Raw materials, logistics and policy: The challenges facing OEMs in 2022

Analysts and other trade associations have given their forecasts for the health and profitability of turbine makers this year

Rising commodity and shipping prices, as well as policy delays, contributed to OEMs' challenges (pics: Vestas, Ørsted, Maersk, Official White House Photo by Adam Schultz)

Turbine manufacturers have endured another difficult year for their businesses; with rising costs for raw materials and logistics, uncertainty over tax credits in the US and countries failing to build enough new capacity to meet their own targets in many parts of Europe hampering their profitability. But can OEMs turn a corner and move the needle back from red to black? Windpower Monthly asked a range of industry experts for their assessment of the outlook for 2022 and beyond.

Grim reading

When financial results began to come in from January, for GE Renewable Energy, Siemens Gamesa and Vestas, they painted a grim picture. GE reported annual losses had reached nearly $800m in 2021, citing uncertainty about the main support scheme for renewables in the US – the production tax credit (PTC) — as one reason for its potential customers delaying investment decisions.

Siemens Gamesa posted quarterly results for October to December 2021, in which the company also detailed losses of more than €300 million (Ebit) for the quarter. Explaining its figures, the company said it had encountered supply chain challenges, market volatility and difficulties in ramping up production for its 5.X onshore turbine platform. 

Vestas, which supplied preliminary results towards the end of January, said it expected its profits to fall by almost 40%, to €460m, from €750 million in 2020. The company added that it expected supply-chain instability caused by the pandemic, as well as increased logistics and raw material costs to continue having an impact throughout 2022.

Pain points

Market analysts tend to agree with Vestas’ gloomy outlook for the year ahead. Shashi Barla, global head of wind supply chain and technology for Wood Mackenzie’s power & renewables division, said OEMs will face major, and ongoing, difficulties this year, including the cost of logistics and commodity inflation, the latter of which they have become all too familiar with over the past four quarters: “Commodity prices, for steel, aluminium, copper, and the fibreglass resins for blades have been sky-rocketing and that’s hurting the turbine manufacturers significantly,” he said. “The number one priority for them is to address commodity inflation.”

Indra Mukherjee, senior research analyst in the clean energy technology division at IHS Markit, observed that while OEMs may have passed on the higher costs of raw materials to customers for new orders, “executing older order backlogs in the current price environment will continue to negatively impact balance sheets”.

He added: “Poor profitability will remain a major pain point for OEMs as they try to manage input and logistics costs and execute projects on time, while simultaneously retaining the pace of innovation and bringing new products to market.”

Why are raw material costs rising?

To put figures on the increased costs of raw materials; global iron and copper prices rose by around 50% last year, compared with 2020, while global glass-fibre costs went up by a slightly smaller margin of 45%.

(pic credit: Ørsted)

But steel prices saw the biggest jump. They rose by more than 180% compared to pre-pandemic levels, according to trade association WindEurope.

There are essentially two reasons for that. The first is the price of oil. If it rises — as it has done, apart from a brief fall in late November — it impacts the cost of everything else. Russia’s invasion of Ukraine last week has already caused a significant spike in oil prices, to an eight-year high, and price-volatility is likely to continue in the short term.

The second is the effect of a global economic rebound in the wake of the pandemic. As countries around the world return to pre-Covid levels of production, they are vying for the same pot of raw materials, driving up the cost for everyone.

Perhaps a more important question then why raw material costs are rising is for how long they will continue to do so. On this, there is no clear agreement.

Injecting a note of optimism, Mukherjee said: “We expect some raw material prices to start easing from 2022 onwards.” But Barla is less optimistic, describing any expectation on the part of OEMs that the cost of raw materials will begin to fall from the end of 2022 as “wishful thinking”.

Rising cost of logistics

Little more than a year ago, a single container shipment from China to Europe cost around €2,500 but this cost has risen almost five-fold to €12,000 over the last four quarters, according to Wood Mackenzie.

