The Verband Deutscher Maschinen- und Anlagenbau (VDMA) represents over 3100 mostly medium-sized companies in the German capital goods industry. Its Large Industrial Plant Manufacturers' Group, known by its German acronym AGAB, comprises producers of large industrial installations, including power generation facilities, chemical plants and cement plants. Its members include subsidiaries of the major global cement industry suppliers ABB, Alstom, Caterpillar, Claudius Peters, FLSmidth, KHD Humboldt Wedag, Linde, Siemens, ThyssenKrupp and Voith. Here AGAB presents a summary of its activities in 2014, which proved to be another challenging year.
Note: This summary has been compiled by Global Cement staff using portions of AGAB's '2014/2015 Status Report' sub-titled: 'Coping with crisis around the world - Taking advantages of local opportunities,' July 2015.
Large industrial plant manufacturers are defined as companies capable of processing one or more factory or power generation plant projects a year, with a volume of at least Euro25m each. They must have the comprehensive technical and process expertise necessary to handle all aspects of the entire project, including the planning, design and engineering of the plant and the production or international procurement of the facilities and equipment, along with delivery, installation, commissioning and provision of financing.
Cement plant manufacturers and some of their subcontractors fall into this category, although AGAB members deliver plants to over 20 different industries in all. Each project takes an average of between two and three years to complete, with contract volumes frequently over Euro100m.
The large industrial plant manufacturing industry is a major sector of the German economy with an average annual new order volume of Euro22bn on average between 2010 and 2014. This is a global market share of roughly 16%.
In financial terms, around 81% of AGAB's orders came from outside Germany in 2014, a 2.7% rise year-on-year compared to 2013. Foreign orders peaked at 82.8% in 2007.
2014: A further decline
AGAB members booked orders valued at Euro19.6bn in 2014, down by 7% from the Euro21.2bn reported in 2013. The decline was generally in line with the group's 2013 forecast, albeit at the lower end of the scale. Given the number of international 'flash points' and the sluggishness in the global economy, the result was not unexpected. Nevertheless, order intake was the lowest recorded at any time during the past 10 years and was substantially below the 10 year rolling average of Euro24.6bn.
Domestic demand during the reporting period was also disappointing, with orders declining by 18% in 2014 to Euro3.7bn. This is well below the Euro4.5bn reported in 2013. This was primarily due to the fact that the market for new construction of fossil fuel power plants in Germany has virtually collapsed. Overcapacity, high energy prices and stringent regulations in the process and basic commodities industries leave no room for large projects.
The market structure in the large industrial plantmanufacturing industry has undergone significant changes since about 2010. More suppliers have entered the market, while the project volume has stayed roughly the same. New contractors, particularly from Asia, several of which are not focused on any specific technology and many of which operate locally, are now competing with the traditional suppliers from Europe and North America. This has shifted the balance of power between suppliers and plant operators. Competitive pressure in the market has increased substantially, and the results of a recent VDMA survey indicate that the pressure will continue to increase in the years ahead.
Regional breakdown
A breakdown of AGAB's Euro15.9bn of foreign orders can be seen in Table 1. Incoming orders from Europe were up by 34% year-on-year to Euro5.99bn. In Eastern Europe and the Commonwealth of Independent States (CIS), the rise was 98% to Euro3.77bn. In the rest of Europe, including Turkey, Norway and Switzerland, orders fell off by 57% to Euro389m.
Region / Category | Orders (Billion Euro) |
Industrialised states | 4.33 |
Eastern Europe & CIS | 3.73 |
Asia-Pacific | 4.06 |
Near and Middle East | 1.79 |
Rest of the World | 1.99 |
TOTAL | 15.91 |
Above - Table 1: Breakdown of AGAB's orders around the world in 2014.
African orders were down by over a half, falling by 53% to Euro524m, while in North America, they fell by 19% to Euro1.82bn. Latin American orders were down by a third to Euro576m and Asian orders were down by 6% to Euro6.7bn. In Australia and Oceania, they were down by 22% to Euro69m.
In total, including spare parts and small orders (which fell by 7% to Euro1.13bn) all foreign orders were down by 5% year-on-year.
In country terms, the group's number one customer in 2014 was Russia, with Euro2.38bn-worth of orders. The USA was second with Euro1.55bn, with China third (Euro1.00bn) and Saudi Arabia fourth (Euro916m). Other significant contributors can be seen in Table 2.
Rank | Country | Orders (Million Euro) |
1 | Russia | 2376 |
2 | USA | 1548 |
3 | China | 1000 |
4 | Malaysia | 987 |
5 | Saudi Arabia | 916 |
6 | South Korea | 904 |
7 | Poland | 875 |
8 | India | 386 |
9 | UAE | 311 |
10 | Turkey | 252 |
11 | France | 246 |
12 | UK | 245 |
13 | Thailand | 244 |
14 | Sweden | 214 |
15 | Netherlands | 194 |
16 | Italy | 170 |
17 | South Africa | 159 |
18 | Brazil | 143 |
19 | Spain | 124 |
20 | Austria | 122 |
21 | Iraq | 122 |
22 | Qatar | 66 |
23 | Egypt | 51 |
24 | Iran | 45 |
TOTAL | 11,721 |
Above - Table 2: AGAB's top export order destinations in 2014.
