The State of the Valve Industry Today Is…Mixed

In August, the VMA and the Hydraulics Institute (HI) held their annual Market Outlook Workshop for members in person for the first time since 2019. Attendees heard from a variety of global and national economic experts from key vertical markets as well as consultants, and like the last couple of years, the predictions are mixed and still being affected by the complete disruption of the pandemic. Overall, the experts don’t think we’re in for a bottoming out of the economy from a deep recession, but most do predict a softening and more contraction across industries. In this article, we’ll cover the highlights from some of the key sectors and verticals where industrial valves play a critical role.

Overall Flow and Motion Control Perspective

Regularly featured speaker and senior research analyst for Baird, Michael Halloran, predicts a volatile next 6-12 months, or a bit longer for flow and motion control-focused companies that are in his purview. His long-term view is still strong, but in the short- and medium-term, he said he’s less enthusiastic about returns. There have been several factors driving uncertainty for a few years, currently including: geopolitical issues with Russia and China; monetary policy; debt levels; a sluggish economic recovery in China post-Covid; student loan repayment resumption; globalization reversal, and the upcoming U.S. presidential election. Halloran says he and his colleagues believe that companies are still working out what the new post-Covid normal is for orders and inventory stocking, and he thinks deglobalization will continue as U.S. companies onshore more of their manufacturing. Halloran also warns about government debt levels being historically high, and higher interest rates than we’ve seen in years, so companies may be holding back on investment while they wait for interest rates to dip again.

For 2024, Halloran shared the trends he sees for the next year and the cycles ahead — what he calls more of the same. Order levels should normalize, but he thinks that inventory levels will be reduced. There will be pockets where a recession has more of an impact, with up to a 20% decrease in revenue possible, but he thinks we’ll be on the upside of any recession in the next 18 months. He believes the U.S. is in better shape than most of Europe and even China as far as workforce challenges and demographic shifts, but it’s still something that industrial companies need to anticipate. As part of supply chain control, he also predicts that customers will trend toward system and subsystem purchases to reduce their supply chain risks, and that the workforce shift is a massive driver toward widespread automation.

When it comes to specific market verticals, oil and gas production levels are still quite high and he’s optimistic they’ll remain that way for a while. Chemical production is more closely aligned to GDP, so it may still see fluctuations. LNG demand is still positive globally, and if natural gas prices start to rise substantially, there could be faster growth of LNG. And even with the push toward clean energy and decarbonization, Halloran says coal isn’t dead, particularly because of strong markets for it in developing markets and countries like India and China. He’s also bullish on nuclear as a good source of clean energy.

In closing, Halloran said: “In a world that has more debt than it’s ever had, funding is a challenge and returns are vital. It’s so important for you to be able to show ROI for [management’s] willingness to spend. Demographic fixes don’t have a return, but automation and productivity do. We need to think outside those boundaries.”

Water and Wastewater Are Still Booming

Tom Decker, a consultant with more than four decades of experience in water and wastewater, called the outlook for the water and wastewater market like the last boom in the 1970s. With new laws and regulations passed, and billions of dollars appropriated for expansion and infrastructure, the industry is poised for a solid few years of continued steady growth, despite a significant shortfall in the number of workers.

The aging infrastructure, climate change and worker shortages are some of the largest challenges the industry faces. But drought is also a market driver for utilities, as half of the largest lakes are losing water and groundwater shortages are impacting cities such as Phoenix. But with the allocations from The Water Infrastructure Finance and Innovation Act (WIFIA), funds are flowing into water utilities across the U.S., with $5.3 billion in projects in the pipeline for the year by May, and more coming. As of the workshop, 107 loans had closed for $18.3 billion, with $6.1 billion saved from WIFIA allocations already.

“Forever chemicals” like PFAS (per- and polyfluoroalkyl substances) have a direct impact on the country’s water systems and utilities. Estimates are that 45% of the U.S. drinking water sources have PFAS in them, and the EPA and state governments are starting to pass guidance and legislation on the management of PFAS in water systems. This will continue to be monitored, and water utilities can expect to address this in the future. Decker said the American Water Works Association (AWWA) estimates a cost of $2.5 billion per year to address this across 3,400-6,500 systems in the U.S. alone. But, only $10 billion is currently allocated from the Infrastructure Investment and Jobs Act (IIJA). This shortfall in the future will need to be addressed.

Other challenges today include difficulty sourcing products for these large jobs funded by the Build America Buy America Act (BABAA) which requires all iron, steel, manufactured products and construction materials used in federally funded projects for infrastructure to be produced in the U.S. Many states are issuing waivers and accepting bids for non-U.S. products because they can’t currently be sourced from American manufacturers.

