Large-scale Plant Engineering Status Report 2023/2024 - vdma.org

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WG Large-scale Plant Engineering - Status Report 2023/24

Innovative and resilient - how large-scale plant engineering remains successful

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AG Großanlagenbau - Lagebericht 2023/24

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At 24.3 billion euros, the order intake recorded by the members of the VDMA Large-scale Plant Engineers (AGAB) in Germany in 2023 was 15.7 per cent higher than the previous year's level (2022: 21.0 billion euros). This figure represents a long-term high and is mainly due to large and mega projects as well as a strong increase in spare parts and small orders in Germany, which were mainly placed by customers from the energy sector.

Driven by this growth, AGAB members achieved a record number of orders in Germany last year. Orders abroad rose moderately, with the USA being the most important market worldwide, followed by Italy and the UK. In addition to the use of innovative technologies in project planning and on construction sites, the companies' strategic focus on new markets and sustainable technologies contributed to these successes. Support programmes, such as the Inflation Reduction Act (IRA), also played a role.

Record orders in Germany

Domestic orders rose by 45.4 per cent to 9.6 billion euros in 2023 (2022: 6.6 billion euros). The previous record from 1993 (7.4 billion euros) was thus significantly exceeded. In addition to many small and service orders from the energy sector, this upturn was triggered by some large and mega orders for sustainable plants, particularly from the steel industry. Examples include the conversion of Salzgitter AG's integrated steelworks at its home location to green steel production and the replacement of a blast furnace with a hydrogen-powered direct reduction plant at thyssenkrupp in Duisburg.

Demand for systems from abroad continues to grow

At 14.8 billion euros, incoming orders from abroad in 2023 were 2.5 per cent higher than in the previous year (2022: 14.4 billion euros). AGAB members have thus succeeded in compensating for the loss of the Russian market by acquiring new customers in other regions of the world. VDMA large-scale plant engineers were particularly successful in the industrialised countries, especially in Western Europe and North America. Companies there recorded the highest number of orders since 2008. There was also growth in some emerging markets in Africa and Asia, while bookings from China and India declined. As a result of strong domestic demand, the export ratio fell to 61 per cent in the reporting period (2022: 69 per cent).

High orders from industrialised countries

More than half of all foreign orders in 2023 came from industrialised countries - this report includes the countries of Western Europe and North America as well as Australia, New Zealand, Japan and South Africa. Orders there rose by 9 per cent to 7.7 billion euros (2022: 7.2 billion euros). This success is proof of the engineering sector's ability to adapt to the changing conditions on the global market. Resilience and agility are equally important here: VDMA large-scale plant engineers have set up their organisations in such a way that they can act with agility in volatile markets. The most important countries in Western Europe in terms of incoming orders were Italy (1.1 billion euros), the UK (860 million euros) and France (152 million euros). In the USA, members recorded orders worth 2.4 billion euros, which is 7 per cent more than in the previous record year of 2022 (2.2 billion euros). The tax incentives provided by the IRA had a particularly positive effect. Demand in the United States was primarily for equipment for production of energy, gas and for air separation units. In metallurgical and rolling mill construction, there were projects for the construction of electric steel plants, which generally produce fewer CO2 emissions than blast furnace plants, especially when they are operated with renewable energy.

Declines in Asian business

Orders from the Asia-Pacific region - defined by AGAB as China, Hong Kong, North and South Korea, Mongolia, Taiwan, and the ASEAN states - fell by 17.5 per cent to 1.8 billion euros in 2023 (2022: 2.2 billion euros). This was primarily due to the decline in demand from China, which fell by 20 per cent to 791 million euros in the reporting period (2022: 993 million euros). The People's Republic was still the largest sales market in Asia and the fifth largest worldwide. However, major projects were only realised in few cases. Instead, AGAB members benefited from orders for the sustainable conversion of plants and the expansion of electromobility in China. This led to an increase in demand for systems for lightweight materials and battery separator films as well as for the manufacturing and recycling of batteries. In Southeast Asia, incoming orders climbed by 46 per cent to 600 million euros (2022: 410 million euros). The most important ASEAN markets were Vietnam, Singapore, and Malaysia. In East Asia, AGAB members once again suffered a decline in orders due to a lack of major orders, for example in South Korea (230 million euros) and Taiwan (149 million euros).

