3Q11 IPD Commodity Reports by Westlund PVF

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3Q11 IPD Commodity reports The IPD COMMODITY REPORTS are prepared quarterly in February, May, August & November by the members of the IPD Executive Council

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This report is published as a member service of the American Supply Association’s Industrial Piping Division (IPD). Its contents are solely for informational purposes, and any use thereof or reliance thereon is at the sole and independent discretion and responsibility of the reader. While the information contained in this report is believed to be accurate as of the date of publication, ASA, its IPD and the authors disclaim any and all warranties, express or implied, as to its accuracy and completeness. ©2011 American Supply Association. All Rights Reserved.

3Q11 IPD Commodity Reports

CARBON STEEL PIPE Overview The big question: is this the summer doldrums, or is consumption on a real downward track? Much like a broken clock, we are right twice a day. Take your pick. The addition of two new domestic Hot Rolled Strip mills increases the dynamic for more volatile and uncertain pricing entering the marketplace. Demand continues at a rather unenthusiastic pace in markets not energy related, hence the doldrums or tepid consumption puzzle. The uncertainty in the financial markets adds a negative ingredient to an already cloudy picture. Although showing growth, lower readings from the Institute of Supply Management as well as dramatically lower second half GDP (Gross Domestic Product) growth rate projections from previously bullish economists now seem to confirm the general lack of market enthusiasm. Say what you will about our industry, it is at the forefront of new construction, repair and replacement and, as such, feels the impact of slower/faster economic growth models. The slower economic growth forecast for the second half of 2011 is manifesting itself in what now seems are fewer opportunities.

Domestic Carbon Steel Pipe Overall pipe demand has fallen with the start of summer. Many fear that this may be part of a double-dip recession. Now, the average HRC cost has fallen from a high of $900/ ton in April to a recent low of $660/ton (as of August 5). No one wants to commit to high dollar inventory at a time when raw material prices are falling, and no one wants to get stuck with inventory if demand does not pick up. Non-residential construction is still flat with no growth projected into 2013. The domestic (on-shore) oil and gas industry continues to see strong demand with the shale plays at the Marcelus, Bakken and Eagle Ford. The ISM (Institute for Supply Management) reports that the economic activity in the manufacturing sector expanded in

July for the 24th consecutive month, and the overall economy grew for the 26th consecutive month. The PMI registered 50.9 percent, a decrease of 4.4 percentage points indicating continued expansion in the manufacturing sector although at a slower rate of growth than in June. Production and employment also showed continued growth in July, but at slower rates than in June. The New Orders Index registered 49.2 percent indicating contraction for the first time since June of 2009 when it registered 48.9 percent. The rate of increase in prices slowed for the third consecutive month, dropping 9 percentage points in July to 59 percent. In the last three months combined, the Prices Index has declined by 26.5 percentage points, dropping from 85.5 percent in April to 59 percent in July. Despite relief in pricing, however, several comments suggest a slowdown in domestic demand in the short term while export orders continue to remain strong. Of the 18 manufacturing industries, 10 are reporting growth in July, in the following order: Paper Products; Furniture & Related Products; Computer & Electronic Products; Transportation Equipment; Wood Products; Petroleum & Coal Products; Printing & Related Support Activities; Primary Metals; Fabricated Metal Products; and Nonmetallic Mineral Products. The seven industries reporting contraction in July are (listed in order): Apparel, Leather & Allied Products; Plastics & Rubber Products; Textile Mills; Electrical Equipment, Appliances & Components; Food, Beverage & Tobacco Products; Machinery; and Chemical Products. Inventory in both raw material and finished goods are at good levels throughout the supply chain although they grew somewhat this year with the run up in carbon steel pricing. This remains a good sign and will aid in a sustained recovery when demand picks up. Pricing for seamless pipe products has remained stable throughout, but ERW pipe pricing (6” and under) has been volatile with smaller producers fighting over market share in times of diminished demand. Pricing in the 8” and above ERW market continues to be stable.

