ROD DEAN'S 2006 REVIEW
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E & C Hydrocarbon Review - The Global view from Europe. Looking back on 2006 & ahead to 2007.
Chiyoda also concentrated its marketing efforts on projects more likely to attract orders, minimizing spending on less fruitful operations. According to Nihon Keizai Shimbun projections, the company is likely to post a 42% year-on-year increase in pretax profit to about 33bn yen for the fiscal year ending March 2007, or 5bn yen more than the firm's own forecast, surpassing JGC's projected profit of 27bn yen for the full term.
JGC's profit margin was affected by rising prices of steel used for four major projects whose orders were won in spring 2004. Because it will no longer be impacted by the four projects next fiscal year, JGC is expected to earn a higher profit than Chiyoda, according to industry analysts.
"The difference in the two firms' business strategies is clear. Chiyoda is focusing on a few highly profitable areas of strength, while JGC is trying to spread the risk," said an analyst at Nomura. Unlike Chiyoda, which earned a substantial portion of its profit from its LNG plant operations concentrated in Qatar, one-quarter of JGC's group operating profit for the fiscal first half came from non plant engineering businesses. The firm is also aggressively investing in power generation and desalination projects in Saudi Arabia.
JGC also handles a wide range of engineering projects, including oil refineries as well as chemical and LNG plants. It has even taken on unprofitable projects as a way of acquiring new technologies and expanding its client base in such countries as Vietnam and Yemen, where it had no business experience. These projects "are considered as investments to expand business in the future," said JGC Vice Chairman Hideo Masuda.
Chiyoda can boost its profit more easily now that global plant engineering demand is expanding on the back of high crude oil prices. The company is seeking to lower its break-even ratio by increasing its profit margin, hoping this will make its profit structure less susceptible to market downturns. For its part, JGC is attempting to boost its profitability across a wide range of operations, bracing for a time when plant engineering demand will decline significantly.
LNG - the Eldorado still gets closer (but has not quite arrived yet - not one award in 2006) perhaps 2007 is the year - well it’s looking better or is it?
There was little in the way of project sanctioning last year in LNG but maybe that could change as 2007 progresses. It is not impossible to think that there could be new developments under way in Angola, at Pluto, with the Equatorial Guinea second train and possibly in Peru (now let to CB&I). However as I mentioned earlier in my report there are many negative signs that could further slow a number of developments.
There will be those in Nigeria saying that developments there too may surprise. And looking to the future there is even the prospect that Qatar might hold out the possibility of starting talks about projects to begin once its current moratorium on new developments ends.
Even with a cautious approach prevailing, there is still a decent chance that this year could see more project sanction pen action than last. Let’s take a closer look.
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