Desalters discover the meaning of competition

Mostly we talk about market consolidation, but over the past decade, the reverse has been happening in the desalination industry. Growth has sucked more and more players into the industry, to the extent that the market leaders have actually been losing market share. It is such an unusual phenomenon that I am not sure there is a word for it. I call it market proliferation.

As those who tuned in to my DesalData webinar* yesterday will have heard, the top 30 EPC (engineering, procurement and construction) contractors used to represent around 80% of the market in terms of total contracted capacity. A decade later, this group is responsible for around 40% of total new contracted capacity. This reflects both a flood of new entrants into the market as well as a number of smaller companies taking on larger projects. Although the total size of the market has grown five-fold since the late 1990s, the amount of competition has grown apace.

This would not matter much if the growth was smooth and continuous, but it looks as if the total volume of capacity contracted during 2009 will be in the region of 3.5 million m3/d, compared to the 7.6 million m3/d which was contracted in 2007 – a fall of more than 50%. We won’t know the truth until the 23rd GWI/IDA Worldwide Desalting Plant Inventory is published later this year, but it is clear that the competitive pressures on the desalination market in 2010 will be greater than ever.

Pitting the need to preserve margins against the need to maintain a cashflow creates an interesting strategic challenge. There have already been signs of heavy price competition on the equipment supply side, but the major EPC contractors, cushioned by their backlogs, have been more inclined to hold on to their margins. However, many of the big plants contracted at the height of the market in 2007 are now reaching completion, and cashflow maintenance might become the priority.

The signs are that 2010 is starting strongly. We have seen project awards at Soreq, Ashdod and Nemmeli, and encouraging progress on tenders for Ras Azzour and Swakopmund, but it won’t feed all of the mid-market companies now active in desalination.

By June, I expect that the industry will be abuzz with stories about the crazy prices that have been bid, and how different companies are about to go bust as a result. It may not be all bad. Since 2003, the cost of desalinated water has been slowly drifting upwards. In fact, the $0.48/m3 achieved by Hyflux at Tuas has yet to be bettered. Tougher competition will focus EPC contractors and their suppliers on cutting costs. That might restart the downward trend in desal prices that we had become accustomed to before the desal boom started off seven years ago.

*DesalData subscribers who missed the presentation should contact Jack Ceadel at jmc@globalwaterintel.com for their copy of the presentation and commentary.