A Wall Street Perspective: Indicators ‘Paint a Mixed Picture'

"We are headed in the right direction," but will see only moderate growth rates heading into early 2011, then a normalized recovery rate from that point on, he predicted.

On Wall Street, industrial sectors during this economic slowdown have outperformed most other end markets, particularly the consumer markets, Halloran pointed out. U.S. industrial production reached a trough of -13.3% in June 2009, turned positive in March of 2010 and is now accelerating. Global industrial production reached its trough in about March of 2009 and turned positive in January of 2010.

One of the factors holding back a quicker recovery is that credit is still tight because lenders still have risk aversion, but that picture is also changing, Halloran said. Banks are beginning to loosen loan standards, which should stimulate investment and the release of major projects going forward, Halloran predicted.

Halloran had this to say about the various end markets:

Oil & gas

"We are seeing a recovery, but it's very early stage," with the most money right now going into repair and recovery efforts, Halloran said. Rig counts are at healthy numbers, up nearly 40% globally from where they troughed in 2009 and up 80% in North America from a year ago. But "a lot of that is old rigs that are coming back online" right now, he said. New project activity is not yet back in full force. Most of the new projects going forth will be in horizontal and directional rigs, but digging is harder on these wells so the process will be more costly. "As these sites become more difficult to access, we will need more cap ex [capital expenditure] to get the same amount of production," he pointed out.

In the downstream market, the trends have not seen quite as strong a recovery, Halloran said. Refinery capacity utilization rose slightly in early 2010 after reaching its lowest levels since the 1980s in 2009. Latin and Central America and China will lead in growth rates in this area. In the U.S., spending has accelerated, but utilization levels have fallen and crack spreads (the difference between the price of crude oil and the products that are extracted) are recovering from a collapse so spending in 2011 will be flat to downward.

Chemical Processing

For the chemical processing field, "2010 played out ahead of our expectations, but those expectations were muted to begin with," Halloran said. Global capital expenditures came out ahead of forecasts after falling about 4% in 2009 primarily because capacity utilization deteriorated. In the U.S., for example, plant capacity fell to about 71% in that year, the lowest it's been since 2001.  Future production expansions will primarily occur in developing markets, particularly China, India and the Middle East, he said.

In North America, growth growing forward will come not from new building, but from maintenance, repair and overhaul (MRO) projects. North American chemical MRO projects increased by 14% in 2009, but spending in that area increased just 5% because the size of projects decreased. However, maintenance turnaround projects should increase 27% during 2010 and spending will increase 43%, Halloran said.

Power

The power sector lags behind other end user industries when it comes to recovery, Halloran said. However, in the long term, the market is driven by the realities of increasing demand throughout the world. He predicted world energy consumption will grow 49% from 2007 to 2035 because of the needs of developing nations, for example.

Developed regions, in the meantime, will focus on replacing infrastructure, modernization of facilities and changing needs brought on by regulatory demands.  For example, the share of electricity generated by renewables is expected to increase from about 18% in 2007 to 23% by 2035. Power maintenance projects will see a growth of 8% in numbers and 20% in spending for 2010, Halloran said.

Still, "we are going to need all kinds of energy sources-including coal and oil-to meet our demands," Halloran pointed out.

Water/Wastewater

One reality about the water/wastewater market is that "it has never played out as predicted," Halloran said, and the current situation is no different. Yet the drivers are very clear, such as the increasing need from population growth and the aging infrastructure in North America and developed regions of the world. For example, the U.S. Environmental Protection Agency estimated in 2004 that U.S. would need almost $300 billion over the next 20 years to replace existing systems and construct new ones to meet demands, Halloran pointed out. Such clear-cut drivers mean a growth in the overall wastewater/water market of about 6 to 8% yearly in the long term, he said.

Growth deteriorated in North America and Europe (which comprise 69% of demand) through mid-2009 mostly due to lower state and local tax receipts, as well as tight credit and uncertainty over what the stimulus package would bring, he noted. Still, in the U.S. new opportunity for funding exists beyond the stimulus package in the form of several bills now before Congress on water quality and state revolving water funds.

Halloran's Predictions

Global fixed investment growth in process equipment and controls will accelerate to more than plus 6% by the fourth quarter of 2011. In the upstream oil & gas industry, capital spending globally should grow at a rate of about 5 to 7% because of infrastructure investments in emerging regions of the world, which have not caught up to demand. Demand in mature regions will decline modestly through 2014 but will be offset by the growth in developing regions. Global downstream capital expenditures will increase 8% in 2010, 2011 and 2012. In chemical processing, global capital expenditures will grow 7% in 2010 and 2011 driven primarily by activity in China, Latin and Central America. For power, investments in electricity infrastructure around the world will exceed $13 trillion by 2030. The global water/wastewater market will grow 6 to 8% going forward, driven by population growth, rising living standards, industrialization and disrepair of existing systems.

Genilee Parente is managing editor of Valve Magazine. She can be reached at gparente@vma.org.

Conditions for Growth in End-User Markets

In the table below (prepared by Robert W. Baird & Co.), color indicates the current condition-yellow is stable; red is decelerating and green is accelerating. The text indicates direction or "second derivative."