Once again, the twin factors driving this price hike are the cost of oil and an uptick in global economic activity, which has led to a shortage of containers and the ships to transport them, with perishable goods taking priority.

There are alternatives to shipping turbine components of course, such as air-freight, but that would attract costs up to 12 times the standard price of containers, and further eat into profit margins.

Analysts agree there is no clear end in sight to these problems. “Oil prices will probably keep logistics prices elevated, and all the other challenges still exist, so I would be surprised if we can say OEMs’ logistics challenges are behind them,” said Barla. That pessimistic outlook is shared by Mukherjee, who added: “Higher logistics costs are likely to persist well into 2022.”

Inflation strategies

Some OEMs have adopted novel strategies to meet these inflationary pressures. In the autumn, GE Renewable Energy partnered with US car manufacturer General Motors (GM) to secure supplies of critical production minerals, including rare earth metals and copper. And Vestas signed a long-term agreement with shipping giant Maersk for containerised transport (below), to offset its logistics challenges.

Supply chain streamlining, said Barla, is “one of the big levers for OEMs to lower costs”, while Mukherjee thinks these strategies have provided OEMs with “much needed” visibility on future costs. He warned, however, that such strategies are not entirely risk-free. “Securing dedicated capacity for anything in a period of undersupply would generally imply long-term contracts at a premium price,” he said. “As a result, there’s always a risk that if prices normalise fast, then players might be left with higher costs for a long period of time.”

Regional issues

The challenges facing OEMs differ according to which region of the world they operate in. In Australia, for instance, where there is a predominance of EPC (engineering, procurement and construction) turnkey contracts, OEMs that have signed up to them have faced grid connection issues. Although the lack of infrastructure is an investment problem which is within the gift of the federal or national government to solve, OEMs have faced financial penalties for delays because a wind farm was unable to begin feeding energy back to the grid.

In Europe, a key issue in many countries is overly long and complex permitting procedures. Italy, is a case in point. After wind power won just 392MW in the latest 3.3GW Italian tender, WindEurope described the country as “Europe’s prime example for how bad permitting leads to low renewables build-out.” 

Generally, according to WindEurope the situation for OEMs is “not comfortable”, thanks to tight margins, which have been further squeezed by the inflated costs of raw materials and logistics.

An EU guidance document on permitting is expected in the summer. In the meantime, said WindEurope, member states should “refrain from creating additional cost pressures on the industry with unhelpful ideas such as negative bidding for offshore wind sites, as previously planned in Germany, uncapped seabed leasing rounds, as seen in the UK, or clawback measures as proposed in Italy and elsewhere.”

Vestas, Siemens Gamesa and Nordex are among OEMs that have confirmed an increase in prices to offset cost inflation widening regional differences in the price of turbines. As a result, said analyst Sanjeet Sanghera, head of wind at BloombergNEF. “The wind turbine pricing gap between China and the rest of the global market is widening. “While prices in China dropped to historic lows, prices in EMEA and AMER increased 19% in the second half of 2021, according to [our] ‘wind turbine price index’.”

Between them, the US and Chinese markets account for almost two thirds of the global demand for new turbines, and China is also a major manufacturing hub for turbine components. But a trade war between the US and China means that any component imported from the latter attracts a tariff of 25%.

For OEMs whose businesses rely on supplying the US market but that do not have a supply-chain footprint there, this creates an additional layer of complexity, and cost, to their operations. To avoid these tariffs, Barla argues that OEMs should consider re-routing their supply chains into other countries, such as India, Spain and Mexico.

Any policy changes in these two key markets are likely to have a significant effect on demand. According to Wood Mackenzie, global wind installation was an average of 55GW per year until 2019 but demand more than doubled in 2020 because of two major policy changes.

On the one hand, the Chinese government phased out feed-in tariffs for onshore wind in 2020, followed by offshore by the end of 2021.

