AWE Alert - January 2024

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AWE Alert

January 2024

The Future of the AWE Industry Depends on New Variables

Since the end of World War II, government policies have not been a variable in determining the future AWE market. Not too many years ago the major nations including China agreed on a policy to a policy which would result in stopping CO2 increases by 2050.

China has been a leader in applying air pollution control equipment to coal fired boilers. India is installing scrubbers and more efficient particulate control equipment. Hungary and Turkey have made significant pollution control investments.

The situation has radically changed in the last two years. Europe has put retired coal plants back into operation. Fighting has taken place at nuclear power plants in Ukraine. China has moved away from free enterprise. U.S. policy in the future depends on politics. The EU realizes the risks of depending on a consistent U.S. policy.

The U.S. is the world leader under almost any metric that is used. GDP has grown at a rate greater than other countries in the last few years. China is no longer seen as overtaking the U.S as growth rates have halved.

The U.S. produces more oil and gas than any other nation. It has the best military of any country. Its nuclear arsenal is equal to any other. It has been a strong partner in NATO. Its commitment has made European and some Asian countries confident enough that they have not built up their own nuclear arsenals or otherwise entered an arms race.

Given developments in Ukraine, North Korea, China, Hungary, Russia and the United States political stability is no longer assured. As a result, AWE companies have to consider all the potential factors including an isolationist U.S.

Republicans appear to be supporting a 10% tariff on all imported goods and not just China. This America First policy could have a positive effect on domestic AWE service and fabricating companies. Specialized pump, valve, and compressor component manufacturers could see an increase in business. Many distributors offer to manufacture custom parts.

U.S. manufacturers of air and water filters will be in a better position in the domestic market. U.S. systems companies will also benefit.

The downside for the U.S. AWE industry is the fact that 80% of the market is based on an international system which has castings manufactured in India and China at a fraction of the cost of a U.S. option. So, one way or another costs for U.S. goods will rise.

The majority of the revenue in the AWE industry comes from international companies such as Emerson, GE, Dupont, 3M, Donaldson, and Ingersoll Rand. Barriers to free trade will be detrimental to these companies. But they have flexibility which domestic companies do not have. They can invest more in their offshore operations and then pursue geographies where they see the greatest potential.

The AWE industry will also be greatly impacted by the changes in global warming policy should isolationist regimes dominate in China, the U.S. Turkey, Hungary, and other countries.

McIlvaine has been striving to predict political trends and their impact on the AWE market for 4 decades. It is complicated when you try to predict who will drink the Kool-Aid at Jonesboro or be swayed by the $77,000 payment to families of dead Russian soldiers.

The challenge is to predict life quality preferences for individuals rather than assumptions in the conventional sustainability models. The patriarch setting up a trust fund for grandchildren has far different motivations than the father of a starving family in Gaza. This recognition of individual human motivation is the cornerstone of the Universal Sustainability Rating System (SURS) https://www.mcilvainecompany.com/SURS/subscriber/Default.htm

Using SURS to Predict the AWE Market Future

The AWE market will be shaped more by politics in the next decade than at any time since World War 2. Political decisions are a result of individual choices, either voluntary or forced.

The basic element is life quality preferences. The average person would rather enjoy life and live to 80 rather than be a recluse and live to 100. The race car driver and the soldier who falls on the grenade are extreme examples.

The Sustainability Universal Rating system has all sorts of uses in helping predict the AWE market. It was first used in contracts with Thermo Fisher and Rockwell. One wanted a common metric to measure CO, CO2 and Nox. The other wanted a common metric to measure each of the toxic metals.

The metric takes into account personal life quality benefits. NOx causes regional haze. But the importance to some people is greater than to others. EPA treats mercury among the top dangers. But the concern is about pregnant women who eat Tuna. Are the life quality benefits so high for tuna consumption by pregnant women that it should be ranked higher than lead which people can’t avoid if it is in the air or water.

The common metric called Quality Enhanced Life Days (QELD) aggregates the perceived life quality choices of those affected.

The reality is that life quality choices are both personal and as a member of a tribe. The tribe can be the family, city, country, or cult. Death, comfort, Joy, and pain are viewed differently by individuals and tribes.

