2009 Market Outlook: Riding Out The Storm

Still, there were a few bright spots among the gloomy news: The power industry in general will remain strong, driven globally by the world's increased need for energy and affected here in North America by the need to tap into new and existing alternative energy sources. Nuclear in particular appears poised to take off in the U.S. as the general public, legislators and other policy-makers accept that nuclear can be a safe, cleaner way to get power. And for the short term, the upstream oil and gas marketplace is actually doing better than predicted a year ago as a reacceleration plays out that may well last into 2009.

Most left knowing that darker times may be coming, but that the North American valve industry has "been there, done that," and with proper preparation and knowledge about new markets and opportunities-global and domestic-their companies can survive this inevitable downturn and come out the other side stronger than ever.

Here's what our speakers had to say:

DOMESTIC ECONOMY
Yes, the Recession is Still Coming

Many people who attended past forecasting conferences were anxious to hear what Alan Beaulieu, economist with the Institute for Trend Research, had to say-not just because he's an entertaining speaker, but because his prediction last year for the U.S. economy was rather bleak-a good 2008, but a recession by 2009.

As far as 2008: "I'm glad you've been enjoying the year," Beaulieu joked, "but the U.S. is softening. Everything you heard in the first half of 2008-all that concern-was just the band warming up."

"This time next year, we will be recognizing that we are in a full-fledged recession," he said. The same will be said in Europe and in China (whether that country recognizes it or not, Beaulieu commented).

Consumers will lead the parade into the downturn, he said, helped along in part by the fact that despite the current woes, we have had poor leadership in this country. For example: "We are a debtor nation. The richest nation on Earth but we can't pay our bills."

Inflation will be a major pressure, he added, because even though officials and experts say the core inflation rate is "only" 3 to 4%, that rate doesn't take into account energy and food. The Consumer Price Index, on the other hand, is 5.6%, which is high, he pointed out.

When people's budgets are hit as hard as they are being hit at present by food, energy and other daily needs, "they stop spending, and that brings a recession," Beaulieu said.

As far as other locations around the globe, "when the U.S. gets a cold, so does the rest of the world," he said.

Still, Beaulieu was not all doom and gloom.

U.S. industry is "doing wonderful things," he exclaimed. They are proficient in selling to the rest of the world, they have the most competitive work force in the world, and they have twice the output of the emerging giant China.

What it will come down to for industry is what's happening at the company level, he said. "If you are doing well, you have to ask: how can I prepare?"

Among his suggestions:

Help your margins by differentiating your company from competitors, and then let everyone who works for your company know how you're different.
Develop quantifiable reasons you are better than your competition. "What people want in a downturn is a metric. [They want to hear:]
'I can fix this problem on the first go-around, and I can fix it in four hours, not six,'" Beaulieu explained. Clients want to know that quality is more than an adverb.
Consider taking on subcontract work if the backside of the cycle begins to look recessionary.
Begin missionary efforts into new markets.
Freeze expansion plans unless they are related to the logical next step for a particular company. If those plans are made just to expand the company's reach, rethink those plans.

When things start leaning into a recessionary cycle, Beaulieu suggested:

Begin reducing work forces. Don't tell employees that everyone will keep their jobs, but let them know most people will be okay-we've been through this before.
Set budget reduction goals by department.
Avoid long-term purchasing commitments.
Find a way to do business in the counter cyclical or unaffected areas (e.g. energy, travel, green, Canada/exports, higher education, healthcare, etc.).

Most importantly, Beaulieu told attendees to bear in mind that in the U.S. "we are still able to do things others only dream about. It's your responsibility to your country to keep your company profitable."

BEAULIEU'S FORECAST: Commercial construction will cool off in the second half of 2009. There will be a 1.7% decline in industrial production in 2009 and almost 4% in 2010. Employment will continue to weaken; taxes will be raised; the housing market will see more declines in 2009 and 2010.

