Despite thousands of flight cancellations and challenging travel conditions resulting from an unexpected snowstorm, most members headed for VMA’s Valve Industry Leadership Forum made it to the meeting at the Ritz-Carlton Pentagon City in Arlington, VA, March 22-23.
Speakers focused primarily on governmental activities and regulations, as was befitting an event held just a couple of miles from the nation’s capital.
ITR senior analyst Alex Chausovsky kicked off the meeting by addressing the economic "winds of change." He noted that 2018 has so far been a positive year. Since the 2009 recession, the U.S. economy has been growing but ITR is calling for a visible slowing of economic growth in the next 12 to 18 months, with what negativity there is concentrated in the first part of 2019. However, “this will not be a true recession in the general economy.”
On the industrial side, the outlook is a little bit more negative but it’s part of a cyclical pattern. Downturns happen every 10 years, whether mild or hard. “This year, expect growth of 1.6%, about half the growth we saw last year.” Part of this is because consumer spending has been the engine of the current growth, but now consumers are pulling back due to debt load and increased interest rates. However, Chausovsky expects that at the end of the year, growth will still be 1.2% and then in 2020 look for another good year with 2.8% growth. “There is nothing lurking out there that should give you a major concern,” he advised. “Preserve a little more cash to protect you during the weakness of early 2019.”
With respect to corporate tax cuts, Chausovsky said that ITR is apolitical and simply looks at the data. Corporate tax rates have been going down for long time and the actual tax rate is more like 10-15%. “Corporate tax rates don’t seem to affect large corporations (stimulating economic growth) but do have more of an effect on medium and small businesses.”
He provided an example from Washington. Boeing got a huge track break from the state, but they still cut their workforce. Washington lost $8.5 billion with no results.
“It’s not realistic to think we will get the growth rate up to 5% range,” Chausovsky pointed out. “Also, thinking individual tax cuts are going to stimulate the economy is not realistic. People tend to use extra money to pay down debt rather than purchase new things.” He provided another example whereby Kansas put into effect a major tax cut to stimulate spending, but it did not happen. “It was so bad they had to cut education, law enforcement, etc.,” he warned.
Chausovsky also noted that “individual tax contributions to government have stayed fairly steady, while corporate income tax rates have been going down. As a result, the fallout will be to add debt to the U.S. “
Chausovsky said the long-term implications of these tax cuts will be what leads to what Alan and Brian Beaulieu, principals at ITR, have predicted to be another great depression in the 2030s. The Congressional Budget Office (CBO) statistics project that obligations for interest on debt, healthcare and social security will go up as much as 70% from 2015 to 2035. Simply put, that money will have to be taken away from other services.
“You need to prepare yourself, your company and your family for the great depression,” he warned. “Every decision should be made based on the long-term, and you could profit if you are positioned properly.”
Regarding tariffs and a protectionist trade policy, Chausovsky believes that it is overall a detriment to the economy, partially because they can cause unpredictable side effects.
How to Protect your Business
In the shorter term, Chausovsky suggested that suppliers and manufacturers identify the clients that are not where you want to be profitably. “You may need to lose some of the poor performing ones,” he said. Budget for continued economic expansion through this year and add new products. Chausovsky pointed out that new ventures help companies buck the business cycle decline.
Also, focus on employee retention because you can’t afford to lose top people. Raise prices to offset higher wages, input and logistics costs.
Finally, Chausovsky recommended regarding the 2030 depression: Be very watchful of what’s going on in the world. “You must be ready when the dominoes start to fall.”
What’s up with FERC?
Robert F. Powelson, Commissioner at the Federal Energy Regulatory Commission (FERC) updated the assemblage on the activities of FERC over the past year, and pointed out the importance of production in the Utica and Marcellus shale to the economy. The largest methane market in North America is the Gulf Coast, with 70% to 75% of total ethane cracking capacity. A substantial logistical infrastructure exists to enable efficient ethane consumption and the ethylene industry has been increasing cracking capacity since 2008.
However, what is now coming out of the Southwest Pennsylvania Marcellus play has higher BTU, so processing is needed. The industry needs a solution for transport because the pipelines currently in place may not accept higher BTU product. Since there is no regional ethane market in Pennsylvania, a solution must be presented soon. This is exacerbated by the Utica shale, which is deeper than the Marcellus. Analysts expect a higher BTU here as well.
FERC’s priorities for 2018 include having federal policies in place to protect markets. According to Powelson, state policies can and do impact wholesale markets. Competition should be for market revenues, not subsidies, and investment risk belongs in the market, not on consumers. FERC is also working on reducing barriers to innovation this year and working on energy storage and responsible pipeline development.
The Industrial Internet of Things
He explained that the Internet of Things (IoT) extends internet connectivity to a diverse range of everyday “things” that can communicate and interact with their external environment (and each other). Examples include smart meters and buy buttons that measure how much detergent is left in the bottle and adds it to your shopping list.
He said that “The Industrial Internet of Things (IIoT) is simply the IoT applied to manufacturing.”
For manufacturing, the most important benefits come from sensors that can transmit data on things in a plant, machine-to-machine communication and automation technology. Essentially the idea is that smart machines are better than humans at accurately capturing and communicating data, so there is a potential for greater quality control and sustainability, tracking goods and real- time information exchange about inventory. It also enables automated delivery to increase supply chain efficiency.
The IIoT can impact nearly every aspect of manufacturing including sensor-enabled monitoring of water, vibrations, usage and flow. Systems constantly measure moisture, humidity and other environmental influences. It can also track usage patterns and optimization of equipment, and enable maintenance alerts and predictive failure.
All of this allows users to gain competitive advantage over those who are not utilizing the IIoT. Still, with all the benefits that can come from implementing the IIoT, many companies are not jumping on board the technology train. The reasons include lack of budget and uncertainty on the return-on-investment.
There are also many concerns over security and privacy issues. However, as Saul pointed out, the bottom line is that the IIoT is here to stay, and it will be essential to integrate it in your process at some point. Determining how much and how far to go with your company is determined by your business goals, user needs and tech feasibility for your situation. “Take a deep breath, define your goals, do research and test each step. Build and repeat,” he advised.
Unexpected Fugitive Emissions
John C. Cruden, Former Assistant Attorney General, was unable to attend and present “Environmental Regulatory and Compliance Concerns,” but attendees were not disappointed when Greg Johnson, president of United Valve, stepped in to update everyone on the latest “Fugitive Emissions Standards & Laboratory Test Methods for Valves.”
Johnson began with 50 years of emissions control in 50 seconds, sharing how much has been accomplished in cleaning up the air from industrial pollutants since 1964. Since the first U.S. industry valve test standard (ANSI/ISA SP93.00.01) was instituted in 1999, there have been many updates and the requirements have become much more stringent.
However, Johnson noted that repeatability of valve testing is still a major issue in low-cost manufacturing countries and legacy designs do not address the dimensions and tolerances needed for Low-E packing efficacy. Some manufacturers still don’t know how to achieve repeatable Low-E compliance.
Johnson also provided his insights into what he believes will be changing in the next number of years. He foresees that helium will become the test gas and API will create a full-featured type test standard that will include high-temperature FE testing at working pressures. API will also create a helium production test.
The next Valve Industry Leadership Forum is scheduled for March 28-29, 2019 in Toronto, Ontario.