2011 Valve Shipments Forecast

Considering what has happened in the general economy, that’s pretty good news, according to VMA Chairman Max Mitchell, president for Crane Fluid Handling Group.

“Although the rise is slight compared to some year-to-year increases early in this decade, the fact we’ve managed to maintain steady momentum through a difficult economy shows how strong the valve and actuator industry is,” he says. And things should continue to improve at a faster pace over the next few years, he adds.

Mitchell’s upbeat assessment on the valve industry was echoed early this year by general figures on industry. For example, the Institute for Supply Management’s ISM Report on Business for February 2011 shows that the Purchasing Managers’ Index (PMI) continued a 19-month trend to reach 61.4, a level not seen since May of 2004. That report says that much of the increase has been driven by an accelerating growth in exports, which parallels what the valve industry has experienced.

Figures from the VMA forecast show that part of the reason shipments remained steady (and in fact, except for a decline in 2009, increased slightly) during the past recession is because domestic shipments stayed about the same but exports have risen. In 2009, exports were at about $717 million; by 2010, they had grown to $751 million, and they are forecast at more than $761 million for 2011. This growth is a departure from the fairly even rates of exports over the past decade, as shown in Figure 1.

“European markets [for the valve industry] are still flat while North America is showing signs of recovery,” says Mike Mason, executive vice president, Emerson Process Management - Fisher Division.

Mason says most of the growth over the next few years will come from Asia and the Middle East. While slow recovery in the U.S. and Europe will eventually bring consumption of goods and services back to earlier levels, Asia and the Middle East have favorable demographics. “The major Asian economies, which have growing populations with larger spending power, are going to drive an increased need for commodities and energy,” Mason says. On the other hand, isolated parts of Asia will not do so well, he adds. For example, Japan likely will not see growth in demand.

Barry Glickman, president, Dresser Flow Technologies, feels the valve industry global growth year-over-year will be a bit greater than the 1.5% in 2011 that VMA predicted for North America. He says that markets in South America, Asia and the Middle East will be particularly strong.

HOW DID WE GET HERE?

To make sense of what’s happening this year and in the immediate future, it’s useful to look at data released by VMA on trends over the past decade.

Valve shipments in 2010 at $3.85 billion were the strongest they’ve been over that decade except for that peak in 2008 at $4.0 billion in sales (Figure 2.) They started the decade off at about $3.1 billion.

In looking at end-user industries, of the 15 markets tracked by VMA in 2010, water & wastewater had the largest share at about 18%, followed by chemical (17%), petroleum production and petroleum refining (each at about 12%), and power generation (11%) (Figure 3). This distribution seems to have changed little over the past few years (Figure 4).

Since the global economy has a great effect of valve shipments, it’s also useful to look at what’s likely to happen in general to these markets.

Oil and Gas

The Baker Hughes United States rig count for March 4, 2011 was 1707, up 311 from last year. In Canada the count was 625, up 82 from last year. Two factors may account for increased North America activity: The general increase in crude prices (to around $100/bbl as of this writing), which makes exploration more attractive everywhere, and U.S. companies are reportedly working to reduce dependence on imported oil.

Glickman says that increases in commodity prices, particularly in refining, petrochemical (as well as chemical), are contributing to an increasing rate of building infrastructure worldwide, a development that began late last year. He says most of these are greenfield projects, but there is also some growth in infrastructure around existing facilities.

Jeff Kane, Sales & Marketing Manager, DFT Inc., says he also sees growth in this field. “The oil and gas sector has really come back strong for us,” he says, and is strong in all of the U.S. driven by the increase in oil prices. For his company, he says that geographically, the Gulf area continues to be strong and that for upstream oil, California is a good market.

Experts warn that the turmoil in the Middle East and the resulting increase in crude prices may yet derail the recovery in oil and gas if prices continue to increase. “Saudi Arabia will need to be stable or oil prices could go beyond $200,” says Mason. He added that political upheavals in Egypt and Libya could disrupt shipping through the Suez Canal, again impacting oil prices.

Glickman agrees. “A continuing and deepening spike in oil prices would impact my assumptions for global growth for the year,” he says. “If [the price spike] turns out to be a short-term anomaly and prices return to more stable levels, I would expect these developments to have very little impact.”

Chemical Processing

While oil and gas development in the U.S. and Canada seem to be gaining nicely, the same couldn’t be said for chemical processing. At the VMA Leadership Forum in January, for example, Michael Halloran, senior research analyst/vice president for Robert W. Baird & Co., Milwaukee, WI, reported that, “[m]igration of chemical production continues away from North America and Western Europe and toward the emerging markets and the Middle East.” Citing figures from Global Insight, Halloran reported that in 2000, world chemical output was $1.8 billion, with 39% coming from ROW (rest of world; that is, outside the Western Hemisphere Europe, the Middle East and Africa, but including Asia). In 2008, the total was $2.4 billion, with 48% in ROW, while in 2019, Global Insight predicts the total will be $3.6 billion with 57% coming from ROW.