More orders from Eastern Europe again

In 2022, demand from Eastern Europe and the CIS - the Eastern European EU member states and the countries of the Balkans and the former Soviet Union - almost collapsed as a result of the abrupt decline of the Russian market. The situation has now stabilised again: In the reporting period, incoming orders rose by 61 per cent to 1.7 billion euros (2022: 1.0 billion euros). The main reason for the upturn was a series of major orders from Poland, Kazakhstan, Romania and Uzbekistan. These were primarily projects for the modernisation and development of a modern and clean energy supply. Due to the economic sanctions against Russia and Belarus, business with these countries has now come to a complete standstill. Demand from Ukraine has also been severely affected by the war. Once the conflict is over, however, billions will need to be invested to rebuild the country's destroyed industrial base. VDMA's large-scale plant engineering sector could make an important contribution to the reconstruction process. After all, some AGAB members are long-standing partners of the Ukrainian economy and have already supplied large industrial plants in the past.

Difficult market environment in the Middle East

Incoming orders from the Near and Middle East fell by 24 per cent to 1.4 billion euros in the reporting period (2022: 1.8 billion euros). Reasons for this decline included strong competition from Asian plant manufacturers, the unstable political environment in some areas and Western economic sanctions. Nevertheless, there are rays of hope. After all, some of the financially strong countries in the Persian Gulf are investing in the sustainable transformation of their economies. This offers opportunities for VDMA large-scale plant engineers to receive orders for the construction of plants for climate-neutral energy sources and power plants suitable for the use of hydrogen. In this transformation, the United Arab Emirates were the most important customer country in the region in 2023 with orders totalling 432 million euros, followed by Saudi Arabia with 332 million euros and Iraq with 190 million euros.

Market success in emerging countries

The "Rest of the world" refers to all countries that cannot be allocated to any of the four groups mentioned before. These include Africa (excluding South Africa), South and Central America, South Asia with India, Turkey, and Oceania. As in the previous year, orders in this group of countries totalled 2.3 billion euros. The most important markets were Nigeria (572 million euros), Mexico (365 million euros), India (263 million euros) and Turkey (254 million euros). In all these countries, the focus was on investments in the modernisation of the steel industry and the expansion of the energy supply. The orders underline the leading position of AGAB members as providers of complete solutions on the global market. The companies can therefore regularly hold their own against strong international competition in contract award processes.

AGAB Lagebericht Auftragseingang Grafiken

Incoming orders provide important information on the current situation in large-scale plant engineering. They provide insights into country-specific and regional trends and serve as an indicator for future economic developments. The market figures presented here are based on primary surveys of the members of the Large Industrial Plant Manufacturers' Association and provide reliable information on the actual business development of the industry. To view the charts, please click on the headline.

AGAB Lagebericht Umsatz Grafiken

Turnover in large-scale plant construction is developing continuously. One reason for this is the payment methods. Customers often transfer their installments in line with the construction progress of a plant, which leads to a constant flow of income. On the other hand, the expansion of the service business is stabilizing the inflow of funds. Nevertheless, turnover in large-scale plant construction is less suitable as an indicator for assessing market development, as it reflects past orders due to the long-term nature of the projects. To view the charts, please click on the headline.

AGAB Lagebericht Marktumfeld

The global economy is losing momentum

After a good start to 2023, the pace of global growth slowed significantly in the second half of the year. According to estimates by the International Monetary Fund (IMF) in January 2024, global economic growth was 3.1 percent in 2023, 0.4 percent less than in the previous year (2022: 3.5 percent). For 2024, the IMF expects stagnation. Growth in 2023 was far below average in the Eurozone (e.g. Germany: -0.3 percent) and the United Kingdom (0.5 percent). The US economy fared better (2.5 percent), benefiting from rising private consumption and higher government spending. Growth in Asia was driven by India, with real growth of 6.7 percent.

The main reasons for this disappointing development were the decline in industrial production in many regions and the sharp rise in interest rates, which inhibited investment in residential construction in particular. Another dampening factor was the weak economic growth in China, which was held back by the high level of debt in the real estate sector. In the medium term, government consolidation programs aimed at reducing the deficits of the corona years and the risk of greater geo-economic fragmentation could have a dampening effect on growth. In the advanced economies, demographic challenges are also likely to lead to lower labor force participation.

In the short term, therefore, no economic stimulus for large-scale plant engineering is to be expected. Geopolitical tensions such as the war in Ukraine and the conflicts in the Middle East are also dampening investment demand. Stimulating effects are mainly caused by funding programs for sustainable technologies, such as the Climate and Transformation Fund in Germany and the Inflation Reduction Act (IRA) in the USA.

