Fight for Alstom shows turbine market is alive and spinning

Mon Jun 16, 2014 12:58pm EDT

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* Alstom leader in steam turbine market, small in gas

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* link.reuters.com/xek22w

By Geert De Clercq

PARIS, June 16 (Reuters) - In a world where power generation capacity growth is driven by solar and wind, the bidding war for France's Alstom SA shows big players believe turbines connected to coal, gas and nuclear plants will be spinning for decades to come.

With the growth of coal plants limited by emission concerns, the nuclear industry in a funk following the 2011 Fukushima disaster, and dozens of gas plants around Europe mothballed as power demand stagnates, suppliers of the outsized turbines that generate power in traditional thermal power stations have suffered along with their clients, the utilities.

Even so, Siemens AG and Mitsubishi Heavy Industries Ltd on Monday presented a bid to rival that from General Electric Co (GE), showing they take a long-term view on its prospects regardless of recent woes.

"The battle for Alstom is about where utilities are going to be spending money five years from now, not where they will be spending in Q3 or Q4," said a London-based sector analyst who declined to be identified.

With 43 percent of Alstom's sales made in Europe and 8 percent in the United States, a bet on Alstom is not just a bet on emerging markets, but on a recovery of European demand, analysts say.

In a study last month, Deutsche Bank estimated European utilities will have capital spending of 60 billion euros ($81.7 billion) this year, with a significant share of this going to new electrical equipment - both generation and grids - and on maintaining existing machinery.

While demand for new power plants is low, Alstom's huge installed base - it claims more than 20 percent of the world's installed steam turbine capacity, or 580 gigawatt - brings lucrative service contracts that made up more than half of the 9 billion euros worth of orders of Alstom's thermal power division in the financial year through March 2014.

Steam turbines - a technology more than a century old and which led to the development of the jet engine - use steam generated by thermal plants to drive an electricity generator.

The global steam turbine business is highly fragmented - Alstom and Siemens each have a market share of just 4 percent in terms of annual sales, and GE 3 percent, SocGen estimates show.

The bigger players in steam are India's Bharat Heavy Electricals (BHEL) with 18 percent, Japan's Toshiba Corp with 10 percent and China's Harbin Electric with 7 percent.

TECH LEADER

A GE-Alstom or Siemens-Alstom tie-up would only become the fourth-biggest player by sales, but would be a technology leader. Alstom builds the world's largest steam turbine generators, with output of more than 1.1 gigawatts (the equivalent of one medium-sized nuclear plant) and claims to have supplied the world's seven largest fossil fuel plants.

More than 30 percent of the world's nuclear power plants use Alstom steam turbine generator sets and the world's four largest operating nuclear units use Alstom's "Arabelle" turbines, which have capacity up to 1,900 megawatts.

Alstom's smallest steam turbines have capacities of between 5 and 60 MW and are often used in biomass plants.

In gas turbines - which operate like a jet engine by burning gas - Alstom is a small player, with a global market share of just 4 percent, compared with GE's 39 percent, 28 percent for Siemens and 16 percent for Mitsubishi Heavy, SocGen estimates.

The implication is that there are likely to be few regulatory obstacles to a combination. So are there any potential hurdles?

Sources familiar with Alstom's organisation say it could be tricky to separate the firm's steam turbines from the gas turbines business, as proposed by Siemens and Mitsubishi Heavy.

While the steam turbines are made mainly in Belfort, eastern France, and the gas turbines made mostly in Switzerland and Germany, there are about 15,000 Alstom service workers worldwide paid to carry out maintenance on both kinds of turbines.

Another possible negative is the impact on the utilities who are Alstom's customers, such as EDF and GDF, and who have also been victims of the industry trends which help propel Alstom shares to a 14-year low earlier this year.

Yet Deutsche Bank's Martin Brough - who co-authored a study about whether utilities should care about what happens to Alstom - said utilities have relatively little to fear about the outcome of the bidding war on equipment supply costs, given the broader trends already outlined.

Ultimately it is long-term developments in the energy sector which are most significant for the utilities, just as they are for the likes of Alstom and its future owners.

"The threats to utilities are energy efficiency, decentralised solar energy and the weak economy in Europe," Brough said, "rather than market shares of their equipment providers." ($1 = 0.7345 Euros) (Additional reporting by Natalie Huet; Editing by David Holmes)

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