US and China Beckon to German Chemical Contractors

Shale Gas and Coal Processing Offer Attractive Opportunities

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Regaining a foothold - "Made in Germany" is often regarded as a symbol for quality. But quality has its price, and this a cross that the large plant contractors committee (AGAB) in the German Engineering Federation VDMA has always had to bear. Especially as engineering contractors in developing countries have continuously found ways to copy their success and deliver at lower cost.

While low-priced competitors based in China and Korea have long since replaced Japan as the Germans' nemesis as regards cost competition, the country's engineering flagship firms also still have to get by without the desired amount of support from their federal government in the form of export credit guarantees, and for cost reasons must often outsource engineering and procurement competence.

Despite all the hurdles that have to be taken, however, German contractors have continually risen to the challenge, mustering their intellectual and technical resources to not only survive but thrive.

The past year was no exception. Despite the backdrop of weak global economies, overcapacities in basic manufacturing sectors and political unrest, contractors belonging to AGAB increased their worldwide order intake by 3% to a value of €21.2 billion.

With orders from abroad flat at the 2012 level, business at home leapt forward by 15%, committee spokesman Helmut Knauthe, who is chief technology officer for ThyssenKrupp Industrial Solutions, explained in presenting the group's annual report for 2013/2014. The figure is relative. Put into context, foreign orders were worth €16.7 billion, the value of business at home only €4.5 billion.

In the domestic market, builders of chemical process plants did not profit substantially from the 2013 order upswing. This largely benefited contractors for wind energy plants. For companies with expertise in building traditional fossil fuel-fed plants, business in Germany and Europe continued to stagnate or dwindle.

But if German contractors on the whole were affected negatively by the stagnation in business abroad, builders of chemical plants had reason to celebrate.

Their order intake from in foreign climes in 2013 surged ahead by an impressive 43% against 2012 and provided a welcome contrast to steadily falling orders from major German chemical producers who are increasingly shifting capital investment to Asia or North America.

Chemicals outperform other engineering sectors

All in all, German chemical contractors were able to improve their order intake at home and abroad by 15% last year to a value of €3.4 billion - five times the sector's general dynamics and the highest level seen since the beginning of the global economic crisis in 2008.

An encouraging development, AGAB said, was that conditions for financing new projects improved. This made it possible companies without ready cash reserves to build new petrochemical production facilities.

Not all engineering firm executives were able to uncork the champagne, however. Uncertainties in some of the weaker Eurozone markets continued to dog business to some extent. Suppliers of air separation plants were especially affected by lower investment rates in some industries such as steel.

Despite the only gradual recovery of the US economy and still sluggish development of the BRIC economies, suppliers of chemical process plant and equipment engineered in Germany have now begun to profit from a burgeoning upswing in worldwide plant construction that began in mid-2012 and as yet shows no signs of turning around.

Starting from a low level, the US petrochemical market was the driver of Germany's success last year, with engineering firms receiving orders for projects worth €1 billion - compared with only €230 million a year earlier. After years in the doldrums, German plant manufacturers believe they have good chances to regain a foothold in the American market, Knauthe said.

Only a year ago, engineering firms headquartered between Hamburg and Munich saw their markets as clearly moving eastward, to Southeast Asia, India and the Middle East, but also to Russia. In surprising contrast, AGAB's annual report shows that in 2013 the US moved back to the top of the list of customer countries - for the first time since 2008.

The reasons for the shift in the economic wind's direction seem obvious. Leading the list is undoubtedly the decline of the Middle East as a major market - the reverse side of the shale gas boom in the US, which has pushed gas prices to record lows. In the building activity taking place in the Gulf region, Asian contractors a stranglehold, for the German grouping notes.

In light of recent political developments in and around Ukraine, the outlook for Western contractors' future business in Russia is, at best, murky, even if "Putin's Kingdom" as some wags are dubbing the country, was worth a project volume of €900 million.

Will last year's glimmer in the US light a spark?

For projects in the US, German plant and equipment suppliers hope that last year's glimmer was only the spark that will lead to an explosion of new projects. As AGAB points out, in the American market, shale is driving all projects that process gas for end applications or rely on gas feedstock. New facilities are on the drawing boards or already taking shape for ethane crackers and ammonia plants, for example.

Leveraging an analysis frequently seen, the contractors' committee underscored that the US market has become the el dorado of international chemical plant building. But as Germany's major players face fierce competition for new projects from US firms as well as other European contractors, voices from the off are already warning companies not to focus their strategic hopes on one country, however tantalizing the prospects may be.

Even if the dynamics of doing business in another mammoth market, China, have slowed, German contractors are well aware that the People's Republic still represents the largest economy for chemical construction, and India is still looming large on the horizon.

In China, Knauthe noted that AGAB's member firms are in a good position to leverage their know-how in coal processing - which once formed the nucleus of the chemical industry at home. However, he said there are caveats: although the government's economic planning gives undisputed preference to coal feedstocks, it appears that Western competitors' welcome has worn thin.

 

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