$ / Ton $ / Ton

AMM HR Sheet index AMM HR Sheet index

Continued on page 3

$1,200 $1,200 $1,100 $1,100 $1,000 $1,000 $900 $900 $800 $800 $700 $700 $600 $600 $500 $500 $400 $400 $300 $3008 0 08 08 08 08 08 09 09 09 09 09 09 10 10 10 10 10 10 11 11 11 11 20 8 /20 8 /20 8 /20 8 /20 8 /20 8 /20 9 /20 9 /20 9 /20 9 /20 9 /20 9 /20 0 /20 0 /20 0 /20 0 /20 0 /20 0 /20 1 /20 1 /20 1 /20 1 / 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 1/ /2003/ /2005/ /2007/ /2009/ /20101/ /2001/ /2030/ /2005/ /2007/ /2009/ /20101/ /2001/ /2031/ /2015/ /2017/ /2019/ /20111/ /2011/ /2031/ /2015/ /2017/ /201 4 4 4 4 4 1/4 /4 /4 4 4 4 1/4 /4 /4 4 4 4 1/4 /4 /4 4 4 / / / / / / / / / / / / / 1 3 5 7 9 1 1 3 5 7 9 1 1 3 5 7 9 1 1 3 5 7

3Q11 IPD Commodity Reports

CARBON STEEL PIPE...Continued from page 2

Import Carbon Steel Pipe

CARBON STEEL FITTINGS & FLANGES

The Import Carbon Steel ERW Pipe market is a different story than the Domestic Carbon Steel ERW market. Import pricing, as seen in the comparison below, has been on a rollercoaster. We started the year at a level of 850-1050st. Then, pricing went up, and now, we are back where we started the year. Right now, the trend seems to be on the upswing with coil prices trying to increase. At the time of this writing, offers are a low of $930/nt to a high of $1020/nt. There is a move away from Korean and Taiwanese pipe mills as the traditional low-cost West Coast delivered mills. Coming on strong are the Philippines and Vietnam, while Korean and Taiwan import offers still dominate the upper end of the scale. The cost from these second tier countries seems to be less $50 - $75 per net ton. While the Domestic steel mills have been reducing HRC pricing, the import Asian mills are trying to increase coil pricing approximately $60/nt; we shall see if it sticks. On the Import Carbon Steel Seamless Pipe front, Vallorec/ Mannesman just announced a $50nt increase. This follows increases from India and Spain. It seems that we have seen the bottom in pricing for the time being, but this could change with the worldwide economy. This table provides a price comparison between Import and Domestic 4” ERW. US standard pipe pricing

$dollars/short ton, ASTM A53, Grade B, 4-inch black, fob mill Feb 11

Mar 11

Apr 11

May 11

Jun 11*

Domestic standard pipe

1050 - 1150 1150 - 1200 1200 - 1300 1200 - 1300 1200 - 1250

Import standard pipe offers

850 - 1050

1100 - 1150 1000 - 1100 1000 - 1100

850 - 1050

Finally, during the last quarter, import duties were reviewed and are shown below. North American pipe makers are considering more trade cases against countries they believe may be skirting trade laws. While they don’t say who may be the targets, they do feel that some are importing finished pipe and tube cheaper than the cost on the US for coils. Imports to the US are at the second highest level since the 90’s. This is the new dumping rate issued by DOC for Standard Pipe: Company

Rate, %

Husteel

2.25

Seah

4.99

Hysco, Kumkang, A-Ju Besteel

8.17

Nexteel

12.9

Carbon Forged Steel Fittings & Unions It appears that the second quarter average price increase of 10 percent driven by SBQ (Special Bar Quality) has been supported by the industry. SBQ hot rolled steel prices remain virtually flat after six months continuous rise. Depending on the size, steel lead times for SBQ SA/A 105 hot rolled steel are still out 3 to 4 months. Larger sizes remain extended out to 2Q12. Strong order backlog in the automotive sector and other OEMs, like off highway equipment manufacturers, had been causing the mills to stay booked and busy. According to a recent survey by the Institute for Supply Management’s (ISM) Steel Buyers Forum, steel inventories have slipped to unprecedented lows this summer. Even with extended lead times for SBQ and allocation by the mills, the need for domestic manufacturers to have a lot of inventory on-hand has not really been required to-date. Buyers do have to have a minimum of 3 to 4 months commitments in the pipe line. In light of recent events in Washington, DC, and around the world, opinions are mixed as to whether prices will fall, remain flat or rise at the end of the third quarter. Due mainly to the drilling and related activities in the energy sector, it has been reported there is more expansion and entry by wholesalers into oil and gas shale areas, including establishing a presence in Houston. Throughout the supply chain, this continues to cause excess supply and price pressures. It is a constant battle of domestic and import sources not wanting to relinquish their market share. Many wholesalers have taken the position if they cannot get a bigger price spread on import FSF, it is not worth the risk or expense of having dual inventories. What makes it more difficult for foreign manufacturers to be competitive is the high cost of transportation and the weak Dollar against most currencies. To add more uncertainty to this issue is the debt crisis in Europe and how the Euro will play out against the Dollar. These are a couple of reasons that PVF wholesalers must take into account in managing their inventories and how today’s decisions will play out in their long-term planning. Assessment audits are being conducted more frequently by end users and wholesalers to verify manufacturers’ compliance and assurance that they are supplying PVF brand products produced from approved raw material, forgings, castings and pipe sources. After the most recent end-user lawsuit over alleged defective flanges, end users, contractors, engineering firms, wholesalers and manufacturers will be even more cautious that material supplied to them meets all the ASTM, ASME and other required code standards. Trustworthy relationships between well-recognized and established wholesalers and manufacturers become even more important in assuring the engineering firms, end users and contractors that they are receiving material from the most reputable Continued on page 4

