Not surprisingly, Covid-19 started to affect spending decisions across industries in the first quarter, according to Wärtsilä’s interim earnings report.
While net sales were up slightly in January through March, the Covid-19 pandemic effects, revised forecasts for economic development, and the sharp decline in the price of oil have disrupted activity in both the marine and energy markets, the company said.
“During the first quarter of 2020, Wärtsilä’s business environment was characterized by a sudden increase in uncertainty related to the coronavirus pandemic and its longer-term impact on the global economy,” said Jaakko Eskola, company president and CEO, in a news release. “The weakened demand outlook, in combination with anticipated delivery postponements and challenges in accessing customer sites, will have a material effect on our financial development this year. To mitigate this impact, we have taken proactive steps to lower our cost base with approximately EUR 100 million by reducing working hours and initiating temporary layoffs, as well as by limiting the use of external personnel and consultants. The first concrete actions have been taken in locations where operations have been adversely impacted by the pandemic.”
Overall, Wärtsilä’s order intake in January-March totaled EUR 1,247 million (1,416), a decrease of 12% compared to the corresponding period last year.
Net sales increased thanks to growth in both equipment deliveries and service activity in the marine business. Energy equipment deliveries declined largely due to project timing and some Covid-19 related delays. Measures taken to contain the spread of Covid-19 have resulted in factories running at lower than usual capacity and in restricted mobility of field service personnel.
“Demand in the first quarter was reasonable considering the prevailing market conditions,” Eskola said. “The decline in marine order intake was largely due to the lack of scrubber investments, as fuel spreads have narrowed. Equipment order intake in the energy business improved, thanks to the turnkey contracts received for two large power plants in Latin America.”
But he noted the effects of the coronavirus pandemic are increasingly becoming visible in the demand environment of our markets. The cruise segment in particular has been severely affected by the actions taken to contain the virus spread, while several energy project sites have been shut down. The risk of weakening economic activity has caused shipowners and operators to re-evaluate their investment plans. Similarly, in the energy markets, deteriorating macroeconomic conditions and the anticipated decrease in electricity consumption are resulting in postponed investment decisions for new power generation capacity.
The company said the marine operating environment saw “significant disruptions” during the first quarter of 2020. Vessel contracting declined to 127 registered contracts in the period (227 in the corresponding period last year, excluding late contracting), reflecting the prevailing demand uncertainty, the company said.
“Shipowners and operators have been forced to re-evaluate their investment plans and to adjust their operations to secure the safety of personnel and retain business continuity,” the company’s earnings report stated.
The cruise and ferry markets have been severely impacted by precautionary actions taken to contain the virus spread, including reducing the frequency of sailings and taking vessels out of service temporarily. Earnings softened in the LNG carrier segment because of reduced demand for LNG in China, and lower overall demand for LNG as a result of the mild winter. Investments in the container ship segment were affected by increasing concerns related to weaker economic growth, supply chain disruptions, and reduced consumer activity, the company said. The contracting of oil and product tankers was supported by the enforcement of the IMO2020 regulations and the increased demand for floating storage capacity.
“The sharp decline in oil prices has created further challenges for the offshore segment, where many projects are on hold or have been postponed due to overcapacity,” the report states. “Lower oil prices have also reduced the spread between low sulfur and high sulfur fuels, thus prolonging the payback time of scrubber technology investments and decreasing the interest in exhaust gas scrubber retrofits.”
And, because of limited shipyard capacity and mobility restrictions, there have been some delays in the commissioning of on-going scrubber retrofits.
“Despite the difficult market conditions, long-term efforts to minimize the environmental footprint of the shipping industry continue to support interest in alternative fuels, such as LNG, LPG, and ammonia, and in the use of hybrid battery packs across all vessel segments,” the report states.
Marine service demand improved compared to the corresponding period last year, mainly because of improved demand for service projects for offshore support vessels supported the offshore service business. In the merchant segment, service demand for LNG carriers remained positive, thanks to vessels reaching their major overhaul windows. In general, maintenance demand in the merchant segment is expected to be impacted by the coronavirus pandemic, but with some delay.
In the power sector, Wärtsilä’s market share in the up to 500 MW market segment decreased to 9% (17% the previous year), while global orders for natural gas and liquid power plants increased by 52% to 17.6 GW during the twelve-month period ending in December 2019 (11.6 GW at the end of September). The market increase was due to two large steam turbine projects booked in the fourth quarter of 2019. Global orders include gas turbine and Wärtsilä orders with prime movers over 5 MW in size. The data is gathered from the McCoy Power Report.
“The gas and liquid fueled power plant markets, as well as the energy storage business, are increasingly being affected by the coronavirus (COVID-19) pandemic and the resulting expected slowdown of economic activity,” the report states. “Mobility restrictions are disrupting operations throughout the business, from sales and sourcing to deliveries and lifecycle services.”
The company said that energy transition to greater use of renewables is expected to slow down temporarily as a result of delays in project deliveries, cheaper fossil fuels, and the focus being shifted to containing the virus spread and mitigating business impacts.
“However, the decreasing power demand, combined with high levels of renewable energy, is highlighting the increased need for flexibility in power systems. In the emerging markets, the slowdown of economic activity and weakening currencies are expected to reduce investments in power capacity additions,” the report states.