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Better than expected

The Romanian machinery sector, which includes aircraft, railway, military and naval producers, saw its first ray of sunshine in 2012, after the several-year storm that haunted the industry

Producers managed to reduce their losses from 33.2% y/y in 2010 to 5.48% a year later, according to the sector’s production index in terms of volume released by Eurostat. The sun started to beam in 2012, when the index showed a 21.6% y/y growth in the first eight months of the year, compared to the 5.6% growth at the European Union level.

 

The industries included in this sector had completely different evolutions as reported to the sector’s overall trend. 

 

The Romanian shipyards, which export almost their entire productions, increased their turnover by 25% y/y in 2011, up to EUR 1.25bn, shows the ANCONAV (Romanian Shipbuilders Association) data. However, in spite of the higher turnover, 2011 wasn’t a good year for the industry and continued the descending trend started in 2008. The eight local shipyards received 41 new orders through IHC Fairplay (the company that gives each ship its unique IMO number), of which only 16 were for new ships, compared to the 21 received the previous year. The rest were orders placed for ship bodies, with an outfitting degree of 80% to 90%.

 

Producers adapted to the market and tried to cut their costs by giving up 1,500 subcontractors. Local shipyards currently employ 8,800 people, less than half compared to 2008.

 

Things started to improve in 2012, when 16 new ships had already been ordered by October. “The trend is positive this year and I expect 3% to 4% growth of the shipyards’ turnover. I think the number of new orders will increase by additional 50% by the summer of 2013,” said Gelu Stan, general manager of ANCONAV.

 

The eight shipyards don’t compete among each other for new projects, as they are specialized on different niches. STX OSV Tulcea and STX OSV Braila produce supply vessels/AHTS (anchor handling tug supply) vessels and tugs. Damen Galati builds military ships and tugs/AHTS. Daewoo Mangalia Heavy Industries is specialized on containers of minimum 5,500 TEU and bulk carriers of 80,000 to 180,000 tdw. Constanta Shipyard specializes in 40,000 to 55,000 tdw oil tanks and does construction works. The other three – Severnav Drobtea Turnu Severin, Orsova Shipyard and Shipyard ATG Giurgiu – are located at the Danube and focus especially on fluvial ships and coastal vessels.

 

“There is a big demand for special and military vessels. Romanian shipyards need to adapt to the demand for green vessels, such as windmill-related offshore ships,” said Stan.

 

That’s why the Tulcea and Braila shipyards, which produce special ships such as offshore specialized vessels, have the highest workload in Romania, of 110%. Next comes Damen Galati, which is building several special ships like a military vessel for the Dutch navy and a Swedish nuclear waste transport vessel. The workload is nevertheless low compared to the 200% in 2006.

 

Trouble on wheels

 

The situation looks more dramatic for the rolling stock sector, which has contracted for the fourth year in a row, by 2.4% y/y in the first half of 2012, according to Eurostat data. The Baltic Dry index, a barometer of the world commerce, continues to have very low values compared to the years before the crisis.

 

Demand for railway equipment has decreased sharply both in Romania and in Europe. Previous investments in this sector have led to a surplus of production capacities that suffer from lack of new orders. Prices have decreased and competition has fueled, as projects are less available in Europe. Chances that the market will improve in 2013 are small. The Romanian market suffers from lack of financing, in spite of a real need to upgrade its railway infrastructure.

 

 

 

Electroputere Craiova, one of the largest local producers of locomotives, electric engines, power transformers and electrical equipment, has struggled for years to reduce its losses and grow business. The company, which was privatized in 2007 and acquired by Saudi firm Al-Arrab Contracting Company, was forced to close its locomotive business this year because of low demand and outdated technology. The division had focused on locomotive repairing works during the last two years and had worked with the GFR group and a private Slovakian operator.

 

“By the end of this year we will finalize the restructuring process of the company, which took much longer than expected. We will focus on export of power transformers and electric engines in the MENA region and the Gulf countries,” said Adrian Dumitriu, CEO of Electroputere Craiova.

 

The company decreased its turnover by 32% y/y in 2011, down to EUR 47mn, while losses soared up to EUR 11.4mn. The same trend continued in H1 2012, with losses increasing by 8.66% y/y, up to EUR 6.6mn.

 

The industry consolidated in July this year, when the German group Astra Rail Industries acquired Astra Vagoane Arad, Meva Drobeta Turnu Severin and Romvag Caracal for EUR 30mn. The Germans plan EUR 10mn investments within the first year from the takeover in new equipment and will focus on the European markets, followed by Russia and Middle East.

 

Easier landing

 

The aircraft industry had the best evolution within the sector, as its production index in terms of volume in the European Union increased by 10.9% y/y during the first eight months of 2012. The Eurostat data indicates the growth was of 6.5% y/y in 2011. “This evolution shows that passenger air traffic continues to increase, in spite of the great recession,” said Andrei Radulescu, senior investment analyst at SSIF Broker.

 

In comparison, the military vehicles sector decreased by 1.6% y/y in the EU during the first eight months of 2012, following a 20% y/y growth in 2011. The decrease is the result of the budget constraints operated by Western countries.

 

The evolution of the machinery sector in 2013 will depend directly on how the US economy solves its budgetary and fiscal problems, on how the ongoing European crisis develops and on how China manages to avoid a forced landing. “US sentiment indicators show there are premises for the world economy to reach an inflection point in the last quarter of 2012 or the first quarter or 2012 and to start a gradual growth process in 2013,” said Radulescu.  However, the analyst warns the aircraft industry could see a slowdown next year, no matter the world macro-financial climate.