Market Outlook 2022 Forecasts Stability and Cautious Optimism

Greek philosopher Heraclitus is quoted to have said, “There is nothing permanent except change.” This notion captures this year’s Market Outlook Workshop (MOW) that looked ahead to 2022 through the lens of a broadly positive 2021. Unsurprisingly, COVID-19 has had considerable impact on every market and industry, and as this is written, the Delta variant is adding more contingencies that have yet to be borne out. What was clear, however, is that while uncertainties remain, 2021 has been a year of growth and 2022 is on track to continue that trend, albeit with some predicted slowing. Also inextricably linked to COVID’s lasting effects, repeated themes of supply chain issues, labor shortages and inflation dominated much of the experts’ presentations.

Marking its second year of the MOW being virtual only, about 150 people participated in the online event that included expert presentations on global and domestic economic outlooks, Wall Street trends, pending congressional infrastructure plans and international trade. Attendees also had a chance to ask questions of the speakers and engage via live question-and-answer sessions throughout the two-day event that is jointly produced by the VMA and the Hydraulic Institute.

In considering what lies ahead for end-user markets in the coming year, these themes prevailed:

Overall, the news for 2021 was good with soaring consumer demand as the United States and the world balanced vaccination rates with a handful of variants that continue to play a pivotal role in what the future holds. By and large, the belief was that the broader recovery will continue, albeit with drawbacks tied to employment needs, supply shortages, inflationary spending, stimulus monies and the world’s collective effort to emerge from and adapt to the COVID-19 pandemic.
Domestically, much hinges on the massive $1.2 trillion bipartisan infrastructure package that is in flux at the time of this writing. The bill would include $55 billion for water and wastewater—a tenfold increase in funds if the legislation is passed. With a related budget reconciliation bill for fiscal year 2022 also hanging in the balance, forthcoming negotiations in congress will have a major impact on associated spending that will affect the valve and pump markets.
International trade relations with China will remain tense as both countries are concerned with self-interests, decoupling efforts and anti-trust standards, making dealings more difficult and costly in the future. China will continue to be a motor for economic growth—even more than usual.
Many sectors are focused on issues concerning climate change and associated environmental, social and governance (ESG) topics as pressure mounts from investors to make significant steps toward decarbonization and water conservation, particularly in the western United States.

ECONOMY

As Michael Halloran, CFA, associate director of research, senior research analyst at Baird, aptly commented, “We are in the middle of a staggered recovery and, in many respects, staggering as we continue dealing with all the complications of COVID-19 and recovering from those lows.” With 18 months of the pandemic casting a shadow over almost every aspect of our lives and the global economy, Halloran said, and with the looming uncertainties, a linear recovery should not be expected. “Keep an eye on the big picture: We are likely in front of a very healthy industrial recovery cycle, but short-term volatility will continue in the meantime,” he added. The focus will turn to these issues:

Lingering COVID-19 variants and global responses.
Sustainability of recovery, transitioning/inflecting end markets.
Impacts of eventual fading fiscal and monetary stimulus.
Debate over inflation as to whether it’s transitory.
Global supply chain capacity and the ability to ease bottlenecks.
Trade tensions remaining elevated.
Unemployment improvement with fiscal stimulus running out.
Merger-and-acquisition activity.

In future-looking models, both economic experts, Halloran and Connor Lokar, speaker and senior forecaster, ITR Economics, acknowledged that while the pandemic is an uncertainty driver, they predicted that lockdowns and a second wave of closures are not likely to happen—it can’t be altogether ruled out, but it’s not probable. This is, of course, critical given that the workforce is greatly impacted if schools and daycare providers were to close again, requiring parents to stay home with their children.

Compared to 2020, 2021 showed across-the-board growth with the economy expanding and consumer demand came back very quickly, which, in turn, contributed to supply chain issues and labor shortages. This overall trajectory of growth and continued capex spending, cited Lokar and Holloran, will remain strong but will decelerate in the second half of next year as things normalize and moderate somewhat.

Relatedly, Lokar discussed a tendency toward supply chain panic and the risk of overordering and overloading at the peak of the pricing cycle. For instance, lumber futures have collapsed about 70% since the peak of May 2020 when consumers were home more and spending discretionary money on renovations (and the residential housing market remained extremely robust) instead of vacations and travel. “The supply side of the economy is really trying to make a comeback…but it just doesn’t feel like it because demand is so robust and a paradigm shift for 2022 that we’re seeing is the supply side finally catching up,” he said.

