Industrial plant manufacturers: Historic slump in foreign business
The losses in exports in 2020 were exceptionally high, even for a sector such as large-scale plant engineering, which is used to strong fluctuations.
Cancellations and investment deferrals in 2020
At €11.9 billion, the order intake recorded by the members of the VDMA Large Industrial Plant Manufacturers' Group in Germany in 2020 was 35% below the previous year's level (2019: €18.3 billion). The most severe slump to date occurred in 2009, a year dominated by the financial crisis: At that time, the decline amounted to 33 %.
While the decline in Germany remained within the usual fluctuation range (-9 %), the losses in exports were extraordinarily high (-42 %), even for a sector such as large-scale plant engineering, which is used to strong fluctuations. The cancellation of projects and the postponement of investment decisions primarily affected the new installations business. Thus, significant declines were recorded in large orders worth more than €50 million, which are particularly important for the companies' capacity utilization (2020: 29 projects; 2019: 53 projects), which could not be offset by the almost stable demand for modernizations and services.
Domestic business almost stable despite pandemic
Domestic orders fell by 9% in 2020 to €3.2 billion (2019: €3.6 billion). In a long-term view, order intake is thus 20% below the average of the last decade (2011 to 2020: €3.9 billion); compared to the record year 1993 (€7.4 billion), demand has even more than halved.
This solid development in Germany against the backdrop of the Corona pandemic is mainly due to rising demand for chemical plants ( 46 %) and for power plant technology ( 12 %). In power plant construction, orders reached €1.1 billion (2019: €1.0 billion), the highest level since 2014. In addition to upgrades and services, there were a number of new construction orders in 2020 for smaller, efficient combined cycle power plants, which are mainly used for industrial applications, e.g. in chemical parks. These plants are characterized by the fact that they can be operated with natural gas, pure methane or even hydrogen and thus meet the requirements for flexible and sustainable electricity and heat production.
Demand in the other subsectors was predominantly down. For example, orders for plants in the paper industry (-41%), the metallurgical industry (-62%) and the building materials industry (-85%) fell significantly below their respective prior-year levels.
Historic slump in foreign business
Foreign business saw a landslide in demand in 2020. Orders fell by 42% from €14.7 billion (2019) to €8.6 billion, dropping to the level seen at the turn of the century in 1989. With the exception of Eastern Europe, all regions were affected by this development to a similar extent. The export ratio was 72.7 % in the reporting period (2019: 80.6 %).
These figures reflect the distortions and uncertainties in the international project business triggered by the Corona pandemic. Many customers suffered from high revenue shortfalls in 2020. They were unable to continue ongoing projects as planned and were unable to launch new projects. Furthermore, the strict travel and contact restrictions made it more difficult to perform services and negotiate new contracts, which had a dampening effect on demand for major projects. After all, the realization of these projects depends to a large extent on trust and direct talks.
In this difficult environment, characterized by previously unknown challenges, capacity adjustments were often unavoidable. Currently, large-scale plant manufacturers employ 48,600 people at their home locations (2019: 53,800). The ratio of employees with an engineering degree remained constant at a high level of 35.3% (2019: 35.0%). At the same time, some companies continued to expand their international presence to be closer to customers and seize market opportunities at an early stage
Orders from industrialized countries slump
New orders from industrialized countries - which this report defines as the countries of Western Europe and North America, as well as Australia, New Zealand, Japan and South Africa - fell by 49% to €2.6 billion in the reporting period (2019: €5.0 billion).
Declines were above average in North America, where members of the consortium acquired orders worth €646 million, 62% less than in the previous year (2019: €1.7 billion). In 2019, business had still been characterized by a special boom in US metallurgical and rolling mill construction with record orders of €1.0 billion, which were offset this time by orders of only €100 million.
In Western Europe, AGAB's members in the core markets of France (€155 million; -53%), the UK (€133 million; -56%) and Italy (€132 million; -34%) recorded significantly lower orders than in the previous year. The development in Greece was positive. Here, there was an increase in orders to €232 million (2019: €15 million) as a result of a major order for an infrastructure project. A consortium led by an AGAB member is supplying several turnkey plants for a high-voltage power line that will improve the connection of the Mediterranean island of Crete to the Greek mainland power grid once the link is commissioned in 2023.
