Current market signals indicate that the US power generation equipment market boom is about to go bust. So how are suppliers positioning themselves to survive the downturn? Siân Green reports.
The unprecedented levels of growth seen in the US power generation equipment market have reached a peak and are about to fall sharply, according to senior industry executives. Driven by a combination of volatility and uncertainty in the market, the healthy order books enjoyed by suppliers for the last three years will wane and market players need to position themselves well in order to survive.
Speaking at the recent Power-Gen International conference in Las Vegas, Mike Barnoski, president of Alstom Power Inc., stated that the market was becoming more bearish, and that he expected to see a “sharp drop” in order levels, with growth falling to perhaps five per cent.
The speed at which growth will fall is difficult to predict, says Barnoski, and the evidence on which he has based his prediction is largely anecdotal. But the causes, he says, are clear.
Driving the reduction in demand for equipment is uncertainty in the market following twelve months of change and upheaval. Starting with California’s power crisis and ending in Enron’s collapse, the US has seen power shortages, fuel price volatility, a slowing economy and hesitancy over energy policy and restructuring legislation.
Power generation market forcast-different scenarios to 2005. Alstom projects in annual order baseline of 100-150 GW.
These factors have combined to create an environment where it is difficult to plan and finance projects, says Barnoski, and signal the end of the boom.
The boom began in 1998 when orders for gas turbines for the US market rose tenfold over 1997 levels (see PEi June 1999, Vol. 7, Issue 5, pp16). By 1999, the market for gas and steam turbines in North America reached growth rates of over 300 per cent, according to Frost & Sullivan.
In 2001, Alstom achieved worldwide sales of $20bn, 31 per cent of which were in North America. GE Power systems’ worldwide revenues increased from $15bn in 2000 to about $20bn in 2001, while its shipment volume will rise 20 per cent in 2002 over 2001 levels. Alstom’s order backlog stands at $34bn.
These equipment suppliers, and others, are clearly in good shape, but the behaviour of the market over the early part of 2002, and how it will affect these businesses, is difficult to predict. The high levels of uncertainty in the market has led to speculation that some major developers may consider cancelling some of the orders made for power generation equipment.
“We got a couple of very small cancellations over the last year, but these are almost minor in the scheme of things,” said John Rice, CEO of GE Power Systems. “What we have seen are some customers who have asked us to reorganize and reshuffle the deck – pull some units in and push some others out – and we’ve got to accommodate their needs to every extent that we can.
“[Developers] are looking at their project portfolios and are trying to either accelerate or delay projects by three or six months to better organize themselves.”
Commenting on the predicted downturn, Rice said: “We expected the market in the US to return to more normal order patterns over the next couple of years. The smart money has been anticipating that since the boom started and arguably it lasted longer and was stronger than anybody anticipated. So there’s no question that it will return to more normal order patterns and businesses have to be ready for that.”
And GE is ready. While Rice hinted that the slowdown could be gradual rather than sudden, he believes that GE Power Systems’ strategy to diversify and expand over the past few years has positioned it well to capitalize on growth in other areas of the energy business.
“If you go back a few years you could argue that we were a single dimension company – we were power generation then it was power generation plus,” said Rice. “Now we see ourselves as much more of a portfolio business in the energy sector and we have significant growth opportunities. There’s no question that demand for large unit power generation equipment is going to decline, but we have a lot of freedom and a lot of latitude.”
He added: “Our service business is continuing to grow at significant double digit rates, 44 per cent of that business is out of the US, so while we’re not immune to a reduction in demand in the US, we have a very wide variety of other activities that will give us places to go and grow.”
GE recently added to its portfolio of business units with the acquisition of machine monitoring and diagnostics company Bently Nevada, which, says Rice, will add to GE’s energy services business. “We see energy services continuing to be a big area,” said Rice. “Bentley Nevada is one of about 20 businesses that we will acquire this year to add around a billion dollars in revenue. We believe the sky is the limit in terms of expanding our portfolio and continuing to grow and it will not necessarily be in core power generation inside the US.”
Like GE, Alstom is also well prepared to tackle the downturn in the US. The company is unusual in that due to the challenges it is facing with its GT24/26 gas turbine technology, it has sold few gas turbine units into the US market over the past two years. It has, however, been able to capitalize on the boom through the supply of steam turbines, heat recovery boilers and other equipment. This, says Barnoski, means that the company will be less affected by a downturn in the market than some of the other suppliers, and its global presence and diversified capabilities means that it, too, is well positioned.
Both Rice and Barnoski agree that electricity-based innovations will soon begin to drive the market again. “The increase in demand for power and for higher quality power is going to be driven by the digital economy,” noted Rice. “And although this is probably going to be delayed for a year or so … it will return eventually and the timing of that and the significance of that is going to have a big impact.”