After enduring the effects of wildly fluctuating raw materials prices over the past few years, those in the cabling sector must now brace themselves for the global economic downturn. As construction projects are cancelled and postponed, firms must adapt to ensure their survival and the overall quality of installations in the long-term. But can a healthy utilities sector in the region helping to counteract any negative effects from the building market?
Electrical economies
Most industries have now seen some effects of the current worldwide recession. However in the Middle East at least one sector seems to be not only maintaining a healthy status, but is actually growing – that of utilities infrastructure.
In January the Government of Dubai announced a AED 37.7 billion public sector spending plan as part of its 2009 budget; this included significant planned expenditure in infrastructure projects including electricity networks, district cooling and desalination plants. The 2009 Middle East Electricity Exhibition (MEE) held in Dubai in early February backed up the positive signs for the Middle East cable industry, with reports from exhibitors of strong interest in the market.
According to data from global manufacturer Dow Wire & Cable, the capacity for medium and high voltage cables in the region is 270 000 km. More than 90 000 km of this will be required in the next two to three years the firm reports, which equates to a 10% increase in capacity.
Global strategic management consultant AT Kearney also recently announced that an estimated investment of more than US $500 billion is needed in the region’s electricity infrastructure to enable economic growth. And this may be a conservative figure according to the firm: “The additional generation capacity needed is potentially underestimated; while economic growth in the Middle East is expected to be in the region of 7%, the build-up of generation capacity is only 4% per annum,” it reports.
But now the global recession has begun to affect expenditure in the region, how positive is the market truly for cables manufacturers? Although the economic downturn is still in the early stages, market forces are already beginning to show two clear patterns of development for the cables sector, with the medium and high voltage products currently still in strong demand, while there is a falling demand for smaller products such as building wires.
This division in demand is a direct result of the cancellation and postponement of projects in the region, with utilities projects largely going ahead as planned and the largest drop in work being on residential developments.
“As the demand softens a bit, the impact is felt across all segments of the business…however, we do find the categories like building wire and LV cables are a bit more sluggish as opposed to large power cables,” reports Ducab managing director Andrew Shaw. The growth in large infrastructure projects with committed long-term investments by utilities firms is continuing “unabated”, he adds.
“Committed expenditure for electricity projects throughout the Middle East has been unaffected by the current economic climate, as governments recognise that the expansion of generation capability, in line with rapidly expanding populations and manufacturing growth, are key to the continued development of the region,” explains MEE organiser IRR group director Sarah Woodbridge.
“For utilities transmission and distribution we have seen very little slowdown across the globe as these [sectors] tend to have big investment projects planned in advance and the finance is in place, so these projects are continuing,” confirms Robert Tarimo, Dow Wire & Cables marketing manager Europe, India, Middle East and Africa. “There is some slowdown in the low voltage and building wire industries as the construction of buildings is somewhat reduced,” he adds.
The planned long-term development and continued economic growth of the region are key factors in the continuation of the utilities projects. “At the moment some buildings are on hold, but when the market upturns again and [construction of these projects] continues, the power will be needed, so installation of the HV network has to continue,” reasons Prysmian Middle East branch general manager Giovanni Caradonna. Diversification and undertaking of increased project load are two ways that firms are tackling any potential downturn.
And manufacturers are quick to stress that work has far from stopped in the region as a whole. “At the moment we’ve seen a number of projects on hold, but there are still a large number ongoing,” states Graeme Aittis, general manager Middle East, AEI Cables. “We are hearing about issues that could impact us, but they haven’t filtered through yet.”
The falling cost of raw materials such as copper is increasing the pressure on those in the cabling industry as many projects are currently being retendered with the aim of cost-cutting to beat the economic crisis. “Our target growth this year is 12-15% and we want to maintain this; [to do this] more business volumes [are needed] because the raw materials prices are going down,” explains Caradonna. “Our product is linked to copper, lead and steel prices and something that may have cost $100 now costs $50, so project values are also going down and we need to make this up by taking on more projects.”
“Across the board, the volatility of copper prices [is a major issue in the cables market],” stresses Aittis. “In August 2008 copper was around $3500/tonne, this dropped to around $2000/tonne and has now climbed a little to $2300/tonne…Copper is a big component in cables, so right across the industry it causes problems; if you buy when it costs $4000/tonne and it drops to $2000/tonne that’s a problem.”
“Clients are getting a bit perturbed with the impact of the global financial meltdown and as a result many projects are being renegotiated, while some are even retendered for,” adds Shaw. “Suddenly we see the shift from focus on ‘deliveries’ a few months earlier to a whole new set of challenges around value engineering driven by costs.”
Maintaining quality
While the market appears to be relatively healthy at least in the short-term, pressure on project costs is inevitable in the current climate. Ensuring that clients and contractors continue to select high quality cabling when jobs are being retendered rather than opting for cheaper alternatives is vital to enable the long-term safety of installations stresses the British Approvals Service for Cables (BASEC).
