28 October 2003 – Overcapacity, low growth rates and margin erosion have characterised the mature European transformers market. Falling prices have intensified competitive pressures with suppliers floundering amid sluggish market conditions. However, continued demand for replacement units, the rising need for electricity in Southern Europe coupled with greater price stability offer a glimmer of hope, reveals a collaborative new study released by Frost & Sullivan and Eutilia.
Replacement opportunities derived from critical end-user sectors such as utility, municipal and private electricity companies are expected to present a steady revenue source for suppliers in future. Sustained growth in the two largest segments of the transformers market – power transformers (high voltage range) and distribution transformers (medium voltage) – will be primarily driven by the need to replace and upgrade ageing equipment.
Restrained investments in power transformers within the Northern European market are expected to be offset by the growth in electricity demand from Southern European countries. In Italy and Spain, particularly, rising electricity requirements are creating demand for upgrades and for new generation and transmission equipment.
“The Spanish and Italian markets have suffered from a certain investment moratorium in the past five to six after the liberalisation of the energy market,” explains Frost & Sullivan Research Analyst Anne-Corinne Barbier. “Having reached the total absorption of spinning reserve in the past three years, utilities have started to invest again mainly in combined cycle plants, pushing the market up.”
New opportunities for power transformer manufacturers are also emerging from within the nascent private power generation sector. Supported by these trends, the European power transformers market is set to expand from an estimated €865m in 2003 to just over €1.0bn 2010.
While such projections are cause for optimism, power transformer suppliers will continue to grapple with two overwhelming challenges – overall market maturity and greater end-user buying power.
A similar conundrum faces the €656.2m distribution transformers segment. Manufacturing overcapacity combined with the growing purchasing power of end-users has depressed price levels in the second largest segment of the European transformers market.
Over time, however, pressure on unit prices is expected to ease with sales of higher-specification units likely to effect moderate price increases. This mirrors pricing patterns in the power transformers segment where recently achieved price stability is forecast to persist in the long term.
Apart from relative price stability, the distribution transformers segment is set to receive impetus from renewal projects and rising investments by utilities. The need to upgrade several national distribution networks to cope with higher demand is poised to spur market growth. At the same time, an emphasis on safer units is likely to prompt widening installation of dry-type transformers that are considerably more expensive than traditional oil units. Based on these trends, the distribution transformers sector is estimated to accrue €727.9m in 2010.
Stable long-term growth is forecast for the smallest segment within the market – the industrial and traction transformers (medium voltage) segment – that is poised to grow from €323.5m in 2003 to €366.8m in 2010. Investment in many high-speed rail projects and the need to upgrade subway networks will augment demand for traction transformers. Restructuring of the electricity market and the growing popularity of co-generation schemes, especially among large industrial users, is poised to bolster growth in the industrial transformers sub-sector.
However, like the power transformers and distribution transformers segments, the industrial and traction segment, too, has been battling market saturation, price erosion and declining revenues.
Despite these ongoing challenges, the prognosis for the overall European transformers market remains positive. “From 2001, price stability has been observed on most European markets and slight price increases are even expected in the period between 2005 and 2010 as a result of rising demand combined with the need for better quality and improved monitoring capabilities,” notes Ms. Barbier.
“Prices tend to be the main focus for end-users but suppliers expect service and maintenance requirements to become increasingly important purchase criteria,” she adds.
Currently, over 135 market participants including large multinationals, regional and specialist manufacturers are active within the European transformers market. The market is expected to contract over the long term as multinationals strategically reposition themselves.
Heavyweights such as ABB, Alstom, Siemens and Schneider are projected to increasingly rely on their ability to offer total solution packages. Smaller manufacturers are expected to continue eking out profits in niche areas based on lower priced offerings and supplement it with shares that giants such as ABB, Alstom or Siemens lose while restructuring.