3Q11 IPD Commodity Reports

CARBON STEEL FITTINGS & FLANGES...Continued from page 3

supply chain partners. Refineries, chemical companies and utilities in particular are requiring a maximum carbon content of 0.23 percent. The 0.23 percent carbon content is critical in the PVF industry for high H2s service applications and HAZ (Heat Affected Zone) weld cracking concerns. Material Test Reports and Original Mill Certification of materials from most manufacturers are available online. It is prudent to do independent testing of material for verification as one cannot always be certain by looking at the finished product or the paper trail that precedes it. On a very positive note, there is confidence that the U.S. onshore drilling boon will continue this year. Rig counts for oil are expected to end 20 percent higher this year than the average for 2010. Recently, gas rig counts are down slightly but the overall consensus remains positive for the long haul. Rebuilding business in the deep-water U.S. Gulf of Mexico has just begun and will remain a work in progress. Lastly, Canada will continue its crude oil sands production momentum following the second quarter weather-related disruptions. In summary, supply and demand for forged steel fittings are in relatively good balance. At present, there isn’t any reason or confidence to build inventory. Prices that are firm at the time of this writing can change quickly due to raw material costs, other cost factors or just plain emotions. Most important, supply chain partners should do their homework and maintain historical, trustworthy relationships.

Carbon Steel Weld Fittings & Flanges Raw material costs continue to tick up but not at a rate that would signal any new increases. Look for pricing to remain unchanged through the third quarter, but stay close to your sources. Market volatility that we all have had to endure since 2008 is beginning spike again. We face the challenge of crushing debt that was passed on from households, to banks and on to the government. The Federal Reserve has done everything possible to keep interest rates low, but so few can secure financing to fund any large private sector projects. This year, large construction projects have been funded in one way or another with local, state and/or federal dollars. Obtaining flanges this year has been nagging wholesalers. Developing countries are using these products for their own purposes such as infrastructure and energy production.

STAINLESS STEEL PIPE, FITTINGS & FLANGES At the time of our last report in May, virtually all commodities, including base metals, were in the midst of being trounced. While copper and most of the other base metals battled back to impressive recoveries by the end of July, nickel continued to decline through June hitting its lowest point since November, 2010, on June 20th. Its July rally made up some ground, but 4

In some cases, government subsidies have been pulled squeezing margins and making the U.S. market a lot less appealing. Wholesalers will continue to keep their inventories modest and will lean on master distribution for the remainder of the year. Most master distributors are carrying a robust inventory level up to a three or four month supply allowing wholesalers to serve their customers more efficiently and just in time. Foreign manufacturers are still being plagued by a container shortage. This is due to a drop-off in production in Asia during the U.S. recession. Renewed output hasn’t caught up with acceleration in overseas markets, which causes issues for U.S. exporters as well. Once unloaded, most foreign containers are shipped back to Asia for reloading rather than shipping them inland to pickup U.S. goods.

