Process Business Barometer: Jan 2011

Update of industry and financial experts’ views on how the process sector is likely to fare in 2011:

KSB Group expects the market for pumps, valves and related systems to recover further during the current year, especially in its ’short-cycle broad-based business’. Project business will, however, continue to feel the effects of the financial and economic crisis. Business in 2011 will be marked by fierce competition and strong pressure on prices, though KSB noted that 2011 may see the order volume return to the high pre-crisis level. Despite price pressure and anticipated higher costs, KSB aims to achieve 2010 earnings levels. 2010 results: Order intake Euro2,075.6m (+7.3 %); Sales revenue Euro1,949.7 (+ 3.0 %); Pre-tax earnings expected to be down on the prior-year figure of Euro172.8m on price pressure, materials and staff costs.

 In 2010, the annual rate of business insolvencies fell for the first time in two years as the financial health of UK businesses improved, according to the latest Insolvency Index from Experian. Just 1.04% of UK businesses failed in 2010, compared to 1.25% in 2009. Businesses in the plastics & rubber (P&R) sector continued to have the highest insolvency rate in 2010 (2.33%). The oil industry continued to have the strongest financial strength score, with an Experian rating of 85.88, with pharmaceuticals (81.61), chemicals (81.57) also among the above-average (81.03) performers. Weaker sectors included engineering (79.32), P&R (77.99) and food manufacturing (77.57).

UK manufacturers’ organisation EEF’s pay data for the three months to the end of December 2010 shows that the average pay settlement has increased to 2.2%, up from 2.1% for the three months to the end of November. The number of pay freezes has fallen slightly but still remains at one in fibe settlements, reflecting continued downward pressure to contain internal costs in some companies. Lee Hopley, EEF chief economist, said: “Historically these figures are at normal levels and continue to reflect a return to more normal patterns of wage negotiation. The key now is whether the recent upsurge in inflation and costs faced by employees results in significant upward pressure on settlements in the forthcoming bargaining round.”

Brussels-based United Anodisers, which claims to be a world leader for aluminium anodising, has posted 2010 sales of Euro23.4m, up 4.6% on 2009, and forecast strong growth in the continuous anodising business, where sales rose 16.2% to Euro18.5m. A Q4/10 slowdown, it said, reflected a temporary shortage of metal on the market set due to high demand. Visibility for 2011 is gradually improving with the emergence of several major high-end and high-value added architectural projects, it added.

The manufacturing recovery is well on track, driven primarily by export orders, the CBI said 20 Jan. Output and orders growth picked up over the past three months, and companies expect another solid rise in production during the next quarter, and investment plans are gathering pace. But prices for finished goods rose markedly, and an even faster increase is predicted over the next quarter, as manufacturers look to pass on higher raw material costs. Ian McCafferty, CBI Chief Economic Adviser, said: “It is also encouraging to see that employment prospects in the sector have risen for the second consecutive quarter and manufacturers’ confidence is improving. “But manufacturers have come under intense pressure to pass on rising costs: they have increased prices markedly in this quarter, and expect to raise them at an even faster pace over the next three months. This will drive further inflationary pressure in the wider economy.” Read more

Invensys plc’s interim management statement covering the period since 30 Sept 2010 notes that its Invensys Operations Management unit has benefited for a recovery in industrial capital expenditure. This, it said, produced strong growth in order intake in the quarter. Good revenue growth in the period was also driven by the conversion of its order book, with the commencement of recently awarded large greenfield projects in emerging markets.

World energy growth over the next 20 years is expected to be dominated by emerging economies such as China, India, Russia and Brazil while improvements in energy efficiency measures are set to accelerate, according to BP’s latest projection of energy trends, the BP Energy Outlook 2030. Read more

News that UK manufacturing is growing at a 16-year high is an indication of an industry hitting its stride once more, enthuses the organiser of the Southern Manufacturing & Electronics Show: reporting “extraordinary demand” for tickets and exhibition space for this year’s event at Farnborough, 16-17 Feb.

The process automation market is recovering well, according to Bob Sharp, president, Emerson Process Management, Europe. ” A lot of projects have come back and there is a lot of traction with customers.” Emerson has posted fiscal 2010 sales of $21bn, including $4.3bn in the global process sector. Sales to the European process sector came in at $1.4bn. ’Wireless’ contributed $76m to global sales, 20% of which was in Europe. “Wireless has become mainstream for monitoring applications in greenfield and brownfield project,” said Bob Karschnia, Emerson’s vice president of wireless. There are, he reported, over 1400 sites now using IEC 62591 (WirelessHART). The technology, he added, had now chalked up over 200m hours of operation.

Tentec, a UK-based supplier of bolt tightening ’solutions’ for industry has reported that, despite tough market conditions, worldwide sales have reached a new high in 201. “Our order book has been strong throughout the year.” said newly appointed managing director, Mike Gethings. “As well as pleasing sales for our standard bolt tensioning equipment, we have seen demand for our customised engineering skills also increase.”

Manufacturers expect production to rise solidly in the next three months on the back of strengthening demand at home and abroad, the CBI has reported. The business group’s latest monthly Industrial Trends Survey revealed that 32% of manufacturers are predicting a rise in output in the coming quarter, and 19% a fall – a marked improvement on November’s expectation. Total order books continued to strengthen, with 27% of firms reporting they were above normal in December, and 31% below. Overseas demand accounted for much of the improvement in total order books. Of the respondents, 25% reported export order books to be above normal, and 21% below. Inflationary pressures remained intense for UK manufacturers in the December survey, with 27% expecting to raise prices in the next three months, and 11% expecting to reduce them.

