The growth in demand for oil & gas valves will likely soften in light of rising interest rates, strong inflationary pressures, and fluctuations in global currencies. The emerging need for renewable energies and other non–oil & gas industries will add some pressures on production capacities. Recent merger and acquisition (M&A) activities have reduced the number of suppliers, lowering competitive intensity in the marketplace. Cost inflationary pressures from raw materials and parts will subside on improved availability because original equipment manufacturers (OEMs) divert procurement resources, taking raw materials from a variety of suppliers. Pricing momentum since 2022 has eased, marking a great opportunity for clients to acquire valves in 2023.
By Yi Tan, Principal Research Analyst – S&P
Demand and Spend
The underlying demand for oil & gas valves is anticipated to increase by 7% year on year (YOY) in 2023, but the growth will likely soften in the light of rising interest rates, strong inflationary pressures, and fluctuations in global currencies. Global spending on oil & gas valves is projected to slip by 3.5% YOY in 2023, driven mainly by cost deflations in the global market.
Spending on valves for above-sea production and processing applications is predicted to shrink in 2023, mainly owing to the declining investment in valves for onshore production facilities and the completion of some large refinery projects.
Demand for liquefied natural gas (LNG) valves is projected to expand this year. Spending increases for valves on onshore LNG liquefaction facilities and onshore regasification terminals will be offset by a decline in spending on valves for floating LNG (FLNG) facilities and offshore LNG regasification terminals.
Spending on valves for onshore pipelines should grow in 2023, boosted by new developments in the Mediterranean and Middle East region, North America, and the Russian and Caspian markets. At a global level, investor and political sentiments are shifting toward renewable energy and away from oil & gas investment, eliminating some potential demand for pipeline valves.
Spending on subsea valves is anticipated to contract moderately in 2023 because of the spending cuts on subsea manifolds and trees.
Suppliers Manufacturing Index (SMI)
The SMI of valves is anticipated to grow year on year in 2023. Rising business optimism has been supported by an upturn in suppliers’ new orders, inventories, and headcounts.
Sales have been lifted by renewed underlying demand. Clients brought purchases forward in 2022 in anticipation of higher selling prices in the coming year. Suppliers expect new infrastructure from LNG and decarbonization projects to continue to drive underlying demand in 2023. Project opportunities are also evolving more biofuel and carbon-reduction activities.
Raw materials expenditure index increased in 2021–22 for the buildup of safety stock. The inventory index of finished goods has also grown since the second quarter of 2021. Demand resilience and efforts to prepare for future sales will continue to support the rise in stocks. With a sufficient availability of resources, production should be sustainable in 2023.
Manufacturing jobs are expected to rise in 2023, although at a low pace. Demand improvements and efforts to fulfill orders may be behind the uptick in payroll numbers.
Logistics disruptions and longer-than- expected lead times in 2020-22 challenged the supply chain of valves. OEMs responded by diverting resources to a wider array of countries and are in transition to mid- to long-term procurement contracts of direct materials. Given the expansion of procurement resources and skilled workforce, manufacturers’ delivery services of valves are expected to improve in 2023.
Industry Consolidation
The industry consolidation related to oil & gas valves is expected to continue to be active through M&As in 2023, reducing the number of players in a competitive landscape.
OEMs dominate the total number of acquisitions over the past five years, but activities from independent service providers (ISPs) and distributors/stockists have become increasingly popular. The amalgamation of manufacturing capacities and the integration of distribution channels and resources should continue to encourage M&A deals.
Demand and Supply Balance
Overall, manufacturers’ book-to-bill ratio slipped quarter-on-quarter (QOQ) in the last two quarters of 2022, linked to a slowing growth in new orders and a stronger growth (as compared with order growth) in sales.
The valves industry is working through the existing excess supply while the supply outlook has enhanced considerably. With production returning to the pre-pandemic levels, suppliers’ ability to fill orders has strengthened. On balance, supply is sufficient but the emerging demand from renewable energies and other non-oil-and-gas industries may add pressures on production capacity in 2023. An increase in production activities and inventories under consolidated capacities should shift the bargaining power of buyers toward suppliers.
Costs and Pricing
The production cost index of valves (i.e., cost index excluding margins) is projected to slip from the second quarter of 2023, following an increase of 2.1% QOQ in the first quarter.
Development activity in industrial markets was slowly accelerating in 2022, when there were shortages of raw materials and skilled labor resources. Prices lifted in 2022 because suppliers passed on the cost inflation pressure to buyers to maximize profitability. As a result, valve prices remained high at the start of 2023 but the pricing momentum since 2022 has softened. Buyers are expected to regain some strength in negotiating power because inflation pressures from raw materials and energy prices started to fade. Users of valves may take this as a great opportunity to acquire valves, along with long-term service agreements, in the latter half of 2023.
Supplier Challenges and Opportunities
Geopolitics: The ongoing war in Ukraine and Russia’s energy supply cuts to Europe are the flashpoints that may potentially affect the global supply chain and production for valves.
Buyers: Suppliers anticipate the medium- and long-term fundamentals for the valves industry to remain attractive, predicting revenue growth for 2023 on strong underlying demand. The number of buyers will continue to increase, with more emerging from the energy-transition markets.
Suppliers: Recent industry consolidations continue to reduce the number of suppliers, benefiting suppliers’ negotiating power over buyers.
Supply conditions: Suppliers’ resources are sufficient owing to increased inventories for raw materials and finished goods at manufacturers’ plants, and increased stocks at ISPs/distributors’ warehouses. Delivery times are shortened as OEMs divert procurement resources, taking raw materials from a variety of suppliers to secure production activities. Many suppliers have set up contingency plans, and if needed, may adopt approaches such as adjusting production capacities, relocating production facilities, and implementing cost-cutting measures.
Costs and prices: Inflationary pressure has eased since late 2022, leading to a decline in raw-material costs. As supply chain disruptions and labor-related inflation will remain challenging for OEMs’ operations, suppliers will try to maintain margins through favorable prices in 2023.
Sub-suppliers: There is a wide array of countries for the supply of subcontractors across the globe, benefiting valve producers. Compared to 2022, the availability of capacities and resources will improve in 2023 because sub-suppliers are better prepared for the new waves of supply chain constraints. However, given the ongoing challenges arising from global supply chain restructuring, there will be longer-term bottlenecks in the procurement markets, which may delay or block valves manufacturers’ operational progress.
