Annual Report 2016
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Economic Review

Macroeconomic Environment and Sector View

Global economic growth remained subdued in 2016. The increase of a mere 3.1 % was weaker than forecast by the majority of economic research institutes. The International Monetary Fund (IMF), whose forecast provided the basis for our planning, also proved to have been overly optimistic, predicting 3.4 % growth in GDP. In the industrialised nations, economic development became markedly less dynamic during the reporting year. In contrast, the emerging markets and developing countries were able to more or less maintain the same rate of growth.

Consistently weak levels of demand for energy and raw materials, as well as unfavourable economic data from China, were key factors in what were far from satisfactory economic developments overall. Political crises, both new and emerging, also contributed to the state of the economy, impacting on global willingness to invest on the part of private companies and, in the countries hit by these crises, also government institutions.

Some three quarters of the modest growth recorded during the reporting year can be attributed to the world’s emerging economies, with significant growth in Asia, where KSB has major production companies in China and India. Growth on the Chinese market, however, actually slowed. There was also a shift in growth from the industrial sector to services, as reported by the German Engineering Federation (VDMA). In two other BRIC countries, namely Brazil and Russia, we continued to find ourselves in a recessionary market environment with our range of products and services. South Africa, the location of a significant KSB sales and production company for the region, failed to record any appreciable growth in 2016.

The economy in the industrialised countries grew only slightly year on year, up by 1.6 %. The moderate recovery in the euro zone, KSB’s most important sales market, continued. The single-currency area’s gross domestic product grew by 1.7 %, although structural problems in some member states hampered any stronger push forward.

LACK OF GROWTH IN MECHANICAL ENGINEERING

Global sales revenue from the mechanical engineering sector stagnated in 2016. According to figures from the VDMA, of which KSB is a member, demand for investment goods was too weak to trigger even a low level of growth. While increases were indeed in evidence in some emerging markets in Asia, sales in the mechanical engineering sectors in Europe and the USA were down on the previous year.

Sales revenue in Germany, as well as in France and Italy, remained at prior-year levels. According to the VDMA, companies were able to use successes in Europe and on many smaller markets to offset some major falls in business, particularly in relation to operations in Brazil, China and the USA. Sales revenues recorded by liquid pump and industrial valve producers in Germany were considerably weaker than for the mechanical engineering sector as a whole. In the pumps business, they declined by 6.0 %, with valves falling by 3.1 % year on year.

RISING DEMAND IN THE WATER INDUSTRY

Among the main sales markets for pumps and valves, the water and waste water sectors displayed the most stable growth. In the emerging economies with growing populations and rising standards of living, investments in the construction of new water infrastructures were a key focus. Wells, treatment plants and pumping stations are all being built, as well as municipal and industrial waste water systems. These applications require pumps for wet and dry installation, mixers for sedimentation tanks, and butterfly valves. Market conditions in the construction sector were also favourable, benefiting our products used in pressure boosting, heating, ventilation and air-conditioning, and also drainage and garden technology products. Boosted by low interest rates, the construction boom continued.

WORLD MARKET OF CENTRIFUGAL PUMPS AND VALVES

In most other fields of application for our pumps and valves, demand either stagnated or fell further compared with 2015. This is particularly true of the oil and gas industry, which was hit hard by low energy and commodity prices. In contrast, the mining sector experienced a slight improvement, with prices for some minerals making up ground again. The oil-processing industry and gas producers only began to profit from slight price increases towards the end of the year, which meant that no additional projects were initiated during the year under review. Similarly, the transport of liquefied gas by tankers, which we fit with cryogenic valves, was a sector still dominated by overcapacity. There was a general lack of new shipbuilding, with replacement investments being kept to a minimum. In particular in the oil-producing countries, the slump also had an effect on secondary sectors; public investors lacked the funds for major projects.

In the energy sector, new power plants were only being planned and built on a very limited scale. To this extent, there was no let-up in the poor order levels affecting plant engineering contractors. For their part, they then only had a handful of orders to place with suppliers of components such as high-pressure pumps and valves. At the same time, fierce competition meant that some of these orders were not financially attractive. One exception was equipment for nuclear power stations, an area in which price pressure is not so acute and in which plans are in the pipeline, both in Asia and in Europe, for some new projects.

Generally weak business activity in industry across the globe also manifested itself in the manufacturing sector. Demand picked up in only a handful of countries, among them India. Overall, however, it fell short of expectations, even in Asia.

COMPETITORS TURN TO RESTRUCTURING

Given the weak demand in the sectors mentioned, coupled with currency-related reductions, global pump and valve manufacturers were often forced to accept dramatic falls in order intake. Their response to the market difficulties and decline in business was, in some cases, to introduce restructuring programmes. As in the case of KSB, these targeted large savings.

Where a national market proved particularly difficult, individual pump and valve producers also took steps to reduce their local production and sales capacity. This was particularly relevant in Brazil in 2016, with several companies cutting back their activities substantially.

In light of the small number of large-scale orders to be placed, some suppliers were willing to grant larger discounts in order to put their production capacity to good use. Consequently, pricing pressure in relation to projects from industry and the energy sector continued unabated.

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