A WALL STREET PERSPECTIVE
Deceleration in the U.S., Then Globally

The industrial economy peaked in about mid-2006 at about 5% annualized growth, slowed down in 2007, and reaccelerated at the start of 2008, but that reacceleration will not continue, according to Michael Schneider, CPA, managing director and senior research analyst at Robert W. Baird and Company.

Companies in the valve industry are all doing well, so it's hard to imagine, "but I'm talking about basic industry, not project work," Schneider explained.

"What we are seeing [currently] is a natural maturation" of the industrial capitalization market, but production for both the U.S. and global industries is past a mid-cycle slowdown. In the U.S., growth rates will decelerate through 2008 and into 2009 followed closely by a slowdown in global growth rates into 2009, he said.

The cycle is the same as in previous downturns: The Purchasing Managers Index (PMI) peaks about 4 years from the bottom, real GNP peaks about 4.5 to 5 years from the bottom, and industrial production peaks 5 to 6 years out, which means we still have a ways to go before economies will start to pick up, Baird said.

For specific industries, he said:

The oil & gas upstream market, for the short term, is "surprisingly strong." A year ago, he predicted it would be declining in 2008, but what happened was a surprising reacceleration, which he said will continue into 2009 with rates declining in 2010. Rig activity will be subdued, but project size and cost will grow, driven by under-investments since 1991, as well as global demand surges, depletion of mature fields and the need for new technologies to recovery supplies from sources such as the Canadian tar sands, deep water, shale and directional drilling.

The oil & gas downstream market is "surprisingly weak," Schneider said. For the first time in 5 years, the market has been substantially lower for over a year, he said. Meanwhile, record capacity additions are occurring in China, India and the Middle East. "This is great for you now, but as we get into 2011 or 12, we will be facing overcapacities," he said.

The chemical processing industry, "I would position as steady," Schneider said. The industry should benefit from lower gas prices, a reacceleration of domestic spending on chemical processing and a slight moderation in overseas spending. The call for oil and gas alternatives will drive a call for coal gasification projects going forward.

In the power industries, coal is clearly under stress "but hardly dead." 2009 and 2010 will see significant spending on global power capacity addition so power remains a good market for investments.

Although there is a huge need to invest in water and wastewater both here and abroad, "the money is simply not going to be there," Schneider said.

SCHNEIDER'S FORECAST: Capital spending in upstream O&G will remain strong through 2011, but growth rates should slow substantially. Despite short-term strength, the next five years will see growth at about 7%, compared to 24% from 2003 to 2007. Downstream capital expenditures will decelerate to 3% by 2011 as significant capacity comes on line. Spending on chemical processing should increase "meaningfully" in 2008 and reach a similar level to the $1.1 billion spent in 2002. Capital expenditures will grow at about 7% through 2011. The natural gas industry will be the fastest grower among power industries at about 145% over the next 25 years. The amount of power generated by oil will decrease 20% over that time.

INTERNATIONAL ECONOMY
A Double Whammy

The global economy is experiencing a "double-shock" of a financial crisis plus inflationary pressures, but it is not yet in a world-wide recession, according to Zbyszko Tabernacki, CFA, executive managing director of the Country Intelligence Group for Global Insight.

Seven to 10 months ago, when clients asked what factors could bring the world into a recession, he named three developments that would need to take place consecutively: a major financial crisis in global financial institutions that would bring a credit crunch in all the countries affected, an oil shock such as the one we've just gone through, and a hard landing for China (which hasn't yet occurred).

When the figures on the first two elements are added, "We don't get recession figures," Tabernacki said. But the world is "not out of the woods yet."

One of the realities of today's global market is that it runs at two speeds: developed countries and those that are emerging, Tabernacki pointed out. Right now, the developed world is slowing down in growth, while the other half is running at growth levels averaging 3% to 5%. However, one of the great myths-that de-coupling (one country separating itself from others economically) can still occur-is starting to be disproved, he said. Eventually, the emerging markets will slow alongside developed areas.

As far as trade, in the last decade, trade flows shifted toward developing Asia and other countries, while the role of the U.S. as a market for other countries' exports declined. But 18% of the world's demand for consumer goods still comes from the U.S., so what happens here will continue to affect the world.

