Sluggish growth, a number of regional conflicts and falling prices in global commodity markets had a major impact on the business climate in the chemical plant manufacturing sector in 2014. The net result was a curb on demand. Order intake by chemical plant manufacturers which are members of the German Large Industrial Plant Manufacturers´ Group (AGAB) fell 12% to €3.1 billion.

Germany No Longer a Core Chemical Plant Manufacturing Market

The industry reported domestic order intake of €167 million in 2014. Compared to 2013 (€117 million), bookings were up 43%, but that needs to be seen in perspective. It is still only roughly half the ten-year average of €320 million. The industry did not really benefit from the roughly €3.5 billion which chemical producers in Germany invested to expand their production capacity in 2014. So why not?

For one thing, chemical producers have their own engineering teams. Third-party large industrial plant manufacturers only get a slice of the project business if special expertise is needed or if companies need help to overcome resource constraints. In addition, most of the expansion and refurbishment projects are below the €25 million threshold. The core expertise of the AGAB member companies which are active in the chemical sector is directed at projects with contract values far above that level. There are a number of engineering service providers in Germany which specialize in small projects and are not members of AGAB, which is a sector group of the German Engineering Association (VDMA). In this segment Germany is no longer a core market for the member companies of the Large Industrial Plant Manufacturers´ Group.

International: Large Projects in Russia and the US

Approximately 95% (€2.9 billion) of the order total was placed in international markets. The major growth markets in the chemical plant manufacturing industry were in Eastern Europe. Several large petrochemical projects pushed Russia to the top of the sales rankings worldwide. However the outlook for 2015/2016 is subdued and there are no other large projects on the horizon. Declining commodity prices and EU economic sanctions are exacerbating existing structural problems in the Russian chemical industry such as its strong focus on certain end products and dependency on specific export markets. As the economic situation worsens and investors pull back from Russia, there is currently little likelihood that the modernization projects which are urgently needed will be carried out. 

New orders in the US were down from the record level in 2013. However at roughly €400 million, order intake was still very substantial. Low gas prices are stimulating demand, particularly in the fertilizer sector, and AGAB member companies succeeded in acquiring some large contracts in that industry. Follow-on projects in the US and Canada are also expected in the years ahead. Other petrochemical, natural gas liquefaction and synthetic fuel projects are on the horizon. Finally, demand for electrolysis production facilities is also expected to increase. Given the high construction and installation costs and the current decline in oil prices, it remains to be seen whether all of the projects will come to fruition as planned.

AGAB member companies reported a decline in order intake in most of the other chemical plant manufacturing markets in 2014. This was the case in the large emerging markets China and India as well as in Africa and South America. In Brazil, protectionist tendencies are making the import of foreign industrial goods including chemical plants and equipment increasingly difficult.

Mega Project and Complete Package Trend Continues

The trend towards larger green field projects continues. Demand for these megaprojects is strongest in the Middle East and the US. Although AGAB member companies have acquired some large contracts in the US, general contracting work has been difficult to find in the Middle East. The enormous scale of the projects, the resulting demands on financial resources and execution capabilities and strong competition from Asian industrial plant manufacturers have made it more difficult to acquire business on the Persian Gulf.

In order to become more competitive in this market environment, chemical plant manufacturers are making massive investments to enhance their EPC (engineering, procurement, construction) expertise and expand their construction and installation capabilities. Utilization of complex IT programs to track progress at the construction sites and the acquisition of construction and installation expertise in core markets such as the US are two of the major challenges. None of this will be possible without a skilled workforce. The industry will have to work in partnership with universities to set up courses of study which meet the needs of the large industrial plant manufacturing industry.

Demand for Local Content

Chemical plant manufacturers are finding themselves increasingly confronted with customer demand for local content. Customers in emerging and developing countries in particular want more and more of the goods and services to be provided in country. In the past that was normally limited to the construction phase, but expectations now extend to material procurement, engineering services and plant staff training. The industry is reacting to these demands by setting up subsidiaries in major core markets. International expansion is generally reflected in the growing number of foreign employees in the German chemical plant manufacturing industry. Besides the 6,200 employees who are based at the sites in Germany, an additional 8,000 people work for these companies at international locations.

Ongoing Expansion of Service Business

In addition to global procurement and the development of modularization strategies, expansion of the service business provides a major opportunity to improve earnings in the chemical plant manufacturing industry. From the industry perspective, this means a package of services for the operational phase such as process optimization and strategies to increase energy efficiency. The service business currently generates around 10% of total turnover in the chemical plant manufacturing industry. The companies intend to raise that figure above 15% by 2018. There are many reasons why the service business is becoming increasingly important. One advantage is the greater immunity to economic cycles along with bigger margins compared to the conventional plant manufacturing business. It creates the need for a local presence which can unlock the door to future projects and help put EPC capabilities in place in foreign markets. Finally, the provision of support during ongoing operations can help companies quickly identify opportunities for process improvement so that they can optimize their own equipment.

Innovative Strengths and Technology Leadership are Trademarks

Innovation and technology leadership are still the principle factors which differentiate German and European industrial plant manufacturers from their execution-driven competitors based in North America and the Far East. The challenge remains, however, to convince customers to order leading-edge German equipment which comes with a big price tag. Lower operating costs, higher availability and lower maintenance and repair requirements compared to the competitors are good sales arguments. In addition, industrial plant manufacturers which are members of AGAB also have the capability to maintain and in some instances even operate the equipment which they supply. Demand for these services is increasing, particularly from customers that do not have a lot of engineering depth.

Cautious Outlook

The medium-term market expectations in the chemical plant manufacturing industry remain subdued. A large majority of AGAB member companies expect demand to remain stable at best during 2015. Muted growth prospects in core markets such as Brazil, China and Russia along with a significant number of local trouble spots are the main reasons for the cautious attitude. However, there are opportunities as well. The weak Euro increases the competitiveness of German suppliers compared to companies based in the US and Asia. Lower commodity prices, particularly in importing countries, creates greater room for investment. Reindustrialization in the US has spawned a number of plant construction projects. Finally, the service business is expected to generate sustained growth.