The fifth annual Pump Industry State of the Industry survey conducted recently showed a positive shift in expectations for the year ahead. Despite reporting a rise in overseas competition and increasingly demanding customers, the outlook is good for the Australian pump industry. With the challenges of 2016 and 2017 now behind us, optimism seems to be increasing for growth and opportunity.
There’s no doubt that there have been a couple of tough years for the pump industry, with unstable commodity prices, a weak Australian dollar and a downturn in the mining industry all impacting the industry.
The Pump Industry survey this year produced some interesting insights around business and consumer behaviour in the industry. Respondents reported that during 2017 their customers have become more internet savvy, increasingly willing to shop online for imported goods and have become far more price driven.
However, despite recent challenges for the pump industry, optimism remains high. Although almost 30 per cent of survey respondents said the performance of their company in 2017 fell short of their expectations, 43.6 per cent said it met expectations and 27.2 per cent reporting that it exceeded expectations. These results can be seen in Figure 1.
This positivity is also reflected in company outlook for 2018 with almost 80 per cent reporting a positive outlook, and only 21.82 per cent reporting a neutral outlook. No one reported a negative outlook for 2018. These results are more optimistic than those of 2017 where only 70.4 per cent had a positive outlook, 21.2 per cent were neutral and 5.6 per cent had a negative outlook. This change could be due to industry uncertainty decreasing in some sectors such as mining as the downturn experienced in the last few years comes to an end.
Figure 2 shows the increasing optimism at a company level over the last three years.
Comparing the results of questions two and three of this year’s survey suggests that respondents were more positive about their company’s outlook for 2018 than the industry as a whole. The results can be seen in Figure 3, with only 45.5 per cent of respondents having a positive outlook for 2018, 38.1 per cent neutral and 1.8 per cent negative.
However, compared to previous years there is a trend of increasing optimism for the industry with 2018’s outlook up from 41.1 per cent for 2017 and just 22 per cent for 2016 (Figure 4).
Performance by vertical
Key to understanding the current state of the pump industry is to examine which particular verticals performed the best and worst for businesses during 2017, and to identify how key sectors are expected to fare in 2018. We asked our respondents how the volume of work across key verticals had changed for their businesses during 2017, and how they expected them to change in 2018.
Figure 5 illustrates the actual reported performance of various verticals for our respondents during 2016 and 2017, and their anticipated performance in 2018.
Reported performance for 2017
According to respondents, the best performing verticals were water and wastewater, mining, and power generation. On the other hand, the vertical that performed the worst was oil and gas which is making a comeback from a largely negative reported result in 2016.
Overall, most verticals experienced increases in volume of work compared to 2016.
What lies ahead for 2018?
Similar to respondent expectations for 2017, the water and wastewater, and mining industries are expected to be the best performing verticals in 2018. Most respondents thought the volume of work in these areas will increase in 2018, and no respondents thought they will decrease. Significantly more work is also expected in oil and gas than in 2016 and 2017.
What has made an impact?
Figure 6 shows the areas of growth reported and predicted across the industry. Interestingly, water and wastewater growth was not as robust as predicted in 2017, with 28.21 per cent of respondents reporting the volume of work from this sector increased somewhat, and 10.26 per cent reporting a significant increase. A third of respondents said their volume of work in this sector had not changed. This is compared to reported expectations at the end of 2016, where 60.78 per cent of respondents expected a slight increase in volume of work and 13.73 per cent were expecting a significant increase. Predictions for growth in 2018 are in line with what we saw in 2017 with almost 54 per cent reporting that ‘major projects approved and/or underway’ would have a positive impact on their business in 2018.
The lower-than-predicted growth cannot easily be explained, but is likely impacted by a number of factors, including simple over-optimism around the state of the market heading into 2017. This could also be due to delays in projects starting as reported by some respondents, so we may see some of the expected growth to occur over 2018 as these projects start moving forward again. Respondents also noted that changes in government impacted on their business with one stating the merger of shires created confusion and delays.
Growth from the irrigation sector was also lower than expected in 2017, with 41.18 per cent of respondents predicting the volume of work to increase somewhat, compared to only 15.38 per cent reporting this growth. Significant growth was predicted by 15.69 per cent of respondents at the end of 2016, but only 7.69 per cent actually reported this significant growth over 2017. Predictions for growth in 2018 sit between these two sets of results.