Inflationary pressures are high everywhere, but especially in emerging economies, and among the developed area, the Eurozone. Until the emerging markets slow, commodity prices probably won't weaken, Tabernacki said.

Some specific comments Tabernacki had on what's happening globally were:

Canada. Canada's economy will see only 0.1% growth this year. The business investment boom now occurring will moderate. Industrial production will bottom out at the end of the year, and then begin climbing into 2009.
Europe. The EU seems to be going through the same problems it had in 2002/ 2003, including too much export-led growth with one additional factor: financial pressures such as inflation, wage issues, tightened credit and oversupply of inventories.
Middle East/North Africa. The countries' current economic boom will not falter this year, but rather intensify. However, the bust is coming-just not in 2008.
China. One risk it faces going forward is that, aside from exports, the only driver of real growth is investments, so overbuilding remains a risk. China also needs to contain its double-digit inflation; and the economy will need to grow at least 6% to 7% a year just to accommodate people coming into the labor market.
India. The country is not yet fully exposed to the global economy, but is looking inward, driven predominately by consumer spending. However, while the economy is less dependent on financial markets, there are indications of overheating, inflation and slowing growth.
Latin America. While people tend to clump all the countries in this area together, there are many little areas with different types of growth. Clearly Mexico's connection to the U.S. makes it most vulnerable to suffering from what happens in this nation while some of the countries in South America (Brazil in particular) are bright pockets of growth.

TABERNACKI'S FORECAST: Assuming the housing market in the U.S. doesn't recover until some time next year, the bottom of the national market will come in the first quarter of 2009. Exports will see growth of 8.2% in 2009, but they will begin to drop after that. Meanwhile, imports will begin to grow and reach a 6.4 % gain by 2010. Tabernacki predicted the dependence that countries like Germany, Japan and China have on exports to maintain their countries' growth rates will leave them vulnerable going forward.

WATER/WASTEWATER
A Slower Pace, But Plenty of Potential

It's not easy to entertain an audience while spouting economic statistics, but Tom Decker, a veteran speaker at VMA's Market Outlook Workshop, found a way. Decker, who is a vice president with CH2M Hill, presented the audience with his version of Jeopardy-water and wastewater style.

For $100, what is the question behind the answer, "5%," Decker began. How much did wastewater grow in 2007?

That's a slower pace from previous years where wastewater growth year over year was averaging in the double digits, Decker said. But wastewater is still outgrowing the pace of water. In fact, some reports showed water declines for the last year, he said.

One reason for slower growth is "utilities are seeing sharp increases for O&M [operation and maintenance], higher energy costs, high chemical costs," he said. In such a situation, "the amount left to spend on capital projects drops."

"This is not a trend, but you should keep an eye on it," Decker said. History has shown that the industry lags what's happening with the economy by about 18 months.

So for $200, what's the question to the answer "two times," Decker quizzed the audience. What is the rate at which the world desalination capacity will increase by 2016?

Since only 1% of the world's usable water supply is now supplied by that process, that leaves plenty of room for growth, Decker said.

"Process advances keep on coming; the cost to produce inches downward, and brine disposal [one of the industry's main physical challenges] is becoming more advanced," Decker said.

And for $300, what's the question answered by: "51%," Decker next ?challenged. What is the storage capacity for water in Lake Mead?

He cited that number because it is an indication of a situation happening not only in the U.S., but in the world. Studies have shown that 39 states will experience water shortages by 2020 and that two-thirds of the world will be in water stress by 2025, he said.

"Call it what you want, but there is a water drought," Decker declared.

One way states are reacting is to put restrictions on development. In California and Colorado, for example, jurisdictions are requiring documentation that a development will have 20 years of water supply before construction can begin, Decker said.

The next Jeopardy answer was: "The Gay '90s, the Roaring '20s, Post-WWII, and That '70s Show." The question revealed a problem in the United States (as well as some of the developed nations): When was much of the nation's water infrastructure built?