Meanwhile, in the US, the PTC mechanism — in which owners are paid a sum on the sale of electricity for the first ten years of the operational life of a wind farm — is gradually being phased out and, without new legislation in place, will disappear entirely after 2023.

“Because of these policy cliffs, global wind installation in 2020 went up to 114GW, mostly driven by China and the US, which is more than twice the previous two years of installation,” said Barla. “This is a clear example of how a policy shift in a market is likely to affect global demand.”

Some good news

While Wood Mackenzie predicts the global installation figure for this year will be down on the 2020 peak — at around 92GW — the future outlook, in policy terms at least, gives OEMs operating in China, the US and Europe reason for cautious optimism.

Ambitious net zero targets, as well as near-term goals, are driving investor confidence. China, for instance, has announced it will be carbon neutral by 2060, but it has also set a near-term target to install 1.2TW of renewable capacity in wind and solar projects by 2030.

“That has driven the confidence of investors, whether the Chinese state or others, as well as the supply-chain fraternity to invest in the market,” said Barla.

In the US, President Joe Biden (below) has announced a target of 30GW of offshore wind by 2030.

(pic credit: Official White House Photo by Adam Schultz)

The Biden administration is also attempting to pass its “build back better” bill, which includes recommendations to extend tax credits for another ten years.

However, the bill has encountered difficulties, due to the objections of at least one senator in the Democratic Party, and is currently on ice while cross-party negotiations continue.

“Policy is a critical lever. We have seen time and time again how [it] can bring a dormant market to life, or vice versa,” said Sanghera. “We estimate that onshore wind installations between 2022 and 2030 could increase by roughly 40% when compared to our baseline forecast if ‘build back better’ proceeds with enhanced tax credits.”

Sanghera also pointed to Europe’s ‘fit for 55’ package — which calls for around 360GW of onshore installation from EU members by 2030. However, he pointed out that BloombergNEF estimates the EU will fall short of its 2030 target by around 100GW.

“Ambition alone is not enough,” he said. “To scale installations, a major task for policymakers will be to reform the slow and difficult permitting procedures that often act as a roadblock to realising deployment targets.”

However, the invasion of Ukraine has shone a light on Europe's heavy reliance on Russian gas, coal and oil and has arguably sharpened the minds of decision-makers regarding the necessary speed of transition to renewables. 

Last week, EU president Ursula von der Leyen told member states that only a switch to renewables will make them truly independent, in energy terms, and added: "We simply cannot rely so much on a supplier who explicitly threatens us."

Meanwhile, stocks in wind companies including Nordex, Vestas, Siemens Gamesa and Ørsted have surged in the last week amid investors' expectations of a quicker transition to renewables. 

Beyond 2022

The Global Wind Energy Council (GWEC) is upbeat on 2023 onwards but said this year was unlikely to see growth for OEMs. According to chief executive Ben Backwell “the pipeline for new installations, under current policies, is forecast to dip slightly before picking up again towards the middle of the decade, as new energy policies aimed at meeting Nationally Determined Contributions and Net Zero come into play”.

“For OEMs, this may impact the short-term manufacturing volumes that could help to achieve cost efficiencies,” he said. “Beyond 2022, we are seeing more policy momentum around onshore and offshore wind targets, such as in revisions to Vietnam’s master energy plan that favours more onshore and offshore wind over coal, and Brazil’s new regulatory guidelines for offshore wind. The timeline and scheme for procurement of these future wind projects is still not clear, so unlikely to impact order books in 2022.”

The likely picture for OEMs this year is that they will continue to experience significant challenges, but this is tempered by the broadly favourable policy outlook. There will be short-term pain, but there should also be long-term gain.

“I do not think [OEMs] numbers will turn black in 2022. They will have to wait one more year before they can make some money,” concludes Barla. “All the long-term fundamentals are strengthening the prospect of an income stream but that will not take away from the fact that there are certain challenges. However, if [OEMs] are able to circumvent these short-term challenges they will be able to capitalise on the long-term good story.”