Economic Review

Macroeconomic Environment and Sector View

The global business cycle lost momentum in the course of 2018. The International Monetary Fund (IMF), whose forecast provided the basis for the planning, predicted growth of 3.9 % at the start of the year. At + 3.7 %, the actual performance fell short of this forecast. Causes included trade policy restrictions of the traffic of goods and above all the increasing difficulties experienced by a number of emerging markets and developing countries. They had to contend with an increase in the price of loans and energy together with political tensions, primarily in the Middle East, which put a brake on public-sector and private investments.

Europe was once again of primary importance for the KSB business in 2018. However, compared with the IMF forecast the growth of the economy on the home market weakened more sharply than it did on a global scale. Nevertheless, at + 1.8 % it reached a satisfactory level. The export business in Germany weakened. Taken together with lower industrial production, this meant that the economy, at + 1.5 %, fell considerably short of forecasts. France, Italy and the United Kingdom also fell short of expectations, albeit for different reasons. By contrast, the economy in Spain recorded above-average growth, which improved the conditions for local selling, production and support services.

Among the traditional industrialised nations the USA reported stronger growth than expected at + 2.9 % due to the policy of tax cuts and the favourable underlying financial conditions. The KSB Group produces its slurry pumps in the country and continued to expand its service and spare parts business in 2018.

Of the emerging markets in Asia, China and India performed particularly well with growth rates of 6.6 % and 7.3 %, respectively, in 2018. But whereas the Chinese economy failed to reach the previous year’s growth, also on account of the trade dispute with the USA, economic expansion in India exceeded that seen in 2017. As well as higher private consumer spending, increased investment activities, which directly benefited mechanical engineering companies such as KSB, which have their own production base, contributed to this development.

The five economically most significant countries in South East Asia – Indonesia, Malaysia, the Philippines, Thailand and Vietnam – also showed a good performance with a growth rate totalling 5.2 %. Here, too, KSB is represented with its own companies.

The Region South America, which includes the important markets for KSB in Argentina, Brazil and Chile, remained considerably weaker with a growth of + 1.1 %. The economic and currency crisis in Argentina severely restricted demand; the recovery on the market in Brazil was also slow.

The economic performance of the countries in the Region Middle East / Africa was primarily marked by the international tensions in the context of the Syrian war, the US embargo against Iran and the political crises in Qatar, Yemen and Saudi Arabia. In South Africa, where KSB operates a factory in Johannes- burg, the upcoming elections caused unrest and an investment climate shaped by uncertainty. This set narrow limits to the growth of companies operating in the country. But KSB South Africa additionally served further countries in sub-Saharan Africa, some of which recorded a stronger business performance.

Russia does not yet see any signs of an overall economic improvement due to the continuing sanctions and the lack of foreign investments. In view of the preferential use of domestic sources, it was important for foreign companies to expand their production base in the country. KSB achieved this by establishing a new production and service site.

POSITIVE DEMAND TREND OVERALL

The more upbeat forecasts on the economy at the start of the year initially prompted companies to tackle new industry and infrastructure projects, some of which had been postponed for some time. This benefited the relevant suppliers in various industries, including KSB. But the risks to international trade that became more apparent in the course of the year put an increasing damper on the willingness to invest, particularly in regions affected by trade restrictions including sanctions or experiencing political tensions.

Demand in industry, the most important market for KSB, nevertheless showed a positive trend overall. This was particularly pronounced in the chemical and petrochemical industries. Alongside maintenance investments, an increase in new refinery projects in the oil processing industry was observed.

World market of centrifugal pumps and valves
Source: KSB estimate (February 2019), European Industrial Forecasting

The water and waste water sector, which is prioritised in strategic terms, similar to the industrial sector, saw marked regional differences in demand. A number of emerging economies and the growth market of China continued the expansion of their infrastructures. North America, too, recorded an increase in demand for products and services for safe drinking water supply and reliable waste water disposal. By contrast, the countries in the Middle East and North Africa, in particular, planned substantially fewer new plants for these purposes. Here, the uncertain political situation put a brake on investment.

Energy supply proved to be a persistently difficult market for all suppliers and service providers. The decline in demand for equipment and support services for coal-fired power plants continued. Alternative business options, such as the supply of combined cycle power plants, were unable to offset these structural losses.

In mining, the increase in commodity prices entailed brisk investment activity in some countries. This applied, for example, to copper mines in South America and to the mining of gold and lithium in Asia and Australia. In addition to replacement investments that had been postponed until then, the mine operators in some countries decided to expand their systems, which strengthened demand for equipment goods.

The construction industry recorded a good performance on the whole. In Western Europe this continued to apply to both residential and commercial construction. Here, the fact that interest rates remain very low in some countries had a beneficial effect. Investment activity also remained high in several Asian countries, such as China and India. One focus was on the construction of commercial buildings where KSB’s building services products are primarily used.

The new shipbuilding market including LNG carriers recorded no more than a minor increase, according to Macquarie Research. The biggest share is accounted for by container ships, bulk carriers and tankers, followed by LNG and LPG carriers by a considerable margin.

ENGINEERING STILL ON THE UPSWING

According to the German Mechanical Engineering Industry Association (VDMA), global sales in the mechanical engineering sector rose by 3 % in real terms for the second time in a row. Engineering posted above-average growth in Switzerland, Austria, the Netherlands, Germany, Sweden and the United Kingdom. Sales growth in 2018 was between 4 % and 7 %, with Switzerland, Sweden and the Netherlands reporting a particularly good sales performance of 7 %. In the Netherlands, business with semiconductor production equipment was extremely good, and in Sweden the public sector increasingly invested in smart city projects.

In Germany the previous year’s level was exceeded by just under 5 %, due to a good order situation.

In China, companies are struggling with declining export orders on account of the trade conflict with the USA, which led to sales growth of only 2 % in 2018. By contrast, growth in India was unexpectedly strong at around 10 %. Mechanical engineering demand in Latin America rose significantly, reflected in an increase in sales revenue of 5 % in real terms.

In the liquid pumps sector, the VDMA recorded real sales revenue growth of 5 % among German pump manufacturers. Industrial valves also reported a positive sales revenue trend of 6 % whereas the order intake declined by 1 %.

Segment reporting

Order intake Sales revenue EBIT
€ thousands 2018 2017 2018 2017 2018 2017 (restated)
Pumps segment 1,506,248 1,473,628 1,469,443 1,444,392 90,563 79,284
Valves segment 355,618 343,505 340,771 338,849 -37,373 51
Service segment 441,670 448,179 435,734 421,717 21,512 37,020
Total 2,303,536 2,265,312 2,245,948 2,204,958 74,702 116,355
Finance income / expense -9,141 -12,175
Earnings before income tax (EBT) 65,561 104,180
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