"None of that is terribly recent, is it?" Decker asked the audience. In this nation, there are 72,000 water miles that are greater than 80 years old-several decades beyond their normal life expectancy, he said. New York City itself loses 36 million gallons a day from its water system on the way from the reservoir to the city; and a third of the national publicly owned treatment works are currently subject to Environmental Protection Agency enforcement actions because of equipment malfunctions, Decker pointed out.

The next answer was: "$500 billion." The question revealed where a big part of the industry's problem lies: How much is needed just to keep our systems up to snuff?

In the '70s, Decker said, the government was paying for about 78% of water/wastewater infrastructure improvements, but that number has fallen to just 10%. Meanwhile, the burden falls on local municipalities, which are receiving some help from states that face their own set of financial woes. While privatization is part of the answer (more than $10 billion has been raised for private equity infrastructure) and public-private partnerships are starting to blossom: "This is a slow-moving train," Decker observed.

DECKER'S FORECAST: The water/ wastewater market will grow 4% to 5% in 2008/2009. Desalination will play a greater role in creating drinkable, usable water and alternative delivery systems will play a greater role in bringing it to people. The best opportunities are on the wastewater side of the industry because market growth will slow a bit on the water side.

POWER GENERATION
Coal Wanes, Other Markets Strengthen

The long-term energy market has remained strong for more than 25 years, and it will remain strong going forward as energy demands around the world increase, said Howard A. Russell, vice president and regional general manager for the Power Business of Black and Veatch Corporation.

The power industry continues to see expansion and while there aren't currently a lot of new project awards being announced, "there is still growth, and it's not going to slow down," said Russell.

Yet, "there are challenges, and certainly the market cycles will go up and down" for end users like the valve and actuator industries, he said.

As with the rest of industry, power companies are seeing costs rise and resources become scarcer, particularly in the skilled crafts, such as engineering, he pointed out.

"This country is short about 1 million skilled craft workers," Russell said, citing a recent study.

Elsewhere in the world, growth will come from the needs of developing countries. "If we are going to pull poor people out of their status, it requires more energy, not less," Russell pointed out.

As far as specific markets, Russell said the coal industry is in a major decline (Russell downgraded his forecast for the next five years from $25 billion in capital spent-2007's forecast-to $10 billion), while the nuclear industry is seeing major advances and interest. The nuclear industry is benefiting from increased consumer acceptance, new support from environmental groups, and a world focusing on carbon sequestering and global warming. This means opportunity for those who build valves and pumps, Russell told the audience.

While energy companies face the same pressures as other industries today (the recession, interest rates, credit challenges, employment challenges, the price of oil), they have two larger boulders currently being tossed at their businesses: capital costs and regulatory uncertainty, Russell pointed out.

For example, contributing to the coal industry's woes is the fact that while its link to carbon emissions is debated, a squeeze has been placed on building new plants, and some states are even taking regulatory action. The state of California, for instance, recently passed legislation banning building of new coal plants and even prohibited the purchase of power from coal-fired plants.

"Certainty is needed before someone is going to invest in a new coal environment," Russell explained.

Meanwhile, opportunities exist in the combustion turbine (CT) industry, which will see huge growth as the need to replace coal-fired demand grows. He pointed to a slide he showed last year that indicated 40 gigawatts (GW) of planned CT projects and compared it to what has been more recently announced-60 GW of projects.

Another industry that will benefit from coal's reputation is the air quality industry, which remains steady, though somewhat stagnated by greenhouse gas regulatory uncertainties. While the market for equipment suppliers has not yet softened in this area (it remains about the same size as last year), significant opportunity exists as retrofits and new building projects address increasing environmental regulations for coal plants, he said.

The other two industries that stand to benefit from coal's decline are nuclear and renewable energies, Russell said.

He told the audience, "If you own a business with a nuclear stamp, get it out and get it updated," because the industry is about to explode. "We've had the technology waiting for us for decades, it's safe, it's clean, etc. We will be building plants or letting the lights go out," he said.