Carbon Welded & Seamless Pipe Nipples The second quarter ended with posted new price sheets of an 8 percent average increase for both carbon welded and seamless pipe nipples. The two 8 percent increases on average this year followed the rise of pipe prices. There is no anticipation of further price increases in 2011. Inventory for both domestic and import pipe nipples are forecast to remain at good levels. Initial order shipment is running an average of 90 percent fill rate. Similar to other high pressure PVF commodity products, seamless pipe nipples must be manufactured from pipe produced from raw material using processes that comply with the appropriate ASTM specifications. As a caution, even some pipe mills that certify compliance with the specified ASTM material requirements may not be on some approved manufacturers lists. Demand for welded pipe nipples is expected to remain steady as new projects continue to be approved by municipalities, utilities and the commercial sectors. Seamless pipe nipples will continue to experience strong demand as a correlation to the strong oil and gas shale drilling activities. In summary, carbon welded and seamless pipe nipples prices are anticipated to be flat during the remainder of the year. Demand for both products is expected to remain the same as the first half of 2011.

July’s average price for nickel was still around 10% lower than the April average and 17% lower than February - 2011’s peak month for base metals. Conversely, the bellwether copper’s July average was 2.25% higher than April’s and only 2 percent lower than February’s. The major cost driver of austenitic (300-series) stainless steels has not garnered much respect from very many analysts lately. Continued on page 5

3Q11 IPD Commodity Reports

STAINLESS STEEL PIPE, FITTINGS & FLANGES...Continued from page 4

Price pessimists peg nickel as the only base metal that will have lower average prices in 2012 versus this year. Increasing supplies of both high-grade nickel ore and burgeoning nickel pig iron production in China are the primary, fundamental reasons for ongoing price pessimism. However, directly following nickel’s June 20th “bottoming,” stainless steel (188) scrap prices began a modest price rally that LME nickel “signed onto” from early July. In the second half of July, nickel’s cancelled warrant ratio had moved higher, and LME stocks were declining, which signaled a promising immediate future price path. But when the first week of August brought intensified fear of U.S. and European debt crises possibly leading to a double-dip recession, global financial turmoil ensued. Nickel lost 14% of its spot basis value between August 1st and 9th, and its slow but steady rally came to a screeching halt. Given the magnitude of the dysfunctional gridlock in Washington, the move by Standard & Poor’s to downgrade the U.S. credit rating for the first time ever wasn’t necessarily unexpected but the violent market reaction to it was. The timing of the announcement could not have been worse since it was directly preceded by the worst week for U.S. stocks in more than two years. At the time of this writing, U.S. equity markets were gyrating wildly, and while the United States is no longer the head of the train for driving many commodities, including base metals, the U.S. remains the global financial focal point for investors. Unless your name is “Gold” or maybe “Franc” there is absolutely no hiding from a steep decline in America’s stock market.

With regard to nickel’s present supply and demand challenges, it’s important to separate traditional demand patterns and what is occurring as a result of external factors (extreme volatility of equities, threat of European debt contagion, increasing political hostilities in the Middle East, etc.). In general, nickel demand tends to be solid in the first and second quarters. Vacations and scheduled maintenance at stainless mills typically causes a lull in the third quarter, which usually pressures prices. The fourth quarter is normally characterized by a recovery in activity and price levels. 2011 has already been marked by two periods of extreme financial volatility, and the reaction by investors towards nickel has not been as ugly as some may have expected. LME stockpiles have just come off of their lowest level since March, 2009 and have been steadily decreasing all year long. Total inventories remain heavy in historical terms and represent approximately 24 days of aggregate demand but are nearly 24 percent lower than they stood at the end of last year when there was a global supply deficit of 30,000 metric tons. Despite the fact that the International Nickel Study Group asserts there was a 9,300 36 34

LME CASH PRICE AVG (LB)

32 30 28 26 24 22 20 18 16 14 12 10

CASH PRICE OF PRIMARY NICKEL (LBS)

LME INVENTORY (MT)

So, what is the near term outlook for base metals in general and nickel in particular? An interesting paradox is in play: second and third quarter demand levels for industrial metals have not been strong, and 170,000 events of this month will cast 160,000 a further pall over a global macroeconomic outlook that can 150,000 be described (at best) as dreary. 140,000 The level of concern is evidenced 130,000 by the U.S. Federal Reserve’s 120,000 unprecedented commitment to maintain its record-low 110,000 borrowing rate (0.25%) for at 100,000 least two more years and to “take 90,000 whatever steps necessary to ease 80,000 financial conditions; and thus, underpin economic growth.” 70,000 The implication that the Fed 60,000 is prepared to add additional 50,000 stimulus (QE3?) should serve to 40,000 buoy metals prices as virtually 30,000 any accommodative monetary policy will be constructive for the 20,000 commodities complex. Another 10,000 prospective bullish consequence 0 of America’s challenging financial outlook and current political

constipation is the weakening effect it should continue to have on the greenback, which in turn, makes dollar-priced commodities cheaper for holders of foreign currencies. Hence, it’s logical to presume that investors who are continuing to move money out of equities will convert sizeable portions of their liquidity into purchases of commodities as a wealth preservation substitute to cash. The Chinese Yuan just set a record high ($6.3991) against the dollar. The fact that Beijing has allowed its currency to appreciate sends a positive message about the direction that they believe the world’s second largest economy is heading in.

