Depth of the transformer industry: domestic demand + overseas expansion, resonant development of domestic and foreign markets

01. Transformers are widely used downstream

1.1. Transformer is an important component in the power system

Transformers are used to convert and connect voltage levels

What is a transformer? A transformer is an electrical device that can change AC voltage while keeping AC frequency unchanged. Its main components are primary coil, secondary coil and iron core. In the process of power transmission and transformation in the power system, transformer is an important electrical equipment.

Classification of transformers: Transformers can be divided into oil-immersed transformers and dry-type transformers according to different insulation media and cooling methods; single-phase transformers and three-phase transformers according to the number of power supply phases; and amorphous transformers according to different iron core raw materials. Alloy transformers and silicon steel sheet transformers.

1.2. Transformers are widely used downstream

Transformers have a wide range of downstream applications

Transformers are widely used in many fields, including power grids, new energy (wind, solar, storage), rail transit, electric vehicle charging piles, industrial manufacturing, infrastructure, real estate construction, etc.:

Power grid: Transformers of different voltage levels are used in different links. According to the "Urban Power Network Planning and Design Guidelines", voltages of 220kV and above are power transmission and transformation systems, 35, 63, and 110kV are high-voltage distribution systems, 10 and 6kV are medium-voltage distribution systems, and 380 and 220V are low-voltage distribution systems. . The transformation of voltage in different links requires the use of transformers of corresponding grades.

Transformers have a wide range of downstream applications

New energy: The grid connection voltage level is related to the installed capacity scale. Take photovoltaics as an example. Photovoltaic cells convert solar energy into low-voltage direct current. Since the power grid and most electrical equipment use alternating current, the inverter converts direct current into alternating current. The general output is 270V or 400V. If it needs to be connected to the grid, it needs to be upgraded. voltage transformer. According to the State Grid Corporation of China's "Opinions and Specifications Related to Distributed Power Supply Grid Integration (Revised Edition)" (State Grid Office [2013] No. 1781), photovoltaic power stations ① have a capacity of less than 8kw and generally do not need to boost the voltage and are connected to 220V power supply; ② Capacity 8-400kW, connected to 380V power supply, if the layout is dispersed, a booster is required; ③ Capacity 400kW-6MW, generally boosted to 10kV; ④ Capacity 5MW-30MW, generally boosted to 35kV. In addition, when the photovoltaic installed capacity is 30MW and above, it generally needs to be integrated into the power grid with a voltage level of 110kV and above. Since the integrated voltage level is relatively high, it generally needs to be boosted twice, first to 35kV locally, and then to Boost to output voltage.

02. Demand side: Global power grid investment enters a boom cycle

2.1. The development of European and American power grids lags behind, and there is an urgent need for power grid investment.

The aging problem of European and American power grids is prominent. According to the IEA report, only about 23% of the power grid infrastructure in developed economies is less than 10 years old, and more than 50% of the power grid infrastructure is more than 20 years old, especially in Japan, Europe and the United States. Old equipment is in urgent need of upgrading and updating. Looking at transformers.

United States: Hoffman & Bryan already mentioned in 2014 that 70% of large transformers in the United States have been used for more than 25 years. At the same time, as the United States has been frequently affected by natural disasters caused by extreme weather in recent years, reconstruction has consumed a large amount of transformer inventory, and the replacement demand for transformers in the United States is imminent;

Europe: According to Eurelectric& Deloitte, in 2020, the proportion of medium & low-voltage transformers in France, Spain, Sweden, Denmark, and Hungary that have been used for more than 40 years will reach 20%, 28%, 20%, 25%, and 32% respectively.

Europe and the United States are increasing investment in power grids to support the transition to new energy.

Europe: Currently, the EU invests approximately 23 billion euros per year in expanding the distribution network. According to the European Electric Power Industry Association (Eurelectric), in order to achieve its climate goals, Europe should increase its annual distribution network investment to 38 billion euros by 2030. According to Bloomberg, the European Commission will develop a plan of up to 584 billion euros (approximately RMB 4.55 trillion), which will focus on power grid upgrades, especially cross-border power grid upgrades to better integrate Offshore renewable energy. According to the Economic Daily in December 2023, the British National Grid Corporation announced that it would expand its investment in the British power grid system from 2025 to 2026, with an additional capital investment of 2 billion pounds, bringing the overall investment plan to 42 billion pounds, mainly to increase Large investments in UK onshore and offshore power transmission projects.