Halloran went on to point out that current manufacturing capacity in chemical processing is 59% in developing markets and 41% in mature markets, and that 94% of project specific capacity additions are in developing markets.

Global Insight also estimates that world CAPEX in chemical processing grew 10% year over year in 2010 and predicts growth of 8% in 2011. The forecasting firm gives credit to developing regions, such as China at 19% in 2010 and 9% in 2011, and Latin and Central America at 12% and 13%, as the primary drivers. Baird’s analysts also predict chemical to be the most difficult end market in processing during the next up-cycle.

Energy and Power

Energy consumption continues to increase, especially in the developing world. In Halloran’s presentation, he cited figures from the Energy Information Administration (EIA) that chart a compound annual growth rate (CAGR) from 2007 to 2035 of 2.2% in non-Organization for Economic Cooperation and Development (OECD) countries compared to 0.5% in OECD countries.

In the U.S., according to EIA, power capacity additions, which fell from about 23,475 megawatts (MW) in 2009 to 15,484 MW in 2010, are expected to decline further to 13,762 MW in 2011 and then begin to turn around in 2012, reaching 19,049 MW. Much of the North American spending in power in 2009 was in maintenance, repair and overhaul (MRO), and this area will drive modest increases in 2010. Halloran said he expects project work to remain sluggish in 2011 in the mature markets.

Kane agrees that the power market, especially in MRO, has been soft, but he sees two hopeful signs. The first is that, despite recent increases in MRO spending, we are not yet caught up and this spending will continue. Once that’s accomplished, it will be time to reinvest.

Also, however, there is considerable interest in converting existing coal-fired plants to natural gas, he said. This is generating significant business in itself, but it also clears a path for the future. “Once you start getting a number of these coal-burning power plants converted over to natural gas, there’s going to be a huge demand for this natural gas,” he says, which means more drilling, more production and more business for everyone in the industry.

Water and Wastewater

Halloran said the worldwide water and wastewater market is growing at a CAGR of 6 to 8%, “driven by population growth, rising living standards, industrialization and the disrepair of existing water systems.” The recession reduced growth in North America and Europe through the middle of 2009, he said, and while some companies saw a pickup last year, 2011 looks to be sluggish at best, with construction project growth in the low-single digits for 2011 and mid-single digits for 2012.

A report from management consulting firm FMI Corporation is also sobering, predicting that U.S. water supply construction will remain flat for the next two years.

Glickman echoes these predictions. “Water and wastewater are … areas that have fairly sustained, predictable investment patterns, tied generally to GNP [Gross National Product] growth,” he says. As a result, “We don’t expect big spikes in those markets, nor would we expect to see big spikes down the road—they just tend to be much less cyclical.”

Water and wastewater must eventually accelerate, however, because, there is so much work to be done. Halloran cited Environmental Protection Agency (EPA) figures from 2002 that state by 2020, 45% of U.S. water/wastewater pipes will be classified as “poor,” “very poor” or “elapsed;” in 2000 only 23% were in this condition. In 2004, he said, “the EPA estimated that the U.S. must invest $298.1 billion over the coming 20 years to replace existing systems and construct new systems to meet rising demands” for wastewater infrastructure, plus another $334.8 billion over the next 20 years for drinking water.

While governmental entities are strapped for cash, there may be some light in this tunnel coming from private companies. Two examples are Aqua America and American Water Works, both of which buy water and wastewater systems from local municipalities then upgrade them. Since these companies’ funding mechanisms are different from those of local governments, they can obtain the money to expand. Aqua America’s Pennsylvania subsidiary, for example, recently spent $4.5 million on just one local water system it had acquired at the end of 2008.

For companies that export their products around the world, however, the increased worldwide demands in this market may present opportunities. For example, a February 15 Reuters article by Lucy Hornby and Jane Lanhee Lee quoted World Bank estimates that “China needs to spend up to $20 billion a year to bring its urban water supplies up to standard.”

CLOSING THOUGHTS

With the possible exception of oil and gas, where new opportunities are sprouting, one theme that seems apparent from recent forecasts is that companies today that want to make gains may need to consider looking to foreign soils to find new areas of growth. However, no matter where the growth is coming from, it’s apparent that the valve industry has weathered the economic crisis well and is on its way to more fertile ground.

Peter Cleaveland, a contributing editor to Valve Magazine, writes extensively about issues related to the flow control industry. Reach him at pcleaveland@earthlink.net.