Optical fibre/optical fibre cable -- Betting on a bandwidth surge

Krishnan Thiagarajan

THE optical fibre/optical fibre cable industry is just beginning to reel out in the country.

The slow acceptance of OFC till 1998-99 was because of the excessive reliance of the Bharat Sanchar Nigam (BSNL) (earlier Department of Telecom) on jelly-filled telecom cables (JFTC) for wiring up the nation and the absence of private players to provide a fillip to the OF/OFC market.Moreover, a significant chunk of the OFC capacities were built up by players such as Sterlite, Birla Ericsson Optical, Finolex, RPG Cables, HFCL and Tamil Nadu Telecom only over the past three years.

However, two events happening in close succession in 2000, finally put India on the global OF/OFC map. In March 2000, Sterlite Industries announced its intention to demerge the telecom-related activities of JFTC and OFC from its non-ferrous metals business by creating a separate company, Sterlite Optical Technologies. Following the approval of the demerger by the courts in August 2000, the telecom-related activities began to be operated by Sterlite Optical, while the non-ferrous metal business accrued to Sterlite Industries. Fuelled mainly by the potential of its OF/OFC business and as one of the few integrated manufacturers of OF/OFCs worldwide, the Sterlite Optical stock, since its listing on October 26, attracted the market's fancy -- it touched a high of Rs 1,100-1,180 in the first few months. However, the downturn in the telecom market has taken a heavy toll on the stock since the 2001-02 first quarter and the stock is trading at its 52 week low currently.

The second major event was the initial public offering by Aksh Optifibre in July 2000 to finance an expansion of its OFC/OF capacities and integrate backwards into quartz preforms. Although the initial response to this offer was lukewarm, the stock gathered momentum in November-December 2000 (after listing in August 2000) and touched a high of Rs 170-180 in November-December 2000. But Aksh also suffered more or less the same fate as Sterlite Optical and the stock was beaten down in recent months, especially after certain company-specific developments and earnings performance for the 2001-02 first quarter.

As an industry still trying to find its footing, it is essential for investors/shareholders to realise that the entire dynamics of the optic fibre industry can be better understood by looking at the global developments. Relatively speaking, as an industry with players having much smaller capacities vis-a-vis international majors such as Corning, Furukawa or Alcatel, both the global demand-supply dynamics and international price trends will have a significant influence on the performance of the OF/OFC players in the country.

Global demand-supply: Review time?

The global demand-supply dynamics in the optic fibre industry has been in a state of flux for the past eight months. After the crash in 2000, with its aftershock spilling into the first quarter of 2001, the entire telecom landscape stands transformed.

Before the telecom downturn, Kessler Marketing Intelligence, a reliable outfit for fibre optic research, had forecast that the total global demand for OF (both single- and multi-mode) would grow from 63 million fibre kilometres (mfkm) in 1999 to 193 mfkm in 2003 and 235 mfkm in 2004. In value terms, the total demand for OF was slated to grow from $8.7 billion in 1999 to $17.4 billion in 2004.

These demand projections were made on the assumption that the following demand-drivers would be in place:

*Expected growth in bandwidth-hungry application and services -- such as broadband and 3G;

*The bandwidth demand was triggered by the expectations of a massive surge in Internet traffic, with the Internet being used as a medium for communication and business transactions. According to the International Data Corporation, the number of Internet users worldwide was estimated at 244.6 million in 1999 and forecast to grow to 643.2 million by 2003-end.

*Telecom deregulation, especially in the US with the Telecommunications Act, 1996 which infused competition for Baby Bells from numerous Competitive Local Exchange Carriers (CLECs). The deregulation bug spread worldwide, with expected growth in long distance, metro and last-mile networks.

A slew of bandwidth hungry applications triggered a sharp upsurge in project demand and capacity build-outs on an aggressive scale, making most of the demand forecasts made by research agencies such as KMI Corporation and Ryan, Hankin and Kent seem achievable (see related story). As the US is the biggest user of bandwidth, after the dotcom flame-out and its far-reaching effects on B2C (business-to-consumer) and B2B (business-to-business) transactions, a sharp cutback on funding by telecom carrier giants and its impact on telecom service providers and the pathetic financial state of CLECs, it is likely to make most OF/OFC players review these demand forecasts.

For instance, Corning Inc, the market leader in OF/OFC, announced on August 29 that the weakening demand for optic fibre and cable, primarily in North America and Europe and sudden slowing of orders across all product lines have raised fears that the market growth for 2001 will be significantly lower than the previous 15 per cent outlook. However, Corning projects a robust outlook for bandwidth demand and exponential growth for OF/OFC in the future, the uncertainties call for a scale down in demand estimates at least for 2001 and probably for much of 2002. Much of the growth in the OF/OFC arena will hinge on robust offtake from China, parts of Latin America and the Asia-Pacific.