And while renewables cannot hope to meet the needs of this nation's bulk energy demands, most states are embracing them and more than half now mandate their use. For example, California has mandated that 20% of its energy come from renewables by 2011 while New York has mandated 24% by 2013.

RUSSELL'S FORECAST: About 30 GW of new coal-fueled generation will be needed through 2015. The total market for CT will be 15 to 20 GW per year through 2015 with 70 GW of additions made over that time. In the U.S., investments of $56 billion in CT and $22 billion in air quality technology will be made through 2015.

LNG
Growth Overseas, But U.S. Market Softens

The liquefied natural gas business in the U.S. currently "is not doing very well," and the market overall is expected to remain tight, according to James M. Kendall, director of the Natural Gas Division of the U.S. Energy Information Association. This is despite the reality that the U.S. has only about a decade of gas production years remaining (ratio of natural gas reserves to production) compared to 59 years average for the world and 217 years in the Mideast. But there are many factors that will influence what will happen in the future.

To help attendees understand the business and what's happening in various parts of the world, Kendall explained where the expenses lie and where activity is occurring. A quarter of the cost of the business is in exploration, while 53% is in the liquefaction process, 14% is in shipping and 8% is in receiving.

Liquefaction plants-the place where gas is made ready to transport to other countries-typically run between $5 to $8 billion, costs that remain high because the plants are in remote areas, they must deal with difficult safety issues, large amounts of cryogenic materials are used, and equipment and utilities costs run high. By the year 2012, the number of LNG exporting countries is expected to increase to 18, but one-third of those new entrants are in developing countries such as Angola, Iran, and Venezuela, which carry higher degrees of risk.

Meanwhile, the world is "in the midst of a shipping boom," Kendall said, as ship's capacities increase through better technology. The number of ships being made is growing faster than the number of liquefaction plants, he said.

The regasification business-turning the transported liquids back into gas-is booming, also growing faster than liquefaction efforts. But by far the greatest amount of activity is in Japan and Korea, Kendall said, while only 12% of the business is in the U.S. and Mexico. Still, there are currently 8 LNG terminals in the U.S. and Canada, another 5 are proposed or under construction, and 12 have been approved by the Federal Energy Regulatory Commission.

KENDALL'S FORECAST: After reaching 771 bcf (billion cubic feet) last year, LNG imports in the U.S. for this year (390 bcf) and next year (480 bcf) will be the lowest levels since 2002. Imports into the U.S. from Canada will decline at the same time exports to Mexico may increase. Still, in today's natural gas industry, "tiny changes in supply/demand can mean a big difference in prices," Kendall said.

PETROCHEMICALS
Beginning a Decline

The value chain of the petrochemical industry is driven more by the end users-which are consumers-than by the feedstocks that go into making the products. Because of this, the industry has not yet seen decreases of the size that businesses in some other oil- and gas-dependent industries have seen, according to Mark Eramo, executive vice president of Olefins and Derivatives at CMAI Global.

That's partly because of the dynamics of the chain: Petrochemicals make up only 10% of the products that come from crude oil and only 25% of those that come from natural gas. Instead of being price drivers, "petrochemicals are energy price takers," he added.

Still, "at some point, we will start to feel it [price increases combined with inflation] in the downstream markets, and we've certainly seen it in the investment end," he said.

To follow the market, many in the industry focus on ethylene, which is growing at a rate of about 4% to 5% per year and was sitting at 115 million metric tons in 2007. Ethylene is used in products such as pipes, containers, polystyrene-the kinds of nondurable products most people relate to "plastics." Because of the need for these products: "Regardless of how the economy is doing, the market will do well as long as global needs increase," he explained.

Overall, the petrochemical industry is seeing a low to moderate slowdown brought on partly by the "paper vs. plastic" debate. The supply side, however, is seeing an aggressive rate cut, especially in North America. Capacity is "ample and expanding," but the industry is at the beginning of a cyclic downturn, Eramo said.

"We are at the end of a beneficial cycle for petrochemicals and now on the downhill curve," he said. "Producers are fighting a losing battle on healthy margins."