Poor rural Russians are a tribe which is mollified by death payments of $77,000 for a son killed in Ukraine. For those who believe Russian mothers will dissuade Putin, this is a sobering fact.

EPA uses $ 7 million for each iife in its cost evaluations. Given the trading value of CO2, one life is worth 700 million lbs. of CO2.

Automobile travel is one of the most dangerous endeavors. Statistically every 1000 miles as a traveler reduces life by several hours. Someone willing to drive 1000 miles for a basketball game is creating a QELD of a few hours for one basketball game. If someone is willing to drive 1000 miles to Virginia and wave a NAZI flag. He is creating a QELD quotient of several hours. If he is willing to storm the capital despite a 15 sentence in prison, he is creating many QELDs. The soldier that falls on the grenade is creating tens of thousands of QELD equal to his otherwise remaining life.

This analysis was lacking by Russia and ROW when Ukraine was invaded. There were many more willing to fall on the grenade than were anticipated.

People have unique life quality preferences. If a large enough group wants to be part of the MAGA tribe, then the voting in November then the voting in November will reflect it.

SUSTAINABILITY IS A BALANCE

Net Zero is an aspiration which was accepted by the Nations of the World because it was voluntary.

This policy is a top-down aspiration and may not reflect the life quality choices of the majority of the world’s citizens.

Definition of Sustainability: Sustainability is a balance between the life quality goals of the tribe and the life quality goals of the world. There is also a future value discount. How important is what happens 50 years from now to a starving family in Gaza.

The U.S. spends less than 0.2% of the budget on humanitarian aid. So, the importance of the tribe is greater than 99 to 1. So, sustainability in terms of water needs to be individualized. If you live in a drought area and have a brown lawn the value of CO2 per ton of water will be different from someone in a water surplus area.

The whole purpose of the SURS is to determine what each tribe wants rather than what is best for the world. The AWE predictions are based on the extent to which various tribal wishes will be fulfilled. The new reality is that this fulfillment will be shaped in a large part by political events of which war is just one.

Will Net Zero be instead Net Survival

The AWE industry has been shaped in the last 100 plus years with little political interference. Unfortunately, AWE managers now have to take seriously a market where isolation and aggression are potential negative forces.

At the very least the more expensive net zero initiatives will be delayed. Green hydrogen will not receive the investments which blue hydrogen and BECCS will receive. Coal will continue to expand in Asia. Where wind and solar are not clearly less expensive due to space and climate the progress will be slowed.

Exxon Mobil publishes a detailed forecast which shows the 2050 need to serve 2 billion more people with twice the purchasing power as today. This forecast is not based on Russia occupying large parts of Europe, China invading Taiwan while the U.S. abdicates world leadership.

Up until 2 years ago the threat that aggression would be the dominant force was less than 5%. Developments in The U.S. China, and Russia in the last 2 years have increased the odds. The big variable is the U.S. As long as the U.S. maintains its policies to protect the free world, the risks of aggression and chaos are low.

McIlvaine forecasts will now provide alternatives where autocratic decisions shape the world and with it the AWE industry.

Without Excessive Political Interference the forecast is bullish. ExxonMobil projects a world in 2050 where politics plays the role it does today.

The global population is projected to rise by 2 billion people, a 25% increase. It took thousands of years for the world to reach the first 2 billion people, which happened around 1930² – the next 2 billion is predicted to take around 30 years. Not only will there be more people, but they will have greater opportunity and prosperity. Global GDP per capita – measured as purchasing power per person – is expected to rise by roughly 85% by 2050. Those who live in developed countries are projected to see purchasing power rise roughly 50% to around $70,000. Most of the world's people live in developing countries (non-OECD) and are projected to see purchasing power more than double to $25,000. While this growth projection is impressive, people in the developing world would still have far less purchasing power in 2050 than people in developed nations have today.