Commenting on the latest CBI Industrial Trends Survey Ian McCafferty, CBI chief economic adviser, said: “These figures show that the recovery in the manufacturing sector is well underway. “With total order books getting back to normal levels and overseas demand particularly strong, the outlook for UK manufacturing output growth is encouraging. The past sharp depreciation of Sterling should continue to underpin demand for UK exports into 2011. However, with oil and other commodity prices rising, cost pressures will remain a concern.”

European chemicals producers will face a slowdown in demand for their products during 2011, warns Cefic, which expects markets to cool after double-digit year-on-year growth in 2010. The trade group predicts growth of 2.5% next year, and that the EU chemicals sector will post a year-on-year recovery of 10% for 2010. Read more

Many company owners in the process plant engineering industry are too much of a risk to lend money to, argues market analysis firm Plimsoll. Its latest study finds 138 companies in the market on profit margins of less than 1.5% with 60 of these making a loss. “Nobody should blame the banks for refusing credit to companies that might not be able to pay it back,” the firm said. Even companies with minimal or no debt are struggling to get credit if they have thin margins, adds Plimsoll. On the flipside, it said, there are 91 prudent companies that made tough decisions to cut costs, instead of chasing sales. These companies could now capitalise on their much higher credit ratings by investing in some smart acquisitions.

Engineering support services provider Redhall Group plc has reported a 9% increase in pre-tax profits to £7.0m for the year ended 30 Sept, on revenues up 12% to £144.7m. David Jackson, executive chairman commented: “The medium- and long-term prospects of the group remain extremely good. We are confident that we have positioned the business in growth sectors in growth markets and in particular, we are looking forward to the start of the nuclear new build programme where we have a lot to offer.”

2011 will be a dangerous year, warns Stephen Aldridge, managing director, Numeritas – a business planning and forecasting firm. “There are a whole range of cost and cash flow pressures facing UK manufacturers … many profitable businesses will be forced into insolvency if they are not prepared.” The pressures, he said, include: Employers’ national insurance up 1%; VAT up from 17.5% to 20%; raw material cost increases; customers taking longer to pay or becoming insolvent; exchange rate movements; and increased orders. Aldridge explained:  “More companies go insolvent once a recession is passed its worst and orders are picking up.  This is because manufacturers overstretch their working capital through spending too much on inputs such as raw materials and labour, but do not have the working capital to last until payment is received.”

Demand for UK-made goods improved in November, compared with the previous month, the CBI said today. But manufacturers also expect prices to rise faster in the next three months, and predict slower growth in manufacturing output Ian McCafferty, CBI chief economic adviser, said: “Manufacturing demand improved in November, following October’s more negative figures for total and export orders. Demand is now back in line with that over the summer months, suggesting that particularly weak order book readings last month may have been a one-off. “Factory output is still set to rise, albeit with modest expectations for growth compared with recent months, as the boost from re-stocking starts to fade. Inflationary pressures are a concern, with companies saying they will be increasingly forced to pass on at least part of their rising costs in the form of higher prices.”

Foster Wheeler CEO Umberto della Sala, said: “Although we clearly felt the impact of competitive pressure in the third quarter, the increase in proposal activity confirms our view that markets have bottomed and that demand has improved … Due to the lagging impact of the competitive conditions under which contracts have been awarded in 2010, it is likely that EBITDA margins in both of our operating groups will be lower in 2011 than 2010. However, if proposal activities and client inquiry levels continue to remain high, we could very well see an increase in scope revenues in 2011 as compared to 2010.”

Fluor Corp. chairman and CEO Alan Boeckmann. “Looking ahead, we are encouraged by the strength of new awards in the quarter, which has allowed us to grow our backlog for the second consecutive quarter.” Looking ahead to 2011, the company expects its growing backlog to drive increased revenue. While there are early signs of a recovery in oil and gas markets, recent new awards have been driven by substantial mining awards which have a lower margin profile.

Emerson chairman and CEO David Farr: “Our fourth quarter results reflect continued strengthening in the global economy and improved demand for Emerson’s products. Businesses are spending again. That’s good for Emerson. In the midst of the harsh economic downturn of the past couple of years, we did what we’ve done before. We repositioned the company to be stronger than ever before and to benefit from what we expect to be a slow but steady economic recovery.”

Commenting on the group’s third quarter 2010 performance, Air Liquide chairman and CEO Benoît Potier said: “This quarter demonstrates continued growth in our sales across all economies, with the pace of growth remaining different according to regions. It also reflects a recovery in the investment cycle, as shown by the large number of new contracts signed. Total investment decisions for these new projects as at the end of September 2010 were greater than for the whole of 2009, showing our customers’ confidence in long-term projects. In the shorter term, business continues to be robust in our main markets …”

Jacobs Engineering Group president and CEO Craig Martin: “This (fourth) quarter was a decent finish to a difficult year. Our team did a good job of controlling costs and executing projects well. In addition, our client survey scores are at record levels. When you set aside our backlog adjustments, we are beginning to see some growth in backlog …”