Capturing the overall view of industrial stocks, Holloran said, “The underlying fundamentals of industrials are doing well, and that’s what we’re focused on. If you have a strong cycle ahead of you where you have earnings power, earnings growth, revenue growth, it tends to be a pretty good leading indicator of why we’re bullish on the stocks is because, in part, where the industrial cycle can go from here.”

Looking at the valve and pump industries, specifically, their demand is correlated to end-market exposures, capex investment, heavy industry exposure and valve-replacement opportunities with increased MRO as repair needs will likely grow in 2022 and well beyond. Also discussed were research and development technology drivers, diversity of end markets and the types of valve applications that manufacturers focus on as meaningful factors on a long-term basis.

Halloran touched on a few end-user markets:

Engineering and construction—Backlogs still exist, which suggests a better spending environment and a willingness to undertake large projects. As with last year, cancellations are not materializing for the most part. Concerns surround broader macroeconomic uncertainty, trade disputes and geopolitical tensions.
General industrial projects—Expect to see very healthy revenue growth as experienced this year continue in 2022, recognizing that the recovery curve will likely have “stops and starts” given global challenges that center around ongoing supply chain problems.
Oil and gas upstream and midstream—Oil pricing recovered in 2021 as economic and mobility conditions have improved, although prices have been volatile. Baird expects oil pricing to remain, and now-stable levels determined by OPEC that are corresponding with increasing demand associated with a choppy but generally positive emergence from pandemic-related restrictions and closures. An interesting shift Halloran pointed out, “The marketplace is far more interested today than it has ever been in driving appropriate returns for its shareholder base, its investor and constituent base…resulting in far tighter decision making when it comes to capital allocation, which will cumulatively be very healthy for this industry.”
Oil and gas late-cycle—Downstream processes in oil and gas and chemicals short-cycle work have started to move, Halloran said, but again expect a rather bumpy progression as some projects continue to lag but to expect and overall upward trajectory. What he does see is more targeted, smaller projects that aren’t as broad based.
Traditional and legacy power generation—“I think traditional power gen is fading and we’ll see far more replacement-oriented investment, regional variability and some of the more mature markets going far more to alternative investments,” explained Halloran, and then added, “I will tell you that the companies I have exposure to that have traditional legacy exposure or oil and gas exposure are all figuring out how they can pivot toward higher-growth, more sustainable areas of investment.” However, in this context he went on to clarify that sustainable doesn’t necessarily mean ESG; it means sustainable for their own enterprise and business platform. This process of transitioning will last a long time, he predicted.

OIL AND GAS

On the heels of 2020 and its unprecedented decline where the U.S. rig count had fallen below its 80-year low point, activity has doubled in the past 12 months, due in large part to behavioral changes associated with the pandemic. John Spears of Spears & Associates, making his regular annual presentation to VMA and HI audiences, reflected on many aspects and ups and downs seen in these turbulent times for the industry but said the sense overall for better days ahead is palpable.

In terms of fundamentals and where the global demand and supply is headed, Spears drew on 2019 numbers, explaining that it’s informative to see that, on a global basis, demand is sharply improving and will soon be back to pre-pandemic levels. Estimates show that oil demand has averaged 98 million barrels per day (bpd) in 2021, a 5.9% increase and is expected to climb another 3.7% to 101 million bpd in 2022.

Pursuing a strategy since the latter part of 2020 of targeting oil prices in the $60-$70 range, Spears explained that OPEC+ (larger group formed in 2016 to have more control of the global crude oil market) members and other producers are restricting their production so that the supply doesn’t grow faster than the recovery that is seen in demand. The thinking seems to be that if they undershoot the demand recovery it’s acceptable because that means global inventories will begin to shrink, which will help to stabilize oil prices and he’s predicting that this approach will continue into next year.

Spears forecasted that prices will gradually decline slightly to about $65 per barrel—down from the peaks of $75 per barrel seen in late June and early July of this year. He also said U.S. oil production will likely average 11 million bpd, up from 10 million bpd currently, both of which are lower than the 13 bpd being produced at the of 2019 when prices bottomed out at $30 per barrel.

Gas production is following a similar and related trend as oil and is expected, per Spears’ analysis, to rebound after its low point in 2020 and subsequent COVID-related decline. Spot gas prices look to be tracking at an average of $3.20 per mmbtu, up from about $2.00 per mmbtu at this time last year—an increase of 60%.

One key factor that Spears mentioned in looking at the long-term picture is energy transition and the global shift to combat climate change, entailing an increased use of electric vehicles and renewables as the effort to phase out fossil fuel production in the U.S., Europe and other parts of the world. Spears stipulated, “In examining the numbers, it suggests to us that global oil consumption will remain at or above this 2022 level for the balance of this decade and perhaps longer.” So while changes are certainly afoot with a push toward reducing our carbon footprint, he said that over the next five to ten years, demand is expected to remain very strong, sustain higher prices and activity levels will continue to remain higher over time.

