Cable manufacturers plan for a new model

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Shifts in the price of copper have changed the dynamics of the cable industry in the Middle East, where many manufacturers are forced to keep large quantities of product in stock, in order to compete successfully for contracts.

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A buoyant oil and gas market is driving demand for cables. Manufacturers sometimes struggle to cope with the immediacy of the industry’s needs and are trying to promote a European model of supply planning among customers.

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European cable consumption is planned in advance, helping work stay on schedule and allowing smaller manufacturers to compete.

International demand for oil and gas is leaving some Middle East manufacturing sectors struggling to keep pace.

Increasing oil prices over the last few years have drawn more investors into the oil and gas sector, producing a knock-on effect for the cables industry. With many cable manufacturers left scratching their heads, the industry has turned to the European model to cope with rising cable consumption.

In Europe, consumption is planned for way before it is needed, with orders secured anywhere from 12 and 18 weeks ahead of time. If a company places an order weeks in advance, it is sure to receive it on time. Cable factories work to a six-month schedule and, with planning the deciding factor, the bulk of the order is irrelevant. This is the main difference between Europe and Middle East, where few companies order cables in advance.

"Demand planning is something companies in the Gulf would do well to adopt," said Ziad El Sayad, general manager of the Cable Distribution Centre, a subsidiary of CAE Group. "Here, the last thing companies think about in any development is the cables. There are three criterion for selling cables in the Gulf: price, quality and availability. If you miss any of these, you will not get the deal."

But El Sayad feels the region is finally turning a corner. Huge exploration and production projects have enforced the need for planning, compelling companies to place cable orders well in advance. "Companies want cables, and they want them yesterday. It's a kind of instant demand, which Europe does not experience," added El Sayad.

Unwilling to work to this ‘on demand' model, cable companies in the Gulf are trying to convince their market that planning is an essential process in the supply chain. They are touting the benefits of obtaining quarterly data, indicating cable materials most likely to be consumed over the coming months. With better intelligence leading to more effective demand planning, they claim this kind of information will reduce operational delays. But, says Shome Bag, marketing specialist of 3M's Middle East and North Africa oil and gas division, the challenge in the Middle East is overcoming the industry's reluctance to share information.

"Companies in the Middle East are starting to realise the benefits of sharing information far outweigh the risks," said Bag. "We're not anywhere near the planning standards of the US, but we are on our way."

Another facet of accelerating regional demand is the prospect of the cable industry becoming elitist. In Europe, it is as simple as manufacturing the cables and then shipping them immediately. But in the Gulf, manufacturers are forced to keep large amounts of stock to cope with the need to deliver product with little or no warning. This closes the market to companies without sufficient capital resources to maintain millions of dollars worth of stock, creating an unnecessary barrier to entry.

"The oil and gas business is very liquid at the moment," added Bag. "Because of the rise in oil price, oil majors will only invest in manufacturers which can provide the best technologies most efficiently."

However, according to El Sayad, there is an upside to the region. He believes the Middle East cable industry is now better placed than Europe, due to the escalating demand for oil and embryonic stage of many emerging cities. In Europe more cable factories are closing than opening. Urban infrastructure is well-established and, despite continuing demand, this is mainly for maintenance, rather than new projects.

In contrast, the Gulf is now a projects market on an epic scale, something particularly notable in the UAE, Saudi Arabia and Iran, by far the biggest market in the region. In Qatar, Oman and Bahrain, the infrastructure is currently being laid, just as Dubai's was thirty years ago. By 2012, Saudi Arabia is projected to represent 47% of Middle East oil production, with the UAE having 12% (Pricewaterhouse Coopers).

"In Saudi Arabia and Iran we have seen a greater demand for oil-specific cables, particularly those coated with high-temperature jackets, armour, and industrial connectors resistant to oil, water and gas," said El Sayad. "We have a standard called IP, which measures how much the connector, cable or enclosure is resistant to environmental or industrial factors. In the oil sector, materials such as IP 66 or IP 67 are particularly popular, which provide maximum resistance to oil, dust and chemicals. In Qatar, however, demand is greater from the gas sector. Here, gas-to-liquid technology is being implemented."

At the same time, Shome Bag has seen oil and gas companies opting for fibre optic cables over the traditionally used copper. Fibre has always been more expensive than copper to install and maintain, but with copper prices on the rise, the difference is increasingly negligible. Security considerations also play a part. Fibre optics are more difficult to tap and companies are now valuing data security over the extra cost involved.

"The trend at the moment is to opt for Cat 6 cables, which enable speeds of anything from 600 megahertz to one gigabyte," said Bag. "These cables can cope with the kind of immense volumes of data that large oil companies deal in. These can be used in both upstream and downstream activities."

