Engineers feel impact of cancelled projects

A growing tide of project cancellations by mining, oil and gas companies is hitting the trading prospects of many engineering businesses, which for most of the year had defied recessionary fears as commodity prices boomed.

Bateman Engineering, the London-listed engineer specialising in mining and metals processing, is typical of those hit by cutbacks in planned capital expenditure by its clients.

Three weeks ago the Netherlands-based company saw its share price halve in one session as it warned of a “markedly more difficult trading environment with clients reassessing their capital expenditure programmes”.

British engineering companies in recent weeks appear to have been generally hunkering down for a tough 2009, as even those with long order books prepare for contraction.

Engineers delivering to projects nearing completion could enjoy some respite before the scale and depth of the manufacturing recession becomes apparent.

Peter France, chief executive of Rotork, which supplies valve actuators and fluid control systems to a range of heavy industrial and oil companies, said: “If you’re 4,900km through a 5,000km project, you are not going to cancel it for the last 100km.” This argument raises the converse question of what happens to projects just 100km through a 5,000km target.

Financial constraints on client spending are bound to lead to high hurdle rates of return being imposed on projects funded out of capex, according to Mike Foster, chief executive of Charter.

His company’s ESAB welding supplies division has been hit by short-term order falls caused by extended shutdowns by customers, though its Howden business which supplies ventilation systems and air compressors, has remained more resilient with a long order book for customers in the power generation, petrochemicals, steelmaking and mining sectors.

“We have enough order backlog to have a solid view for 2009. The issue is over the level of contracts that come through in 2009 for 2010,” says Mr Foster.

Other UK companies such as conveyor belt manufacturer Fenner argue their exposure to overall and maintenance spending by customers may prove less glamorous but more robust.

“Conveyer belts carry materials based on volume and tonnage. If you are producing a commodity, we are driven by volume, not its price,” says Mark Abrahams, chief executive of Fenner.

Samir Brikho, chief executive of Amec, says he has made a deliberate attempt to shift the oil services and nuclear engineering company’s exposure from capex to opex.

”Once you have an asset, you need to achieve high efficiency and production rate,” he says.

Better efficiency leads to a bigger “bang per buck” for customers, whether they are facing booms or downturns, says Mr Brikho.

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