8 6 4

Jun 07 Jul 07 Aug 07 Sep 07 Oct 07 Nov 07 Dec 07 Jan 08 Feb 08 Mar 08 Apr 08 May 08 Jun 08 Jul 08 Aug 08 Sep 08 Oct 08 Nov 08 Dec 08 Jan 09 Feb 09 Mar 09 Apr 09 May 09 Jun 09 Jul 09 Aug 09 Sep 09 Oct 09 Nov 09 Dec 09 Jan 10 Feb 10 Mar 10 Apr 10 May 10 Jun 10 Jul 10 Aug 10 Sep 10 Oct 10 Nov 10 Dec 10 Jan 11 Feb 11 Mar 11 Apr 11 May 11 Jun 11 Jul 11 Aug 11

Continued on page 6

3Q11 IPD Commodity Reports

STAINLESS STEEL PIPE, FITTINGS & FLANGES...Continued from page 5

metric ton deficit in the first five months of 2011, they project that overall, there will be a 60,000 metric ton surplus by the end of this year. Several large-scale projects that had been delayed for a variety of reasons, including start-up difficulties and political/environmental issues, should all come on stream within the next 12 to 18 months. Whether these projects will perform up to their projected turnouts will depend on myriad factors but owing to the total scope of oncoming supply, it is imperative for stainless steel demand to remain solid in order for the market to absorb all of the new nickel without significant, additional price deterioration. Chromium and Molybdenum’s price futures also remain closely linked to stainless steel demand. Price levels of both key alloying ingredients have drifted lower over the past three to four months but have not yet been adversely affected by Augusts’ financial fireworks. This may place both metals in position for increases if stainless traders and consumers undergo a reasonable amount of restocking through the balance of the year.

two months prior to each month’s surcharges. Effective with October shipments, leading U.S. coil mills will incorporate the following change: the LME nickel average price calculated on the daily official cash settlement price from the 21st day of month #1 through the 20th day of month #2 will determine the nickel component of the surcharge for shipments in month #3. In a letter addressed to their customer base dated July 26th, Terry L. Dunlap, President of ATI Allegheny Ludlum asserts, “This change is being made to better align raw material costs with the surcharge and to bring added stability to an increasingly volatile market.” Since surcharges represent such a large portion of the net prices of stainless steel welded pipe, major distributors and end users tend to load up on inventory when nickel prices increase substantially. Conversely, the tendency has been to reduce or even halt purchases as nickel prices decline. The extended time-frame of the previous surcharge further exacerbated the disconnect existing between actual and speculative demand.

Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov Jan Mar May 06 Jul Sep Nov Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov Jan Mar May 09 Jul 09 Sep Nov Jan Mar May Jul Sep Nov Jan Mar May Jul 11 Sep

SURCHARGE (PER POUND)

The other major obstacle to demand SURCHARGES FOR AUSTENITIC STAINLESS STEELS and price optimism of refined nickel 5 is China’s explosive use of nickel 304/L SURCHARGE 316/L SURCHARGE pig iron (NPI). While the use of NPI 4.5 is limited to China’s stainless steel industry, its percentage of growth 4 has been even more audacious than the country’s corresponding 3.5 stainless steel production increases. There are reports that China’s NPI 3 output has increased from 100,000 metric tons in 2009 to between 160,000 and 200,000 metric tons in 2.5 2010. Estimates for total 2011 output are between 250,000 and 300,000 2 metric tons. While all of this nickel from pig iron is being consumed in 1.5 China, it’s being made into several different stainless steels, including 1 300 series. This should help finished goods manufacturers there remain 0.5 low cost producers of PVF products and offset ongoing inflationary 0 pressures in energy costs, labor wages and other related operating costs. However, the Indonesian The only thing that appears relatively certain during these government enacted a law in 2009 that is designed to bring an perplexing financial times is that base metals should remain end to exports of non-value added base metals and minerals volatile in the short-term. The coming weeks could bring by 2014. Indonesia is far and away the largest exporter of further weakness, but a declining dollar coupled with the U.S. low-grade nickel ore that the Chinese use to produce nickel Federal Reserve’s vigilance against falling back into recession pig iron. While the specific details of the law are not presently should place a reasonable floor under prices. As the dust clear, this may have major, future implications on the cost and settles, we’ll continue to look for nickel to take its general price availability of NPI. direction cues from the dollar, U.S. equities, Chinese demand An important change to the manner in which stainless steel levels and oil and copper prices. coil mills calculate surcharges should serve to have a calming effect on American demand patterns. The previous formula was based on applying the monthly LME nickel average of 6

