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Abu Dhabi National Oil Company’s Supply Expenditure Report (Assessment)

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Updated: Apr 29th, 2021

Executive Summary

The market under consideration is the valve market due to its direct connection to the chosen company – ADNOC. The motivation for selecting this product among other procurements made by the firm is the fact that valves are used for constructing sites and platforms for drilling as well as transporting and distributing the company’s finished products. In this way, the central objective of the given paper is to determine the size and scope of the valve market as well as identify the extent of competition in this industry. More than that, the research focuses on finding out what are the primary supply and demand factors that influence the formation of prices in this industry and point to the current pricing mechanism and the way it is influenced by supply and demand. During conducting the research, it was concluded that the valve market has experienced a significant upturn since the 2008 global financial crisis.

According to forecasts, the industry will undergo further positive shifts and its development will boost to reach a peak of $85 billion by 2021. Even though there are some influential valve market players in the United Arab Emirates, the most powerful companies are American, Canadian, and European ones such as Emerson Electric, Flowserve Corporation, Cameron Inc., the AVK Group, and Barksdale Inc. It can be explained by access to natural resources required for manufacturing valves and distribution channels. It was also concluded that the current pricing mechanism is based on both direct and indirect costs, i.e. expenditures on resources necessary for manufacturing valves, labor and transportation costs as well and profit range and administrative expenses. Finally, these days, there is a robust impact of automation of the industry and spending on satisfying energy needs that affect pricing in the valve industry.

Introduction

As mentioned in the investigation of Abu Dhabi National Oil Company (ADNOC), it purchases numerous groups of equipment in order to run its everyday operations. Valves are one of the related procurements because they are commonly used for constructing sites and platforms for drilling. More than that, valves are indispensable elements of everyday operations due to the fact that they are deployed in shipping and distributing a company’s products. Therefore, the paper at hand aims at investigating the valves market as one of the most critical ones for the sustainability of the chosen company. Moreover, the goal is to identify the current pricing mechanism and determine what demand and supply factors have a direct influence on the formation of prices in the valve industry.

Valves are commonly used for regulating and controlling the flow of gases, liquids, and loose materials. To carry out this function, valves are fitted in passageways. In order to manufacture these devices, a great variety of materials are used such as stainless steel, bronze, cast iron and steel, plastic, and ductile iron. Based on the materials used for manufacturing valves, they are divided into several primary types – waterworks, nuclear, safety, plug, gate, ball, pinch, check, and butterfly valves. Companies operating in different industries choose an appropriate type of valves based on their prices and the functions they are expected to conduct.

Market Research

Valve market is sensitive to any changes in the global economy due to the fact that pricing is dependent on material prices as well as finished product demand. The 2008 global financial crisis had a detrimental influence on the whole industry due to the inability of the most influential, as well as smaller companies, to satisfy their need for valves because of lacking financial resources. Nevertheless, during recent years, there was a significant upturn in the valve market connected to the recovery of the global economy. As for now, the demand rate in this industry is higher than the pre-crisis level. In 2008, sales of valves in the global market were around $15 billion. In 2015, the global valve market accounted for $65 billion. More than 22% of revenues in the industry came from oil and gas companies such as ADNOC due to increasing demand for valves. More than that, there is an optimistic forecast, which points to the potential of growth to $70 billion in 2019 and $85 billion in 2021 (Joel, 2016; Rohan, 2016). It means that the market is constantly increasing and 5% annual growth is expected. According to these statistics, it is possible to conclude that the valve market is constantly growing in size.

As for the geographical scope of the valve industry, the most influential companies are located in Canada, the United States of America, and Europe. Nevertheless, there are smaller companies around the globe including the Arab region, Africa, and Asia. In this way, it is an international market. Moreover, it can be explained by the fact that valves are distributed across all regions of the globe regardless of the sector of operation of those companies that purchase valves. Some of the most influential companies are Emerson Electric, Cameron Inc., the AVK Group, and Barksdale Inc. (Richardson, 2012). As for the Arab region, it is represented by such firms as Abahsain Group and Flowserve Corporation.

Finally, because numerous countries and companies are involved in the market and customers are well informed of the types and make-up of valves, the competition in the industry is perfect. At the same time, entry barriers are not high, which means that oligopolies and monopolies are avoided. In addition, prices are established by the market, i.e. supply and demand, instead of being determined and driven by the most influential manufacturers. So, these factors also support the statement that competition is perfect.