Easing of supply chains

The situation on the market for supplies has eased noticeably over the past year. This is particularly true for industrial metals such as copper, aluminum and zinc, as well as for most kinds of energy, whose prices have fallen significantly due to the weak global economy and the loss of demand in China. In addition, availabilities have improved and delivery times have been shortened for numerous components that are particularly relevant to plant construction, such as valves, pumps and pipelines. However, this does not apply to all components to the same extent. Particularly in the field of energy technology, such as switchgear and transformers, there are still considerable bottlenecks. These supply risks are so glaring that in some cases schedules have not been met and the completion of projects has been delayed.

Decarbonization stalls, transition technologies gain acceptance

The members of the VDMA Large-scale Plant Engineering Group (AGAB) have many technologies for the decarbonization of industrial processes and for CO2-free energy generation in their portfolio. The industry is thus one of the pioneers of the global energy and mobility transition and makes a significant contribution to society's goal of sustainable industrial production. These strengths are particularly evident in metallurgical and rolling mill construction, which – supported by national and EU funding programmes – is experiencing a boom in the construction of climate-neutral steel mills within Europe. On the other hand, other areas such as green hydrogen, green ammonia and synthetic fuels are experiencing declining demand. The euphoria for the green transformation and its economic potential, which until recently electrified plant engineering, has been dampened, as the decisions taken at the World Climate Conference in Dubai (COOP 28) also make clear. Reasons for the faltering ramp-up of sustainable technologies include the falling prices for fossil fuels, which are making "grey" investments more attractive again, the expansion of renewable energies, which has been slowed down by excessive regulation, and unexpectedly changing political conditions such as the discontinuation of subsidies for hydrogen projects or electromobility.

All of this raises questions such as which projects are still viable in the current market environment and how a market-based allocation of resources within companies should take place. In view of these volatilities, many project decisions are postponed or made only very hesitantly. The economic viability of greenfield plants is now often much more difficult to assess than it was just a few years ago. As an alternative in the fight against climate change, so-called blue (transition) technologies, in which carbon dioxide is captured, stored and, if necessary, further processed (CCS/CCU), are gaining wider acceptance in the current market environment, especially in the USA and Europe. In a remarkable decision, Germany has readjusted its previous position. The application of CCS/CCU is to be made possible in Germany, whereby the strategic focus for the use of the technology is to be on emissions that are difficult or unavoidable, for example in the steel or cement industries. Behind this change is the realization that the transition from a fossil to a green industry cannot happen abruptly but can only succeed gradually via a mix of green and fossil fuels with integrated CO2 storage. Otherwise, both the ambitious climate targets for 2050 and the competitiveness of Europe as an industrial hub would be at risk. Concrete projects, such as the construction of the first climate-neutral cement plant in Norway or the retrofitting of several gas-fired power plants with CCS technology in the UK, are currently taking shape.

Politicians must set stable framework conditions for the transformation

In order to pick up the pace of the green transformation of industry again, policymakers in Germany and Europe must set smart framework conditions that enable companies to establish sustainable business models and mobilise investment capital. On the one hand, it is essential to establish a long-term stable funding framework, for example for the restructuring of the particularly emission-intensive chemicals, steel and cement sectors. On the other hand, infrastructures (e.g. wind turbines, power lines, hydrogen pipelines) urgently need to be built or expanded, and approval procedures need to be accelerated and systematically streamlined. On the "credit side" are the European Emissions Trading System, which was introduced in 2005, and the EU-wide CO2 Border Mechanism ("CBAM"), which is currently being set up. With these instruments, it will be possible to direct investments more strongly into sustainable fields and to ensure fair international competitive conditions, especially for European companies from the energy-intensive industries.