3Q11 IPD Commodity Reports

COPPER TUBE & FITTINGS Increasing financial market turmoil during the third quarter of 2011 is pressuring copper prices lower against the strong inclination to climb upward based on supply and demand fundamentals. Because the metal is used in everyday goods like iPhones, air conditioners and cars, demand usually drops when business activity stalls, making it very economically sensitive. Despite minor declines in reaction to concerns over slowing growth in the U.S., China and the Eurozone, copper prices remain high (up 200% from the lows in 2008), reflecting exceptional global demand. That demand isn’t expected to drop any time soon, but it doesn’t mean that prices go up uninterrupted. The debate continues as to the direction prices will take. The bears say that demand in China is slowing and stockpiled supplies are plentiful. The bulls point to steady demand from China and also to those in the mining industry who say that new supplies are dwindling due to lack of big discoveries and the lower quality of ore being found today from all parts of the world. The bottom line remains almost as it has been indicated in the previous quarters. In the short-term, the supply/demand equation for copper looks uncertain and volatile. Over the long-term, the direction certainly looks positive for the bulls. The only caveat is that economists are starting to use the “r” word with greater frequency. These different interpretations make the market volatile.

The Great Recession 2.0 The similarity of the current economic climate to that of the 2008 crash generates understandable fears that we’re heading into another round of the same difficulties that drove down markets around the globe at that time. Investors are seeking shelter from an inevitable storm, as demonstrated by gold at over $1,800 an ounce. While the U.S government is too embroiled in political bickering to act responsibly and get its fiscal house in order, E.U. leaders are scrambling to get control of their own financial mess, which is expanding into the region’s bigger economies, like Italy and Spain. Market reaction shows that investors are not convinced U.S. and European governments have the ability to solve these problems, and they are most likely right. “We are witnessing well-informed investors conclude future employment and production in the West is in jeopardy as a result of the governments’ inability to solve problems,” writes MSNBC’s Dylan Ratigan in a Huffington Post blog. “They are seeking to reduce their exposure to the future production of Western countries because it does not appear that these governments can deal with expectations of sustained unemployment and diminished prosperity in a way that is constructive.” The U.S. crisis is showing signs of reaching its breaking point. Christina Romer, former chair of Obama’s Council of Economic Advisors, raised eyebrows during an interview when she

actually used explicit, vulgar language to describe how bad our situation is. Even China, the largest foreign holder of U.S debt, is calling out the U.S. on its “addiction to debts” and “dysfunctional political process” in comments from its staterun Xinhua News Agency following the S & P down-grade decision. Xinhua went on to call for major cuts to “gigantic military expenditure and bloated social welfare costs” and suggested replacing the dollar as the global reserve currency. All of this serves to create an atmosphere of grave concern among investors, ultimately resulting in some decreased industrial demand for copper and pushing the price down. Worse still, some advisors predict this recession may be even worse than the one from which the world is still struggling to climb out of, and this time, there will not be a fiscal stimulus to instill confidence. During the 2008 recession, copper prices fell dramatically because demand was so weak. But as soon as the global economy began to recover in 2009, the mining industry could not keep up proving that growth has a full head of steam and will only be temporarily suppressed.

