Wire&cable market: its current status and near future

CRU Conference is the European largest forum of wire & cable professionals. Participation in this event has become traditional for the Clobbi team. We are eager to share the most interesting conference insights with the readers of our blog. This material is based on information provided by Max Yates, Research Analyst of Credit Suisse.

 

Challenges has continued in 2019

Challenges faced by cable companies in the past will remain relevant in 2019. According to Max Yates these problems will remain important:

– uneven project pipeline in the Submarine cable segment, which leads to production capacities underload

– execution of projects across large players

– high financial leverage in uncertain markets

 

 

Concerns about competition is becoming a new topic for discussions with investors. Spreading from the commodity cables segment, this topic is increasingly affecting high voltage and telecom cables segments.

What is the market strategy of cable manufacturers? The key points of the major cable industry players’ strategy for reducing pricing pressure are getting the synergy of acquired assets and production costs reduction.

While most manufacturing companies are accelerating the disposal of non-core assets, cable manufacturers are focused on turnarounds. But analysts believe that divestments could speed up the process. Financial leverage in the cable industry remains high, given the project risk profile and will remain above the average for the industrial market.

 

Submarine cable market

According to Max Yates, Submarine cable market has some serious mid-term opportunities and near-term challenges. Current state

– Execution issues have led to EBITDA projects margins converged to 10% for major players

– Uneven project sanctioning has led to some pricing softness resulting in mispricing of risks for vendors

– Offshore wind installations becoming more competitive

 

 

Key challenges in 2018 across the three leading companies in the market were execution and project phasing.

Prysmian

Financial year results were impacted by 95m EUR of provisions related to Westernlink. EBITDA was also impacted by project phasing and some reworking activities.

 

Nexans

In Land HV capacity utilization rates in Europe and China were low through the year. In Submarine market sales contracted due to weak umbilical volumes and deferrals of projects.

 

NKT

The solutions business was negatively impacted by lower project margins, fewer projects in execution and lower capacity utilization.

 

Near-term challenges:

– Assuming a 50% success rate for large projects would mean a flat market scenario for 2019-2022 years with 2,5bn EUR on average. Assuming full project sanctioning this could be 4bn EUR.

– Industry capacity should become saturated in 2020 as large projects enter production phase

– Industry order backlogs are back to healthy levels of 1.5x revenues on average.

There is no reason given demand not to regain pricing discipline.

 

Mid-term opportunities:

– Offshore wind installations continue to grow. Cables are ordered 3 years ahead. Credit Suisse forecasts 55.6GW of offshore wind installations in 2019-2025 (Including 31GW in China)

– Key projects in upcoming months are mostly UK orders that according to Credit Suisse estimates can generate 1.5bn EUR of orders

 

Competitive landscape of the Wire&Cable market

Consolidation become the main trend on the cable market.

New CEO of NKT joined the company at the time where EBITDA margins were under pressure and financial leverage was high. Company has to choose between 3 scenarios:

– Carry on in the current setup and execute on the backlog. Then backlog execution risks are elevated.

– Reduce financial leverage by selling Photonics. This could take total net debt/EBITDA down to 2.5x by 2020 year.

– Comparation of ABB Cables enterprise value (2016 year) with the NKT current value can lead to strategic review of the group with a potential decision of selling ABB Cables enterprise as consequence of the review.

Despite NKT’s share price fall company remains expensive. That indicates significant earnings recovery expected by market experts. But even if 500bps was added to the NKT EBIT margin if Nexans were to acquire it then NKT’s ROCE still would be in line with the Nexans’ current ROCE. Credit Suisse believe that to manage NKT’s debt acquirer would need to dispose Photonics.

 

 

Leoni Wire&Cable is another name to keep an eye on. Net debt of the company in 1st quarter 2019 increased sharply placing pressure on the balance sheet which could let to a step-up in disposals from the industrial cable unit. Quite possible Leoni to be assessed for restructuring, shutdown or divestment. Credit Suisse experts continue to expect Prysmian/Nexans to focus on the higher value market segments. That can be an opportunity for an Asia player.