The key to long-term viability for the industry will be low cost production of the goods because most of the industry is based on market costs. The greatest challenge going forward will be energy costs because countries where prices are set by the government (Saudi Arabia, for example) have a built-in advantage. The Mideast and Asia dominate the current wave of new capacity with roughly half of new additions driven by incentives for industrial development, while North America and Europe have limited to no capacity, Eramo said.

ERAMO'S FORECAST: Major petrochemical markets are transitioning from peak to trough cycle conditions meaning profits will be lower and prices will fall. Oversupply due to accelerated new capacity will dominate near-market conditions. The trough could be severe if demand growth is impacted by high prices and slowing economic growth.

HYDROCARBON REFINING
A Different Face to Come

In the hydrocarbon industry, high prices are not necessarily good for refineries because they hurt margins significantly, according to Mark Peters, publisher of Hydrocarbon Processing and Construction Boxscore. As a result, the last year has been a tough one-much harder than 18 months to two years ago. Because the recent spikes in crude oil were unexpected and rapid, the hydrocarbon processing industry hasn't been able to keep up with the pace in terms of raising their own prices, he pointed out.

"Essentially what we are seeing worldwide is the end of the era of cheap energy sources," he said. The nation needs to find as many alternate sources of fuel as it can, but most are workable only on a smaller level, not at the power grid scale, he said.

Still, the focus has become stronger on alternatives to traditional fuel sources such as:

Biofuels. While biofuels very recently have taken a bad rap because of scarcity of food crops, Peters said, the political power behind such fuels in the U.S. is high. While increased amounts of ethanol are now coming from Brazil, where sugar is used, "that doesn't help the farmers in the Midwest."
Solar. The popularity of solar sources has increased, but the expense for a solar panel is still around $25,000, "and most people won't make that leap," Peters said.
Hydrogen. Wide acceptance of hydrogen is still a long way off, again because of the expense and the fact a truly efficient hydrogen cell has not yet been developed.
Arctic National Wildlife Range. At some point, there will need to be development in ANWR, but conservation is still a priority so that development is a long way off, Peters said.
Oil sands. While the Canadian oil sands are a promising source of supply, Congress' 2007 energy law specifies that the U.S. can't buy fuels that would increase greenhouse gas emissions and oil sands do that, Peters pointed out.

Climate change also has been thrown into the mix so in the U.S., politicians are not looking at resources within the nation's borders. "We are the only country in the world not actively pursuing all our energy sources, [but] we continue to lecture others that they are not producing enough cheap fuel," Peters exclaimed.

The world also needs a replacement for the Kyoto treaty because while the countries that signed it made great promises, no one is making them accountable for those promises. And countries such as India and China, which continue to say they will not participate in greenhouse gas emissions programs, are some of the biggest emitters: China's emissions were up 11% and India's 8% in the last two years.

All of these developments will play a role going forward, resulting in different refining processes, different configurations within refineries, and more crackers and environmental protections. But the future of the hydrocarbon processing industry remains strong, Peters said.

PETERS' FORECAST: The world will see capacity additions going forward as refining, petrochemical, gas processing, LNG and synfuel construction activity remain strong through 2012, but much of what happens will be in other areas of the world. Areas to watch are Asia-Pacific and the Middle East. Challenges will include availability of crude, workforce, engineering skills and equipment, as well as cost of construction. Oil and gas, upstream and downstream should remain a good investment. By 2012, there still will be a possible surplus of 5 to 6 million barrels per day of refined products.

UPSTREAM OIL & GAS
Unanticipated Developments

Calling 2008 a "most interesting year," John Spears, president of Spears and Associates, pointed out that despite the record high prices of oil and gas this year, drilling operators have responded with only a 6% increase in planned drilling activities.

Oil prices will have risen about 60% by the end of this year, from $80/barrel to as high as $145/barrel (averaging about $115). Gas prices were somewhat less volatile but will have risen 40% for the year from between $6 and $7 up to $9.50. While these rises were unexpected at year-end 2007, prices were on track with predictions.