Bullish Trends Still Emerging All of the factors that led to soaring copper prices earlier in the year are still in place: output problems in the Chilean mines, Chinese demand that has carried this bull market and long lead times for new exploration, to name a few. Even during some of the scariest stock market plunges during the first few weeks of August, copper has rallied as much as 40 cents per pound in one day calling into question the metal’s notorious usefulness as a barometer of economic conditions. Now, more encouraging signs can be observed that may help support the price if we continue to see government budget and debt catastrophes in the headlines. One is the gold-copper price ratio that is charted by technical analysts to track indicators of both metals behaviors. Recently, gold and copper have changed from a negative correlation (price moves are in opposition) to a positive correlation (prices move in unison) since the beginning of July in a very abrupt and now steady manner. The metals complex and the mining sector typically view this chart pattern as extremely bullish. Additionally, labor disputes and complete shutdowns abound in the many of the world’s largest copper mines. Strikes at Escondida, Collahuasi, and Codelco in Chile, Freeport McMoran in Indonesia, and others in Africa and Peru have interrupted production. Miners understand that copper is profitable for mine owners at current prices and are organizing for a better share of revenues. The result will be raising prices to cover undependable supply and higher labor costs. Over time, an increased production of hybrid and electric vehicles will increase copper applications in the automotive industry. Discoveries of the value of copper to human health also have the potential to increase demand and prices. The Continued on page 8

3Q11 IPD Commodity Reports

COPPER TUBE & FITTINGS...Continued from page 7

market is seeing new copper-containing skin care products designed to rejuvenate aging skin. Small amounts of copper woven into socks have been proven to help eliminate athlete’s foot. Copper door handles and switch plates installed in hospitals are able to inhibit the spread of dangerous bacteria without encouraging super-bugs to breed as with chemical disinfectants. All of these products are in their infancy now, but as news of their effectiveness spreads, they will take more quantities of copper off the market. With global supply and demand for copper in a delicate balance, the demand from the emerging world as it builds its infrastructure will likely more than offset any slackening of demand from the developed world. But, future bullish momentum will be reined in intermittently as investors witness global economies unraveling.

PLASTICS PVC and CPVC resin prices for pipe and fittings have continued to rise as a result of overall strong demand for resins in general. The U.S. export market for resins remains particularly strong, partly because Japan was a large consumer prior to the tsunami and subsequent nuclear events earlier this year, and since then, it has significantly increased its usage as the country rebuilds infrastructure. Current resin utilization is approximately 83-86 percent. Even though the dynamic is set up for higher prices for PVC products based on raw materials, pricing for the first half of the year of 2011 was extremely volatile. After two or three significant increases in early- and mid-2011, the market declined appreciably in July resulting in an overall increase of approximately 5-8 percent. Though resins and other minor ingredient increases have been in the 25-30 percent range, continued soft demand, production capacity around 55-60 percent and multiple suppliers in the pipe and fitting space have been the primary drivers for the modest overall price increases. Due to modernization of U.S. plants and the lightweight nature of PVC, import PVC products have had little to no effect on the market. The general consensus for the second half of 2011 is there will be continued upward pressure on resins and other raw materials; however, demand and competitive forces will result in relatively minor overall increases of 7-9 percent for the second half of 2011.

HDPE The HDPE market experienced similar increases in resins as the PVC market, but the outcome in the market appeared markedly different. Strong activity in the energy and mining sectors, less HDPE competitors, low inventories and a strong backlog should sustain price strength for the balance of 2011. Declining steel prices have had a modest effect, but now that steel appears to have stabilized and could start rising by year end, the outlook may improve for an already healthy HDPE market. 8

VALVES 2011 Market Overview Year-to-date valve sales activity has been less than spectacular with certain markets performing relatively well and other markets still mired in the malaise of their 2009 collapse. We will identify the specific strengths and weaknesses of each market segment later in this report. According to Industry Insights, valve sales have improved 7.8 percent in 2011 when compared with the same period in 2010, but this is really a false positive as the majority of that increase is due to a rise in material prices and the weakening of our dollar rather than as the result of an increase in the number of valves sold. All valve manufacturers have been contacted by, and learned from, various sources of the shrinking availability of the TFE resins required to produce the seats and seals for most “standard” valve products. The shortages of raw materials will ultimately escalate the costs of the components used in most valves and will in-turn contribute to the overall cost of the final products. Suppliers are not optimistic that the situation will improve for the balance of 2011 and 2012. TFE is a fundamental chemical needed for many growth industries including the expanding refrigerant segment. As demand increases and the supply chain is unable to react quickly enough, continued rapid price escalation is expected. Also, copper hit its highest point in its history in February of this year at $ 4.60/lb and has bounced around since then while iron prices have increased 12 percent since the beginning of 2011. However, the most important contributor to these increases has been the fact that in the last 12 months, our dollar has weakened significantly against most of the world’s major currencies. In particular, our dollar has lost 5.9 percent of its value in the last 12 months against the Chinese RMB, and another 3.5 percent decline is anticipated by year end. This weakening has put tremendous upward price pressure on all of the products that the industry currently imports as either rough or finished goods, which are a major factor in today’s valve industry. On average, all of these factors contributed to a 5-7 percent increase from the valve manufacturers early in the second quarter of this year, and if these trends do not reverse themselves, there is already talk of an additional increase in either the fourth quarter of this year or the first quarter of 2012.