Europe and the USA are moving into the focus of large-scale plant construction

The regional focus in the large-scale plant business has shifted fundamentally over the past two years. While Russia is no longer a relevant market and demand from China is stagnating, orders from (Western) Europe and North America have increased significantly: The share of orders from the USA in the order volume from abroad increased from 6 to 22 percent from 2021 to 2023, and in the EU and EFTA countries this rate increased from 17 to 39 percent. These figures show that the members of AGAB have succeeded in compensating for the loss of formerly important markets in a short period of time – and even on a large scale. The key to this is agility: Plant manufacturers have set up their organizations in such a way that they can act agilely in volatile markets. In absolute terms, the US was also the most important market in 2023 . AGAB members booked orders worth 2.35 billion euros in the United States, which is 7 percent more than in the previous record year 2022 (2.20 billion euros). In particular, the investment incentives provided by the IRA had a positive impact on asset demand. However, the boom in the U.S. market is also associated with resource bottlenecks in the area of construction services. Individual projects have already had to be stopped due to high installation costs. Decisions on the direction of future US economic policy will be made in the presidential election in November 2024; It remains to be seen whether the tax breaks for renewable energies promised in the IRA will be reduced or even discontinued as a result of a possible change of government. Most observers do not currently expect such a step to take place, as the subsidy programs could not be terminated by government decision, but only by Congress. However, the mere debate is already causing uncertainty. Anyone who wants to invest in long-term large-scale plant projects needs planning security, which is being called into question by the current discussions.

Complex customer expectations – and the answers of large-scale plant engineering

In the current market environment, the requirements of buyers of large-scale plants in terms of quality, execution times and investment costs (CAPEX) remain challenging. In addition, many customers are increasingly attaching importance to ensuring that plants manage with the lowest possible CO2 footprint during project management and subsequent operation (OPEX). These expectations are currently mainly expressed by European customers, but could apply globally in the future and become more important in the awarding of contracts. In addition, there is increasing competitive pressure, triggered primarily by plant manufacturers from Asia. In order to be able to survive successfully in this market environment and to meet the needs of customers, the large-scale plant engineering industry relies on a broad package of measures to increase productivity, agility and resilience. After all, plant manufacturers must increasingly manage risks that were previously hardly or not at all relevant, for example in the area of cybercrime, regulation or fixed-price agreements. The key to this often lies in contract management. Project contracts must be designed in such a way that they protect against sudden changes in the market environment, for example through price escalation clauses and conditions linked to price indices. Plant engineering also makes use of the diverse possibilities offered by digitalization and virtualization. Examples include the potential of predictive maintenance, virtual audits, meetings and commissioning, as well as 3D tours that make it possible to experience the exploration of production facilities interactively. These measures allow companies to reduce travel costs, optimize maintenance cycles, and reduce the likelihood of workplace accidents. They are therefore to be used even more in the future. In addition, there are technologies such as drones, lasers, robots, and 3D printing, which are used especially on construction sites, and support people in processing orders with precision within the specified time and budget framework.

A game changer? The potential of AI in large-scale plant engineering

The topic of artificial intelligence (AI) is currently firing the imagination of many companies around the world and triggers both fascination ("solution to all human problems") and fear ("complete loss of control"). Large-scale plant engineering is also working intensively on this potentially disruptive technology and is testing different applications and scenarios to increase productivity. Considerable progress has been made so far through the use of AI, especially in the programming of systems and in software development. There have been no comparable breakthroughs in other areas. The members of AGAB closely monitor the very dynamic progress in the development of new AI technologies and try to derive possible applications for their specific needs, for example in project procurement and engineering. At the Engineering Summit in October 2024, the topic of AI will take up a lot of space:

www.engineering-summit.de

Prefabrication, pre-assembly and modularization offer further starting points for greater productivity

Another lever frequently used in plant engineering to reduce costs and increase productivity is the prefabrication, pre-assembly and modularization of plant components, technology modules and complete assemblies. This is about more than just moving work from construction sites to safe locations. Changes in quantity structures and new ideas in the organization of work also contribute significantly to the success of efficient modularization concepts. Although these efforts are limited by the individuality of the business, large-scale plant construction has already achieved success in the past and will continue to exploit potential in the future. According to a VDMA study, modularization can shorten project durations by up to 15 percent – while at the same time significantly increasing the reliability of schedules. In addition, large-scale plant engineering has managed to reduce the number of construction site accidents as well as quality and error costs through the application of intelligent modularization concepts. Furthermore, the measures contribute to the reduction of the CO2 footprint and reduce the impact of economic activities on local communities. However, the success of the various efforts described here to increase productivity in large-scale plant construction is being called into question by tightly meshed state regulation: Increasing bureaucratic obligations in many areas of the company tie up scarce human resources that plant manufacturers lack for their actual business activities, for value creation and innovation. Especially in times of a shortage of skilled workers, this proves to be an obstacle to efficient project management. Greater digitalisation of public administration could facilitate the fulfilment of bureaucratic obligations and offer enormous potential for companies in terms of time and financial savings.