United States: In 2022, the Biden administration in the United States, through the U.S. Department of Energy (DOE), announced an allocation of US$13 billion to expand and modernize the national power grid. The U.S. Energy Administration states that in order for the grid to support the rapid growth of new energy sources, meet the needs of electric vehicles and home heating, and reduce the impact of blackouts due to extreme weather, the U.S. transmission system will need to expand by 60% by 2030 and by 2050. Capacity needs to be tripled from current levels.

2.2. The scale of large-scale industrial reshoring projects in North America continues to grow.

From January 2021 to the fourth quarter of 2023, the scale of large-scale industrial reshoring projects in North America has reached approximately US$933 billion. According to Eaton's 2023 fourth quarter report, the scale of large-scale industrial reshoring projects in North America in 2023 increased by approximately US$415 billion compared with 2022. The scale of large-scale industrial reshoring projects in North America in 2023Q4 increased by approximately US$81 billion compared with 2023Q3. From January 2021 to April 2023, The scale of large-scale industrial reshoring projects in North America reached approximately US$933 billion in the quarter.

2.3. Emerging economies have increased investment in infrastructure & power grids, and the demand for supporting power equipment has increased.

Emerging economies are the engines of global electricity consumption growth. According to the report "Electricity 2024" released by the IEA on January 24, 2024, global electricity demand will grow by 2.2% in 2023, with emerging economies being the main contributor. The IEA predicts that with the recovery of industry, the continued electrification of residences and transportation, and the application of big data & AI & cryptocurrency, by 2026, 85% of the growth in electricity will come from emerging economies, with source countries mainly including China, India, Southeast Asia, etc. We believe that with the rapid growth of electricity demand, the demand for supporting power equipment in emerging economies will grow rapidly.

MENA (Middle East and North Africa) vigorously promotes infrastructure projects. The member states of the Gulf Cooperation Council in the Middle East include Saudi Arabia, the United Arab Emirates, Qatar, etc. In order to reduce the region's dependence on oil resources and enrich its economic development structure, they are actively deploying infrastructure projects, including Egypt's plan to build 20 new fourth-generation cities to accommodate 30 million people; Saudi Arabia has invested US$500 billion, US$59 billion, and US$28 billion in Neom Future City, King Abdullah Economic City, and Jeddah Economic City respectively. In order to meet the energy supply of these cities, the demand for power equipment is expected to promote.

MENA (Middle East and North Africa) renewable energy installed capacity has increased rapidly, increasing investment in grid interconnection. According to the report "Anuual MENA Energy Investment Outlook 2022-2026" released by AICORP, the newly installed renewable energy capacity in the MENA region will be nearly 5.6GW in 2022, and it is expected that the newly installed renewable energy capacity in the MENA region will reach 33GW from 2022 to 2026. As the proportion of renewable energy installed capacity increases, increasing investment in grid interconnection is expected to become an effective means to solve the problem of overload operation of the grid. According to the official account of the China International Contractors Association, taking Egypt as an example, the cross-border power grid projects that have been completed include Egypt-Libya power grid, Egypt-Jordan power grid, Syria-Jordan power grid and Syria-Lebanon power grid. At the same time, Egypt-Saudi Arabia power grid, Egypt - Sudan-Chad-Central Africa-Congo (DRC) power grid and Egypt-Jordan-Iraq power grid are also being implemented steadily. The "Energy & Utilities 2020 Market Outlook Report" released by Informa Markets stated that by 2027, the Middle East will invest US$17.6 billion in smart grid construction.

South Africa’s electricity transmission network will expand rapidly. According to the "Transmission Development Plan 2023-2032" released by the South African State Electricity Company (Eskom), South Africa will add an average of 434.7km of transmission lines annually from 2013 to 2022, and an average of 1906MVA of new transformation capacity each year. From 2023 to 2032, South Africa is planned to An average of 1,421.8km of new transmission lines have been added, and an average annual new transformer capacity of 10,586.5MVA has been added. The annual average values increased by 227% and 455% respectively compared with 2013-2022. According to the Ministry of Commerce website, South Africa's State Electricity Company (Eskom) stated that its transmission unit is currently formulating a five-year investment period, during which it plans to invest R70 billion in the construction of new power lines and transmission capacity; it is expected to be About R250 billion is needed to build new transmission lines.

2.4. China: Distribution network investment is expected to accelerate

Distribution network transformation drives demand for distribution transformers. During the "14th Five-Year Plan" period, investment in the two distribution networks is expected to reach 1.5 trillion yuan. Large-scale investment in distribution networks will drive demand for distribution transformers, mainly in two directions:

Energy-saving transformation of distribution transformers: In March 2024, the National Development and Reform Commission and the National Energy Administration issued the "Guiding Opinions on the High-Quality Development of Distribution Networks under the New Situation", which pointed out that in 2025, power grid enterprises will completely phase out S7 (including S8) types. And for distribution transformers with an operation period of more than 25 years and energy efficiency that does not meet the admission level, the proportion of transformers with energy efficiency and energy saving level and above in operation in the whole society will increase by more than 10 percentage points compared with 2021.

