MENA’s steady infrastructure investment drive NDT inspection market

The Brent crude oil price, against which the Middle East and North African (MENA) countries benchmark their oil industry, has steadily remained high since 2011. Despite volatility, the oil prices have traded at a fairly healthy level; in excess of $100 a barrel. As a result, the oil and gas companies have earned significant revenue, which has been duly invested back into developing infrastructure to support increase in production. A number of new construction projects were announced between 2012 and 2014 benefitting the non-destructive testing (NDT) inspection services market in the region because in any new construction project, on an average, approximately 1% of the cost can be attributed to NDT inspection. In addition to investment in new projects, the growing focus on safety in the oil and gas industry in MENA has been driving demand for NDT inspection services, leading to revenue growth rates in excess of 15% for the market across the region.

However, since June 2014, the Brent crude oil price index has declined by approximately 50% because of increasing oil production and less than expected demand. As a result, there has been a slowdown in the oil and gas industry in regions such as Latin America, Europe, and Russia. However, the Middle East oil and gas industry, driven by Saudi Arabia has remained robust during this period. Investment in developing new infrastructure has not been cut as oil-rich countries such as Saudi Arabia and the United Arab Emirates (UAE) do not want to lose market share to the booming shale industry in the United States. The NDT inspection services market in MENA has remained insulated from the slowdown being experienced in other regions, but the year-on-year revenue growth has slowed to lower double digits. Oil prices are expected to bounce back in the short to medium term resulting in healthy growth of the NDT inspection services market.

Competition based on price is an important challenge for the participants in the MENA NDT inspection services market. Over the past 5 years, there has been an influx of South Korean and Indian NDT inspection service providers in the market. As a result, the average price for services has declined to historically low levels, which makes remaining profitable a challenge. Companies such as S&K Engineering, Samsung Engineering, and Hyundai Engineering have recently won contracts for mega construction projects. These EPC (engineering, procurement, and construction) contractors are winning projects by quoting extremely low prices. To maintain a healthy profit margin, the EPC contractors prefer sourcing products and services from South Korean companies that offer attractive prices. However, the average price of services has declined to such levels that industry experts believe any further reduction will hamper the quality of service offered.

Another key trend in the MENA NDT inspection services market is a glut of technicians, especially for conventional NDT. While North America, Europe, and Latin American markets suffer because of a lack of qualified technicians, MENA has an oversupply of technicians. However, research shows that a sizeable percentage of these qualified technicians require retraining as they are not trained on latest equipment. This further erodes the profit margin of the companies that is already low because of the low price of service. Profit margins can be recovered by offering advanced NDT services which provide better return than conventional services. Analysis shows that on an average, the profit margin for conventional NDT services is lower than advanced services. As competition in the advanced NDT services segment is far less than in the conventional services segment, participants providing advanced services can charge a premium, which increases the profit margin.

As the MENA NDT inspection services market provides steady revenue growth opportunities, it is expected that many global participants will want to enter this market through the mergers and acquisitions route. Intertek Group PLC entered this market in early 2014 by acquiring International Inspection Services Ltd (INSPEC) in a £40 million deal. This is expected to be the precursor to many such deals over the next 2-5 years. The top 10 participants hold between 40% and 45% of the total MENA NDT inspection services market. Apart from Intertek PLC, NDT & Corrosion Control Services, AMSYCO, RAWABI Holdings, SGS Group, Emirates Industrial Laboratory, Bureau Veritas (through Sievert PLC), Gulf Engineering House, Saudi K-KEM, and SOGEC are other key market participants.