Short-term easing of tensions in the market for skilled workers does not mean a trend reversal

The difficult situation on the market for skilled workers has eased slightly due to the general economic weakness in some segments, such as chemical plant construction. However, as many orders are currently in the construction phase, resources for construction and assembly in particular remain scarce, which has led to significant cost increases and in some cases even to the halt of projects. In any case, there can be no talk of a fundamental easing or even a trend reversal on the labour market, as the baby boomer generation is gradually retiring and valuable experience is thus being lost. The members of AGAB are therefore called upon to convince young people of a career in large-scale plant construction. The "green" transformation of the economy and the energy transition play into the hands of companies. Until recently, plant engineering was considered an "old economy" and thus dirty and backward, but today the industry is often perceived as groundbreaking and meaningful, for example when it comes to pioneering deeds such as the development of a carbon-free steel industry or a circular economy in electromobility. Especially for people who are looking for a deeper connection to personal values, goals and a larger vision in their work, this makes plant engineering more attractive as a potential employer. The increasing number of unsolicited applications received by companies is a clear indication of a change in the public's perception of plant engineering. Against the backdrop of demographic change, talent management, i.e. the identification, development and retention of employees, is also becoming increasingly important. A credible and sustainable corporate culture, opportunities for personal development, responsiveness to individual needs and a high degree of freedom in the choice of place of work and working hours are considered success factors. In principle, long-term employee retention is particularly important in large-scale plant construction, as individual orders often last several years and extensive experience in the project business is a basic prerequisite for high work productivity.

Large-scale plant engineering relies on future-proof political framework conditions

The companies involved in VDMA large-scale plant construction are facing enormous challenges. They have to manage a wide range of geopolitical and economic risks, attract new employees to their companies and at the same time meet the demanding wishes of customers, politicians and other stakeholders. In the past year, the members of AGAB have succeeded in this balancing act convincingly, as evidenced by the increase in incoming orders and the high turnover in large-scale plant construction. In addition to the intelligent use of innovative technologies in project management, the strategic orientation of the companies towards new markets and sustainable technologies has contributed to these successes. In addition to its own efforts, large-scale plant engineering is also dependent on political support, especially when it comes to setting a framework for the implementation of sustainable business models and implementing fair competitive conditions on international markets. Some important approaches to this have already been discussed.

AGAB Lagebericht Politik

The predominantly international project business of the VDMA large-scale plant engineering sector has always depended on reliable and practicable political framework conditions, especially in this VUCA world. In the area of state-subsidized export financing, companies should be able to compete fairly on an equal footing for customer projects worldwide. However, this so-called level playing field for export credits only exists to a limited extent for the project business of European companies. We therefore welcome the modernization of the OECD Consensus implemented last year. Although it was not possible to extend the scope of the OECD agreement to include development cooperation and other financing instruments such as investment guarantees, the rules for state-supported export credits are significantly more flexible and better suited to offering competitive conditions vis-à-vis non-OECD competitors such as China. In view of the upcoming elections to the European Parliament, the VDMA Large Industrial Plant Manufacturers' Association also supports the joint demands of European trade associations to deepen the EU internal market.

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EU-Internal Market

Joint statement by European business organisations

VDMA is a co-signatory of a joint statement by European business organisations calling for a deepening of the Internal Market.

Export financing Hermes cover

New OECD rules for export credits help with competition

The modernization of the OECD consensus offers European plant manufacturers more flexibility in credit offers. Renewable energy in particular benefits.

AGAB Lagebericht Branchenberichte

Given the heterogeneity of the industry and a project business that is characterized by irregularly awarded large orders, it is difficult to make quantitative forecasts for business development in large-scale plant engineering. The assessment of the industry's prospects is therefore sensibly broken down by individual segments and in the form of trend statements. The following industry reports reflect the assessments of the members of the Large Industrial Plant Manufacturers' Group on their respective fields of activity and are regularly adapted to market developments.

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Chemical plant engineering

The industry is facing the challenge of adapting to a changing market environment and taking advantage of the great opportunities presented by decarbonization and the new technologies that come with it.

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Paper plant engineering

Global production capacities in the paper industry have been declining for some time. One reason for this is the increasing digitalization of many areas of life.

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Steel mill and rolling mill construction

Despite the volatile market environment, the outlook for the future remains optimistic. The main reason for this is the change in the steel industry, which has made it its goal to become climate-neutral in Europe by 2050.

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