Chief Investment Strategist
Summary: The wind turbine industry has been through a couple of difficult years with declining operating margin and elevated input costs from higher steel prices. This morning the news got even worse with Siemens Energy announcing worse than expected quality issues related to its onshore wind turbines. The problems will cost Siemens Energy an excess of EUR 1bn and investors have sent its shares down by 32%. The bad news is following an improving outlook for revenue just one month ago as orders in its gas and power business are surging.
The renewable energy theme basket was already the worst-performing theme basket this year down 8.8% as investors have focused elsewhere in pursuit of returns with AI-related stocks stealing the show. This morning it got worse for renewable energy stocks and especially those related to manufacturing of wind turbines.
Siemens energy is withdrawing its profit guidance due to worse than expected quality issues related to its Siemens Gamesa wind turbine business. The company is currently evaluating the associated costs related to these issues and the board of directors are assessing that costs will likely be in excess of €1bn. In addition, the board of directors is reviewing the assumptions behind their business plans for Siemens Gamesa as productivity improvements have failed to materialise as expected and ramp-up of offshore wind turbines has proved more difficult than expected. Shares are down 32% to around €16 per share which is below the IPO price in August 2020. The issues in Siemens Gamesa and the falling share price in Siemens Energy will likely mean that Siemens further divestment of shares in Siemens Energy will take longer than planned.
Siemens Energy is maintaining its revenue guidance for the fiscal year which was recently lifted due to significant order intake in its gas and power business driven by strong demand for electrification.
The wind turbine industry is going through a tough period. In the years before the pandemic the industry experienced solid growth and reasonable operating margins leading to strong return on invested capital (ROIC) figures. However, the pandemic led to a 275% increase in steel prices which have significantly impact the operating margin and while steel prices are down 52% from their highs they are still around 30% above the long-term average since 2008. Besides higher input costs many of the wind turbine manufacturers have had difficulties ensuring quality and high productivity despite higher volume and revenue sending a worrying signal. Most industrial companies experienced improved unit economics and higher efficiency as the business scales, but in the case of wind turbine manufacturing that has not been the case in recent years. Vestas, the world’s largest wind turbine manufacturer, is a good example of this.
Vestas generated revenue of €14.5bn in 2022 up 138% over 10 years or 9.1% annualised. During this period of rising revenue the company initially improved the EBITA margin from 5.3% in 2013 to a peak of 15.7% in 2016, but since then the EBITA margin has declined every single year to a catastrophic -7.5% in 2022. In 2016, Vestas delivered a ROIC of 36.1%, but by 2020 it had fallen to 13.8% which is still above the cost of capital, but a significant deterioration. For a market leader in a growth industry the ROIC should be above 20%. Siemens Gamesa has had the same issues and their EBITA margin was also -6.8% in 2022, so the entire industry is having major problems.
The long-term outlook is still solid and wind energy is still an energy source that governments are allocating resources to deliver on the green transformation. However, it is clear that production issues and industry manufacturers operating at a loss are a bad recipe for the industry to fulfil its potential. Profitability should recover over the years as the top five ex-China manufacturers are enjoying a market share of around 90% in the ex-China markets, so pricing power should not be a problem. If the wind turbine manufacturers can improve their productivity and quality then margins should recover over time. For more information on the wind turbine industry read Wood Mackenzie’s short summary.
Quarterly Outlook
Global Head of Macro Strategy
Quarterly Outlook
Global Head of Investment Strategy
Quarterly Outlook
Global Head of Macro Strategy
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Head of Commodity Strategy
Quarterly Outlook
Global Head of Macro Strategy
Quarterly Outlook
Head of Fixed Income Strategy
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Head of Commodity Strategy
Disclaimer
The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.
Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-gb/legal/disclaimer/saxo-disclaimer)