PUMP AND COMPRESSOR MANUFACTURERS ADJUST TO CHALLENGING MARKET TRENDS

WHILE LOW OIL PRICES DETER PUMP AND COMPRESSOR ORDERS IN SOME MARKETS, OTHER OPPORTUNITIES ARE EMERGING

PRESTON REINE

Low oil prices have harmed many industries where pumps and compressors are regularly sold, but power generation and other markets still offer plenty of opportunities for manufacturers to recoup lost revenue. The oil & gas and power industries vary in their allocation of capital expenditures (CapEx) depending on where they are.

Figure 1: The size of each disc represents the relative amount of CapEx within each segment per region

Figure 1 highlights the importance of these industries across the Americas, Asia-Pacific (APAC), and Europe, Middle East, and Africa (EMEA). It is also important to note that the Asia-Pacific region accounts for more heavy industry investment than the American and EMEA regions combined as of the third quarter of 2016 (Figure 2).

Figure 2: Asia Pacific spends more on heavy industry now than Europe, the Middle East the Americas combined

Most notably — and in parallel with the steep decline of oil prices — investment activity has largely waned throughout the industrial automation equipment market, especially for pumps, compressors, motors, drives, generators, fans, blowers, and other equipment involved in the energy sectors. Waning investment activity has harmed some suppliers because the depressed commodities market led customers to request substantial discounts on heavy equipment, thereby negatively affecting the profitability of machinery producers. Within the past 18 months, standardized pumps and gas compressors have been sold at up to 40% discount to customers in the energy sector. Partly negating this revenue loss for vendors is a customer- driven push for customized products designed to reduce energy spending and environmental waste.

In an effort to counteract the negative effects weak oil prices have had on the overall state of the pump and compressor market, suppliers have become more creative, in terms of product development, marketing and overall offerings. As energy efficiency and lifecycle cost management have taken precedence over initial installation costs, suppliers of pumps and gas compressors have increased R&D expenditures by an average of 2% to determine the best way to deliver products that meet those expectations. The industrial internet of things IIoT has introduced the concept of “smart manufacturing” in which sensors monitor pumps and compressors and alert plant operators when errors occur. As expensive as pumps and compressors are to purchase and install, downtime and regular maintenance costs account for the majority of end users’ lifetime expenses for these products. Therefore manufacturers are seeking innovative ways to offer more than just a product to customers.

Although sales volumes for pumps and gas compressors have declined, many leading suppliers have offset these losses with alternate revenue from service contracts. These contracts include regular monitoring of pump and compressor packages that use sensors and other smart technology to offer predictive maintenance to ensure uptime and more efficiency. Lower oil prices are affecting oil and gas development, leading to stricter measures in CapEx. For pumps and gas compressors specifically, the upstream segment has been the hardest hit, whereas strong investment is still occurring in onshore pipeline and refining applications.

Pump and compressor demand from upstream production has suffered from sharp cutbacks, and it is not forecast to rebound until late 2017. For North American exploration and production (E&P) in particular, the financial situation is alarming. Financial impairments (writing off goodwill) reached nearly $180 billion in 2015, compared to about $40 billion in 2008 and 2009. These charges are deteriorating both financial and operational performance, as they affect net income, return on capital, and finding and development metrics. This situation has hampered the development of onshore production facilities, as well as the sale of pumps and gas compressors in these facilities.

While the low price for oil is a prohibitive factor in upstream oil and gas development, midstream applications will be affected less than others. In fact, rising demand for natural gas has made it less likely that gas expansion projects will be delayed any longer (Figure 3).

Figure 3: Pump and compressor demand is expected to remain largely flat

Natural gas demand is forecast to grow throughout the next 24 months, and it will need to be transported. Therefore, the midstream market for pumps and gas compressors is in much better shape than those sold into upstream applications. The downstream market for pumps and gas compressors poses short-term growth opportunities. The development of tight oil and shale gas deposits has caused a large increase in oil and gas production and a corresponding increase in the availability of ethane and other natural gas liquids (NGLs) for chemical production. Thus, pump and compressor manufacturers have reported an increase in sales into petrochemical and refining applications in 2016. Declining prices are also causing new grassroots methanol, ammonia, and olefins (ethylene and propylene) and derivative investments.

In the U.S., more than 100 million metric tons of new capacity will be added in the chemical industry by 2025, to support continued domestic and export demand growth. Overcapacity could become a huge concern starting in late 2018. The power generation industry will continue to require significant investment to meet rising energy demands. Emerging markets will account for most of this investment, mostly due to rapid population growth. India and the Middle East are both in need of stronger utilities infrastructure, and tight supply will bode well for power industry machinery sales. In other developed regions, many plants are still buying new equipment to refurbish and adapt their capacity and support renewable energy production. In 2015, Asia was the leading CapEx market for the power industry. However, the three-year outlook is volatile, with capital expenditure predicted to contract in China and Oceania in 2017. China’s current project pipeline shows a contraction in capacity additions for coal, gas and hydro from 2016 to 2018. The CapEx outlook for European power generation has been reduced, especially after the third quarter of 2018 when Brexit’s Article 50 will be triggered (Figure 4).

Figure 4: Projection for pump and compressor sales in power generation

While Brexit plays a role in this recent revision, the European industrial and residential energy demand profile has contracted for a few years now. Still, strong investment activity in the Americas and the Middle East bodes well for pumps and gas compressors sold into the power generation industry. In fact, pump and compressor sales will exceed 2015 levels by more than 10% by 2019. The market for pumps and gas compressors is becoming more consolidated, as smaller companies with specific niches and innovative ideas are not always well positioned to weather recessions without the customer base and regional scope of larger multinational companies. These trends have put the turbomachinery market in a position where high entry barriers, low risk of product substitution, and decreasing competitive rivalry could give suppliers more bargaining power, despite declining prices in certain applications. Maintaining profitability has been a struggle for many pump and compressor suppliers, so they commonly renegotiate price agreements in exchange for suppliers receiving either a longer purchasing contract or more services and support. In order to circumvent the downturn in turbomachinery spending, it is now crucial for suppliers of pumps and gas compressors to focus on services and custom product designs.

Preston Reine is Senior Analyst and Group Manager at IHS Markit’s IHS Manufacturing Technology group. His areas of expertise include motors and motor-driven systems such as pump, fan and compressor applications. He holds a BBS in Finance from Saint Edward’s University. For more information, visit www.ihs.com or email preston.reine@IHSmarkit.com