In the last 12 months the crude oil price has doubled to around 56 US$ a barrel. This is very welcome but as we all know the rise needs to continue to enable green shoots to develop in the market. The recent OPEC control of supply of crude oil late last year appears to have stabilized the price in the 50 US$ range. It’s as though there is an upper “level” preventing further increase. Optimists predict 70 US$ whilst on the other scale 40 US$ is being quoted. For two years traditional end user Demand & Supply Analysis for valves has been adjusted to reflect the economic climate. Obviously projects in many areas have been affected by either cancelling or putting projects on the shelf. This still leaves a low project base line which often continues at a slower pace.
Not all bad
There is some good news in local areas such as offshore, LNG, LPG & pipeline projects. For example on 17th January 2017 Saudi Arabia Oil Fields and Gas Plant Expansion were announced. Also the controversial USA Keystone and Dakota Pipelines were authorized by President Trump. Such news, though, is a far cry from pre 2008 project activities. MRO is also taking a battering.
With maintenance budget cuts, extended shut down intervals the turnover of valves is decreasing and keeping of stock is reducing with much more demand for just in time. Top end valve activity still appears to have maintained a credible activity level. The end user is also more reluctant to invest in innovation unless it is has a very clear proven value with high quick return on investment.
I am now noticing today new environmental products are basing their return on investment on unrealistic assumptions. It is so obvious to an end user. Sometimes 20 year technology is being claimed to be new in 2017. I recently attended a meeting to be presented with an innovation that took 3 years to develop; live loading gland packings.
The ROI was most amusing! Determining end user demand has historically proven to be difficult. I have slaved, as no doubt have many of my peers, for many hours trying to gather reliable valve usage data. Though such information is in the system, priority and time often prevents its gathering. Also how do you effectively address a downturn?
Source: U.S. Energy Information Administration
Valve demand profiling
When contracts are awarded to suppliers it is so important to ensure the valve usage data is actually delivered. The demand can be made up from one or a combination of MRO from operational plants; local, regional, continental, global; project for new builds; various business streams, exploration, petrochemical, refining, power etc. The more skilful end users are able to combine and deliver the above. Regretfully this is the exception rather than the rule.
Historically end user organisation resistance occurs, internal conflict and difficulties arise when combining MRO, projects and different business streams. Today though, some of these barriers are being removed to tackle difficult times. Maybe survival is on the agenda?
When an end user is able to develop a Total Life Cycle cost that applies from projects through to maintenance, success has been proven. There needs to be an irrevocable mandate from the end user Executive Management for compliance to Projects, Procurement and Technical Management who report through to this higher management. Experience has shown for example that Procurement Management is not empowered for procurement on projects or for technical endorsement.
Often you hear from suppliers “We have a global agreement with XXXX” but in reality projects, the biggest prize, is not covered. End users therefore have a responsibility to develop a reliable demand profile and deliver this to the supplier during the contract. If the strategy is to be global then significant preparation and cross discipline endorsement will be required. Also note that global players are very few in number so competitive choice is restricted.
As for the MRO and project this should be limited to local or regional activities. Linking a European MRO contract within Europe may work but to link it with a project in Houston or Shanghai is a tall order, some would say impossible! End users should set strategies that are realistic and are able to be delivered. Too often wonderful “think tanks” come forward with such “challenges”. Such “think tanks” are always over active during turn downs. I have lost count of how many internet valve initiatives have passed over my desk.
- Valves sizes also broken down into pressure class ratings, materials etc.
- >12" cast valves not shown
- Valve specifications standardised
- Valve spend met 80% of predicted spend within 2 years and continuously improved.
Supply analysis involves various methods but it gathers market data on valve production capacity, material costs, industry reports, manufacturing trends, supplier capabilities, feedback from other end users etc. I must admit some of this information is very impressive. In any industry a clear understanding of the manufacturing base, its production location, and route to market and delivery to the plant is essential. Questions like; which end user geographical areas can be supplied? Without this the end user is “blind”. So what’s happened in the last 10 years?
To be brutally honest, has there been anything really mega? Yes there have been buy outs, consolidations but there are no new valve manufacturers that are on all the end user vendor approval lists. It’s fragmented. I am struggling to see new valve companies playing in the major end user market. Instead they are just playing at the edges. Some succeed but real market penetration has not been achieved. I could name probably 6 to 8 valve companies that have made some progress but it’s limited.
Why? There are many reasons for this but sometimes they are not prepared to step up to the international market and change their company. They may talk the talk but do not intend to change in any way. End users have picked this up hence no real change in approved vendors. Also within this analysis an appreciation of any market shift and new supply chains should be assessed. It should be very clear today which elements of the supply are changing and, depending on the end users awareness, will determine their forward strategy.
I applaud Sunbelt’s recent distribution success in Shanghai. This is indeed a significant market change for China. It challenges the Chinese culture to not only deal with valve manufactures but to also deal through distribution. Other competitors have failed miserably in China. End users often struggle with the Supply Analysis and as a result limit their strategic options. There is no quick fix for this. Strategies are cumbersome and sometimes impractical to implement. However when the end user does have good market information then good strategies tend to follow. They become well respected in the market and are often hailed as “leaders”.
In conclusion benchmarking the end user demand on an annual basis should be sought to confirm the deliverable to the supplier is at least 80% accurate! If not then perhaps the end user should consider a continuous improvement programme for its Supply and Demand analysis. If the end user does get it right then a much stronger negotiating position is reached. What about the suppliers? I wish them every success in a very difficult year ahead.
If you have any questions or comments, as always they are most welcome.