The demand for pumps overall is dependent on the level of economic activity in the end-use sectors. Pumps themselves do not require large capital investment, but their use tends to applications where high capital expenditure is required for the total installation, of which pumps form one element.
Thus the effect of interest rates, and the cost of financing borrowing is often of critical importance to the purchase decision of pumps themselves. The relationship of sales growth in the sector and low interest rates exists because of the dependence on this feature by many of the end use industries. These include a wide variety of sectors such as chemicals, marine, mining, oil industry, water as well, of course, as building and construction. It should be noted that the MBD report refers to all these sectors, not just building services.
In the construction market, as with most products in the building services marketplace, growth is dependent on the construction industry. MBD predicts construction output growth will slow to 3% in 2001, falling further to 2% in 2002. However, MBD also believes that while a negligible decline is forecast for 2004, a small but significant increase is expected in 2005 taking total output in that year to £866.4 million.
MBD paints a rather glum picture of the years up to 2000 in the pumps sector. Production of pumps in the UK rose 5% and 9% respectively in 1996 and 1997, but declined in 1998 and 1999 by 5% and 2% respectively. However, the market picked up in 2000 with healthy growth of 14%, taking output to £930.7 millions.
More recently, there has been talk of a slowdown in the construction market. However, many of those in the industry are experiencing healthy growth. Ian Sams, marketing and UK hvac sales manager for Armstrong Pumps, says: "In terms of the market, I think everybody thought recession, and September 11, would have a negative impact. In reality, it slowed at the back of last year, but after that everyone has just got on with it."
Peter Reynolds, director of sales for the commercial building services arm of Grundfos Pumps, agrees: "September 11 resulted in some fluctuations for three to five weeks, but after that it was business as usual. Ever since then we have been in a growth period, and have seen good business."
And Mark Sowden, marketing manager at Wilo Salmson also comments that the market is far more active than expected after September.
The pumps sector was also expecting to feel the effects of the Enhanced Capital Allowances (ECA) scheme, introduced last year. The scheme aims to encourage specifiers to select products which are energy efficient in the long-term. Manufacturers are able to register their products to be eligible for tax relief under the ECA programme. However, there has been a mixed reaction to this from manufacturers and their customers.
Sowden says: "I think the ECA will have an effect, but not yet. With the ECA, if you understand it you're fine, but we have found a surprising number of customers haven't got to grips with it." That said, Wilo has invested in ensuring its products are registered for ECAs.
Sams comments: "We are considering registering our products under the ECA shortly. But we don't feel that it's having an effect on our orders at all. Many people haven't realised the impact of the Climate Change Levy. Product choice is still very much driven by price in the construction market."
Grundfos has a similar experience. Reynolds says that even though their products are registered under the ECA scheme, he doesn't feel that it has had much effect on which products are selected by customers.
Price driven product selection often means that more energy efficient products can be overlooked as they are often more expensive than their standard equivalents.
Reynolds says: "The problem is that those who would benefit from the saved energy – building occupiers – are not the ones who make the choice of product."
Interestingly, Sowden says that he has found customers very aware of the concept of life cycle costs. "It's a really hot topic in the pumps market at the moment. Customers see life cycle costs as a tool to drive down costs. Not capital or running costs, but in terms of maintenance. They are looking for longer warranties."
The story in the exports field is similar to that told by the UK output figures. Strong export growth was recorded by the pumps industry in 1995 and 1996, but conditions deteriorated strongly in the second half of the latter year. MBD reports that sales in 1997 declined by 3% in nominal terms. But in 1998, exports increased by a nominal 2% to a level of £735.9 million. However, there was another decline in 1999 of 15%, dropping to £623.3 million. Yet again the market picked up in 2000 with international sales rising 14% to £709.4 million.
Within the building services sector, most of the big players in the pumps market are worldwide corporations. Armstrong, Grundfos and Wilo Salmson are part of international groups.
This has advantages for product development – which is vital in a highly competitive industry. Sams explains that Armstrong products are developed at international level, with regional variations incorporated where necessary according to market technical or legal requirements.
Manufacturers across the building services industry are feeling the pressure from sleeping giant China. However, many international companies are pre-empting changes in the market by acquiring companies or setting up factories across the globe. Reynolds says: "We have invested in acquiring companies around the world, including Korea and China."
Sams adds: "We anticipate lower manufacturing costs in some countries, and have set up sites there, but we continue to control the production." Sowden comments that the Baltic states such as Croatia and Latvia are very active at the moment in terms of growth.
Overall then, the pumps sector has seen some ups and downs at the end of the 1990s, but has picked up considerably since then. Those in the industry are optimistic about the future. MBD says that profitability is improving but markets will remain very competitive.
New product development will be key to success, with a drive to innovation and energy-efficient products. In the industry, however, the mood is good.
Peter Reynolds comments: "The market has been very buoyant. Last year was the best rate of growth Grundfos has seen for 23 years."
Source
Building Sustainable Design
Postscript
Market Watch is based on data supplied by Market & Business Development. For more information on MBD reports see their website www.mbdltd.co.uk, or call Terry Leggett on 0161 247 8600.
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