Demand and Supply Factors

The procurement of valves is influenced by numerous supply and demand factors. In this case, both organizations purchasing valves are perceived. Demand for valves is driven by the company’s strategic objectives such as expected volumes of drilling and sales. It means that in case of drops in oil and gas prices, valve demand will decrease due to the fact that valves are not needed for carrying out operations (Jose, 2013). More than that, valve demand is determined by the level of automation of the manufacturing and drilling processes. In this way, in the case of a higher rate of automation and implementation of the newest technologies, valve demand drops due to the shift of focus to the newest technologies. In addition, as the valve market is constantly developing, new types of valves are introduced. In case if companies discover more safe and effective valves, they tend to invest in upgrading currently deployed equipment and increasing procurement of modern valves such as those eliminating risks of leakage (Arnold, 2016).

Finally, demand is influenced by the prices of valves because it is directly connected to the company’s financial condition and ability to satisfy its needs. From this perspective, there are some factors related to the economic development of the country of the company’s operation, which affect demand. For influence, in the case of lower interest rates and steady exchange rates, demand increases due to broader procurement opportunities. The same is true in the case of inflation as lower inflation rates are synonymous with the better financial condition of the company.

As for the supply factors affecting the procurement of valves, in most cases, they include economic and political atmosphere in the country of target dispatch due to the fact that instability demotivates suppliers to become involved in economic operations because of higher risks of failure. More than that, such economic development as unforeseen currency fluctuations, drastic changes of interest rates, and regulations might result in delays in deliveries of purchased valves as well as for settling accounts. In addition, supply is commonly impacted by commercial arrangements because of the expected stability of cooperation and established prices for delivered products due to the long-term nature of arrangements.

Current Pricing Mechanism and Factors Influencing Pricing

The formation of valve prices is influenced by the market instead of the most influential companies in the industry. In this way, these are direct and indirect costs that contribute to the final price of valves. From this perspective, expenditures on labor, materials, energy, and transportation are considered direct costs (Rohan, 2015). However, there is a group of the warehouse, administrative, and other costs that are indirect because they are not related to the manufacturing process but affect prices. Among these costs, there are as well employee insurances, implementation of the newest technologies, fringe benefits, etc. (Zoebelen, 2015).

According to recent reports, the cost of materials is constantly growing. For instance, it rose from $499 in 2004 to $764 in 2012 (Thompson, 2012). Together with the increased expenditures on energy and transportation, this trend cannot but affect the price of valves. More than that, it is expected that costs will continue to increase, which means that there are two options for the companies – either sign long-term commercial arrangements with the suppliers, thus fixing prices of supplies, or seek alternative suppliers offering valves at lower prices but facing quality-related risks.

Conclusion

Valves market is one of the constantly increasing ones. It is characterized by the constant dependence upon developments in the global and regional economies such as changes in regulations, interest, and currency rates. At the same time, taxation and labor costs are as well related to price formation because they determine the volume of spending in producing a unit of the valve (Thompson, 2012). Because of numerous demand and supply factors influencing price formation, both manufacturers and suppliers are forced to seek ways of achieving sustainability. In most cases, they fall upon long-term commercial arrangements as a tool for supporting and regulating cooperation because they protect sides from unexpected changes in prices and supplies. At the same time, long-term agreements are beneficial for guaranteeing that manufacturers maintain the channel for distributing valves, while other companies decrease the risks of instability due to the lack of equipment for manufacturing their products. To sum up, due to the constant growth of direct and indirect costs related to the production of valves, as well as the inability to foresee some economic developments, these are commercial agreements that determine the volume of supplies and can be used for forecasting the growth of the valves market.

References

Arnold, J. (2016). Web.

Jose, J. (2013). The global industrial valves market. Web.

Richardson, A. (2012). Web.

Rohan, M. (2015). Industrial valve market worth $70 billion by 2019. Web.

Thompson, L. (2012). Web.

Zoebelen, M. (2015). Oil and gas extraction methods to impact industrial valve revenues. Web.

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IvyPanda. "Abu Dhabi National Oil Company's Supply Expenditure." April 29, 2021. https://ivypanda.com/essays/abu-dhabi-national-oil-companys-supply-expenditure/.

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IvyPanda. 2021. "Abu Dhabi National Oil Company's Supply Expenditure." April 29, 2021. https://ivypanda.com/essays/abu-dhabi-national-oil-companys-supply-expenditure/.

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IvyPanda. (2021) 'Abu Dhabi National Oil Company's Supply Expenditure'. 29 April.

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