However, in what Spears described as an ongoing story regarding greenhouse gas initiatives, he finished up by asking what the future holds for this industry. “We’ve been in business as a company for over 50 years and I’ve been doing my work in oil field research for 40 years and, in probably the last six months, I’ve had more discussions about the 10- and 20-year outlook for the industry than I’ve had in all those previous 39 years of working in this job, so clearly a lot of companies in this sector are asking themselves what kind of future might we expect for this business and beyond the issue of recovery in 2021 and 2022 from last year’s decline,” he stated, “and firms are clearly thinking about improving profitability while lowering their carbon footprint to mitigate their impact on the environment.”

MINING

With a first-time appearance at the workshop, David Kurtz, director, Research & Analysis at GlobalData, touched on myriad topics in the mining sector and its relevance in the marketplace for valves and pumps along with an overall discussion centered around timely ESG issues, particularly with declining grades and related effects on the environment.

Globally, mining generates about $1.5 trillion per year and accounts for 1.8% of GDP. Like many sectors, said Kurtz, mining saw a production and revenue decline in 2020 due to COVID-19, but with commodity prices surging since May 2020 and production back on track since that time, 2021 is expected to finish strong and 2022 will show moderate growth. Within these figures, Kurtz noted that iron ore showed its resilience and has risen sharply in the ensuing months following the start of the pandemic, and backed by demand from the Chinese government’s infrastructure spending, iron ore prices have doubled from their position in March 2020 when it was $88 per ton and is now more than $200 per ton. Similarly, copper has doubled in value since mid-2020 and also hit an all-time high of $10,000 per ton in 2021.

“With a rise in commodity prices and commodity demand, miners are committing higher investments in 2021. After falling by approximately 6% in 2020, the capital expenditure of the top 20 miners is expected to rise by about 23% in 2021, which is the highest point since 2015,” said Kurtz. And in keeping with the broader ESG focus on renewables, he said it’s expected that spending will be directed more toward those commodities that will support a transition to carbon reduction and EVs, such as copper, nickel, cobalt and lithium as opposed to thermal coal, for example.

In developing new projects, Kurtz spoke about challenges that miners face—namely that as good deposits of minerals have become scarcer on the surface, mining is forced to go underground, increasing costs significantly. Currently, among all operating mines, 25% are underground, but Kurtz said that’s due to change with sites that are under construction or in development requiring increasing numbers of underground mines as part of a surface-underground hybrid site. These changes, he said, will lead to a greater need for pumps and valves in the more extreme environment of mining underground.

Another challenge Kurtz described is the number of new mines starting has declined in the last decade with miners preferring to extend the life of existing mines rather than developing new sites as they have shifted to quality over quantity. In terms of exploration, this is also forcing miners to seek opportunities in emerging markets such as Africa, Peru and Chile.

To help offset the greater cost of mining underground, Kurtz said miners are striving for more efficiency and productivity with digital technologies, dubbing it “the digital mine,” which includes equipment health monitoring, drones for surveying, autonomous haulage, cloud computing, IoT, wearable technology and advanced mine-planning software, among other things. Part of this, he mentioned, is a need for smart connected pumps where operators can remotely monitor capacity, control pump operations, use data to optimize operation and minimize costs and downtime.

In wrapping up his presentation, Kurtz reiterated sustainability as a key initiative and emphasis for the industry with the goal of reaching net-zero emissions by 2050. He outlined a wide range of activities like community engagement prior to a mine’s construction all the way through to rehabilitation at the end and said, “Miners need to be environmentally sound and socially responsible in whatever they do.” Adding to this, Kurtz explained, “Miners are facing even greater pressure from investors and customers with investors seeking out more sustainable investments and customers also looking for greater transparency regarding the products they’re purchasing.” With diesel vehicles being a major contributor to CO²emissions, shifting to electrified operations has already shown some benefits and the transition will continue for many years to come, Kurtz said.

HYDROGEN

In the evolving energy space, another newcomer to the MOW included the Fuel Cell and Hydrogen Energy Association (FCHEA). Director of External Affairs Connor Dolan presented on their members (and other outside groups) that have formed a coalition of major oil and gas, power, automotive, fuel cell and hydrogen companies, like Chevron, Shell, Microsoft, utility companies and several auto manufacturers, to develop a road map for hydrogen in the United States to expand the use of hydrogen by scaling up activity in the renewable energy system.

