Transformer prices: Is the only way up?

Transformer prices are stratospheric, and the equipment is becoming more difficult to procure. Is there a single underlying reason, and how long is this situation likely to last?

By: Kathleen Davis

The power industry buzzes with talk of transformer prices. Sometimes, the issue gets laid at the feet of the metals industry, sometimes not; it depends entirely on whom you ask. Is there a single reason for the rise in transformer costs? Our experts say it is an amalgamation of issues.

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According to Gerry Yurkevicz, managing director of the worldwide Energy Group at US forecasting firm Global Insight, transformer prices have risen because of demand and manufacturing costs. “We view transformer prices as a function of both production costs and market activity,” he says, “where costs are assumed to exert the dominant influence over transformer prices through time.” So the price of steel figures in the equation but there are other factors.

Prices of other metals are increasing, demand is rising for those metals in other industries, and the Middle Eastern and Asian economies are growing and demanding more power, which in turn increases demand for metals. On top of these reasons is the immediate need for some utilities to replace old transformers that have served well past their nominal lifetimes. But however many and varied the causes, the single result remains: transformer are now costly, and lead times to obtain them, especially large ones, have quadrupled over the last five years.

Astronomic price rises

According to US market research company Newton-Evans, global sales of transformers of size 2 MVA and larger amounted to $2 billion in 2005, or about about 8600 units. Since then, annual growth has topped ten per cent. President Chuck Newton says current annual global sales for power transformer of all sizes “range from $14 billion to $20 billion”. Figures for the 2 MVA-plus market are $2.5 billion to $2.9 billion à‚— a growth of 25 to 50 per cent over 2005.

China, Mexico, Sweden and Germany are the biggest exporters of large power transformers; the USA, Mexico and China the biggest importers.According to Newton, “The Far East appears to be the largest market this year for very high end transformers.” In fact, demand from the Far East led our list of factors that lie behind the rocketing of transformer costs. Many of the experts I grilled about the state of the transformer market mention it as playing a role on both the materials side and the end-product side of the equation.

Yurkevicz adds that demand for commodities in Asia and the Middle East is also pushing overall transformer prices skyward. His market analysis suggests a rise of 60 per cent from 2001 to 2007, or more than eight per cent per year. But he adds that some slices of the market have seen even bigger increases. “These price increases resulted from worldwide demand increases over the same period of over five per cent annually,” he said, “and from cost increases for the bundle of labour, materials and capital inputs needed to produce transformers of over six per cent annually.”

Cost increases for manufacturing materials and commodities, such as steel, copper and aluminum, have risen greatly over this period, driven by worldwide demand. China’s economy alone expanded by 81 per cent from 2001 to 2007.

Steve Rosenstock, manager of energy solutions at the Edison Electric Institute, a US association of private electricity suppliers, gave us a glimpse of how growing Asian and Middle Eastern economies are impacting prices. He said demand has been exploding: “For example, I have seen news reports that over ten per cent of the world’s cranes are located in Dubai. All of those high-rise buildings need electricity and transformers.”

According to Rosenstock, this factor à‚– which we’ll call modernization à‚– stretches all the way back to 2002 or earlier, when commodity prices were below their historic averages: “Copper was about $1.54 per kilogram, and, historically, it had been about $2.42 per kilogram,” he says. But the pricing fireball began when that modernization factor began to butt up against those already rising commodity prices.

Soaring Materials

Experts disagree about the extent to which the costs of materials affects the final price of transformers, which include in their construction metals such as steel, copper and aluminum for cores, coils and any outer protection. According to one estimate, if the price of copper, for example, in a transformer is ten per cent of the total, and copper doubles in price, that would only raise the cost of the transformer by ten per cent. Why are we then seeing transformer costs increasing by 200 to 400 per cent? If it is not copper that is the issue, could it be steel? Or both? Electrical steel prices are rising too due to a combination of factors. Could demand play a significant factor not just directly in the transformer market but also in the area of raw materials?

Utilities will continue to source in a high-cost transformer market
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The power industry is not the exclusive user of these metals, and increased demand inside our market, paired with a steady or increasing demand outside of our market, can only lead to more issues with pricing the commodities required to make a good transformer. Aging transmission equipment has also played a role in transformer costs. In the US, for example, some steel makers are expanding early in anticipation of even more rising domestic demand. American manufacturer AK Steel has plans to expand capacity to make an additional 340 000 tonnes/year of electrical steel. It says that replacement transmission equipment is a factor in this expansion.

The real culprit?

So, we have steel prices and other metal prices rising. We have the modernization factor and aging equipment that needs to be replaced by an industry traditionally unable or unwilling to do so.

William H. Bartley at Hartford Steam Boiler, one of the largest equipment-breakdown insurers in the US industry, says that over the last 20 years, the utility industry has been in the capital investment doldrums. “Consequently, the worldwide transformer manufacturing capacity has been shrinking.” He adds that in the US, for example, transformer factories have closed their doors or sold out to competitors. “In the last year, however, the global utility industry, including China, is now investing in power. Today, we live in a global capital environment. In supply and demand economics, two things have occurred. First, demand has increased globally. Second, at the same time, the supply [the number of factories in the world] has decreased. The result is a significant increase in the equilibrium prices.”

I like his basic explanation. It focuses on history. Before this surge in demand, a lot of companies closed their doors or merged as transmission and distribution entities, and with an eye to their budgets, sat on their equipment as long as humanly possible. Without customers à‚– or with a significant decrease in their number à‚– it was inevitable that many of those businesses would stop trading. But now, suddenly, we have a surge in demand.

Yet we cannot instantly rev up to meet it simply because there aren’t enough companies to make the products.

Will the market adjust for this? Absolutely. But, Bartley points out, it will take some patience: “As the suppliers catch up with this new demand, we may see transformer prices fall again and delivery times improve. But that is not going to happen overnight. If the demand remains stable, it will take several years for the suppliers to catch up.”

Rosenstock is not sure if that market will stabilize at all, however. There are other factors at play for him. In the US, for example, a Department of Energy rule mandates efficiency standards for liquid-filled distribution transformers to take effect on 1 January 2010. “These rules could have an effect on transformer prices,” he says, “since more efficient transformers tend to use higher grades of steel and copper.” This, of course, loops us back to increased metal prices again. So many factors, so little time.

Rosenstock agrees with Bartley about demand. He says that if worldwide demand for transformers keeps growing at a rate of ten per cent-plus per year, then the market will still stay tight, and prices will keep rising or stay at their current plateau. If there is a demand bubble that goes “pop”, however, with commercial construction, and building/electric demand suddenly stops growing, then there may be some price relief, he says.

Looking at Dubai and China, India and the Middle East, I will not be placing my bets too heavily on a sudden and stabilizing “pop”. But whether you focus on Rosenstock’s “pop” hypothesis or Bartley’s leveling philosophy, one thing remains clear: High transformer prices will stick around for a while. And that’s just the way it is, according to Yurkevicz. In fact, he predicts an annual price increase of 1-3 per cent over the next five years.

“We wish that Global Insight could send a message that transformers will become more affordable,” he says. “However, the message that we can deliver is that prices should increase less in the future. High prices are here to stay. Utilities will continue sourcing in a high-cost transformer market.”

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