Levelling out in 2020: Local and global factors affecting the industry

Now in its seventh year, the annual State of the Industry survey conducted by Pump Industry, has found that a tough year in 2019 and a slight slowdown in work in many sectors are making companies cautious for the year ahead. Ongoing factors are creating challenges, but opportunities are never far away for those who want to take hold of them.

Following a few years of growth, the industry plateaued in 2019 and many industries did not perform as well as expected due to a range of local and global factors.

However, despite companies not seeing different sectors performing as well as expected, a majority felt it had still been a successful year for their company. 

The Pump Industry survey this year provided insights into what affected the industry throughout 2019 and the impact these factors will have moving ahead in 2020, as well as what is driving customer behaviour.

With companies affected differently, depending on the industries and the states they serviced, respondents are cautious about how the year ahead will unfold but there is the expectation for most sectors to maintain current levels of work or experience some growth.

How did the industry perform in 2019 and what’s in store for 2020?

On the back of a few years of an optimistic outlook, this year’s survey shows a greater level of cautiousness, with 22.22 per cent of respondents reporting a neutral outlook for their company for the year ahead, compared to 15 per cent in 2019, and 3.17 per cent reporting they don’t know compared to 1.25 per cent.

There has also been a decrease in positive outlooks from 78.5 percent in 2019 to 68.25 per cent, and a slight increase in negative outlooks from five per cent to 6.35 per cent.

The increase in neutral outlooks could be attributed to companies not expecting much change in performance or uncertainty around how external factors such as the US-China trade war will affect them, and the natural drop in positivity following the high of the mining boom.

However, despite the slight increase in negative views, levels of negativity are still far from those in 2017 when it was at 21.2 per cent. These results can be seen in Figure 1.   

Despite a more neutral outlook for the coming year, a majority of companies felt their business met or exceeded expectations in 2019. As can be seen in Figure 2, 25.4 per cent felt business exceeded expectations and 47.62 per cent felt it met expectations.

While respondents reporting that it fell short of expectations rose to 27 per cent in 2019 compared to 23.8 per cent in 2018, there was also an increase in it exceeding expectations from 21.3 per cent in 2018.

With almost 70 per cent of respondents positive for the year ahead, companies are still expecting a good year even with the current challenges facing the industry.

There are a number of ongoing challenges in the industry that could be adding to the sense of cautiousness and negativity such as online competition, as well as the uncertainty of the full effect of the US-China trade war.

However, it is not all doom and gloom, with companies taking hold of new opportunities and projects getting underway.

The uncertainty respondents are feeling are reflected in expectations for the year ahead for the industry as a whole. As can be seen in Figure 3 (page 36), 42.86 per cent are neutral and 7.94 per cent are not sure.

A large segment are positive (41.27 per cent) and a minority (7.94 per cent) are negative about their outlook. These are the lowest levels of positivity since 2017; however, negativity is still well below 2017 levels which sat at 12.6 per cent (Figure 4, see page 36).

How the industry performed by vertical

To understand the current landscape of the Australian pump industry, we need to examine which verticals performed the best and worst for companies throughout 2019, and how major sectors are expected to perform in 2020.

To do this, we asked respondents about the volume of work experienced across key verticals in 2019, and how they expected them to perform in 2020.

Figure 5 (page 38) shows the expected performance of these verticals in 2020, and compares this against the reported performances from 2016-19.

Best and worst performing verticals

Respondents identified water and wastewater, irrigation, and mining as the best performing verticals in 2019, with building services/HVAC coming in behind. These results are in line with respondents expectations that these areas would perform the best. 

The worst performing verticals for 2019 were identified as plastics and rubber, and manufacturing, which both experienced a decrease in the volume of work. Pulp and paper saw no change.

How these verticals performed provide an insight into the uncertainty and cautiousness to the year ahead. As can be seen in Figure 6 (page 40), none of the verticals performed as well in 2019 as predicted.

Along with external factors potentially playing a part in this, it could also be that respondents were overly optimistic about some verticals after a strong 2018 in several major sectors, including irrigation, water and wastewater, and manufacturing.

What’s in store for 2020?

Figure 7 (page 41) shows which verticals are expected to  drive growth in the industry in 2020. As with previous years, water and wastewater, and mining are expected to be the biggest drivers of growth.