Dolan began by explaining the five uses of hydrogen, including power generation and grid balancing (hydrogen as an energy carrier and storage medium), fuel for industry, feedstock for industry, fuel for residential and commercial buildings and transportation fuel—all emerging markets as the United States moves toward decarbonization. One of the largest uses, Dolan said, is material-handling equipment like forklifts and lift trucks that are powering distribution warehouses across the country. “Over the pandemic, more than 25% of all groceries in supermarkets in our country went through a warehouse or distribution center that used hydrogen-powered forklifts…with 40,000 in operation today at companies such as Amazon, Walmart, The Hope Depot, FedEx and others.”

Dolan discussed and shared a Department of Energy map of the United States detailing hydrogen electrolyzer locations and capacity. In looking ahead, as demand increases, Dolan said, “We will need a lot of electrolyzers and energy-storage capabilities of taking electricity, running it through water and passing electric current through it and get zero-emissions fuel from that hydrogen.”

Speaking specifically about the intersection of the hydrogen economy with pumps and valves, “Basically anything that moves or stores hydrogen needs a valve. Valves are very integral to our industry and important. Most hydrogen being generated today is using gaseous applications, but we are seeing a number of emerging production methods of liquid hydrogen and we have a number of members that are producing large-scale liquified hydrogen,” Dolan said. Relatedly, he went on to explain that hydrogen is typically moved using pipelines, of which there are only about 3,000 miles in the United States, mostly around the gulf coast and refining operations. A majority of the distribution network, however, is currently through trucking, which uses either compressed hydrogen trucks or liquefied hydrogen trucks, and any refueling station is going to need pumps and valves, as well as large-scale storage vessels and tanks.

The particular benefits that hydrogen offers, Dolan outlined, include economic growth and employment opportunities; resiliency and reliability of our national gas grids; a reduction in local air pollutants; and a reduction in greenhouse gases emissions. The pathway for increased hydrogen use could lead to 14% of U.S. energy demand being met by hydrogen in the year 2050. And by 2030, it is projected that annual investment will reach $8 billion and more than 500,000 new jobs will be created, which include direct, indirect and resulting jobs that would encompass the variety of component application and companies such as valves and pumps.

WATER AND WASTEWATER

With clever framing of his presentation around movie series he binged during the pandemic (Star Wars, Star Trek, The Lord of the Rings, Harry Potter), Thomas Decker, of his eponymous consulting firm, provided a thorough and nuanced background on the state of this industry where valves and pumps are widely used.

Faring better than expected, 2020 wrapped up with just under 6% growth for water and wastewater (W/WW) as an industry. This is due to a number of factors, Decker explained, including W/WW markets being deemed essential construction during the pandemic; utility reserves; state and local revenues stayed high or increased due to property taxes; people working from home resulted in higher water use across the board; remote workers in the industry had success performing duties; RFPs going out to engineering firms continued; and the Paycheck Protection Plan (PPP) funds kept many operations afloat.

Through April 2021, construction put in place has held steady and Decker expects the year to follow much like 2020 did where water use grew 9%, making up 44% of the mix, while wastewater grew 3% to account for the remaining 56% of the W/WW combination. As in the past three to four years of Decker’s presentations, he reported that overall the mix is trending toward the drinking water side and again in 2020, consulting engineers did more water work than wastewater work.

In addressing the Star Wars-themed topic of “the force awakens,” Decker dove into the numerous and somewhat revived (compared to the past eight years) legislative issues: pandemic relief, development of the infrastructure plan/bill and two or three regulations that will have some impact on the industry.

The first part of pandemic relief was the December 2020 omnibus package, Decker described, that contained the Low Income Household Water Assistance Program (LIHWAP), which helped cover payments owed to water utilities that had accumulated during the first several months of COVID-19 when a moratorium was placed on utilities shutting off customers’ water. The second part of pandemic relief he discussed is the Biden administration’s American Rescue Plan passed in March 2021; it included $350 billion in aid to state and local governments—with W/WW being specifically mentioned—to be spread out in 2021 and 2022.

The second legislative component Decker discussed was the bipartisan infrastructure plan: President Biden’s American Jobs Plan that came out in March of this year. It initially included a $2.3 trillion plan for what’s known as human infrastructure, but its emphasis is on much-needed physical infrastructure. Decker provided an impressive summary and explanation of all the many moving parts of this process that have changed and progressed countless times over the past six months while the country still waits on what will likely continue to be arduous and lengthy negotiations. He did say, however, that he feels positive about needed funding coming out of all this legislation; it’s just a matter of what it will be in the end.