Given the difficult political and economic situa-tion, it may at first glance seem surprising that, for the first time in 20 years, Russia was the number one export market for AGAB member companies during the reporting period. This shows that, despite the drop in oil prices and the Ruble crisis, there are still solvent investors in Russia that prefer German equipment. This is an indication of long-term confidence in the industry. These figures put fears that the
Russian market could become dominated by Asian suppliers in the short term into perspective. Ranked seventh, Poland was another Eastern European country that was one of the top 10 sales markets.
The US was the second largest market worldwide. A total of 15 large orders were booked in the US during the reporting period. Most of the projects were in the gas-fired power generation and metallurgy industries. Customers in these energy-intensive sectors are taking advantage of the very low oil and gas prices in the US to invest in new facilities and equipment.
Cement sector drops off
Over and above the 5% drop seen in international orders, companies that supply equipment to the basic commodities industry reported higher than average declines. Of these, the cement sector was worst affected by the drop-off. Order intake fell by 63% to Euro198m, down from Euro529m in 2013 and around six times lower than the Euro1.18bn peak of 2008 (See Figure 4). Overcapacity in the cement sector reduced customer willingness to invest. On top of this, declining oil and gas prices also placed a significant strain on the resources available for investment in all commodity extraction and processing activities compared to 2013.
Wider factors
Suppliers based in Western Europe, North America and Japan still dominate the global large industrial plant manufacturing market. Their combined market share in 2014 was approximately 65%. With a market share of roughly 20%, the US is still the biggest player.
However the relative strength of the US Dollar is putting US companies at a disadvantage when they submit bids for international projects. The Japanese industrial plant manufacturing industry has recently succeeded in regaining lost ground. Alliances and acquisitions have helped them strengthen their market position in Europe. Germany is still the market leader in Western Europe. Some of the major
competitors are based in France, Italy, Spain and Scandinavia.
However, the competitive edge of the industrialised nations continues to erode. As is the case in other industries, the number of market players from emerging nations continues to increase. Chinese companies in particular have expanded their market position in recent years, and they have received explicit support from the Chinese government. As the domestic market reaches saturation, Chinese industrial plant manufacturers are placing increasing emphasis on exports. Besides the sales markets in Asia and Africa, they are setting their sights on the countries in South America and the Middle East. The combination of low prices and attractive financing conditions is the main competitive advantage that opens the door to new markets. In the cement sector, Chinese producers are currently engaged in a large number of projects across much of Africa from Ethiopia to Nigeria and from South Africa to Algeria.
Outlook
Market expectations for the large industrial plantmanufacturing industry are subdued. Order intake has declined by an average of 8% per year since 2011 and no significant upturn is in sight during 2015. The results of a recent survey show that the majority of AGAB member companies believe that demand is likely to remain stable at best in 2015. A quarter of them expect that bookings for the year will decline. Members do not anticipate a turnaround until 2016 or even 2017.
The sluggish economy, a number of regional conflicts and falling commodity prices are hampering growth. The main reasons for the conservative outlook are the poor growth prospects in large emerging countries. Russia and Brazil are on the brink of recession. Although this is not the case in China, the days of rapid growth driven by investment have passed. In addition, AGAB members now find themselves confronted more frequently with Chinese suppliers which have become more competitive.
On top of this, the situation in Germany itself is not very encouraging. Government energy policy and high electricity prices have weakened demand for large projects in the power generation sector and energy-intensive industries. Political unrest and wars around the world increase uncertainty for AGAB companies as the projects they undertake depend on stable political and security environments. This is particularly the case in Ukraine, Iraq and Libya.
However, while exporters of cement (and other commodities) lament the decline in earnings, importers welcome falling prices, which relieve some budget pressure. The lower cost of imports adds momentum to the economy in these countries, albeit with a certain time delay, which will presumably stimulate demand for large projects. This may happen in the medium-term, particularly in Western Europe, East and Southeast Asia and India.
The US also appears to be fertile ground for AGAB members. American reindustrialisation creates excellent sales opportunities, a situation that is expected to continue beyond 2015. In addition, compared to competitors that operate on a US Dollar basis, the Euro devaluation enhances the competitiveness of AGAB companies. Many AGAB companies have expanded their service business in recent years, and that is expected to promote steady growth in markets which have a high plant density.
Long-term growth factors, including worldwide population growth, rising worldwide demand for energy and cement and the increasing importance of energy efficiency and resource conservation remain intact. The outlook for AGAB members beyond 2015/2016 is encouraging. However, companies will have to react quickly to the increasingly volatile environment and the frequent changes in customer wishes and expectations if they expect to compete successfully in the global market for industrial plants.