How is the German plant engineering sector doing?
If you ask four plant engineering companies about their economic development, you will currently get four different answers. On the one hand, large-scale plant manufacturers reported record figures in March and expect sales to continue rising, while on the other hand, many machine and plant manufacturers are complaining about falling order intake and are hardly expecting any improvement. So who is right? The answer is simple, but the reasoning is much more difficult.
The turn of the year and the turn of the quarter always provide an opportunity to take stock. And so, in April, the companies that make up the VDMA Large Industrial Plant Manufacturers' Group summarised the past year and came up with a big surprise: Despite the Russia shock in 2022, the industry more than made up for lost business in 2023. At 24.3 billion euros, AGAB members reported a long-term high in incoming orders - an increase of almost 16% compared to 2022. And that's not all: in an environment in which the threat of German de-industrialisation is being conjured up up and down the country, large-scale plant engineering reported an impressive 45% increase in orders: orders totalling 9.6 billion were received from German industry. And many AGAB members are also optimistic for 2024. So: all good?
Not quite. Because the cheers from the large-scale plant engineering sector are counteracted by the lamentations of the mechanical engineering sector and the mixed mood among medium-sized plant manufacturers. The VDMA had reported a whopping twelve per cent drop in incoming orders for the entire mechanical and plant engineering sector in 2023. The first quarter of 2024 also looked bleak: Down 13 per cent on the same quarter of the previous year. So who is right? Both of them. Time for a differentiated view!
Light and shade in the chemical and pharmaceutical industries
Firstly, it is worth taking a look at the customer industries. With an annual investment volume of around 18 billion euros, the German chemical industry is one of the most important customers for plant construction. Half of this is also invested by German chemical companies in their home market of Germany. And here, the industry association VCI has been reporting declining investments since 2022, citing high location costs and deteriorating earnings. However, the German chemical industry is a special case internationally. This is because the loss of cheap Russian pipeline gas as a raw material and energy source is affecting the industry in Germany more than almost any other competitor nation. The industry is growing globally - in the USA alone, the order volume in chemical plant construction tripled in 2023. This means that the chemical industry remains an attractive customer for plant engineering companies - if they have a global focus.
However, the VCI figures also need to be further differentiated. This is because the association analyses the chemical-pharmaceutical industry as a whole. However, the situation of basic chemical manufacturers and that of specialised pharmaceutical companies is worlds apart - as evidenced by the recent massive increase in international pharmaceutical companies' willingness to invest in Germany. Want some examples? In April, the pharmaceutical company Lilly laid the foundation stone for a new €2.3 billion factory in Alzey, Palatinate. Daiichi-Sankyo is currently realising a billion euro project in Pfaffenhofen, Bavaria, and Boehringer Ingelheim is building a 350 million euro plant in Biberach. Good news for the mechanical and plant engineering sector, which specialises in pharmaceutical projects.
Energy transformation remains a growth market
While the construction of coal and gas-fired power plants was still one of the most important markets for German plant engineering until a decade ago, the situation has long since changed fundamentally. Uncertainty about the future direction of energy supply has long led to a reluctance to invest. The energy transition, which was recently massively accelerated by the Russian war of aggression against Ukraine, has turned the situation around: in 2023, almost 37 billion euros were invested in renewable energy systems in Germany. And because electricity from photovoltaics and wind is not always available, new power plant capacities of up to 4 x 2.5 GW are to be put out to tender as H2-ready gas-fired power plants in the short term as part of the new power plant strategy.
Mood has deteriorated further
With investments in the region of EUR 4.6 billion (2022), the food industry is also an important target group for mechanical and plant engineering. Industry leader GEA recently reported slight growth here (Q1-24), although the plant engineering company recently recorded a 13.6 per cent drop in order intake across all business areas. Competitor Andritz even complained about a 19 per cent drop in orders in the first quarter compared to the previous year and does not currently expect a rapid recovery.
And so the question remains as to how the record figures and expectations for large-scale plant construction should be assessed. Jürgen Nowicki, spokesman for the large-scale plant construction working group, provided the explanation at the press conference in April: "Domestic business is being driven massively by subsidies." In particular, projects for green steel dominate the picture here: In July 2023, the EU Commission approved billions in subsidies, paving the way for the construction of the largest direct reduction plant for green steel in Germany. And this is also one of the peculiarities of large-scale plant construction: a single large-scale project can decide whether the balance sheet is positive or negative.