Energy use and improved living standards go hand in hand. You can’t have one without the other. When China’s per capita GDP was around $2,000, its energy use was low – about 36 million British thermal units (MMBtu) per person per year, deep in the realm of energy poverty. By 2021, when per capita GDP passed $11,000, China’s energy use had risen to 101 MMBtu per person, well above the global average. In contrast with China, Africa’s energy use per person has remained at a low 27 MMBtu for the past two decades, and its per capita GDP has only risen by about $500 during that time. Areas that remain mired in energy poverty struggle to raise the living standards of their people. As we look ahead to 2050, how much more energy must the world produce to meet the needs of 2 billion additional people and a global economy that has doubled in size? About 15% more, according to our projection – with nearly all of it going toward meeting the higher living standards of a developing world with a larger population.

The Global Outlook projects that the biggest change in the world’s energy mix between now and 2050 will be a significant increase in solar and wind, along with a significant reduction in coal. Energy from solar and wind is projected to more than quintuple, from 2% of the world’s supply to 11%. Coal will increasingly be displaced by lower-emission sources of electricity production – not just renewables but also natural gas, which has about half the carbon intensity of coal. Overall, electricity use grows 80% by 2050. Oil and natural gas are projected to still make up more than half of the world’s energy supply. The utility of oil and natural gas in meeting the world’s needs remains unmatched. They are energy dense, portable, available, and affordable — and serve as essential raw materials for many products we use today. Given that oil and natural gas are projected to remain a critical component of a global energy system through 2050, sustained investments are essential to offset depletion as production naturally declines by 5-7% per year. Oil use is expected to decline significantly in personal transportation but will remain essential for the industrial processes and heavy-duty transport like shipping, long-haul trucking, and aviation that underpin economic growth. Consider: If every new passenger car sold in the world in 2035 were an electric vehicle, oil demand in 2050 would still be 85 million barrels per day, the same as it was around 2010. Natural gas use is projected to increase by more than 20% by 2050 given its utility as a reliable and lower-emissions source of fuel for electricity generation, hydrogen production, and heating for both industrial processes.

Political Dynamics will Dominate the AWE Industry in 2024

Lurgi was a leading AWE company who due to the Nazi political usurpation found itself designing the coal liquefaction systems needed to fuel the Luftwaffe and the Panzer divisions, At the same time they were trying to protect their Jewish chief engineer.

In 1940 the political developments changed the course of history and by 1945 50% of the world AWE market was in the U.S. IN the next 77 years Politics had the potential to create havoc for the industry but the risk was low.

The relative stability was in part due the U.N. and NATO but most importantly the U.S. commitment to stop aggression backed up by the greatest military force in history.

Candidate Trump is proposing a flat 10% tax on all imports. He imposed an 18% tax on Chinese imports in his first administration. but there’s no tax on the countries with whom the U.S. works closely. Trump plans negotiated adjustments for some countries. This initiative is seen by the Trump team as a way to keep “America First.”

Political Impacts on the World Energy Industry

Trump discounts global warming impacts of energy production. He advocates relatively unrestricted use of fossil fuels. He says electric cars lack the range and are too expensive. He promises great gains in oil production in the U.S. But the US is producing enough oil and gas now to dominate world production. In Europe some coal plants were not retired and the priorities of substituting local for Russian energy are substantial.

The sanctions on Russian pipeline deliveries have resulted in new customers rather than reductions.

Russian production has remained constant over the last year. There are few signs of resistance to the Ukrainian war within Russia. The hundreds of thousands of Russian soldiers who have died were mostly from poor areas. The survivors received $77,000 which is the equivalent of a fortune due to low wages.

Net Zero and Sustainability

So, what is the future of net zero, electric cars, hydrogen and other GHG driven initiatives.

The net zero policy is to balance emissions by 2050. At this point in time man-made emissions will be reduced to where they are offset by the net absorption of CO2 by forests and seas.

This sustainability target is a compromise.

Sustainability is a balance between the benefits for a smaller group now and a larger group in the future. In Ukraine the balance shifted with the invasion to where the benefits long term are devalued. In Gaza the benefits are immediate survival.

So, sustainability is a balance which changes with war. It is also a balance which is much different for isolationists or Invaders than for globalists.