Mother Nature seems to have had a big impact on the volume of work in the irrigation sector, with a number of respondents commenting that the weather had impacted their business. Interestingly, we had differing reports around whether business had been positively or negatively impacted by these conditions.
Some of our respondents reported that dry conditions have prompted farmers to take action. One respondent reported that “Lack of rain in the winter months propelled our business earlier than expected, as we normally have a slump over winter.” This has also had a positive effect on solar pump manufacturers and sellers with respondents reporting that drought along with high energy costs had prompted more customers to change to solar pumps in order to decrease costs.
However, others reported this has directly impacted the capital expenditure budget of their customers, at times putting further investment in infrastructure out of reach.
The 2016-17 financial year was a great year for farmers, with favourable weather conditions contributing to a record high of $63 billion for Australia’s farm production value, according to the Australian Bureau of Agricultural and Resource Economics and Sciences (ABARES). This financial year has not been so kind, dry conditions in grain-growing regions has resulted in an expected seven per cent decline in Australia’s farm production value.
It could be that with the record results in 2016-17, increased spending on irrigation seemed unnecessary to some farmers, despite possibly having some extra spending money. With no foreseeable decline in demand for agricultural products, some farmers are looking for safeguards for their crops, and here is where we may see some growth in the irrigation sector.
The mining factor
Interestingly, mining is one of the major expected areas of growth for the pump industry in 2018. After a five-year investment slump in the mining sector, the Mining in Australia 2017 to 2032 report from forecasters at BIS Oxford Economics predicts the current financial year to see mining production to grow by 5.5 per cent. This is good news for our survey respondents, with 48.72 per cent listing the performance of the mining industry as one of the factors expected to have a positive impact on their business in 2018.
One big indication that faith in the mining industry was returning is that none of our respondents reported an expectation that the volume of work in that sector would decrease in 2018, and a majority (56.41 per cent) expect the volume of work from this sector to increase.
This more positive outlook comes on the back of almost 36 per cent of respondents reporting an increase in the volume of work for their business from the mining sector in 2017. This is in stark contrast to the reported actual results for 2016, where 45 per cent of respondents reported a decrease in work from this sector (Figure 7).
One respondent taking advantage of repairs and maintenance work noted that mines are now paying more attention to the overall cost of equipment, stating, “Mining houses are looking for total cost of life savings. This opens the door for us.”
However, the mining turnaround has not yet impacted all survey respondents. Depending on where businesses sat in the industry, the increased activity has not necessarily translated into increased business. Capital sales were an opportunity in the initial turnaround and expansion of the industry, but those who missed out on those opportunities know it will be some time before major repairs or upgrade sales will occur.
While the general feeling is that the mining downturn has halted, a number of respondents reported concerns about the stability of the mining sector due to the fluctuation of commodity prices, the value of the Australian dollar, and Australia’s ability to compete with Asian mines.
A global challenge
A recurring theme in the responses for 2018 was a report of customers having a reduced capital expenditure budget, resulting in an upturn for repair and spare parts suppliers in the industry, but a challenge for sales.
This may also be driving the increased interest in importing cheaper products. Some respondents noted that this was the feeling they got from clients in both government and the private sector.
Many respondents commented on the difficulty of competing with internet sales. At the end of 2016, our respondents were already reporting an increase in cheaper imported products impacting the market, and this trend looks set to continue. One respondent said, “Australia is being saturated by imported pumps and there is very little control on the quality coming in.” Another agreed that customers were becoming more inclined to choose price ahead of a trusted local brand.
While still relatively new, so far the China-Australia Free Trade Agreement (ChAFTA) has had little impact on most respondents. Those who use Chinese suppliers are looking forward to continually reduced costs, but others are concerned that this will lead to a further out-pricing of local products.
In fact, the competition linked to “cheap imports” is a concern raised by many of our respondents. This coupled with the belief that customers are focusing on price over quality more than ever before is likely to impact those manufacturing and supplying equipment currently sourced from within Australia.
Those already in trade agreements with Chinese manufacturers will see a reduction in the cost of importing goods over the coming years which has been reported on positively. Some respondents are expecting the increased use of imported parts and products will lead to an increased need for maintenance and repairs. This potentially opens the door for more players and opportunities for work in this area of the industry.
Adapting to a tougher market
With many respondents accepting the inevitability of increased competition from around the globe, particularly from Asia and India, some saw this as a positive and the push they needed to improve their own operations.
One respondent noted that their approach would be to target industry sectors still willing to look and pay for solid, reliable performance ahead of cheaper, lower quality work.
