July 16 (Bloomberg) -- Nexans SA is considering the construction of a new plant for submarine power cables in Asia or the U.S. to prepare for expected demand growth and ease bottlenecks at an existing facility in Norway.
The $3.9 billion market is growing by 7 percent to 8 percent a year, and Nexans is starting to plan for a build up in capacity to prevent further strain on existing operations, said high-voltage and subsea cable chief Frederic Michelland in an interview at the company’s Paris headquarters. Nexans shares surged 4.2 percent today, making it the third-biggest gainer in the French SBF 120 index which lost 0.7 percent.
While Europe accounts for 80 percent of the subsea cabling market, the Americas and Asia-Pacific “will take off at some point,” Michelland said. “We’re thinking about these issues at the moment because the construction of a plant takes at least three or four years.”
Nexans, the world’s second-largest cable maker, doubled the workforce at its Halden, Norway plant after subsea cabling revenue doubled in four years. Slowing demand for construction and land high-voltage cables in Europe and the Middle East has combined with poorly performing underwater contracts, squeezing the operating margin and heightening the need for Nexans to rekindle profits at the division.
The company’s backlog for underwater power cables, which are used to connect power grids, offshore wind farms and oil and gas platforms, represents about 1.2 billion euros ($1.6 billion), or more than 2 1/2 years’ worth of sales at the division. The strain on existing factories has now stabilized and Nexans is putting measures in place to cope with growth, according to the executive.
Nexans, which is investing $85 million to build a land high-voltage cable plant in South Carolina, may decide to add a manufacturing line for underwater power cables at the location to supply North and South American markets, Michelland said.
The French company owns 66 percent of a venture which makes submarine cables in Japan, and will have to consider adding capacity in Asia at some point, though it won’t be able to do “everything at once,” he said.
For now, submarine cable margins this year will remain in “low single digits,” similar to last year, as Nexans unravels delays and cost overruns of long-standing contracts, Michelland said.
“We’re currently working to make sure that all contracts we’re taking are aligned with the target of coming back to a normalized double-digit profitability in submarine cables,” the executive said.
Better earnings will come as Nexans improves processes beyond cabling manufacturing, including testing, loading and rigging of cables as such expenses account for 30 percent to 40 percent of overall cable-project costs.
Debt almost tripled last year to 606 million euros as margins dwindled and the company spent 341 million euros on acquisitions, including a majority stake in a maker of land high-voltage cables in China. That market has remained buoyant, the executive said.
In Europe, plans to cut costs in land-based high-voltage cabling are being drawn up to counter stiffening competition.
“This market is much more competitive because many capacities have been added in the 2003-2007 period, which have contributed to imbalance demand and supply,” Michelland said. “There may be between 15 percent and 20 percent overcapacity in the land high-voltage market in Europe.”
“Overcapacities might be absorbed little by little but they are obviously weighing on prices,” he said. “If you miss out on a big contract, you’re going to have to fight on plenty of small contracts.”
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