Major Market Analysis: “The Winners” Oil & Gas and General Industrial - These are currently our strongest markets with considerable opportunities in upstream applications on the oil & gas side and improvements in both industrial production and capital goods orders Continued on page 9

3Q11 IPD Commodity Reports

VALVES...Continued from page 8

continuing to drive the general industry segment. Power - Improved “modestly” in the second quarter, although domestically, we are still encountering many project deferrals due to the lack of a clear, well-defined, energy policy from Washington. On the bright side, project quotation activity is reported to be much improved this quarter, particularly in the international marketplace.

ensure that this will be a short-term problem, and the longterm expectations for significant growth are very positive. Residential Construction – After the initial rebound from the “trough” levels of 2008/2009, significant progress in the “new home” construction market has been very difficult to come by of late; however on the bright side, the “home remodeling” market is quite active and very healthy.

Major Market Analysis: “The Losers”

Final Thoughts

Commercial Construction – Industry forecasts call for negative growth in 2011 and very modest growth in 2012. Schools, hospitals and government projects represent the bulk of the commercial construction work in the country today, and with the current financial condition of our government, we can all expect that work to slow down dramatically in the very near future.

In light of S&P lowering the U.S. credit rating, your valve committee is very hesitant to predict the near-term (the next 6 months) future of the domestic valve industry. In the long-run, this move may prove to be more “historic” than substantial, but in the short-run, it is a dramatic blow to the very fragile confidence that American business has in both the U.S. economic recovery and our economy as a whole. Going forward, this move is certain to have a negative impact on our business prospects, both in the U.S. and globally, but how long and how great that effect will be is impossible to predict at this time.

Municipal Water/Wastewater – Due to municipal budget pressures, project activity is virtually non-existent in these markets for 2011, but the need for infrastructure replacement in the U.S. and new infrastructure in developing markets

GROOVED FITTINGS The market perspective from a prominent grooved fitting manufacturer is that the 4th quarter of 2011 will bring with it a surge in healthcare, education and office construction nationwide that will carry on through 2012 and into 2013. Coupling this with the current and expected usage from the energy market will provide a healthy demand for grooved fittings. This demand will be felt in the majority of markets nationally but will be particularly pronounced in regions that

MALLEABLE IRON FITTINGS Domestic All of the domestic manufacturers are currently reporting strong inventory positions and expect them to remain strong for the remainder of the year. At this point in time no price increases are anticipated, but they warned that with the unstable condition of scrap and the rising cost of energy, health care and labor, it would be fair to assume there would be a price increase over the next 6-12 months.

Import Two major import brokers reported that factory lead-times are stable and are currently running 75 to 90 days ARO. No short- or long-term shortages are expected for this product. One reported it would be realistic to expect an increase in

have geared up for significant exploration and production of fossil fuels. September price increases have been announced for grooved fittings due to higher production costs, which should set off a buying surge as distributors, in conjunction with their own particular market outlooks, build their inventories in advance of this price increase. Some regions, particularly in the south, are expected to see an uptick in grooved product usage because the construction upturn is expected to outstrip the availability of skilled labor.

the 5-8 percent range by year-end. This was attributed to the depreciation of the U.S. dollar, rising transportation and labor costs and increased cost of power in China. Note: There are two open dumping cases against China that will be up for review in 2012 & 2013, and the domestic producers are hoping for better results than in the past based on the recent favorable reviews for the steel pipe producers

Overall Outlook Business in this segment has increased steadily since 2009, but the producers are expecting little to flat results in the second half of 2011. The deep well boom in the oil fields of Pennsylvania, Texas and North Dakota have created numerous jobs with the need for additional housing and its related construction, but most of the other states are still struggling with recovery.

3Q11 IPD Commodity Reports