Disruption in wind energy supply chain has 'turned worse,' Vestas says

Surging raw material prices and supply chain instability will continue to roil the renewable energy industry throughout 2022, Vestas Wind Systems A/S executives said Nov. 3.

Shares in the Danish wind-turbine maker were down about 14% by noon in London, as executives said the issues, which have plagued the company since early 2021, could last for another four to five quarters.

"You always have a little bit of hope that it stabilizes," CEO Henrik Andersen said on the company's third-quarter earnings call. "What has happened in the last quarter is it doesn't stabilize; it actually turned worse."

Supply chain disruptions are now impacting the company's timelines and increasing costs. Two out of three deliveries of components, either to factories or project sites, are delayed or amended, Andersen said.

That is adding to the financial impact of rising commodity prices, which turbine makers have been grappling with for much of 2021 given their reliance on steel as a key component in their machines. Rising demand for iron ore, the raw material used to make steel, has pushed up prices, though the upward trend has slowed down slightly in recent months.

"I know it sounds like that at least the degree of price increases are reducing," Andersen said. "But when steel, key components and other things still increases with 20%, 30% in this quarter, then it is a difficult one for us."

The situation means Vestas now expects its 2021 EBIT margin to be about 4%, down from guidance of 5% to 7% previously. The company already lowered its 2021 guidance from a 6% to 8% range in August.

Vestas expects some respite from the continued disruption of supply chains in 2022 but said the rising cost of raw materials will continue to weigh heavily for many months. In particular, it said the impact of high steel prices will be more material next year given that it pre-bought many components for 2021 at the start of this year.

"It's also other components or raw material that are increasing and having a much, much bigger impact next year than what we have seen this year, and one of them being resin," said CFO Marika Fredriksson, referring to a key component of turbine blades.

Vestas' order backlog for wind turbines stood at €19.3 billion as of Sept. 30, up from €14.6 billion a year ago. Combined with its service business, the company's total order backlog is €47.3 billion.

"Under normal circumstances, we will be really, really pleased with that," Andersen said. "But as you can also hear and see in this quarter, that order backlog gives some challenges in the current environment to execute."

It is difficult for Vestas and other turbine-makers to completely hedge their exposure to the price of key components used to make their products, Andersen said. In some cases, contracts with customers could be adjusted after bilateral negotiations to better reflect the new environment of high raw material prices, but that is often not an ideal solution, he added.

"Passing [cost increases] directly to the customer in the current environment doesn't work ... because there are places where the customer is heavily reliant on getting the solution commissioned, getting it online also under strict conditions," the CEO said.

Vestas' customers are already grappling with an unprecedented surge in electricity prices, Andersen said, adding that he is confident the industry can come together to overcome these issues.

"All of us appreciate we are building a renewable energy system for the next 30, 40 years," the CEO said. "And that, of course, has to take some bumps and some hiccups under the way. This is one of them."