The high cost of concrete and labor are hindering some of the potential growth, or at least costing more than anticipated. Decker says there are currently 383,000 unfilled construction jobs in the U.S., and in infrastructure, only 11% of the workforce is currently under age 24, with 17 million infrastructure workers hitting retirement age in the next decade. This is already resulting in fewer bids and longer schedules, and this may continue for the foreseeable future.

Decker’s forecast for the water and wastewater markets is for double-digit expansion for the rest of 2023 and 2024. Inflation and supply chain issues persist but are getting better, and the influx of government investment will help continue to keep this sector on an upswing for the next few years.

Power Market

Climate activism is changing the power market. But the economics of shifting to clean energy is not just slow but very expensive. Lyle White of LWSC Consulting says that $6.5 trillion has been spent to reduce fossil fuel emissions since year 2000, and it’s only reduced from 81-82%. At that rate, and the cost necessitated to achieve this, current climate initiatives by the U.S. and west won’t offset the growing fossil emissions of China, India and other developing countries in Asia.

Today, 22% of U.S. power production comes from solar and wind, but 60% must be achieved in the U.S. to meet the government’s stated 2035 emissions goals. Renewables today still need to be backed up with conventional power sources, and White suggests that natural gas and nuclear plants will be part of the solution. According to the North American Electric Reliability Corporation (NERC), a nonprofit regulatory authority whose mission is to assure effective and efficient risk reduction to the power grid, at current rates the U.S. is predicted to sustain power shortfalls in the next decade, requiring brownouts and blackouts across the country at different times of year during peak loads.

In addition to power generation, many power companies are investing in carbon capture and underground storage (CCUS) technology to capture CO₂ at its source and transport it to be stored underground, removing it from the atmosphere. Currently, four projects are underway in the U.S. for CCUS, but this number will continue to rise. Companies are also looking at energy storage options to back up their grids. Currently, there is 1650 MW of energy storage in the country, but 12,500 MW is needed by 2050 per NERC’s estimates.

White said he believes that small nuclear reactors may be key to lowering emissions and having stable power. These carbon free, easy to build and run plants can be strategically located, even onsite for some large companies to be power independent. The first U.S. plant coming online is TerraPower’s 345 MW plant in Wyoming, planned in 2024. This Natrium reactor demonstration project will have access to high-assay, low-enriched uranium (HALEU), and is a public-private partnership and part of the U.S. DOE’s Advanced Reactor Demonstration Program. It will feature a 345 MW sodium-cooled fast reactor with a molten salt-based energy storage system which can boost output to 500 MW when needed. This project will serve as a model to future small reactor projects in the U.S. and around the world.

Green and blue hydrogen will be fuel types of the future for both the power market and for vehicles, White predicts. Hydrogen vehicles are powered by fuel cells that convert hydrogen to electric to drive motors, with only water as emissions. Today, the cars are very expensive, with an average fueling cost of  $16 per gallon and a 400-mile range, similar in range to many of today’s electric vehicles (EV). The EV market is predicted to grow exponentially from 2.5 million EVs today to 33 million forecasted by 2050, requiring 28 million charging stations. One of the biggest obstacles to this growth is going to be the scarcity of critical minerals needed to build batteries for the cars. Many of these minerals today are mined in countries with poor labor protections and with limited production capability. There are a number of these resources believed to be available in the U.S., but to secure and permit a mining operation today takes up to 20 years and brings with it many environmental concerns that must be overcome.

With artificial intelligence (AI) discussed in many sectors, the technology has major implications for bringing systematic, real-time controls for power plants and a smarter grid that can be optimized based on need. Look for more smart products built to harness the power of AI in the coming years.

White closed by saying there needs to be a compromise between government, industry and consumers to build renewables to meet our future power needs. And while the valve industry has already brought great enhancement to energy efficiency through leak protection in power generation and beyond, it can continue to offer value through product and service models that provide ROI for its customers in the future.

Other Sectors Discussed

While these were a few of the key sectors covered during the two-day event, there were also experts on pulp and paper, construction, LNG and sustainability in flow control at the event. Supply chain slowdowns, lack of skilled labor, upcoming retirements and higher costs of goods was consistent across most of the sessions as challenges that lie ahead for the U.S. industrial markets. Sustainability and the greening of industry are also weighing heavily on the minds of leaders in all organizations, particularly in the industrial world where valves and pumps are widely used. We will continue to discuss these challenges in upcoming issues of Valve magazine, and on our website.

Heather Gaynor is the editor of Valve Magazine.