“Issues of non-approved cables are well documented and the rise in faulty cables has been a growing issue since 2006 when the price of copper and other materials tempted some manufacturers to use less copper or cheaper insulation material in the manufacturing process,” states BASEC chief executive Jeremy Hodge. “We want to ensure that quality doesn’t become a sacrifice of the economic downturn. We would recommend always choosing cable that not only meets the relevant standards, but has been assessed independently to ensure a product’s claims have been verified,” adds Hodge.
The use of quality products is particularly important in the utilities sector. “When looking at distribution and transmission networks, the key thing the utilities want is reliability,” stresses Tarimo. “If you are going to spend billions of dirhams on an underground cabling network the last thing you want is to have to keep digging it up for maintenance, so critical aspects are reliability and longevity,” he reasons.
Two major components to achieving these requirements are the selection and use of the right materials; and having the skills and technology to manufacture the products to a high quality. “To deliver in high voltage cables you have to provide materials that can operate under high electrical stresses,” explains Tarimo. “The critical thing is to have [cables] manufactured well with super clean materials that have very few contaminants.”
Companies are generally selective about their cable products states Tarimo. “As people get more experienced with materials and products they tend to demand more from them and this region has been particularly good at recognising good cables and demanding them,” he reports. The industry in general is seeking reliability, longevity, low transmission losses and there is a rising trend towards environmentally friendly products.
Company moves
A sign of the relatively positive mood of the cable industry is evident in a number of company expansions. Saudi-based Riyadh Cables has expanded its production capacity across its full range of power cable products, particularly its wires, medium and high voltage products. In October, UK-based AEI Cables opened its first office in the region in Dubai Airport Free Zone, the firm seeing this as a strategic move in an expansion of its business in the Middle East.
Aittis explains: “We have traded for a number of years in the UAE, Bahrain, Kuwait, Qatar, Oman and, to a lesser extent, in Saudi Arabia. Previously we traded through agents and distributors, but we reached the point where we felt we couldn’t build our business any more without a permanent office here; the intention of this office is part of a long-term plan to grow the business.” It is targeting construction, the oil, gas and petrochemicals industry and, in particular, the utilities sector.
Prysmian has also been undertaking expansion plans. The firm has a branch office in Dubai as well as project offices in Abu Dhabi, Qatar, Bahrain and Kuwait. “In 2004 when we started expanding we had two people in Dubai – there are now 12 staff in Dubai and an average of 10-15 people in each of the other offices,” reports Caradonna. “Our target growth this year is 12-15% and we want to maintain this,” he adds.
Prysmian has completed several large-scale power cable projects in the region, particularly in the UAE, Qatar and Bahrain. These include two projects for Qatar General Electricity & Water Corporation (KAHRAMAA): an EUR 140 million turnkey project for the development of a submarine cable to serve Doha; and an EUR 87 million contract for a power transmission project.
Another firm that has consistently undertaken large expansion programmes is Ducab and this is reportedly set to continue. Ducab quadrupled in size over the past three years and has maintained an almost consistent 50% year on year growth in turnover during this period. “2008 was a yet another record year for us in terms of turnover and profit, while we saw the opening of our copper rod plant in Abu Dhabi coupled with the first ever acquisition of a cable factory in Abu Dhabi,” reports Shaw. “As a result, the manufacturing capacity has increased tremendously, with the current capacity at about 106 000 tonnes of copper per annum.”
The firm is planning further growth across all its current markets areas and is expected to announce plans in the near future for expansion into other business segments. “The strategy is to defend our share and aggressively grow in all our existing territories, improve our market shares – we command almost 42% market share in UAE for example – in countries like KSA and Qatar, amongst other objectives,” explains Shaw. Ducab has supplied cables for a wide number and range of high profile projects in the region including the Dubai Metro, Burj Dubai, Bahrain Financial Centre and Dubai International Airport.
“Dow Wire & Cable is committed to the Middle East market place,” assures Tarimo. The firm has several existing and proposed operations throughout the region and is a major supplier to the cables manufacturers. In 2009 the firm is intending to implement further expansion and to further diversify its offerings for sectors such as utilities.
“We have had a 12%+ increase in the number of lines for the Middle East over the past five years and we anticipate this to continue,” stresses Tarimo. “In terms of growth rate, the production of high and extra high voltage is the biggest at over 20%; the medium voltage cables [output] has grown in the region of 12-15% over the past five years,” he adds. Tarimo explains that the region’s need for power combined with the preference for underground transmission and distribution systems are key factors in this growth.
And if any doubt remains about the future of the market, Shaw has positive words of encouragement: “Like most other sectors of the industry, power cables is closely associated with the building and construction sector … Perhaps in the short term, the demand may not pick up immediately but we do not anticipate the downward spiral to continue in the medium term,” he concludes. Surely good news for all in the sector. .