Another survey respondent commented that they had already revamped their business and revised their product portfolio in order to compete, and were now in a strong position for the new market conditions.
The change in customer behaviour over the last 12 months also hints at the financial challenges they have faced. Respondents noted that customers are more price driven than ever before and have become more accepting of non-original equipment manufacturer (non-OEM) parts. Perhaps for the first time in the industry, for many customers the cost of goods and services seems to significantly outweigh quality concerns.
With the willingness to use the internet for supply and research also comes an interest in smarter technology, which some respondents expect will have a positive impact on the industry in the coming years.
One respondent told us that the difficult economic times will force some changes within their business and the industry as a whole. “Companies will need to evolve their business models, simply selling pumps is no longer sufficient, you will need other products and services. If you are just selling pumps you will end up in a margin game which is continually decreasing.”
Far from seeing the competition as something that will push them out of the market, many respondents are actively looking for ways to set themselves apart from the others in the industry.
Despite an increasing concern in upfront costs, there is some interest in intelligent or smart pumps, which are traditionally more expensive upfront but can lead to savings down the track. The old way of selecting a pump that can meet the highest flow rate that will be demanded results in a significant amount of unnecessary energy wastage over the lifetime of the pump.
Intelligent features of newer pumps such as variable frequency drives and embedded sensors to detect flow rate allow pumps to operate at the level required for that moment in time, rather than operating at full capacity as a default position. This technology reduces the energy consumption of the pump, which has both a running cost and environmental benefit.
Increasing awareness and trust in this technology, along with customers doing their own research online, will help to drive this area of the pump industry.
Early adopters of smart pumps have been building services and HVAC, where energy efficiency impacts the Green Star rating of a building. Farmers across a variety of areas, including crops and animal farming, have also been increasingly adopting features such as variable speed drives to improve efficiency and productivity of their operations to reduce fuel and maintenance costs.
As understanding and trust in the technology increases, our respondents expect the application of smart pumps to expand.
As the world continues to focus on renewable energy, the pump industry has seen growth from the power generation sector, with 36 per cent of respondents reporting that business in this area had increased either somewhat or significantly in 2017. Respondents also predict the growth rate in this area to remain steady for 2018.
An exciting development for the pump industry is the government’s recent interest in exploring pumped hydro storage options. According to researchers at the Australian National University (ANU), there are at least 22,000 suitable locations nationwide for construction of pumped hydro storage plants. Used in conjunction with wind or solar power, pumped hydro could contribute to Australia using 100 per cent renewable power within two decades.
Set up costs are expensive, however, and it is unlikely at this stage that many private companies will enter this market, meaning the only hope for projects to go ahead is with government funding.
The government has already shown an interest in hydro storage forming part of the solution to Australia’s renewable energy goals, which is a positive sign for the pump industry.
Our respondents recognise that renewable energy will remain a topic of interest and are moving to take advantage of this. Where possible, some of our respondents stated their intention to diversify into servicing the solar panel industry as well, with another respondent commenting on the importance of consolidating company knowledge and potentially working alongside others in the industry.
Capital sales may have slowed, but maintenance and repairs usually increase in this situation. Those involved in repairs and maintenance looked towards the positive of cheaper imports and reduced capital expenditure budgets, seeing an opportunity for their own business growth in the fall out. A number of our respondents said future opportunities for their business would include an “increase in repair work” and “fixing up the mess left by others”.
One respondent pointed out that short-term savings are not necessarily a wise business decision: “Maintenance programs have been scaled back which will lead to greater failures in pumps, increasing replacements and spare part spending.”
Whether customers running their products to breaking point is a positive for respondents was directly linked to what area of the pump industry their business was in. Respondents in the direct sales areas seem to have accepted that customers may continue to be more difficult to sell to. Those servicing pumps are aware of the opportunities that may eventuate.
What the future holds
After surviving the last few tough years in the industry, it’s no surprise that many of our respondents mentioned hard work as a factor in their success. They talked about the importance of offering top quality service to their customers and expanding on what they could offer.
There was a definite optimism around controlling the things they could, such as attracting and training great staff and being smarter with buying options, and ensuring their own knowledge about the industry was first-rate.
The improvements in the mining sector is definitely contributing to the collective sigh of relief the industry breathed in 2017. Increased competition naturally adds stress, but most of our respondents are heading into 2018 with a positive outlook and the desire to do what it takes to succeed.