Distribution transformer expansion: 1) Improvement of the "two rates for one household" standard of rural power grids: According to the "Guiding Opinions on Implementing the Rural Power Grid Consolidation and Upgrading Project" issued in July 2023, the rural power grid power supply reliability rate and comprehensive voltage qualification rate in the eastern region , the average distribution transformer capacity per household shall not be less than 99.94%, 99.9%, and 3.5 kVA respectively, and the central and western and northeastern regions shall not be less than 99.85%, 99.2%, and 2.3 kVA respectively. The requirements during the 13th Five-Year Plan period are national The above indicators in rural areas are no less than 99.80%, 97.90%, and 2 kVA respectively; 2) With the large-scale access to distributed photovoltaics, the demand for distribution transformer capacity expansion/new construction has increased; 3) The maximum load has increased year by year and large-scale Affected by factors such as fast power charging access: Distribution transformers should be expanded to prevent overloading.

China: Rapid growth in new energy installed capacity drives demand for boosters

The rapid expansion of photovoltaic installed capacity has driven the demand for photovoltaic step-up transformers. Domestic photovoltaic power stations need to be equipped with step-up transformers and substation equipment. According to QY research statistics, China's photovoltaic booster market size will be US$313 million in 2022, accounting for approximately 38.87% of the world's total. The newly installed photovoltaic capacity will reach 216.88GW in 2023, a year-on-year increase of 148.1%. We believe that as the transformation of new energy accelerates in the future, the demand for photovoltaic step-up transformers will continue to increase.

New energy storage installed capacity is expected to achieve high growth, increasing the demand for energy storage transformers. According to CNSEA statistics, the new operational scale of new energy storage in 2023 will be 21.5GW/46.6GWh, which is three times the new operational scale in 2022. Driven by low upstream raw material prices, continued improvement of policies, and exploration of business models, the economic advantages of energy storage are gradually emerging, and the installed capacity is expected to increase. CNESA predicts that the newly installed capacity of new energy storage will exceed 35GW in 2024, continuing its rapid growth trend. Transformers are one of the key components of energy storage power station conversion systems, and the rapid growth of energy storage installed capacity will continue to increase the demand for energy storage transformers.

2.5. The orders and performance of leading overseas power equipment companies are outstanding - Take Eaton, Schneider, and Hyundai Electric as examples

Eaton: In terms of orders, Eaton's electrical business orders on hand in 23Q4 were US$9.5 billion, more than three times that of 19Q4. In terms of revenue, in 23Q4, Eaton's Americas and global electrical businesses achieved revenue of US$2.672 billion and US$1.512 billion, a year-on-year increase of 16% and 6% respectively; for the full year of 23, Eaton's Americas and global electrical businesses achieved revenue of US$10.098 billion and US$6.084 billion. billion, a year-on-year increase of 19% and 4% respectively.

Schneider: In terms of orders, Schneider's backlog of orders (including industrial automation and energy management business) reached 19.2 billion euros in 2023, more than double that of 2019. The company said that the number of orders on hand for the energy management business in 2023 increased. Faster. In terms of revenue, Schneider's energy management business achieved revenue of 28.24 billion euros in 2023, with an organic growth rate of 14.4%. In terms of regions, North America achieved revenue of 10.449 billion euros, with an organic growth rate of 19.5%, and Western Europe achieved revenue 6.658 billion euros, with an organic growth rate of 11.6%. Asia-Pacific achieved revenue of 7.802 billion euros, with an organic growth rate of 8.3%. Other regions achieved revenue of 3.331 billion euros, with an organic growth rate of 20.1%.

HYUNDAI ELECTRIC: In terms of orders, in 2023, Hyundai Electric received orders of US$608 million and US$1.179 billion in the Middle East and North American markets, a year-on-year increase of 17% and 15% respectively. In terms of performance, the company achieved revenue of 797.3 billion won in 23Q4, a year-on-year increase of 17.7% and a month-on-month increase of 14.8%, and a net profit of 139 billion won, a year-on-year increase of 202.2% and a month-on-month increase of 156.0%. In terms of regions, the Middle East market achieved revenue in 23Q4 206.3 billion won, a year-on-year increase of 21% and a month-on-month increase of 18%. The North American market achieved revenue of 206.1 billion won, a year-on-year increase of 75% and a month-on-month increase of 13%.

