New technology, increased customer expectations, expanding markets, new competition from the east, and pressure on costs: Oil & Gas Middle East takes the pulse of the pumps sector.
Pump suppliers are some of the most important and ubiquitous links in the upstream chain: wherever a hydrocarbons production process meets gravity, a pump is there to keep things moving.
Research firm McIlvain states the world market in industrial pumps is worth $35 billion, climbing to $40 billion by 2015. 43% of all pumps sold in this year will supply Asian markets, with China’s oil and gas sector sales alone worth $115 million in 2011.
McIlvain predicts this trend will begin to wash the other way, as increasingly competent Chinese and South Korean manufacturers that have been taking a bite out of international pump companies’ market share at home seek to bring their cost-driven business models to the Middle East.
The banner contract win in the region so far this year is Saudi Aramco’s seven-year strategic deal with ITT, announced at the end of June. ITT is to provide pumps and related services across Aramco’s operations for an undisclosed sum.
Such strategic arrangements are rare, however. Most players in the region do business one contract at a time, winning trust and gaining in standing as they go. Good old fashioned business sense counts for a lot in this crowded market, with firms basing themselves closer to clients to provide more specialized and attentive service.
More mature markets remain competitive following a tough 2009-2010 for many OEMs.
Yet new contracting bonanzas in Saudi Arabia, Qatar and Iraq beckon. Regional OEMs can look forward to renewed growth in the region, if they can rise to meet customer expectations.
We quiz firms in the region about the state of the market and what it takes to compete.
How is the pumps market performing in the Middle East? How does this compare globally?
Sriram Iyer, General Manager ME Sales, LEWA: Current trends in the Middle East generally reflect the crude oil price trend.
The fact that oil has been hovering at around $100 a barrel has boosted the confidence of the oil companies to spend more on searching and drilling for more oil.
Ajith Antony, Business Development Engineer, KSB Aktiengesellschaft: The oil, gas and petrochemical industry in the Middle East is experiencing fast-paced growth, supported by reasonable oil prices during the past few years. We foresee similar growth in these sectors during the years ahead.
Padraig Nagle, Managing Director, Action International Services: Demand for pumps has been quite robust across all regions and sectors. We have actively diversified the markets that we operate in over the past few years and this is now starting to pay dividends. The oil and gas sector has shown great resilience both upstream and downstream and we are now operating beyond the Middle East in the Caspian and North African markets.
Andreas Schulte, Managing Director, Sulzer Pumps ME: We see the markets – and not only in the Middle East – recovering from the crisis in 2009, supported by rising oil prices and ongoing investments in infrastructure projects.
As market growth is higher than in most western countries, the focus of the industry is shifting east; however recent unrest in the Arab world may affect the further development. Development projects, particularly in Saudi Arabia and Iraq, seem to be gaining momentum, while the ongoing political uncertainties and security issues in Iraq prevent a faster development.
Nael Agha, Operation Director, Al Mazroui Engineering: The pump market is experiencing a sound growth in this region with the strong development of upstream & downstream oil & gas developments. Due to this, there are plenty of Original Equipment Manufacturers of pumps from around the world rushing to this regional market. Demand continues to pick up at a healthy double-digit growth rate.
What is your company’s unique selling point in the pumps business?
Padraig Nagle, Action: We have a simple philosophy: “right first time”. We aim to have the widest selection of pumps available at all times and to our high quality standards. We carry the largest range of certified high head, high volume and high pressure pumps in the region, complemented by instrumentation, accessories and qualified technicians.
Nael Agha, Al Mazroui: MEC is ISO certified, specializing in the selection and supply of tailor made pumps for special applications as well as carrying the complete range of pumps for different industries. With a dedicated focus on the after sales service through MEC local workshop facility.
Ajith Antony, KSB: KSB AG is 140 years old. We were able to sustain all these years as a market leader within the industry because of our ability to provide our customers with reliable solutions when they need them.
We pride ourselves on our highly qualified and dedicated staff, who work in unison effectively with our customers. We also have local offices for pump supplies and services, in most of the ME countries to be close to the customer.
Andreas Schulte, Sulzer: Our Middle East organisation is based in Abu Dhabi, UAE and operates sales and service facilities in UAE, Saudi Arabia and Oman. We have a team of experienced service engineers in these locations for quick response to customers.
Sulzer enjoys an excellent reputation for its highly engineered, tailor-made pump solutions for the most critical applications as well as a full line product portfolio to cover all needs of the customer from new equipment to services.
The main focus of our business in the Middle East is the oil and gas sector, but we are also active in the power generation sector.
Taking stock of regional pump sales from 2008-2010, put this year’s market into perspective.
Ajith Antony, KSB: Since 2008 we have experienced consistent double-digit growth. 2011 will also bring growth rates in line with the previous 3 years.
Sriram Iyer, LEWA: We strongly believe that there will be a significant growth of pumps business, especially in the UAE, Saudi Arabia, Qatar, Oman and Kuwait. An increase in infrastructure projects for water and sewerage along with the strong Oil & Gas sector has lead us to plan for growth of 15 to 20%.
Andreas Schulte, Sulzer: 2008 and 2009 were strong years for Sulzer, despite the economic crisis. We felt some impact from the crisis in 2010; however, our order intake for 2010 against 2009 was only slightly affected, mainly driven by the oil and gas segment.
We’ve started well in 2011; we were able to secure projects of strategic importance with our key regional clients. Market activity is increasing rapidly, thanks in part to Saudi Arabia and Iraq.
What are your sales projections for 2011 – 2012?
Ajith Antony, KSB: We have experienced constant double digit growth since 2008. 2011 will also witness growth rates in line with our previous 3 years.