While recognising the need for exports, most cables manufactures in the Middle East want their future growth to be in the local market. Colin Paskins, managing director of Ducab, said the economic cycles come and go, but overall there has been a gathering of pace in the Gulf since the early nineties.

"We're finding demand for cables from this part of the world is enormous and is growing very fast," said Paskins. "Governments of the Gulf, particularly in the UAE, are investing heavily in construction and the oil and gas and petrochemicals industries are leading the industrial development in this part of the world. The UAE in particular does have some cost advantages to manufacturing, such as the availability of land, the benign tax regime, and the availability of skilled labour. In Europe, energy, space and people costs are high. These considerations are not so important in the Gulf."

Ducab has moved increasingly towards what it terms backward integration, a measure that involves manufacturing some of the materials it used to purchase from suppliers.

"We have been consuming more and more cable-making materials, so decided backward integration was a natural response to this increased demand," said Graham Cheetham, managing director of manufacturing for Ducab.

This is not a view held by global exporters, such as 3M, which have leant towards European thinking. In an effort to lower costs, cable producers in Europe have pushed manufacturing out to other countries. Five years ago, the high cost of cable manufacturing in Europe and the US led to companies sub-contracting their manufacturing to China or Taiwan, to capitalise on cheap labour.

This is still the case, but now they are beginning to buy up these factories and manufacture their own cables abroad. This way, individual outlets can specialise in specific aspects of cable production.

"This is not a region where the workforce is particularly skilled, but because the oil and gas industry is focused in this region, we need to be able to market here," said Bag.

"Today, you will not find a large cable manufacturer in the US or Europe that does not have plants in China, Eastern Europe or Turkey," said El Sayad. "They need to find locations with low cost labour and large production in order to supply the markets at competitive prices."

El Sayad said that if demand for cables continues in the Gulf, two things will change. Supply times will increase, as will the price for the consumer. He expects prices to stabilise in about four to five years, with growth rates, currently at around 16-17%, settling at about 5-6%. The question is whether supply in the future will be met by the kind of demand the Gulf is currently observing.

"When we entered a tender four or five years ago, there would typically be two or three companies competing against us," said El Sayad. "Now you will find twenty-five companies all bidding for the same project. Making money is not as easy as was."

Shome Bag is equally concerned, predicting a global recession if oil prices continue to soar. "I can see the industry reaching this kind of level. But because the cable industry is tied to the oil price, prices should start to level out."

Another concern for the cable industry is political instability in some parts of the Middle East. With Iran comprising a substantial portion of the market for the product, some international companies such as 3M have been hit hard by the US-imposed embargo. French-based CAE Group is yet to be affected, but sees sanctions as a sleeping beast.

"If the situation continues to deteriorate with the Iranians, we are afraid we will lose our market if France decides to withdraw country-wide investment," said El Sayad. "This is what has happened to the US. As a result of the current political turmoil, a lot of projects have started in Iran that may never finish. The Americans have become very aggressive towards the Middle East, and if a war happens there, we will loose a significant market.

A war in Iran will have far-reaching ramifications for the whole region. We don't want to continue losing markets here."

Paskins foresees the current cables demand lasting at least a decade. However, he warns some companies are becoming too optimistic about the pace at which manufacturing can be done, given the competition for scarce resources. The situation has been compounded by volatile commodities prices, which have fluctuated considerably of late. According to Bag, 2006 saw a 30% hike in copper prices, forcing cables companies to hedge themselves by buying up materials ahead of time.

"The movement of commodities will always have a disturbing effect on the market," said Paskins. "We usually price our cables with a copper variation clause in the quotation, where the material content of the cable will depend on the copper price on the London Metal Exchange on the first dealing day after we receive the order."

But El Sayad said cable companies should be able to roll with commodities variations. He explained how three years ago, the end-user controlled the market - it was small and lack of competition was driving down commodity prices. Since then, demand has grown drastically and new technologies have been met by an associated commodities price rise. Put simply, there is not nearly enough supply to meet demand - so now the supplier dictates the market. Factories have begun setting their own supply times and are constantly operating at full capacity. This is particularly true of Europe and the US. However, this is not sustainable. Growing investment in the industry will ultimately mean supply will outpace demand and prices will stabilise as a result.

Yes, this shift in market control was a result of the 2006 increase in commodity prices and the resulting inventory crunch, where manufactures, anxiously waiting lower copper prices, drastically cut production. But, paradoxically, the price hike turned out to be fortunate for cable manufacturers - but, warns El Sayad, the haven in which they are residing, will not last long.

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