For closed loop systems, you might select one of our indirect models; however, those models are not currently equipped with an element as a back-up heat source.

Niemi: We do not offer solar-specific models of water heaters.

Schreeg: No, we do not offer solar-specific models. Agreed, solar is a growing market but still a niche. There are efforts within Weil-McLain to evaluate the feasibility of the solar market and many other forms of using renewable energy for space heating.