Stable demand from Eastern Europe and the CIS
Customers from Eastern Europe and the CIS - which are the Eastern European EU members as well as the countries of the Balkans and the former Soviet Union - placed orders worth €2.3 billion in 2020 (2019: €2.4 billion).
Russia is traditionally the core market for large-scale plant engineering in the region due to its wealth of resources and was the most important customer country worldwide in the reporting period, with bookings of €1.6 billion (2019: €1.4 billion). 80% of this volume alone came from major projects, with a mega order for the construction of a petrochemical plant worth over €900 million standing out. Russia thus underlined its importance as the most important market for VDMA chemical plant engineering: in the past decade, orders worth €8.4 billion were reported in this market segment, which is more orders for chemical plants than from Brazil, China, India and the USA, which together account for orders worth €5.7 billion.
Hungary was another growth market in Eastern Europe in 2020. Orders there jumped to €206 million (2018: €56 million). This upturn was triggered by a major project in power plant construction and an order for the construction of an air separation plant to meet the growing demand for industrial gases in Hungary and surrounding countries.
Potential for sustainable technologies in China and East Asia
Orders from the Asia-Pacific region - defined by AGAB as China, Hong Kong, North and South Korea, Mongolia, Taiwan and the ASEAN countries - reached a level of €1.9 billion in 2020. This represents a decrease of 49% compared to the previous year (2019: €3.7 billion).
Demand from China for large-scale plants fell by 41% to €786 million in the reporting period (2019: €1.3 billion) and was thus below the billion-euro mark for the first time since 2016. This decline is largely attributable to the slump in growth in the first half of 2020 associated with the shutdown (GDP: -1.6%). At the same time, however, the figures also reflect the long-term trend towards more intrinsic value creation and qualitative growth in the People's Republic. Chinese customers are increasingly seldom asking VDMA plant engineering to handle large turnkey projects and are instead increasingly focusing on the supply of technologies, high-tech components and services. Here, the members of the AGAB can score with their special competences in the field of environmental protection and sustainability and provide the offers for more climate protection desired in the current market environment. Similar potentials arise in the developed markets in East and Southeast Asia, such as Singapore, South Korea and Taiwan.
Slowing momentum in the Middle East
Demand for large-scale plants in the Middle East fell by 54% to €633 million in the reporting period (2019: €1.4 billion) - the lowest order intake in 25 years. Strong competition from Asian plant manufacturers and the unstable political environment in some areas are key reasons for this decline. Last year the market environment in the Middle East was additionally impacted by the dramatic slump in the price of crude oil in the spring and the associated loss of government revenue.
The most important customer country in the region in 2020 was Saudi Arabia, with orders worth €225 million (2019: €129 million). Several large orders in the power plant sector and for metallurgical plants and rolling mills were the triggers for this upturn. By contrast, declining orders were reported from Qatar (-31%), the United Arab Emirates (-50%) and Iraq (-83%). Business with the former core market Iran came to a complete standstill. Due to the continuing sanctions imposed by the USA and the European Union and the lack of financing options, the difficult situation for plant engineering in Iran is unlikely to change much in the short term.
No market stimulus in the rest of the world
This category includes all countries that cannot be assigned to any of the four groups mentioned above. These include Africa (excluding South Africa), South and Central America, South Asia with India, Turkey and Oceania. Orders in this group of countries were €1.2 billion in 2020 (2019: €2.2 billion).
Orders from India shrank to €144 million in the reporting period (2019: €290 million). Demand is thus falling further and further behind the peak levels of 2007 to 2013, when orders averaged €1.3 billion. Demand was also down in other emerging markets. Orders in important markets such as Egypt, Brazil, Mexico and Turkey fell to long-term lows.
Difficult economic conditions, a shortage of foreign currencies and high inflation rates had a dampening effect on demand for large-scale plants in these countries. This was compounded by pandemic-related tax shortfalls coupled with rising social and medical spending. As a result, the financial scope of the public sector for infrastructure investments, such as in power plants, electricity grids and waste incineration plants, is permanently restricted. It can be assumed that the environment for large-scale plant construction will remain difficult in many emerging countries even after the end of the pandemic.
Industrial plant manufacturers hold their own in a difficult environment