However, oil and gas is also expected to do well, with irrigation, power generation, and building services/HVAC expected to help drive growth. Overall, most verticals are expected to experience some growth over 2020.

What factors are driving the industry?

Maintaining momentum in resources

While it did not do as well as expected in 2019, mining was one of the few areas to have continued growth over the year and was one of the best performing verticals with respondents citing “new mining projects” and “mining expansions” as two of the reasons behind the sector remaining steady or slight increases in work. 

Just over a quarter of respondents (27.27 per cent) said work in mining had increased somewhat, while 7.27 per cent said it had increased significantly.

A majority of respondents (29.09 per cent) reported that the amount of work had not changed from 2018, and 10.91 per cent said there had been a slight decrease.

Comparing these to the reported expectations for last year, only 3.77 per cent predicted a slight decrease and 16.98 per cent expected work to stay the same which are both below the reported numbers.

There was also an overestimation of there being a slight increase with expectations at 41.51 per cent. Those predicting a significant increase were in line with predictions at 7.55 per cent.

However, despite mining work not meeting expected levels of work in 2019, respondents are still optimistic that the sector will continue to maintain growth, with 10.91 per cent expecting to see significant growth, 34.55 per cent a slight increase, and 29.09 per cent no change in work. Only 3.64 per cent expect there to be a slight decrease. 

The September 2019 Resources and Energy Quarterly report released by the Department of Industry, Innovation and Science gives some insight into this positivity for 2020.

It was reported that the June 2019 quarter saw a seven-year high for Australian resource commodities, and a new record for resource and energy export earnings of $282 billion on 2019-20 is likely to be set due to higher export volumes and a lower than expected Australian dollar.

The report notes that while export volumes are expected to rise by 1.9 per cent in 2020-21, export earnings are likely to see a drop due to the industrial production slowdown from the US-China trade war, which has already seen resource commodities prices decline from June.

Furthermore, a forecast rise in the Australian dollar and weaker commodity prices are also expected to have an impact in 2020-21 with earnings likely to be driven down 8.5 per cent to $258 billion.

This could bring a mixed bag of results in 2020 for those servicing the mining sector. An increase in export volumes could see new projects or increased production needs at current sites, resulting in more pumps and servicing.

However, a decrease in earnings and a rise in the dollar could result in tighter spending with equipment sourced internationally.

Along with mining, oil and gas is also expected to see an increase in work in 2020, with 5.45 per cent of respondents expecting a significant increase, 29.09 per cent a slight increase and 25.45 said it will stay the same. This positivity could be due to “increased activity by the big oil and gas players” in 2019 that one respondent reported.

Another respondent said global oil prices would have a positive effect on the industry in 2020, despite reporting that the sector did not perform as well as expected in 2019 due to a “decline in CAPEX in oil and gas”.

The effects of the drought on irrigation

Irrigation remained one of the best performing verticals of the year despite falling short on expectations. For 2019, none of the respondents predicted a downturn in work, 18.87 per cent said it would stay the same, 37.74 per cent thought there would be a slight increase, and 11.32 per cent were expecting a significant increase.

However, there was a slight decrease of work experienced (9.09 per cent) and more respondents (23.64 per cent) found that the amount of work stayed the same. Only 16.36 per cent had a slight increase and 10.91 per cent had a significant increase.

Predictions for 2020 are more closely aligned with the reported results of 2019, with a majority of respondents expecting levels of work to either stay the same or slightly increase.

One of the biggest factors that respondents cited as impacting the irrigation sector in 2019 was the drought. Depending on where companies serviced, this either affected them positively or negatively over the course of the year and impacted their predictions for 2020.

One respondent stated that sales were up because of the drought, while another said “the irrigation market has been stunted due to drought and water restrictions”.

Others felt the drought had positively impacted business but are unsure if that momentum will be maintained, with one respondent saying “irrigation has been buoyant due to the drought affecting eastern Australia but will decrease in 2020”.

How well the sector fares, will in part be affected by farmers and how willing they are to invest in on-farm infrastructure.

According to Rabobank’s Rural Confidence Survey from September 2019, confidence levels amongst farmers is dependent on where they are situated, with those in the west and south of the country feeling increasingly upbeat, while those in the eastern states are losing confidence.

Negative outlooks were driven primarily by drought with 86 per cent citing this a major problem. Those in NSW are feeling it the most, with almost all farmers surveyed (97 per cent) having a negative outlook due to the season.

