Strong Market Likely to Continue for Equipment Manufacturers

Current economic conditions and macro trends for the industry appear to indicate a healthy municipal water market in the United States, which is good news for manufacturers of water and wastewater equipment.

by Angela Godwin, WaterWorld Digital Media Editor

Current economic conditions and macro trends for the industry appear to indicate a healthy municipal water market in the United States, which is good news for manufacturers of water and wastewater equipment.

“I’ve been in this industry for almost 20 years and I’ve never seen the business better,” said Jerry Ristau, a manufacturer’s representative with Ford Hall Company (Lexington, KY). “I think the record-setting attendance at WEFTEC is a good indicator.”

Tom Mills, vice president of Severn Trent Services, a supplier of water and wastewater solutions based in Fort Washington, PA, agreed. “It’s a good indication of both the current financial state as well as the near term expectations for both buyers and sellers of equipment and services,” he said. “When you have strong attendance by the municipal side, it means that they see the need to be purchasing equipment and they see the need to stay abreast of all the changing regulations and technology. When you have a record number of exhibitors, it means that companies see the same type of promise.”

BCC Research supports a favorable outlook as well. According to recent analysis, expenditures for municipal water and wastewater applications are expected to grow at compound annual growth rate (CAGR) of 22.2%, reaching $39.7 million by 2012.

The market for advanced drinking water technologies, such as membrane filtration, ozone disinfection, and UV irradiation, is expected to grow at a combined average annual growth rate (AAGR) of 10.7%, from about $1.3 billion in 2006 to more than $2.1 billion in 2011.

Growth Drivers

Contributing to continued growth in the industry are increasingly stringent water and wastewater quality regulations as well as population increases.

“We’re growing in population and limits are getting tighter for what’s produced in both water and wastewater plants,” said Doug Wilson, president of Heyward Inc., a manufacturing representative firm in Charlotte, NC. This, he said, results in a higher demand for water and wastewater equipment.

The Environmental Protection Agency (EPA), for example, recently issued a finalized version of the Lead and Copper Rule for drinking water, which offers revisions and clarifications to the original rule published in 1991. Seven areas are targeted in the revision, including monitoring, treatment processes, public education, customer awareness, and lead service line replacement. The final rule will take effect in December 2007.

Removal of arsenic from drinking water is another area of compliance that has become more stringent in recent years, stemming from the new standard adopted by EPA in 2001.

“Our industry is driven by regulations,” said Ristau. “As those increase, municipal water and wastewater work will increase as well.”

He predicts that nutrient removal will be a particular driver in the months and years to come. “I think we’ll also see growth in membrane technology, collection, and distribution,” he said.

Outside Influences

Despite the generally positive outlook in the municipal water market, a lack of housing starts, as well as the recent credit crunch, in the U.S. could complicate things over the next couple of years.

“Municipalities depend heavily on a healthy tax base for funding and the banking and credit crunch could lead to a crisis and a recession,” Mills said.

The National Association of Home Builders, however, is optimistic. Although the group acknowledges the recent downward trends, it expects the industry to start turning around in 2008. NAHB Chief Economist David Seiders credits the anticipated recovery to a number of drivers, including a favorable overall economy, steady job growth, and Federal Reserve short-term interest rate cutbacks.

Cost of materials

Controlling costs is an important component of any successful business particularly when deliveries occur months or even years after the orders are placed. Steel and filter media are two particular areas of concern.

“This is primarily due to the demand for these materials coming from China,” said Mills. “We, like many companies, are looking overseas to India, China, Malaysia, and elsewhere for sourcing of crucial components as well as services.”

Ristau is optimistic. “Stainless steel is actually starting to come down for the first time in months. Maybe that’s a good indicator that there are some opportunities for value for municipalities,” he said.

But it’s not just the cost of physical materials on the minds of equipment manufacturers: Energy is another area of concern likely to affect product development and process improvement programs over the next couple of years.

“While energy costs are reaching record levels now, we’re seeing that translated into demand for products,” said Mills. “There’s a term being thrown around now, ‘watergy.’ It’s sort of the nexus between energy-efficient water solutions. So the fact that somebody has coined this is an indication that it’s a new element of the market demand.”

Infrastructure

Increasing attention is being given to infrastructure problems in the U.S., with daily stories of water main breaks, sewer overflows, and more. As the public becomes more aware of infrastructure failures, it is likely to result in increased pressure on lawmakers to take action.

“It’s easy enough to see when a bridge collapses, or just to be able to visually take in some of the infrastructure requirements of roads, because you see them,” said Mills. “But you don’t see the ones that are under our feet, under the ground, and therefore out of sight, out of mind.”

“It’s a slow and gradual process,” he said, , “but high profile infrastructure failures, which no one wants to see, often result in a high level of understanding and more action.”

Funding

Despite the recent credit crunch, there are a number of companies in the water industry that are flush with cash. “They see the long term market dynamics as very favorable and are actively interested in growth,” said Mills. This is a positive thing that could stimulate outside interest and investment in the industry. It could also help to draw attention to the significant infrastructure needs and the commensurate need for full cost pricing of water and sewerage services by public water utilities.

“People ought to pay for what they need,” agreed Wilson. But, he acknowledged, sometimes politicians would rather spend the money on something with greater visibility, such as a road or a park. As a result, necessary expansion or upgrade projects are often put off for the next elected group. “Many political bodies don’t have the political will to spend their funds on water and wastewater,” said Wilson.

“Consumers in general need to understand the big picture in order for our government officials to feel comfortable doing what is right for our future, raising water and sewerage prices so that they match up with the full cost basis,” said Mills. “It’s inevitable that the costs have to go up, and I think that this whole set of dynamics can lead to transformation, can lead to government officials feeling more comfortable and confident making the tough decisions to raise the prices, even though it may not be the most popular thing to do.”

The federal government has also been cutting back on the State Revolving Fund programs, which provide a cheap source of financing for public projects. In 2004, $1.34 billion was available; last year, $886 million. In Pennsylvania, for example, that state’s share of the funding was cut back $30 million to $27 million.

“These cuts could further exacerbate the situation and potentially delay projects,” said Mills.

Wilson is confident that communities can raise the necessary funds, without depending on the federal government. “I’ve not known of a single community that couldn’t find the money when they absolutely had to do something,” he said.

About the Author:

Angela Godwin is the Digital Media Editor for the PennWell Water Group. She also serves as a Contributing Editor for WaterWorld, is Editor of Urban Water Management magazine, and is the Event Program Coordinator for the Urban Water Management Conference, to be held March 31-April 2, in Louisville, KY. She may be contacted via e-mail at angelag@pennwell.com.

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