Turbine manufacturers battered by ‘perfect storm’ of post-Covid crosswinds
With the worst of the Covid-19 crisis apparently over in much of Europe and the US, travel routes re-opening and full order books, wind manufacturers should be celebrating at Electric City in Copenhagen, the industry’s first major exhibition and conference open to a live audience after more than one and a half years of pandemic-related closures.
But the side-effects of Covid-19 on the industry seem nastier and longer-lasting than expected, and all major Western turbine manufacturers have either posted net losses, downgraded their guidance or are in the middle of restructuring.
The once-very-robust Vestas reported a 57.6%-plunge in net profit in the third quarter of 2021 to €123m ($139.7m), and a 2.7 percentage points decline to 5.9% in the margin of its earnings before interest and taxes and special items (Ebit margin), which shows operational profitability.
That prompted the Danish OEM to cut its profitability guidance for the second time this year. The company now expects an Ebit margin before special items of around 4%, compared to 5-7% in the previous outlook, and 6-8% in its initial guidance.
Vestas chief executive Henrik Andersen blamed an increasingly challenging environment for renewables.
“The quarter was thus characterised by supply-chain instability and rising energy prices, as well as accelerated cost inflation from raw materials, transport, and turbine components, which severely impacted profitability and limits visibility.”
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His explanation is very similar to that of other OEMs when commenting on recent bleak results.
But what is worse, Andersen expects the supply chain and cost pressures to last throughout 2022.
Another tough year in 2022?
So will 2022 be the next lost year for Western wind turbine makers?
Comments by Andersen’s peers are not encouraging.
After Nordex posted yet another net loss — of €103.7m ($118.7m) in the first nine months of this year, and only slightly better than the €107.5m loss in the same period in 2020 — chief executive José Luis Blanco said: “Our main priority now is to push ahead efficiently with our production and installation activities and manage the extremely high raw material and logistics costs, as this volatile environment might stay with us for a while yet.”
It is unclear, how long “for a while yet” might mean. Companies are understandably cautious to make precise predictions in the wake of a pandemic that has repeatedly surprised the world with new, unpleasant developments.
Andreas Nauen, CEO of Siemens Gamesa — which posted an annual net loss of €627m in its fiscal year (to the end of September 2021), and a net loss of €918m a year earlier — recently talked of “a very difficult environment with challenging short-term market dynamics and low visibility on supply chain normalisation”.
Next to the raw material and shipping cost inflation its peers also had to deal with, Siemens Gamesa was also plagued by higher-than-expected ramp-up costs for its new 5.X onshore wind turbine platform.
The company said that the impact of imbalances was particularly intense during the second half of its 2020-21 fiscal year and is expected to still affect operations in 2021-22.
As a consequence, the OEM in expects revenue to fall 2-7% in 2021-22, and its Ebit margin before purchase price allocation (pre-PPA) and before integration and restructuring cost to come in at between 1 and 4%. Only in its fiscal year 2024-25 does Siemens Gamesa now predict the Ebit margin to reach its long-term target of 8-10%, a level it previously had seen hitting in fiscal 2022-23.
GE Renewable Energy also posted a net loss in the third quarter, of $151m — compared to a net loss of $51m a year earlier.
German turbine manufacturer Enercon, meanwhile, is still mired in a lengthy restructuring process and has just burned through another CEO, Momme Janssen. Jürgen Zeschky — who as CEO of Nordex from 2012-15 turned around the company by focusing on a limited number of target markets — will take the helm at Enercon next year.
‘Not a crisis, just very tough’
The wind turbine OEMs reject the notion that there is a more generalised crisis, pointing to the current exceptional situation.
In an interview with Recharge, Vestas’ outgoing chief financial officer Marika Frederiksson said: “It’s not that the company is in a mess. We’re doing everything we should. We have a very sound service business. We’re executing as perfectly as we can — you can see that in the revenue increase.
“It’s not a crisis — it’s a very tough environment.”
While OEMs can’t tell when the current ‘non-crisis’ will end, they all point to the extraordinary growth chances of turbine manufacturers in the medium to long term due to climate protection pledges around the world that are certain to trigger another and greater wave of wind-power expansion.
“The current difficulties should not overshadow the bright future for wind energy, driven by its role in the decarbonisation of our planet,” stressed Nauen.
But more demand may not fix everything.
Earlier this year, WindEurope said it expects the continent to install an enormous 105GW of new wind farms over 2021-25, with up to 72% onshore, under what it calls its “realistic expectations scenario”.
Structural issues to address
But WindEurope CEO Giles Dickson points to more structural issues already existing before Covid that need to be addressed in the industry.
“It’s been a very tough environment for the European wind turbine manufacturers for a few years now. The low prices in government auctions for new wind farms have put significant pressures on the supply chain,” he told Recharge.
“And this has been exacerbated by the low volume of new wind farms being permitted and built. The current high commodity prices and supply-chain bottlenecks now make things even harder for the OEMs.”
Even assuming the recent supply-side problems ease, the underlying structural issues will still need to be addressed, Dickson explained.
“Crucially, the complexity of permitting processes… [means] the market for new turbines in Europe is only half what it should be, and only half what the EU wants it to be to deliver our climate goals.”
Another problem for OEMs is how to pass on higher prices to their customers.
Jacob Pedersen, chief analyst at Denmark’s Sydbank, agrees that the current earnings crisis among turbine manufacturers can be put down to disturbances in the supply chain, raw-material costs and high shipping charges.
“It is really a perfect storm for them,” he explains.
“Companies had received orders some 12 to 18 months ago for the turbines they have installed during the third quarter. That means they haven’t been able to compensate on the pricing side.”
A closer look at Vestas’s third quarter results confirms that turbine prices in recent quarters have hardly budged this year. From €0.80 per megawatt in the first quarter for onshore turbines, they went down to €0.79/MW in the second quarter, and back up to €0.81/MW in the third.
Pedersen told Recharge he doesn’t know how long the current crisis will persist, but predicts it could keep pressure across the supply chain.
“The answer would be to get selling prices up. I understand [manufacturers] are trying to do just that,” he said. “I am confident that is coming now.”
Unfortunately for the wind sector, it is not just the turbine supply chain that sees its profitability affected, but also developers.
“When turbines are delayed, installation plans also get thrown away,” Pedersen added.
“It is very costly to move timetables [in installation]. Supply-chain problems become installation problems.”