Andreas Schulte, Sulzer: As long as the political situation remains stable we expect further positive development of the Middle East markets. Sulzer is keen and able to participate further in ongoing regional development.
Padraig Nagle, Action: The upturn in demand for our equipment throughout MENA and the Caspian means we are looking at a very strong orders pipeline for the remainder of the year and on into 2012.
What is the biggest challenge for you in the current market?
Sriram Iyer, LEWA: The main challenge has been to meet customer expectations at much lower prices. This trend is becoming stronger, especially with EPC contractors, who take on a lot of lump-sum turn-key contracts.
Ajith Antony, KSB: Being a European manufacturer, we are not the cheapest supplier in the market. Recently we have recognized that some end users have been attracted to, and been willing to accept, pump products from countries whose operational costs are lower than ours.
So we have to counter this trend by improving our services rendered to customers and by increasing the efficiency of our operations. This will enable us to remain commercially competitive, even when we have to compete with products coming out of low operational cost countries.
Padraig Nagle, Action: Long lead times from suppliers put additional pressure on planning, as we need to take a longer term view on the needs of the market to ensure we are in a position to deliver.
We are working with our suppliers and are building up our stock levels to reduce lead times as much as possible for our customers. We see this problem continuing for the remainder of 2011.
Andreas Schulte, Sulzer: One of the main challenges in the markets is the availability of talent, particularly those with a strong engineering background, in the region. Together with the visa restrictions in some countries it does not allow us to develop and grow the business at a speed we would like to.
Do PMCs and EPC contractors still turn the screw on manufacturers and margins?
Nael Agha, Al Mazroui: Yes, EPCs and PMCs still enjoy that privilege of a buyers market. We foresee that the market will return to normal, but at a slow pace.
Andreas Schulte, Sulzer: Contractors are turning the screws to squeeze margins. We don’t yet see a change in this approach, neither in Middle East nor elsewhere.
Main contracts in recent months have been awarded to mainly international contractors based on very competitive prices. We have to assume that contractors will pass these price pressures down the contractual chain to the OEMs wherever they can.
Padraig Nagle, Action: What is happening within the mining industry cannot be overlooked as it is such an influencing factor in today’s market. Demand for pumps to meet growing mining production levels has caught many manufacturers flat-footed, resulting in long delivery times. Also, global demand for engines is further hampering production programmes.
As such, manufacturers are not under pressure to negotiate on price: On the contrary, in fact negotiations are more likely to be conducted on the basis of accelerated and timely delivery.
Sriram Iyer, LEWA: There is still some tightening of margins happening before we see a rise in prices. We expect the trend for higher prices towards the end of the year
Ajith Antony, KSB: PMCs don’t have a role to squeeze our margins in this region, but EPCs do try. There is a lot of competition within the EPC market, and projects are generally concluded by EPCs on experience-based price estimates. This sometimes brings price pressure on the EPCs, who have to run their projects ‘in the black’, and of course this pressure is transferred to its vendors down the chain.
Who are you most important customers?
Sriram Iyer, LEWA: Our most important customers today are EPC contractors who have successfully bid to local and international oil companies.
Ajith Antony, KSB: All our customers, big or small, are important customers for us. Our customers include all oil operating companies, EPC firms, sub-contractors and trading companies in the region.
Andreas Schulte, Sulzer: All our customers are “most important” to us. At Sulzer we put our customers in the centre of all our activities.
Sulzer has alliances with major international oil companies and also with numerous national oil companies in the Middle East. We want to be a company that people find easy to deal with. The service centres which Sulzer has established in the Middle East are part of our strategy to be close to our clients and to care of our client’s needs over the full lifespan of our products.
Have other sectors been able to take up some of the slack when upstream projects progressed slower than originally anticipated?
Andreas Schulte, Sulzer: Sulzer is focused on the market segments oil & gas, petrochemicals, water and power. We felt the downturn slightly in 2010, but even then, our business was strong in the Middle East.
Sriram Iyer, LEWA: We have seen an uptrend in our Clean Market Business this year. The potential in this business is large enough to create its own momentum for growth.
Padraig Nagle, Action: In short, yes! Our demand remains generally strong across the greater market. We made a strategic decision a number of years back to expand geographically and diversify our product offering in order to better support our regional and international customers. Consequently, this diversification strategy has ensured we are less impacted by a slowdown in any one sector or region.
Have you been able to provide flexible payment terms to companies suffering due to a lack of affordable credit?
Ajith Antony, KSB: We always work against confirmed letters of credit. This was our policy prior to 2009/2010 which we still follow.
Padraig Nagle, Action: We always work with our customers as partners. We understand the current credit market is not as liquid as it was back in 2008 and have adopted a sensible amount of flexibility to ensure that our cash flow is healthy and that the companies we are working with do not fall too far behind with payment.
Sriram Iyer, LEWA: Since the credit crisis began, we have moved towards flexible but guaranteed terms of payment.
Nael Agha, Al Mazroui: We have provided flexible terms to suffering companies, and due to our long presence in the local market since 1986, we can discern companies worthy of flexible payment terms.
Which way do you foresee business heading?
Ajith Antony, KSB: The oil and gas industry in our core focus countries seems to be on the growth path at least until 2014. So, we try to stay ahead of the industry growth rate related to our products for the industry.
Andreas Schulte, Sulzer: We see further growth in Sulzer’s key markets over the next three to five years. The wake of the financial crisis and volatility in global markets have made increasingly difficult to anticipate the development of product markets.
Padraig Nagle, Action: We expect a moderate increase in demand for pumps, and a gradual shift in how pumps are procured. Our aim is to establish a true supply chain partner that the industry can rely upon, based on reliable and certified equipment. We think this is a new offering in the region, and Action is poised for organic growth as the pumps market moves from procurement to rental.