On the other hand, nationally, farmers who had positive sentiments cited the season (58 per cent) and commodity prices (50 per cent).

The report noted there was a nation-wide decline in positivity from the June survey from 27 per cent to 25 per cent, and a slight increase in negative sentiments from 28 per cent to 30 per cent. Thirty-five per cent expected little change to current conditions.

Rabobank Australia CEO, Peter Knoblanche, noted that the dry conditions in the eastern states over winter meant “it remains extremely challenging as farmers continue to feed stock at a high cost and prospects for the summer grain crop and cotton are looking bleak”, with rain needed to enable farmers to start rebuilding from the drought. 

“While the strength of commodity markets, low interest rates and the weaker Australian dollar will aid with that recovery, it is only rain that can materially change the outlook,” Mr Knoblanche said.

These sentiments are reflected in investment intentions, with 17 per cent of those surveyed planning to increase on-farm investment and 66 per cent planning to maintain current investment levels over the next 12 months.

Increasing investment is expected to be particularly strong in Tasmania (26 per cent) and Western Australia (22 per cent), while investment is expected to be wound back in NSW  (24 per cent).

Mixed results for water and wastewater

Figure 6 shows that water and wastewater were expected to provide growth in the industry over 2019, however, the level of work did not meet expectations. A majority of respondents felt that there had been a slight (38.18 per cent) or significant (5.45 per cent) increase in work, and 32.73 per cent found it did not change from 2018 levels.

One respondent said the sector seemed to have grown due to “increasing requirements for wastewater treatment quality and pollution control”. However, there was a greater number reporting a slight (7.27 per cent) or significant (1.82 per cent) decrease.

This is a greater decrease than predicted with respondents for the 2019 survey predicting no significant decrease and 3.77 per cent predicting a slight decrease.

Despite the sector not experiencing the expected growth, respondents were positive about the industry for the year ahead. The majority of respondents (54.55 per cent) expect the sector to see a slight or significant increase in work, 23.64 per cent predict it will remain the same, and a minority (just over five per cent) said there will be a slight or significant decrease.

A respondent noted that there was some scope in NSW for the sector to grow as “there is a lot of aged infrastructure in NSW that will get to the point that it breaks. If there’s a serious attempt to get up to date there will be a lot of work”.

Another respondent was not so optimistic for Victoria stating there was a “lack of progress with water and wastewater projects in regional Victoria”.

An eye on manufacturing

Manufacturing performed the most disappointingly during 2019, experiencing a decrease in overall work. This is a stark contrast to the predictions for the year, which expected it to be one of the top performing sectors, possibly due to a few strong growth years for the industry.

Some responses from respondents included “manufacturing hasn’t produced significant growth for pumps” and “manufacturing is increasingly becoming an irrelevant sector in Australia”.

According to AI Group’s May 2019 report, Australian Manufacturing in 2019: Local and Global Opportunities, this slow down was not unexpected, due to reduced global and local economic growth in the sector.

However, as Australia’s seventh-largest industry for employment and sixth largest for output, there may be opportunities for the pump industry to take hold of moving forward.

One opportunity lies in energy efficiency. The report cites increasing energy prices as a major challenge for the industry as it has impacted on manufacturers’ margins and cash flow, resulting in less cash to fund other inputs or investment.

There is an increasing interest in technologies that can allow manufacturers to generate heat through renewable energy, with heat pumps one of the technologies being explored.

However, as identified in a report from Beyond Zero Emissions, while heat pumps are widely used in other parts of the world for industrial process heat applications, Australia has been slow on the uptake, despite the potential they present.

One of the barriers to this uptake is a lack of local expertise in the industry.

There is a chance that uptake could start increasing following several actions by the Australian Renewable Energy Agency (ARENA) including the launch of its new Investment Plan that made supporting the industry to reduce emissions as one of three investment priorities; the release of a report into renewable energy alternatives to provide process heat; and support for the Australian Alliance for Energy Productivity (A2EP) to investigate opportunities for using renewables in process heating in food and beverage manufacturing. 

However, energy is only one of the challenges, with global competition and the Australian dollar playing a role in decreasing margins.

US-China trade war: challenge or opportunity?

The biggest challenge that faces Australia from the US-China trade war is the uncertainty of how it will affect businesses in the long term if it continues.

