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№ 1 (January 2010)

In Free Fall

   Russian domestic pipeline-valve manufacturing dwindles 50 percent in two years, and the slump seems far from over

By Dmitry Grak

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   In 2009, the overall drop in production of pipeline valves, actuators, flanges and other pipeline components totaled between 30 percent and 80 percent depending on the products’ type and size, making it the worst year for the manufacturers in the last decade.    Add here the plunge in output of flanges, accessories, grummets, stand-beds and you can see the development of the manufacturing industry grind to a halt throughout Russia.

   Production and sales volumes over the last two years indicate stagnation, which has brought about the slump of the valves market. In 2007 the market was worth some $1.5-1.8 billion and this year it shrank to an estimated $800 million, including at least 5 percent of non-liquid assets or the products of unknown origin, produced out of Russia over the last three to five years. Forty percent of those $800 million represent deliveries of valves and actuators by foreign suppliers. The fall in sales of foreign imports was less dramatic in 2009 than the production plunge at Russian valve –manufacturing plants.

Market Splits into New Segments

   The year 2009 was characterized by the domestic industry’s foray into new market niches. These new niches attracted foreign players also. Meanwhile, “classic” market segments stagnanted, namely the production of general-type ball valves, cast-iron valves of all sizes, shut-off valves, condensate traps, etc. "New niche" products include large-diameter ball valves operating in high-temperature environments; valves and actuators for thermoelectric and nuclear power plants; valves for hydrogen disulfide; large-diameter hose valves; production of flanges and accessories for large-diameter pipelines; new design of large-diameter shut-off valves and reverse valves; controlling ball valves and clap valves under a program to replace imports by domestic products.

Bankruptcies, Shutdowns, Mergers…

   If we classify all valve-manufacturing plants in Russia and CIS into four groups ranging from those that are operating steadily (Group 1) to those that have either been shut down or operating on shortened day schedules (Group 4), we will see that the number of factories in the latter category has gone up dramatically in 2009. And if last year there were only a few cases of small and midsize companies going out of business, in 2009 the media brimmed with reports of bankruptcies, plant shutdowns, shortened working weeks and mergers. Such tendencies could get even stronger if the valves market shrinks further in 2010 – a highly likely scenario considering there are no big investments in sight. One other trend also about to pick up pace are changes of ownership and the emergence of new players introducing new, previously unknown “game rules.”

How to Fight Shortages?

   In November and December chief buyers of valve products had to cope with the late financing  and, according to our forecast, this will result in delayed payments for products supplied in early 2010. These delays could go into March whereas this year, for instance, they abruptly ended in February. This is the key difference between 2009 and 2010. Cuts in financing may continue until July-August next year, and this period will see the number of tenders for valves go down. The market will continue to shrink and may fall by a further 10 percent to 20 percent by year-end.

   Next year will also be marked by the growing shortage of valve products. The market will be running short of a whole array of products of different sizes, enabling manufacturers to hike prices. Two opposite trends – a decrease in domestic manufacturing and the end users’ rejection of mass deliveries from China – will cause even bigger product shortages. This, in turn, is going to help retain the output at the same level in terms of revenue despite the drop in output in terms of quantity.

   The third characteristic feature is the relatively substantial change of product classification by Russian producers. Some plants will focus on manufacturing the mainstream valves and accessories of standard industry sizes, while other producers will stress the development of products previously manufactured by the plants that were shut down in 2009. This will considerably weaken the competition with Chinese pipeline valves manufacturers and will boost cooperation with China in regard to deliveries of valves of new sizes.

Foreigners Flock to Russia

   Next year in Russia will also be marked by the growth of supply by the world’s largest valve producers who plan to open a number of new manufacturing facilities here as well. In 2009, foreign companies already began studying the possibilities for building production facilities in Russia. The trend will continue in 2010 when the launch of such sites will become a regular feature in the industry.

   At the same time, the market structure won’t change significantly. As this year has shown, the efforts of disc rotary gates’ (DPZ) producers and suppliers to replace ball valves were futile, and the growth of DPZ output wasn’t achieved by replacing valves of other sizes. Meanwhile, we should also expect further cuts in production of small- and medium-diameter shut-off valves.

   On the other hand, the output of actuators is likely to grow, but due to relatively high prices the imports will not sell at the pace of 2006-2007. Overall, Russia’s 2010 market of the three types of electric actuators – straight-run, multi-turn and rotary type – will not exceed $100 million. Pneumatic and hydraulic actuators will gradually replace electric actuators, making the structure of Russia’s actuators market very similar to the global market as early as 2011–2012.

   Despite this relatively gloomy forecast the valve industry will hold on, but the structural breakdown of special use valves will change substantially in coming years. The main reason for optimism stems from the understanding that Russia is a country of pipelines – and no pipeline will operate without valves. Meanwhile, the falling rate of new valves plant construction will have to be compensated by large pipeline projects in Russia’s north, south and east.

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