ECONOMIC REVIEW

MACROECONOMIC ENVIRONMENT AND SECTOR VIEW

Our planning for the 2015 financial year was based on slightly stronger economic growth than in 2014. However, this increase in growth, as forecast by the International Monetary Fund (IMF) and other institutions failed to materialise. Rather, as the economy became less dynamic over the course of the year, several corrections to our forecast values were required. Ultimately, the increase in the global gross domestic product, at 3.1 %, was down on the previous year.

A key factor in this regard was the economic situation in several of the major emerging markets. Growth in China dipped slightly in the financial year, which also dampened demand for industrial goods on one of KSB’s key sales markets. The economies of Brazil and Russia actually experienced a decline in their gross domestic product. As well as other factors, the situation on the oil and commodities markets played a key role. The collapse in prices for industrial raw materials and fuels also impacted on other countries that export these goods, detracting from their economic strength and reducing the willingness to invest, among both private and government investors.

Indirectly, these developments also had an effect on the industrialised nations, although the economic recovery was maintained overall in the industrialised world. Export-oriented countries in the euro zone, primarily Germany, benefited from the weakness of their common currency. Nevertheless, the economy of the euro zone states lagged a long way behind the US economy.

WEAK GROWTH IN MECHANICAL ENGINEERING

Businesses like KSB that operate in the mechanical engineering sector had limited opportunities for expansion, given the weak state of the economy. The extent of these constraints varied, however, according to production segment and regional market focuses.

While sales of machinery and systems in the EU and in China grew slightly by 2 %, other markets experienced a decline, particularly in South America, where sales figures fell by as much as 12 % compared with the previous year. From a global perspective, mechanical and plant engineering sales only rose by 1 % as a result, a lower level of growth than in 2014.

SALES MARKETS RECORD MIXED PERFORMANCES

The main sales markets for pumps and valves developed unevenly again in 2015 across the different sectors. The trend in manufacturing as well as in the chemical industry was positive, which boosted sales of standard pumps. Chemical companies focused on major projects in the Middle East and the USA in particular, looking to exploit the cost benefits during production. Meanwhile, in the water and waste water sectors, demand for pumps for wells and water pipelines, as well as for waste water pumping stations and sewage treatment processes increased. This is a sector that needs to adapt to supplying a growing population in many countries while also complying with stricter environmental protection regulations. The market for shut-off valves used in the water industry was also healthy. The construction sector developed positively in some regions, primarily the Middle East and Asia.

In contrast, a dramatic slump in demand was recorded in the oil and gas industry, as well as in petrochemicals. Hardest hit by the falling levels of demand were the producers of pumps to API standards. They responded to the changing market by restructuring and introducing cost-cutting measures, depending on their main commercial focus.

Mining companies, which as in the previous year suffered from lower demand for raw materials and low prices for their products, were reluctant to invest. Instead, they focused on improving plant efficiency and cutting operating costs. This is reflected in a lower number of new purchase orders, coupled with an increase in service orders. The lack of investment was felt particularly strongly by manufacturers of slurry pumps, among them KSB subsidiary GIW Industries, Inc.

World Market of Centrifugal Pumps and Valves

Source: KSB estimate, European Industrial Forecasting (February 2016)

In the shipping sector, too, the lower level of demand for goods, including industrial commodities, was tangible. Particularly companies that transport oil and gas by sea slashed their investment levels, limiting the number of contracts that shipyards placed with the supply industry. From KSB’s perspective, the marine sector is most relevant as a sales market for cryogenic valves. These are ordered by equipment suppliers and operators of liquefied gas tankers.

Demand from the energy industry for pumps and valves was also down on the previous year, not least due to structural refocussing in the electricity supply market, with the clear trend towards renewable energies. Fossil-fuelled and nuclear power station projects have only accounted for a handful of projects in Europe for many years now. In several emerging markets, however, contracts for fossil-fuelled plants were awarded in 2015. Opportunities also arose in connection with the building of new power stations with combined gas and steam turbines in the USA.

Against this wider economic background, sales by German manufacturers of liquid pumps fell by 4 % in real terms year on year, according to the German Engineering Federation (VDMA) figures. The VDMA had anticipated a stagnating market at the beginning of 2015. Sales by German producers of industrial valves declined by 2 % in real terms, whereas initially 2 % growth had been forecast

COMPETITORS MAKE ADJUSTMENTS

It has mainly been Anglo-Saxon pump and valve companies that have benefited from the boom in the oil and gas sector and in the petrochemical industry over the past few years. In 2015, these companies attempted to compensate for the specific fall in orders by introducing commercial initiatives in other sectors, or by looking to after-sales business. This resulted in greater price pressure, particularly in relation to industrial plant and power station projects.

Several pump and valve producers launched cost-cutting programmes in response to the changes on the market. The measures introduced included long-term capacity reduction also involving the closure of some plants. Sites were closed down in the Americas, Africa and Australia, as well as in Europe.

At the same time, some pump and valve manufacturers turned to acquisitions, mergers and cooperation projects to strengthen their market position. One of the more significant mergers involved two US companies from the oil and gas sector. Current KSB business with its low level of activities in this branch of industry is, however, barely affected by this transaction.

The different fields of application for pumps require specific technical expertise on the part of the manufacturers, as well as a perfectly tailored product and service range. In areas where this has been lacking, or where operations have not developed profitably, some pump suppliers began withdrawing from certain fields of application again in 2015. This improved the sales prospects for their competitors who chose to remain in the market.

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