In the year under review, the global economy was slightly weaker than expected. While the International Monetary Fund initially forecast real growth of 3.7 % for 2014, during the year it had to revise this figure downwards. Ultimately, the global economy expanded by 3.3 %. The willingness of many companies to invest was also dampened by the political and military conflicts in Eastern Europe and the Arab world. Our economic expectations for 2014 were therefore not fully met.
In particular, the pace of economic growth remained weak in what continues to be our main market, Europe. The EU member states displayed a mixed picture: While Spain after successful reforms once again managed to grow moderately, the French economy stagnated. Italy remained in recession. In Germany the economy performed relatively better, growing by 1.6 %.
In recent years, the BRIC States and various Asian and South American emerging markets have become increasingly important for our business. Since 2014, however, growth in these markets has been less dynamic, with our business opportunities impaired accordingly.
The Brazilian and Russian economies both more or less stagnated. While the budget deficit in Brazil worsened the investment climate, in Russia the political confrontation with Western countries, the decline in oil prices and the depreciation of the rouble all contributed to market weakness. Market conditions in these two countries also affected the demand for our pumps and valves.
China’s economy grew by 7.4 %. This was, however, lower than the growth rates in previous years. But the country remained an important and promising market for our products. In India, where five plants primarily manufacture for the domestic market, the new government announced plans to reform tax and subsidy policies, which has improved the investment climate, but has not yet had an impact on our business.
In the Middle East and North Africa, the political crises including military conflicts slowed down economic growth. Thanks to the growth impetus from Saudi Arabia and the United Arab Emirates, however, the Region’s gross domestic product increased by 2.8 %. The countries in sub-Saharan Africa kept up the expansion pace of the previous year, growing by 4.8 % overall. The Republic of South Africa, however, could only partly keep pace with this development due to long-term work stoppages and sustained infrastructure problems. The gross domestic product rose by only 1.4 %. Our plant in Johannesburg was directly affected by the strike of the metal workers, as well as by reduced domestic demand.
According to the German Engineering Federation (VDMA), global sales of mechanical engineering products, including our products, grew by 5 % in real terms in the reporting year. The sector thus developed in accordance with the forecast presented in the 2013 Annual Report. However, growth was very heterogeneous in the five mechanical engineering markets with the highest sales revenue – China, the USA, Germany, Japan and Italy.
Despite the slightly lower economic expansion in China, mechanical engineering companies there once again achieved an above-average increase in their sales revenue, which was up 9 %. Japanese manufacturers, which in the previous year had suffered a decline in sales revenue, saw an even bigger increase of 10 %. Machinery sales revenue in the USA also grew significantly by 6 %. In contrast, sales revenue in the German mechanical engineering market was a meagre 1 %. The country with the second-largest mechanical engineering sector in Europe, Italy, once again in 2014 recorded no industry growth due to the ongoing recession in the economy.
Source: KSB estimate, European Investment Fund (February 2015)
Global sales of pumps and valves grew by less than the mechanical engineering sector overall. However, in some regions there was positive momentum from the revival in project activity among energy suppliers and water and waste water management companies, which also boosted our business in some sectors. The equipment needs of the liquefied gas industry and of the tankers needed to transport liquefied gas resulted in an increased demand for special valves, which favoured the suppliers of corresponding equipment, including KSB.
The development in the market for power plant pumps and valves in particular was highly differentiated. While new coal-fired power plants were built in Asia, electricity suppliers in Europe increasingly closed down such facilities, switching to gas-fired combined cycle power plants or renewable energies instead. Suppliers to coal-fired plants, including KSB, therefore focused primarily on China and India. In the two target markets, Asian plant engineering contractors exerted strong price pressure on power plant component suppliers, which in turn affected the margins of the pump and valve industry.
Orders for high-quality technical goods, such as those required for fitting out nuclear power plants were still attractive, but were limited by the low number of new projects. As a result, the order prospects for KSB, too, were limited.
In mining, the market development was negative. Weaker demand for raw materials meant that there was no revival yet in this sector. The order situation for manufacturers of pumps for hydraulic solids transport, which include our US subsidiary GIW Industries, Inc., was therefore more difficult than in the previous year. Modernisation projects, however, did offer opportunities.
The successes and failures of pumps and valves manufacturers were heavily dependent on sector orientation. Prospects were much brighter for suppliers of products for the oil and gas industry, particularly in North America and the Middle East. One exception, however, was the Canadian oil sands industry. Project delays meant that manufacturers of slurry pumps did not benefit from the generally strong demand.
Overall, pump manufacturers reported higher order intake in 2014 than in the previous year. Business for valve suppliers, however, did not yet pick up. Here, orders for new projects usually take longer to come through than is the case with pumps. In Europe, the order situation for suppliers of pump- and valve-related technical services remained heavily influenced by the structural problems of the energy sector. The KSB Service companies in this Region also felt the adverse impact of the latter.
Most pumps and valves producers experienced declining sales revenues compared with the previous year. According to VDMA, the sales revenue volumes of liquid pump manufacturers in Germany decreased by 4 % in real terms. The sales revenue volumes of producers of industrial valves in Germany fell by a similar amount according to the association, being 3.4 % lower in the reporting year than in 2013.
Competition from Asian suppliers has risen. This is felt primarily in projects in key industries such as energy, mining and the oil and gas industry. More and more contracts are being awarded to local manufacturers, with China being a prominent example. Chinese pump manufacturers are focusing their efforts on securing a larger share of their domestic market and are striving to improve their quality level.
South Korean plant engineering contractors are increasingly participating in international projects, for example in the Arab world, allowing South Korean pump manufacturers to expand their reach. Thus, they are becoming increasingly interesting for engineering contractors outside Asia, thereby increasing the global competition for companies from other regions.
In mining, our competitors are continuing to pursue the strategy of expanding their product portfolio along the value creation chain. In addition, suppliers of mining pumps, such as KSB, are strengthening their service presence in key mining regions in the world.
Overall in the year under review, there were only a few major acquisitions by pump and valve manufacturers. Instead, individual competitors were much more concerned with trying to sell unprofitable business segments in order to focus on their core business and acquire financial resources for strategic acquisitions. This trend was mainly observed among valve manufacturers. Towards the end of the year, a US pump manufacturer prepared a takeover bid for a Dutch producer of vacuum and liquid pumps primarily operational in Germany. This may aggravate the competitive situation for some industrial and power plant pumps and our service offering. Despite, or perhaps because of the low mergers and acquisitions activity, some competitors improved their sales and service structures. They achieved this by establishing new regional offices and service centres, especially in the Middle East and Africa.