"What that tells me is we tend to forecast what's most recently experienced," Spears said, so "as we see increases [in prices], we expect increases in drilling activity," he said.

Meanwhile, the demand for oil continues to slow in pace (up about 3% to 4% for the first half of this year)-a trend that began a few years ago. However, the rate of slowdown has lessened, which will continue into 2009. Spears said the reason the pace has slackened is that developing countries are in industrialization mode-their demand has risen from zero. And in countries such as China, Iran and Venezuela, end users are protected from price increases by government subsidies.

"Only in the last few months are they [countries with subsidized prices] starting to pass along prices. As this takes place, higher prices will affect these countries as well," Spears said.

The market, with just 2% surplus global capacity, "is as tight as the market has ever been," Spears told the audience. Because of that, everyone bid up the price of oil. However, the situation is expected to reverse rapidly going forward, he said. OPEC production will fall and spare capacity will double as the year 2009 progresses while non-OPEC production will grow somewhat. This will result in rising spare capacity for the world-from 1.5 million to 3 million/barrels a day. "While that sounds like a lot, it's not much by historical standards where it's typically been more like 5 million," Spears said.

Meanwhile, gas consumption looks robust (about 2% growth in the U.S.) with a large part of the growth in demand going forward coming from the power generation sector, Spears said. Onshore gas production will rise an unforeseen 8% for this year pushed forward by new pipelines and unconventional gas field development while other types of production will fall for the year.

Drilling for both oil and gas will rise for 2009. Construction of large-diameter pipelines will rise from 2008 to 2009 because of new sources found in the Rockies, the mid-continent and in east Texas.

SPEARS’ FORECAST: Over the coming year, there will be a 1% rise in oil production. Non-OPEC crude production will grow 1.2% while OPEC production will fall. Oil-related drilling will rise 10% in 2009; gas-related drilling will rise 5%. Infrastructure spending will remain robust with U.S.

CHINA: Land of Opportunity, with Some Changes

George Koo, special advisor with Deloitte, believes that with all the doom and gloom of the current global economic situation, “China remains one of the most optimistic markets.”

Foreign companies have been doing business in China long enough to have built up some expertise and instead of talking about getting into the country, they are now talking about “how to maximize their presence,” he said.

The U.S. has become the fifth largest direct investor in the country after Hong Kong, the Virgin Islands, Japan and South Korea, Koo noted. He said China’s economy is becoming more like the U.S., though it’s presently only about a quarter the size of the U.S. economy, and about 1/16 of where the U.S. is in terms of GDP per capita. And while the U.S. is still the world’s leading manufacturer, accounting for 22% of global activity, China accounts for 8%.

“China has been recognized as the world’s factory,” Koo acknowledged, “but more and more as a significant global investor, and lastly, an important consumer market.” By the end of 2007, China’s aggregate overseas investment reached $128 billion, up from just $29 billion in 2002.

Currently, what’s going on within the country is investment in its own interior—building up its infrastructure to bring strength to pockets of activity. For example, a bridge is under construction that will cut the commute from Hong Kong and the mainland from six hours to 45 minutes.

Koo said that while people used to talk mainly about three regions in China, “it now makes sense to look at finer distinctions”—more defined areas. Different areas have different clusters of specialties, he explained, which is advantageous to suppliers because it allows them to source parts more specifically. Koo said many of the valve customers are located in the Yangtze area.

The main challenges to business in China today are the increasing cost of raw materials; new worker protection regulations, which will increase labor costs; and new environmental protection sensitivities that will likely net new requirements. Also challenging for those doing business within China are the war for skilled management, protectionism in certain areas, land availability and currency volatility.

In general, business concerns within China need to be aware that “margins are reducing, some consolidation is being made for economies of scale, and prices will have to increase,” he said.

Koo quoted sources that said China’s economy will rise to second (in terms of nominal GDP) behind the U.S. by 2025 and surpass the U.S. by 2050. It is now the world’s fourth largest economy with its GDP doubling since 2002.