Cabling for the future

What are the major issues facing the Middle East’s cable industry and how are manufacturers tackling these to ensure a secure future for their operations?

After enduring the effects of wildly fluctuating raw materials prices over the past few years, those in the cabling sector must now brace themselves for the global economic downturn.

As construction projects are cancelled and postponed, firms must adapt to ensure their survival and the overall quality of installations in the long-term. But can a healthy utilities sector in the region helping to counteract any negative effects from the building market?

Electrical economies

Most industries have now seen some effects of the current worldwide recession. However in the Middle East at least one sector seems to be not only maintaining a healthy status, but is actually growing - that of utilities infrastructure.

In January the Government of Dubai announced a AED 37.7 billion public sector spending plan as part of its 2009 budget; this included significant planned expenditure in infrastructure projects including electricity networks, district cooling and desalination plants.

The 2009 Middle East Electricity Exhibition (MEE) held in Dubai in early February backed up the positive signs for the Middle East cable industry, with reports from exhibitors of strong interest in the market.

According to data from global manufacturer Dow Wire & Cable, the capacity for medium and high voltage cables in the region is 270 000 km. More than 90 000 km of this will be required in the next two to three years the firm reports, which equates to a 10% increase in capacity.

Global strategic management consultant AT Kearney also recently announced that an estimated investment of more than US $500 billion is needed in the region's electricity infrastructure to enable economic growth.

And this may be a conservative figure according to the firm: "The additional generation capacity needed is potentially underestimated; while economic growth in the Middle East is expected to be in the region of 7%, the build-up of generation capacity is only 4% per annum," it reports.

But now the global recession has begun to affect expenditure in the region, how positive is the market truly for cables manufacturers? Although the economic downturn is still in the early stages, market forces are already beginning to show two clear patterns of development for the cables sector, with the medium and high voltage products currently still in strong demand, while there is a falling demand for smaller products such as building wires.

This division in demand is a direct result of the cancellation and postponement of projects in the region, with utilities projects largely going ahead as planned and the largest drop in work being on residential developments.

"As the demand softens a bit, the impact is felt across all segments of the business...however, we do find the categories like building wire and LV cables are a bit more sluggish as opposed to large power cables," reports Ducab managing director Andrew Shaw. The growth in large infrastructure projects with committed long-term investments by utilities firms is continuing "unabated", he adds.

"Committed expenditure for electricity projects throughout the Middle East has been unaffected by the current economic climate, as governments recognise that the expansion of generation capability, in line with rapidly expanding populations and manufacturing growth, are key to the continued development of the region," explains MEE organiser IRR group director Sarah Woodbridge.

"For utilities transmission and distribution we have seen very little slowdown across the globe as these [sectors] tend to have big investment projects planned in advance and the finance is in place, so these projects are continuing," confirms Robert Tarimo, Dow Wire & Cables marketing manager Europe, India, Middle East and Africa. "There is some slowdown in the low voltage and building wire industries as the construction of buildings is somewhat reduced," he adds.

The planned long-term development and continued economic growth of the region are key factors in the continuation of the utilities projects. "At the moment some buildings are on hold, but when the market upturns again and [construction of these projects] continues, the power will be needed, so installation of the HV network has to continue," reasons Prysmian Middle East branch general manager Giovanni Caradonna. Diversification and undertaking of increased project load are two ways that firms are tackling any potential downturn.

And manufacturers are quick to stress that work has far from stopped in the region as a whole. "At the moment we've seen a number of projects on hold, but there are still a large number ongoing," states Graeme Aittis, general manager Middle East, AEI Cables. "We are hearing about issues that could impact us, but they haven't filtered through yet."

The falling cost of raw materials such as copper is increasing the pressure on those in the cabling industry as many projects are currently being retendered with the aim of cost-cutting to beat the economic crisis. "Our target growth this year is 12-15% and we want to maintain this; [to do this] more business volumes [are needed] because the raw materials prices are going down," explains Caradonna. "Our product is linked to copper, lead and steel prices and something that may have cost $100 now costs $50, so project values are also going down and we need to make this up by taking on more projects."

"Across the board, the volatility of copper prices [is a major issue in the cables market]," stresses Aittis. "In August 2008 copper was around $3500/tonne, this dropped to around $2000/tonne and has now climbed a little to $2300/tonne...Copper is a big component in cables, so right across the industry it causes problems; if you buy when it costs $4000/tonne and it drops to $2000/tonne that's a problem."

"Clients are getting a bit perturbed with the impact of the global financial meltdown and as a result many projects are being renegotiated, while some are even retendered for," adds Shaw.

"Suddenly we see the shift from focus on ‘deliveries' a few months earlier to a whole new set of challenges around value engineering driven by costs."

Maintaining quality

While the market appears to be relatively healthy at least in the short-term, pressure on project costs is inevitable in the current climate.

READERS' COMMENTS

MORE FROM ARABIANBUSINESS.COM