The full effects on each industry needs to be considered on a case-by-case basis, and is reflected in our survey responses with 40 per cent saying it will have a negative impact and almost 13 per cent reporting it will have a positive impact.

So far it has already resulted in a weaker Australian dollar and higher commodity prices, which for some has been a blessing, while it has hurt others.

In the short term, the trade war could have a positive impact on a number of sectors. For mining, there has been a boost in coal exports due to China and the US’s reliance on it for steel production.

With the US placing a 25 per cent tariff on Chinese steel, not only have commodity prices for these increased, but Australia has become more competitive in the supply chain.

Tariffs on certain agricultural products such as beef, wine and sorghum, could provide Australia with the opportunity to become China’s primary supplier for these products; US products are more expensive and the Chinese Government pushes for citizens to avoid them.

PwC predicts there could also be an increase of five per cent investment and 20 per cent exports in the manufacturing sector over the next 12 months.

With greater demand, new projects and production could be ramped up, resulting in the need for new or expanded infrastructure, and companies having the money to invest in it.

While some sectors could see short-term benefit from the trade war, there are many being hit hard. While coal exports are up, iron ore exports have been down.

China is one of Australia’s biggest importers of iron ore but in June 2019 imports fell to their lowest quantity since February 2016, due to China constraining supply from domestic supply sources, as well as paying higher prices for Australia’s higher-quality products.

In the long term, the trade war could cause more problems as Australia is a small, open economy. Modelling by KPMG estimates a GDP loss of up to $423 billion from a serious US-China trade conflict followed by a financial market downturn. A global recession will be a big blow to all industries and sectors.

A less optimistic outlook in the long term from PwC, suggests that with fewer agricultural products from the US, China could see an influx of cheaper products from other exporters, which would reduce prices more and make Australian products uncompetitive.

Furthermore, if the US finds ways to dominate other markets, Australia could still be pushed out, despite an increase in exports to China.

Some sectors could also be adversely impacted if a deal is made between the US and China to stop the trade war. While this does not seem like it will become a reality soon, previous trade talks have shown what a deal could look like.

One assumption places Australia’s LNG exports at great risk as a deal could involve China committing to buying more LNG from America, which if it goes ahead with plans to increase LNG intake fourfold over the next 20 years could be allocated to US LNG, meaning Australia will miss out.

Other agricultural sectors could see a decline in exports too if China increases imports from the US under a deal.

For the pump industry, sectors being hit hard by the trade war are less likely to have the money available to expand and invest in new projects. A drop in the Chinese yuan has seen exports from China weaken, making them cheaper than before and more appealing to Australian consumers.

What challenges is the industry facing?

The pump industry is facing a number of ongoing challenges that will likely continue to impact the industry in 2020. 

Competition driving sales

Respondents identified increased competition from online and for cheaper products as a continuing challenge for the industry, with price being cited as the biggest factor. This is expected to keep being a major challenge for the industry into the future.

Respondents also noted that there is a greater focus of end users trying to get the lowest price possible for equipment, rather than focusing on optimal performance.

One respondent said this is the result of “purchasing decisions made by people who do not have the technical capacity to assess what is offered, so decisions are made on purchase cost alone rather than best value for money”. Another respondent said “clients are not necessarily looking for pre-sales service, instead looking to cut costs where possible”.

As well as cheap online products creating competition, another reason cited was that there are more pump companies selling products but the demand isn’t high enough for them all to survive.

However, despite these challenges, companies are finding ways to adapt, with technical services being a key area that can be taken advantage of. One respondent stated, “Online competition will continue to grow, however, you need the trained professionals to backup any online play in a technical space”.

Other respondents agreed with this, saying that quoting against online stores is making it hard, as companies are losing tenders over price.

However, companies in Australia can look at selling the whole package, including sales, service and support as this is “a technical and complex industry, expertise is, and will be one of the most valuable requirements. Online competition doesn’t offer this”. 

One respondent saw this opportunity as having a wider positive impact on the future stating, “Online competition for pumps is likely to decline due to the need for pumps to match application requirements. No technical support in the selection process and better trained staff should lead to better selection processes.” 

Getting trained staff

Training and a lack of qualified professionals was also noted as being a continuing challenge for the industry.

Respondents noted there was a deficit in trained professional staff available and there were a lot of non-skilled personnel operating in the industry, and many expect this trend to continue.