Coal Continues to Hold its Own

Coal power continues to expand in China, despite the government’s pledges and goals. In the first half of 2023, construction was started on 37 gigawatts (GW) of new coal power capacity, 52 GW was permitted, while 41 GW of new projects were announced, and 8 GW of previously shelved projects were revived. Of the permitted projects, 10 GW of capacity has already moved to construction.

Permitting continued apace in the second quarter and in some provinces, newly permitted power plants are moving rapidly into construction, while in others, developers might be securing permits “just in case” and not hurrying to break ground. Of plants permitted in 2022, about half (52 GW) had started construction by summer 2023.

In 2000 China was on a course to be a world leader in environmental control. Longking and a number of other companies were producing some of the world’s most efficient air pollution systems. Chinese companies sold their systems throughout Southern Asia.

There was offshore investment in companies who operated with little government supervision.

That all started to change when the free-market policy was reversed and state enterprises started to take control. The change in attitude coincided with the slump in economic growth. No longer is China the symbol of economic prosperity.

Semiconductor Industry Anticipates Double Digit Growth Unless China Interferes

The world semiconductor industry growth should be robust absent any interference in Taiwan by China. The Taiwan dominance of the advanced chip market is protected as much by intellect as hardware.

In Mid-January 2024 Taiwan reelected the pro-western party. China had spent considerable effort on the two opposing parties. The ruling party only received 40% of the vote. But this was enough to win. In the wake of the election tensions are rising. An invasion of Taiwan would not only destroy the delicate semiconductor operations but also the ability to re-create them. In fact, the dominance has been in the ability to develop the next generation of chips before competitors can.

The semiconductor market faced a slowdown in 2023, with a projected 9% decline compared with 2022. The memory market is particularly hard-hit, with a 37% drop, while the logic, analog and discrete markets have remained relatively flat.

Despite the challenging market conditions in 2023, a 9% to 12% recovery is expected in 2024, driven by strong demand for high-performance computing (HPC) and a soft inventory reduction in wireless communication and smartphones.

Here are some key trends for 2024:

The server market is expected to see an upside trend, driven by artificial-intelligence business. A channel inventory reduction is ongoing.
The telecom market is showing signs of a slowdown, with 5G rollout continuing only in parts of the world. Ericsson and Nokia are expected to continue to compete fiercely for market share against Huawei.
Global consumer confidence remains low, despite a slight improvement in the middle of 2023. This could dampen demand for consumer electronics, but a weak recovery is expected.
There are some initial signs of weakness in the industrial and automotive markets.
Chip-on-Wafer-on-Substrate (CoWoS) is seeing a shortage, with a slight expansion in 2024. The high demand for advanced packaging boosted by AI applications will drive the market to find other solutions in the short term.

The Future of the AWE Industry Depends on New Variables

Since the end of World War 2, government policies have not been a variable in determining the future AWE market. Not too many years ago the major nations including China agreed on a policy to a policy which would result in stopping CO2 increases by 2050.

Given developments in Ukraine, North Korea, China, Hungary, Russia and the United States political stability is no longer assured. As a result, AWE companies have to factor in all the potential factors including an isolationist U.S.

U.S. manufacturers of air and water filters will be in a better position in the domestic market. U.S. systems companies will benefit in the domestic market.

The downside for the U.S. AWE industry is the fact that 80% of the market is based on an international system which has castings manufactured in India and China at a fraction of the cost of a U.S. option. So one way or another costs for U.S. goods will rise.

The AWE industry will also be greatly impacted by the changes in global warming policy should isolationist regimes dominate in China, the U.S. Turkey, Hungary, and other countries.

Mcilvaine has been striving to predict political trends and their impact on the AWE market for 4 decades. It is complicated when you try to predict who will drink the koolaid at Jonesboro or be swayed by the $77,000 payment to families of dead Russian soldiers. The challenge is to predict life quality preferences for individuals rather than the assumptions in the conventional sustainability models. The patriarch setting up a trust fund for grandchildren has far different motivations than the father of a starving family in Gaza. This recognition of individual human motivation is the cornerstone of the Universal Sustainability Rating System (SURS).

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