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All quiet on the sub cable front despite financial crisis

Posted on 01.12.2008 - 13:00 EST in SUBSEA TELECOMS NEWS by Rons_ROV_Links

All quiet on the sub cable front despite financial crisisDespite the financial crisis permeating across the global market, the submarine cable sector has yet to show any signs of a slowdown. While bandwidth prices continue to decline, the rate of decline is still consistent with historical trends, says Julian Rawle, managing partner at specialist submarine industry research and consulting firm, Pioneer Consulting.

"Bandwidth pricing general does decline over time. So anywhere you look in the world, you are going to see at least a 5% decline in pricing per year - so that is the baseline inherent price erosion in the market," he said. "So far, we haven't seen any major increase in the rate of decline."

One reason for the lack of apparent impact is that most bandwidth contracts are locked in for a year. It won't be until those contracts come up for renewal that the market will see the full extent of any impact from the current turmoil in the financial markets.

"It will probably take six to 12 months to actually filter through. Most people are taking leases with a minimum of one year, so they are locked into it for a year," he said. "On an average basis, they will start to renew in six months time, so that's when we might see some downward pressure on bandwidth pricing as carriers realise there's less demand out there."

While he does confirm that globally, there's an abundant supply of unlit capacity, that, too, is consistent with the market. "It is certainly true to say, overall, there's still a large capacity overhang. There's somewhere close to, in the region of 16%-17% of the world's submarine fibre optic capacity is actually lit, but that is the nature of the market," he said. "And yes, we are still seeing a lot of new projects, but there are some regions that are getting submarine capacity for the first time. What is also driving it is the need for diversity, particularly in the Asia Pacific after the Taiwan earthquake - there's a drive to try and avoid that situation again."

At the same time, demand is still robust and growing at 30% per annum on a compounded basis, he added.

Credit squeeze

The same is said for the investment landscape for the industry, he continued, adding that most projects that have been announced are already funded.

Also, most of the projects are consortium driven, so the risks are spread across multiple players.

"I think the whole financial crisis is about a credit squeeze and if capital dries up, that's going to make it more difficult for people who've got projects being plan to get the funding for those projects. So we'll probably see somewhat of a slowdown. It's too early really to call it," he said.

"Obviously, different groups have got different access to funding.

Some groups don't need funding at all and are funding their projects internally. What we are seeing at the moment is some customers telling us they are going to be more cautious and taking a slower path towards realizing their new cable projects. I'm not aware of any cancellations yet."

Pioneer projects that investment in cable systems per RFS date will be US$4.8 billion this year, and US$4.1 billion in 2009. The number however will drop to US$0.2 billion in 2010 and 2011, but this is due primarily to the cyclical nature of the market.

"The impact of the current credit squeeze on these numbers is hard to predict at this time. If the crisis is resolved quickly, the impact will probably be minimal," Rawle said. "We are already forecasting a pretty severe downturn in the market around 2010 due to the natural industry cycle so the effect of an extended global recession will probably not have a major impact on these already pessimistic figures."
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