On the supply side too, considerable changes have been on the drawing board since the downturn in the telecom market. By keeping the technology a closely guarded secret, the existing integrated players have managed to peg the number of players to a relatively low number. By early 2001, the OF/OFC market shares were concentrated among Corning and Lucent in the US, Alcatel and Pirelli in Europe and Furukawa, Sumitomo and Fujikara in Japan.

But even this established order was disrupted during the course of 2001. On account of the deteriorating market conditions, the pace of consolidation, which had been rather slow with Corning, Lucent and Alcatel hogging the ranking of OF/OFC manufacturers till 2000, appears to have gathered momentum. Lucent Technologies, a major player in OF/OFC, got mired in the telecom equipment mess and its staggering losses in 2000 forced it to act decisively. It entered into an agreement to sell its Optical Fibre Solutions business for $2.75 billion to Furukawa Electric Co, Japan (among the top seven players in the OF business), and Corning Inc. The major portion of the OF business of Lucent (consisting of OF, OFC, speciality fibres for DWDM -- dense wave division multiplexing -- and optical connectors) accounting for annual sales of $1.925 billion was acquired by Furukawa for $2.525 billion. In addition, there were the two joint ventures in China by Corning Inc for $225 million, marking its manufacturing presence in China. This acquisition makes Furukawa the second largest player in the OF market, ahead of Alcatel Alsthom Inc, Pirelli, Sumitomo Electric Lightwave Corporation, Shin-Estu and Fujikara.

Second, based on the softening demand for OF/OFC in North America and Europe, in early June Corning was forced to announce a delay in its existing manufacturing OF facility at Concord, North Carolina, by six months and defer the construction schedule of its Oklahoma plant by 12-18 months. Despite the long period taken to stabilise production of OF/OFCs (almost 9-10 months), Corning chose to take this decision. At the same time, it is believed that in parts of Japan and Germany, players such as Shin-Etsu, Japan, and Heraeus, Germany, are expanding their preform capacities to meet growing OF demand from around the world, including India. Although most of the international OF/OFC players, including Corning, are projecting a robust outlook for the bandwidth demand in the long-term, the near-term uncertainties and consolidation process is likely to put pressure on near-term capacity build-up and supply growth. Whether these delays in capacity creations fully remove the oversupply prospects and downward pressure on OF /OFC prices remains to be seen.

Domestic demand supply: A tricky course

Apart from targeting the export market, OFC demand in the domestic market cannot be ignored. According to KMI's research, India is expected to be the fifth largest consumer of single mode optical fibre in the world, after the US, China, Japan and Korea by the end of 2004. Obviously, for the domestic OF/OFC players, the growth is expected to be fed by major capacity creations by BSNL. Going by conservative estimates, say, of the DoT's Perspective Plan for 1997-2007 and other growth plans, it is expected that the OFC demand will grow at a compounded annual growth rate of 35-40 per cent till 2004. And this will account for nearly 80-90 per cent of the domestic demand for OFC.

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The other major sources of demand are likely to be the Railways, Powergrid Corporation, and Gas Authority of India as also such private players as Reliance Infocom and Bharti, which have OFC plans in place. But attributing numbers to proposed capacity creation by these players may be tricky.

In the case of players such as the Railways, slow decision-making may take a toll, while in the case of private players, the attractive OFC price trends and the pace of deployment by BSNL will play a role in deciding whether to build or lease out OFC capacities in the medium term.

The lion's share of the supply is expected to come from Sterlite Optical (including subsidiaries), which has capacities of 1.41 lakh cable km and Aksh Optifibre (81,000 cable km, after the commissioning of its enhanced capacities). These are the only two OFC players with captive OF supplies. The others are standalone OFC players such as RPG Cables, Finolex, HFCL, Tamil Nadu Telecom, Sudarshan Telecom and Birla Ericsson Optical which have to source OF from other players or import them. The latter group has OFC capacities ranging from 10,000-20,000 cable kms.

Price trends: A roller coaster

Globally, OF (with OFC prices moving in sympathy) prices have literally been on a roller-coaster. Spurred by a sharp rise in demand, OF prices recovered from a low of $25-30 per fibre kilometre (fkm) in early 1999 to $35-40 per fkm in April 2000. They steadily rose to $55-60 in October 2000 to $80-90 per fkm in March 2001. But, since then the prices have gone into a tailspin and are now believed to be at $30-35 per fkm. There are fears that if the downturn continues, the prices may touch sub-$30 levels.

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A classic instance of the turbulence caused by this price volatility is the BSNL tendering process for 72,000 km of OFC, recently re-tendered. Following a sharp drop in OFC prices from $80-90 to less than $40 in less than five months in 2001, BSNL was forced to re-tender the entire which opened in August. In the re-tender, most bidders, including Sterlite Optical and Aksh, have had to quote prices in line with the prevailing price trends, a significant decline from the first round.