2.6. China, the United States and Europe are the world’s major transformer demand markets.

China, the United States, and Europe are the world's major transformer demand markets. According to the report "CLEAN ENERGY TRANSITION: THE IMPACT OF EVS AND RENEWABLES ON TRANSFORMER MARKET" released by CWIEME BERLIN in May 2022, in the global power transformer market in 2021, the Asia-Pacific/North America/Europe regions will account for 49%/21%/ respectively. 13%, China accounts for 36% of the Asia-Pacific region, and the United States accounts for 78% of the North America region; in the global distribution transformer market in 2021, the Asia-Pacific/North America/Europe regions account for 52%/22%/13% respectively, and China accounts for 43% of the Asia-Pacific region. %, the United States accounts for 80% of North America.

2.7. The global transformer market is growing steadily

Global grid investment needs to accelerate. According to the IEA report, the annual global power grid investment from 2016 to 2022 averaged approximately US$320 billion. If the climate commitments (APS) made by governments around the world are to be realized, the annual global power grid investment from 2023 to 2030 will need to reach approximately US$500 billion from 2031 to 2031. Annual global power grid investment needs to reach US$775 billion in 2040; and if the net-zero carbon dioxide emissions target (NZE) is to be achieved in 2025, global power grid investment will need to increase to a certain extent compared with the above amount.

The global transformer market is growing steadily. According to GMI forecast, the global transformer market will grow from US$58.8 billion to US$109.5 billion in 2023-2032, with a CAGR of 7.2%;

In terms of market size, the transformer market space for power distribution in Europe, North America, Asia-Pacific, the United States, and the Middle East is expected to be US$10.3 billion, US$16.4 billion, US$22.4 billion, US$11 billion, and US$1.7 billion respectively in 2023;

In terms of market growth rate, the CAGR of the transformer market space for power distribution in Europe, North America, Asia-Pacific, the United States and the Middle East is expected to be 8.7%, 8.2%, 5.7%, 7.2%, and 6.8% from 23 to 32 years.

2.8. The import demand for transformers in the United States is increasing rapidly and is higher than the export growth rate.

The import demand for transformers in the United States is increasing rapidly.

According to USA trade Online, based on customs codes (850421, 850422, 850423, 850431, 850432, 850433, 850434), the import volume of U.S. transformers in 2023 will be US$5.698 billion, a year-on-year increase of 45.83%, and the export volume will be US$892 million, a year-on-year increase of US$892 million. The growth rate is 18.20%; in 2022, the import volume of U.S. transformers will be US$3.907 billion, a year-on-year increase of 36.51%, and the export volume will be US$755 million, a year-on-year increase of 22.04%. We believe that the difference in import and export growth rates in 2023 is significantly higher than the growth rate difference in import and export volumes in 2022, reflecting the rapid increase in dependence on U.S. transformer imports.

03. Supply side: Overseas manufacturers have limited supply capacity

3.1. Oriented silicon steel and copper are key raw materials for transformers

The direct material cost of the transformer accounts for a relatively high proportion. According to the Jiangsu Huachen prospectus, the main raw materials purchased for transformer products include copper, oriented silicon steel, electronic components, insulation materials, steel, aluminum, etc., of which copper and oriented silicon steel account for the largest proportion. Copper materials mainly include electromagnetic wires, copper foil, copper rods, etc.; oriented silicon steel is mainly used to make iron cores; in 2021, the direct material cost of dry-type transformers accounted for 89.59%, and the direct material cost of oil-type transformers accounted for 92.80% %.

3.2. Raw material end: Grain-oriented silicon steel supply capacity is limited

The United States is highly dependent on imports of grain-oriented silicon steel. According to SMM, China's grain-oriented silicon steel production capacity accounts for 56% of the world's total, followed closely by Japan, the United States, and South Korea, accounting for about 11%, 7%, and 7% respectively.

However, according to the DOE report, there is only one manufacturer in the United States that produces grain-oriented silicon steel. Compared with imported grain-oriented silicon steel, its product quality and price cannot meet the local demand in the United States. It is expected that the expansion of grain-oriented silicon steel production capacity in the United States will be difficult. According to statistics from USA trade Online, the import volume of oriented silicon steel in the United States reached US$56.4938 million in 2023, a significant increase of 184% year-on-year, and South Korea accounted for 91%. In addition, according to TE statistics, the top three import sources of EU oriented silicon steel in 2023 are Japan, China, and South Korea, with import amounts accounting for 47%, 36%, and 5% respectively.