One respondent said, “Lack of trained professionals is a constant challenge and will only increase as the older generations of highly skilled workers retire from the workforce. More support is required for our technical colleges and educational institutions.”

The “increasing lack of hydraulic engineers that are able to competently specify pumping systems” was reported as being a growing concern, resulting in “poor diagnostics and weekend project management”.

One respondent said a reason for this deficit of trained profession was “because the suppliers and OEMs must keep costs low, so can’t employ or retain the seasoned professionals. Also, end users expect service rates at lower levels but wages increase”.

Respondents agreed that more “pump and system training is needed so everyone involved in pumped systems can understand how all the equipment in the system works together”. One respondent suggested that to do this, everyone needs to get involved as “it is all our responsibility to ensure we are bringing in younger workers and training them, not just relying on others.”

The PIA holds a number of courses in installation and commissioning, and seminars over the year for members and non-members to increase skills their in the industry.

Looking for opportunities

While 2019, did not perform as well as hoped, there are opportunities ahead for those who want to take hold of them and get a competitive edge.

After-sales support and repairs

A number of respondents identified after-sales support and repairs as areas that have seen an improvement over the last 12 months and expect this trend to continue, making it an area that companies can take advantage of.

One respondent said there was an “increasing focus on service and repair of pumping equipment over replacement, due to financial restraints from end users”.

Another respondent noted they had experienced this trend in process plants where there was a reduction in projects and capital improvement and an increase in repairs of existing equipment.

It was noted that there was less focus on repair cost and a “tendency to move away from very ‘cheap’ aftermarket options on the market” with end users “moving back to OEMs and high-quality repairers”.

Smart technologies

A number of respondents said that smart technologies, such as smart pumps and controllers, and Internet of Things (IoT), are playing an ever-increasing role in their businesses and is set to continue growing as companies seek to improve performance and reduce manual errors.

While a majority of businesses (38 per cent) see smart technologies as being an area of opportunity, almost two per cent disagreed, with one respondent stating price is still a hindrance for end users looking for cheap options.

However, overall, companies are positive that smart technologies are improving offerings to end users, and are seeing customers embracing the benefits of these technologies, including using them to get a better understanding of the overall system to then make informed decisions.

According to a respondent, end users can gather information to “gain a clear picture of how the energy within a piping system is created and used” and then use “smart technology to provide a quick picture of how the energy is used”.

One respondent noted, “Promoting ROI for energy efficiency improvements and smart technologies are key opportunities for future business growth.”

Energy efficiency

Energy efficiency was another area identified as creating opportunities, as companies look for more energy efficient products and lower total cost of ownership.

One respondent noted that there was an opportunity for the “introduction of minimum efficiency indices for pumps and motor pumps, and better designs leading to lower power consumption, improve component life and sealing technology”.

Another area identified that could be taken advantage of is “improving uptime and system efficiency of piping systems. This can have an impact on the profitability of all industries with significant piping systems”. 

Building service/HVAC was a key area identified where energy efficiency was having an impact. 

Renewables

As end users and governments work towards reducing greenhouse gases and reducing energy costs, renewables are continuing to gain momentum, with a majority of respondents expecting this to have a positive impact in 2020. 

Respondents noted there has been an increase in solar pumping opportunities in many market sectors. While in the past, solar pumps have been favoured by irrigators, there are larger solar projects underway in different sectors.

One example of this is a project being undertaken by Santos to convert 56 crude oil beam pumps to solar and batteries. Funded by ARENA, if successful it could open up greater opportunities for solar in off-grid locations on large 24/7 operations.

Pump hydro is another renewable energy that is gaining traction, with an increasing number of projects being assessed for feasibility, and continuing support from the Federal and state governments.

Once these have been assessed and get funding, there could be a jump in pumping and associated equipment for these projects.

Another area identified by respondents is motors, as suppliers have found “most customers have taken the approach of implementing renewables rather than efficiency projects”.

Moving ahead in 2020

With companies more cautious for the year ahead, there is scope for sectors to see growth. However, there are a number of national and global factors such as the drought and the US-China trade war in progress that could provide opportunities or challenges depending on the market sector and where in the country they service.

The industry may be facing ongoing challenges from online competition and a lack of trained professionals, however, for those able and willing to take the risk to take hold of the opportunities that are out there, there is a chance for growth.

*Information correct and up to date at time of writing in November 2019

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