As the word ‘recovery’ becomes used more frequently among industrial gas companies, are the equipment manufacturers feeling the same positivity?
It’s no secret that since late 2008, things have been very difficult for industrial gas companies.
A downturn in major industries, like steel, electronics and manufacturing, meant a significant drop in demand for industrial gases, and according to Spiritus Consulting, a decline in global business by 10% in 2009 over 2008.
Thankfully, fourth quarter 2009 results for the Tier 1 players have showed signs of a very slow recovery, and confirm that things are finally on the up.
It’s very easy however, to concentrate on the gas producers/suppliers, forgetting about the lasting effects the global financial crisis may have had on other sectors, like equipment suppliers or OEMs.
Indeed, signs of a slow recovery can now be seen in the results of the industrial gas companies, but the question is, did the equipment companies suffer the same level of decline in the first place, and will their recovery be the same?
Prior to the financial crisis, equipment companies were experiencing a boom; Michael Blondin, of Cryolor, a French-based manufacturer of cryogenic equipment, told gasworld, “In 2006/7/8 it was an equipment manufacturers’ market – demand was greater than supply.$quot;
“Tank and tanker manufacturers had a hard time keeping up with demand, and this resulted in over anticipation by the gas companies, as delivery times had become longer since demand exceeded supply.”
Therefore, when the financial crisis hit, the immediate impact was on the gas companies and the downturn in gas demand, but the equipment companies still had the orders for manufacturing the equipment.
Savir Julka, of Inox India, an India based manufacturer of cryogenic equipment, explained, “The worst thing that can happen to an equipment manufacturer is a recession after a boom.”
“When recession sets in, the buoyancy goes and the gas companies start buying very cautiously. The equipment manufacturers, who have invested heavily to expand their capacity to cope with booming demand, now suddenly find they are not getting the revenues to cover the cost of investments.”
In addition to a cut in spending, the gas companies were also able to put existing orders on hold until such time that they consider it safe to invest. In other words, the gas companies cut off the tap for equipment orders to the OEMs, making 2009 a year of concern for manufacturers.
Some analysts consider the total decline in the equipment sector to be in the region of 20-40%, whilst it is clear some manufacturers have experienced even greater declines of up to 50%; others have faired better and have seen a 10-25% drop in equipment sales. The gravity of the drop seems to be related to the type of equipment being manufacturer and the regions in which the manufacturer operates.
A huge wave of cautiousness has swept through the industrial gases industry; there is a general reluctance to make buying decisions which might compromise a company’s financial standing in the market, and this includes investing in new equipment.
Julka commented, “With the gas industry slowing down, the pace and the confidence of investing in equipment dropped significantly, restricting buying only for secured businesses, and not future prospects.”
Andrew Brown of Bestobell, a UK based cryogenic valves manufacturer, told gasworld that at present, companies are choosing to spend their money on spares – refurbishing old equipment instead of buying new.
Blondin confirmed this, adding, “The only equipment that gas companies are buying is equipment that they do not have.”
Whilst this cautious existence could be considered necessary in the short term, Samuel Zouaghi, of Cryostar - a manufacturer of expanders and pumps - suggests it may have damaging effects in the long-term for the equipment business.
He explained, “The gas companies have realised that they can do more with less, because they have had to make do with less.”
“I don’t think they will ever buy the same way again - this will have a permanent effect on how they will invest in the future.”
What both Blondin and Zouaghi agree on is that in 2009, the equipment manufacturers still had a back order requirement to fill, and so the downturn was not as serious.
However, their concern as we have moved into 2010, has been that there is little or no back order to carry through to this year, and the equipment companies will be more reliant on new purchases from the industrial gases industry – essentially 2010 will be as, if not more challenging than 2009.
The pace of recovery
Steve Hinchliffe, of ACD Cryo, a manufacturer of cryogenic pumps, suggests that as much as the cautiousness of the gas companies will hinder the equipment business’ recovery in the short term, they will not be able to maintain this ‘less is more’ approach.
He told gasworld, “There is a limit to what can be achieved using old equipment and if the gas companies want to grow their business they will need to start thinking about investments into new more efficient and capable equipment.”
“Using old equipment is a short term solution to lower capital investment, but it won’t bring the long term savings that are required from the revenue side of the business.”
Some believe that as soon as the gas companies see that the market is improving, they will have the confidence to invest in new equipment.
Jan Van Houwenhove, of VRV Group, the Italian based manufacturer of cryogenic equipment, considers that this is already happening, albeit slowly, he told gasworld, “Decisions are coming onstream again; there were a lot of projects on hold which were never canceled, that are being revitalised.”
Keith Stewart, of German based safety valve manufacturer Herose, was also positive, commenting, “The start of 2010 has seen many projects being released; it was as if the lights went green on January – order levels at the beginning of this year are now exceeding that of 2008 highs.”
Jan Van Houwenhove also noted the added pressure being put on equipment companies adding, “They want their equipment quicker and decisions are being made later.”
It’s difficult to know just how aggressive the gas companies’ investment has to be in order for the equipment companies to stabilise.
Zouaghi commented, “We are expecting to see a cost pressure for the next few years. This is an opportunity for equipment manufacturers to work on their processes and supply chain in order to improve efficiency as well as overall cost position if they want to survive in the years to come.”
Hinchliffe considers that significant investment in new equipment will have to start soon, he told gasworld, “Only the gas companies can say if they will bounce back this year, but one thing is for sure, they will have to at least start thinking of investing in new equipment sometime within the next 12 months - you can only stretch the elastic so far.”