Next up was the Water Infrastructure Finance and Innovation Act (WIFIA) that is low-interest treasury loans for large ($20+ million projects). “Since 2018 it’s funded more than 50 projects…and those loans have provided roughly $4 billion in interest savings over other conventional financing methods,” Decker said, “so WIFIA really really works.” He added that every year the number of applications is increasing, and it is “an absolute gem” for funding large projects.

Onto the portion of his presentation that focused on drivers and restrainers, respectively as Star Wars: a New Hope and Star Trek: Nemesis, Decker detailed drivers as: aging/deteriorating infrastructure, drought, digitization, energy efficiency and public support and he listed the restrainers as: materials cost, worker shortage and labor cost, population growth and affordability. Of the various statistics and figures, a memorable one that reflects the need for improved infrastructure is the 9 trillion gallons of treated, pumped and distributed water annually that is wasted and does not reach customers.

The drought in the American West continues to pose significant problems for the W/WW industry in ways Decker understatedly labeled as challenging. The figures he presented (California reservoirs at 50%, Lake Mead at 37%, temporary and permanent desalination plants increasing and the Colorado River shortage declaration) revealed a harsh reality from an environmental standpoint, but these issues will drive work for the W/WW industry.

A final and interesting factor Decker brought up, with the census having just occurred in 2020, was that the United States had just 7% growth, which is the second-lowest rate ever recorded since the census began in the mid-18^th century. A growing population is, of course, a driver for the W/WW industry, so it’s just one more consideration, along with a shifting demographic that’s growing more in the western United States, for those involved in this industry.

CHEMICAL PROCESSING

Dually presented by Shaheen Chohan, vice president of Global Analytics and Trey Hamblet, vice president of Chemical Processing, both of Industrial Info Resources, the global chemical processing industry, like practically every market in the workshop has experienced a mix of headwinds and tailwinds in 2021, and 2022 still will show signs of uncertainty in the midst of the world’s tentative and choppy reopening as COVID-19 cases continue to fluctuate. And also akin to other industries, the pervasive energy transition story will play a key role, as Chohan proposed that the pandemic as a disruptor may be a catalyst for longer-term and sweeping energy changes toward a lower-carbon future.

“The chemical industry is actually one of the most intense energy users of all manufacturing industries,” Chohan said. 2021 has been vastly better with 6% growth, Hamblet explained, but uncertainty still prevails even as production and manufacturing activity are up. And, again, as a recurring theme throughout the workshop, hesitancy looms large with the arrival of various COVID-19 mutations combined with vaccine efforts that are in flux worldwide. And speaking to the unprecedented times we are in, Hamblet said, “In my decades of tracking the industry, we’ve never seen such sharp declines and such sharp returns, in some cases, so the market is just in this period of great uncertainty.”

Current projects for 2022 show moderate growth of about 4.4% and delivery of 2021 fiscal support and infrastructure spending programs will be key to maintaining growth. “The reality of it is that chemical-derived end products have vast end-use applications, and in most instances…plastics and rubbers are very hard to replace with another product, so the long-term demand outlook continues to remain intact and look very robust,” Chohan said. A rather interesting dilemma the chemical sector finds itself in is, he added, “On the one hand we have strong demand with little product displacement, which is somewhat jarring against a societal awareness and shift away from plastics.” So in looking at future growth, be it in the near term or farther down the road, the consumer demand for plastics in all its numerous forms, is expected to remain strong. “If you look at the very significant changes in the consumer habits and spending specific to plastics over the past 18 months, and if you think back prior to the pandemic, the world had already moved away from single-use packaging everywhere it was possible and curb consumers’ use of these plastics. We’ve now gone in the complete opposite direction; people want things individually packaged for health and safety, personal protection equipment, increase in deliveries at home or curbside all require an immense amount of plastic,” Hamblet said. These abrupt changes will play a part in a long-term trend.

Other changes and increases in demand Hamblet described revolved around the segments of transportation (EVs, hydrogen-power vehicles, lighter, more efficient vehicles, coatings), green initiatives (solar and wind farms, batteries) and traditional growth (housing, agriculture, population). A relatively new and emerging concept Hamlet introduced to viewers is power-to-X, which in short is “taking renewable energy and producing this X commodity, which can be green hydrogen, green ammonia or green methanol…but it all starts with capturing that energy in a dedicated format to be processed in an electrolyzer to produce the green hydrogen be put toward end uses such as maritime fuel, power generation and mass transit fuel.” Importantly, once it was understood that green hydrogen has a positive impact on the environment, technology advanced to synthesize the green hydrogen and react it into other building block commodities like ammonia and methanol for things like fertilizers or alternative fuels. Hamblet sees this trend gaining traction here in the United States and with more than 200 power-to-X projects planned globally totaling $64 billion, he sees strong growth potential.