Headwind Likely Coming from Domestic Competitors in the Oil and Petrochemical Valve Market
Foreign valve suppliers in China will experience more head-on challenges from their domestic competitors in the near future.
Other than specialty areas where they are irreplaceable, multinational companies’ advantages in China’s market for some engineering products such as parts, components, machinery and equipment have become dimmer over the last few years. Products such as valves are no exception. Recent GCiS research finds that, despite recent growth in demand from oil and petrochemical industry in China, foreign suppliers will experience more head-on challenges from their domestic competitors.
The most common types of valves in the oil and petrochemical industries are ball valves, butterfly valves, gate valves, globe valves, check valves. Other valves, such as safety valves, relief valves, steam traps, throttle valves, plug valves, are also widely used; however, the market for these products is much smaller compared to the five major kinds of valves. As a whole, revenue from these five target products is almost equally divided between the petrochemical industry and the oil industry. Major applications in these industries for these five types of valves are: long-distance pipelines, refineries, wellheads, ethylene crackers, synthetic ammonia, chemical fibers and acrylonitrile production.
In all product segments, foreign products are usually used in applications where domestic suppliers lack the necessary technical competency. This is because where domestic products in more common applications are able to meet requirements they are usually cheaper, and key state level projects have preference over domestic products. These situations typically require valves of a large diameter, the ability to operate under high pressures and temperatures, and the ability to meet anti-corrosion standards. More specifically, opportunities for foreign suppliers will continue to exist in applications including:
- Upstream: Valves used in wellheads need to withstand high pressure. Oilfields with gas containing chloride and hydrogen sulfide or where there is considerable sand or solids in extruded material require highly corrosion-resistant valves.
- Mid-stream: The construction of long-distance pipelines requires large diameter and high pressure ball valves (usually 46 inches in diameter and 600 in pressure; west-east pipeline could reach 56 inches in diameter). Given the varied geographical locations and climate conditions, these valves need to have excellent strength and sealing performances and a long service life.
- Downstream: Ball valves and butterfly valves in ethylene cracking projects (high temperatures, needs good, tight seals); LNG projects (very low temperatures of -167 degrees Celsius); dangerous applications (high pressure hydrogen applications, such as oil refineries), and coal-chemical applications which all go through a particular production step in which the material is extremely corrosive.
There is gap in materials and production techniques between foreign and most domestic suppliers, leading to a difference in the quality and performance of their products. Depending on the products, prices of foreign valves can reach 2-3 times those of products made by domestic suppliers, due to quality differences. The balance between foreign and domestic suppliers is different for different products. Foreign suppliers still have dominant market shares in valves with higher quality requirements and technical barriers, such as ball and butterfly valves, and these two segments also enjoy the largest market value. However, market share in gate and globe valves has been gradually acquired by domestic suppliers with due to their technological advancement. Growth rates for these different products do not diverge much, all at roughly 12% in 2012. Relatively speaking, ball valve market has slightly higher growth among all products, while the growth perspective of butterfly valves has been limited due to the less application and higher price points compared with ball valves.
Figure 1 : Opportunities for Foreign/Quality Suppliers
Source: GCiS. The size of each pie is proportional to each target product’s revenue.
Foreign suppliers currently still enjoy higher growth than their domestic counterparts across all product lines. However, change is on the horizon, with trends favoring domestic suppliers for both low-end and high-end valves. At the low end, government departments and SOEs first evaluate suitable products supplied by domestic firms in the bidding process, before taking foreign products into account. As perceived by market participants, this is especially true for CNPC. Furthermore, there are some government backed projects with a mandate of purchasing at least 70% of their equipment from local suppliers. As many of the end users in oil and petrochemical industries are state owned, this trend is evident and will likely to persist, if not grow, as domestic technology continues to improve.
Meanwhile, domestic suppliers are beginning to tap into the high-end market - as with many other basic manufacturing industries, domestic suppliers in the valves industry are investing heavily in R&D, trying to explore products that they were once unable to make. With its SOE background and heavy investment in R&D, domestic company Sufa Technology has scored several contracts of ball valves in the ethylene projects in recent years, a product which has traditionally been supplied by foreign companies. Wuzhou Valve has recently delivered large diameter ball valves to the third “west-east gas pipeline” project, while long-distance pipeline ball valves used to be foreign dominated ground. Despite the lower overall quality and performance of domestic products, the government is willing to test these products to support the industry’s upgrading and advancement.
What makes the situation worse is that growth in the applications domestic suppliers focus on is likely to experience slower growth compared to past years. Comparing the revenue streams for both domestic and foreign suppliers, foreign suppliers have a significant part of revenue coming from long-distance pipelines as well as ethylene crackers. Both of these two sectors are going to maintain strong growth as plans are laid out and many projects are approved and under construction. However possible overcapacity in ethylene and refineries after 2017 means that domestic suppliers are expected to turn to pipeline projects where demand will remain strong for higher valued products.
Figure 2 : Comparison of Foreign and Domestic Product Industry Revenue Streams
This challenge from domestic companies means that multinational suppliers face a dilemma: continuing to protect their technology and slowly losing one of the largest markets in the world to these domestic competitors, or investing more in the Chinese market to compete with domestic suppliers on a price basis in areas where they have caught up in terms of technology. High costs and long waiting times for both orders and repairs or replacement often cause complaints for customers of higher quality foreign products. Among nine leading foreign companies with target product revenue over 120 Mn RMB, only five have local production, most of which consists only of assembly lines for imported parts. Pentair’s position as the overall market leader in this market is largely due to the lower prices that come from local production, while most foreign suppliers with specialized valves such as Flowserv, Emerson Process Management and SAMSON import all their products to China (Emerson’s China factory only produces smaller size and more common ball and butterfly valves).
Gradually more foreign suppliers are starting to consider the option of setting up their own China production base or partnership with local companies. Some are seeking domestic companies with existing production facility to apply their technology. For example, in early 2013, Cameron, one of the largest foreign players in the China market, has announced an agreement with CNPC to establish a joint venture for the manufacture of pipeline ball valves mainly for use by CNPC to support its plans to build pipelines across China in the coming decade. Under the terms of agreement, Cameron will license its technology to the joint venture and establish a full-scale manufacturing operation in Tianjin, China, with CNPC Bohai Equipment Manufacturing Co., Ltd. This joint venture will be the exclusive pipeline valve manufacturing entity within CNPC. This is expected to bring changes in the overall market landscape.
The RMB 15 Bn oil and petrochemical valves market is just a fragment of the grander picture. Similar stories are happening across in many manufacturing industries, with foreign companies at a turning point where the main reason to add or expand production capacity in China is to better compete with domestic suppliers for the China market rather than low-end low-cost assembly lines to support global consumption. While growth in many markets in China will remain high compare with other countries around the world, it is about the right time for foreign manufacturers to think about next steps to maintain further advantages in the China market.
This was originally published in Valve World magazine, March issue 2014.
About GCiS China Strategic Research
GCiS (www.GCiS.com.cn) is a China-based market research and advisory firm focused on business to business markets. Since 1997, GCiS has been working with leading multinationals in sectors ranging from technology to industrial markets, medical, chemicals, resources, building and constructions and a few others.