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Heading in the right direction

The transformer market is set for growth

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An ABB transformer is on its way to a substation in Kuwait.
An ABB transformer is on its way to a substation in Kuwait.

The transformer market is set for growth, and local producers are looking to play their part in the success story.

Electricity distribution is a subject even the least technically-minded residents of the GCC cannot hope to avoid, as power failures have plagued the region for years. Recently, one of the major steps taken towards securing a stable supply of energy has hit the headlines when the first stage of the GCC interconnection grid became operational.

In the face of rapidly developing industrialisation and urbanisation of the Middle East, the need for an expansion of transmission and distribution networks is apparent. Generators, a vital component of these networks, are in demand.

But it has not all been plain sailing for producers and service providers, as the global economic crisis slowed the pace of infrastructure projects across the region.

A storm in a tea cup?
While things are looking up, the pace of recovery differs. “Key challenges to our business in the region include relatively reduced market demands in some countries due to the effects of the global economic recession to meeting rapidly increasing demands in other countries, “says Mohammad Megdad, business unit manager at ABB in Saudi Arabia.

Nevertheless, for some the downturn has been little more than a storm in a tea cup. “There was a bit of a blip but generally in the Middle East things carried on pretty much as normal,” say Andy Hedgecock, general manager at Omicron, a provider of diagnosis and evaluation services for transformers.

“Counties have pretty healthy bank accounts because of the oil revenues, so the infrastructure plans slowed a little bit, in some markets in particular. Dubai has seen quite a dramatic slowdown. In contrast, Abu Dhabi went on quite normally.”

Yet even the wealthy Abu Dhabi Water and Electricity Authority has been dragging its heels on new projects, according to Manu Domen, general manager at Brush Transformers Gulf. “ADWEA has not done much for the last year of so, and now suddenly they are starting up again.”

Overall, the market favours the customer, as producers are fighting for business. “Our order book is reasonable enough, but it is not as good as it was in 2007. We are still almost 30 percent off those levels,” says Suresh Madhav, regional manager at Tesar, a manufacturer of dry transformers. “It is still very much a buyer’s market,” says Domen, “Prices for transformers have come down dramatically.”

Diversify or die
Limited sales volumes have forced producers to rebalance their business model. It is no coincidence that Omicron, who specialise in equipment diagnostics, are blasé about the downturn. Customers who are watching their pennies are keen to avoid buying expensive new transformers, giving producers the opportunity to offset flagging sales volumes by focusing on the servicing and testing of transformers.

“We are trying to diversify a little bit, and are now focusing more and more on servicing the industry, oil testing, analysing the life of a transformers, refurbishment, tab changes, all that kind of stuff,” says Domen.

Such work can translate into big savings for customers. The main component inside a generator is a silicon steel core, which is encased in copper windings. As generators get older, the insulation material around the copper becomes brittle and breaks up.

Replacing the insulation is sufficient to get a generator back into working order, and costs a fraction of the outlay required for a new machine.

Age concern
An increasing focus on services is not only the result of utilities becoming more cost conscious, however. It is also a consequence of existing generators reaching the end of their lifespan.

While this is less acute in the Middle East, where infrastructure is often more modern than in other parts of the world, the industry is paying more attention to the maintenance of existing networks.

“With most electrical energy suppliers focusing increasingly on the reliability and efficiency of their supply systems and controlling their capital expenditures, a big focus is put on handling such aged transformers in their networks,” sums up Megdad.In the long run, of course, even the best-maintained generators will need to be replaced. This is the cause of some optimism for some market participants, who see a brisk trade ahead.

Buy local – sell big
Supplier manufacturing locally are keen to grow their business on the back of this rosy outlook by expanding their product range.

Most of the power transformers, which can handle 220 or 440 kilowatt, are produced outside the Middle East, but this is changing, as some local producers are currently preparing for the production of power transformers.

Proximity to the end user gives them a key advantage over their competitors from Europe, the US, or Asia. Not only are they able to offer substantially lower delivery times, but they are also able to show up at short notice should there be any problems with their product.

Lead times, especially for the large power transformers, are a nuisance for customers everywhere. As generators are highly specialised machinery that cannot be mass produced, utilities are often forced to order two or three years in advance.

The recession and the subsequent drop in demand brought down waiting times a little, “but you don’t build a transformer
in few weeks,” comments Hedgecock.

Brush Transformers is one company looking to get in on the action. “We have our people here, if there is a problem we can just jump in the car and we’re there. Whereas if you have a transformer from Japan, lets say, you’ll wait for them and you’ll pay for them,” says Domen.

Having been forced to expand their business model to counter flagging demand, companies like Brush can now offer their regional clients a comprehensive service at short notice.

There are further competitive advantages: Domen claims that producing locally is cheaper. And home advantage is not something confined to the football pitch. If the government built the country’s infrastructure while supporting the national economy, it will do so.

“The local utility companies prefer to buy locally if they can if the quality is good enough,” says Hedgecock.

The transformer market is not only benefiting from the ambitious targets governments are setting themselves for infrastructure growth, they are also part of the very development of industry of the region that this expansion is set to cater for.

The Copper price: a threat to margins
Copper is the key raw material needed to produce transformers, and price flutuations are threatening producer’s margins.

Over the last two years, there have been huge price swings. (see chart) After peaking at around US$9000/ tonne in 2008, prices slumped to below US$3000/tonne in 2009, before surging back up to almost US$8000/tonne.

“If you tender for transformer you have to assume a copper price, says Manu Domen from Brush Transformers. “If that tender comes to an order, and the copper price went up, the difference in price will have to be taken care of by the producer, because here most utilities don’t allow for variations in the copper price.”

Even if utilities in the Middle East do take copper price fluctuation into account, it is unlikely to be to the benefit of producers. “The price volatility during last few years has led several key utilities in the region to start applying price variation formulas to reduce the risk of manufacturers suddenly increasing prices. This helps utilities avoid paying higher margins,” says Mohammad Megdad from ABB.

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