Under a fixed GDP growth plan, China is slated to produce over 600 million tons of steel this year. If China hits or nears that mark, demand for iron ore could reach record levels and spot prices could rise 40% over 2009 levels. Add the likelihood of higher export tariffs on iron ore from producing nations and the upward pressure on iron ore prices has momentum — enough to carry it through the first half of 2010 at least.
The single moderating factor is economic inflation. Such a rise in raw material costs (iron ore prices are increasing at their fastest rate since July 2008) would bring substantial inflationary pressure to bear on the world’s economies, particularly in developing nations. Widespread adoption of anti-inflationary measures by industrial and developing nations would tamp down demand for steel and iron ore as higher interest rates impede the capitalization of large construction and public infrastructure projects.
So far, the People’s Bank of China has kept its benchmark interest rate at 5.31% (since December 2008), but PGR’s network consistently points to growing pressure on the bank to adjust its rates upward. Exacerbating the raw material situation, China will be a major player in the spot market for ore if, like last year, major exporters (BHP, RIO, VALE) are unable to come to agreement on long- term contracts. Last year after negotiations with producers failed, China ended up buying over 60% of its iron ore on the spot market where prices are typically far higher than contract prices.
Rising ore prices are also a result of government tariffs where certain producing nations are levying export taxes in support of indigenous steel production.
India is a recent example having imposed a new export tax and raised its export duty to add approximately $5/metric ton to the cost of iron ore out of that country. PGR has several experts who believe this tax could go as high as $20/ton in 12 months time. Others think $8/ton or somewhere in between would be more likely as such cost increases would render India’s iron ore less competitive on the world market. A moderating factor is also in the fact that India produces low quality ore (sub-60 iron quality), which is used primarily in China.
Reports indicate that Brazil, the second largest exporter of iron ore, will tax iron-ore exports this year. Support for this outlook is in the Brazilian government’s effort to persuade VALE to create internal jobs and domestic spending by constructing its own steel plants.
Of course, steel makers who obtain ore without added tax penalties i.e., material out of the U.S. and Australia, will have better margins.
Renewed interest in packet core networks over the past several months has generated new product announcements from infrastructure equipment vendors and touched off a round of acquisitions in the space as well.
I should say that packet core networks are not new. They’ve been used to backhaul IP data traffic to servers and other nodes on the Internet since the days of 2.5 G/GPRS networks. The central player in the packet core network is the Gateway GPRS support node (GGSN) in GSM/UMTS networks — a powerful router that performs multiple functions including user authentication, traffic forwarding and management, support for thousands of sessions, data records/billing, tunneling across multiple GGSNs, etc.
That said, the packet core network’s new prominence is the result of a phenomenal increase in mobile data applications and traffic driven largely the result of a multitude of all-you-can-eat data plans from carriers. Another significant factor driving demand for packet core routers is WiMAX, which is being adopted at a great rate for fixed and nomadic IP data applications, especially in developing nations. The ASN gateway packet node is the key component of WiMAX’s core and, although not a cellular network substitution or replacement, there is a sizeable overlap in the functionality of the ASN gateway and cellular networks’ packet core nodes.
Looking ahead, as the industry moves through the transition to Long Term Evolution (LTE), often categorized as 4G technology, the packet core needs equipment that not only meets today’s amped-up capability requirements but must accommodate future expansion as well. Interestingly, several packet core node vendors are targeting sales to the LTE core network, also known as the Evolved Packet Core (EPC). Unlike today’s 3G networks, EPC provides an “all-IP” aspect that carries voice traffic over IP.
Girding up for what’s next
Packet core equipment vendors include the traditional mobile infrastructure market leaders, among them Ericsson, Nokia, Siemens, Alcatel-Lucent, Hitachi (which recently acquired Nortel), Huawei and ZTE. But smaller startup companies are also making their presence known. For example, WiChorus saw initial success in the WiMAX space and enhanced its product line with offerings for the LTE Market. Tellabs recently acquired WiChorus and will integrate its product into the highly successful 8800 Multiservice Router.
Cisco also acquired a small startup, Starent, in response to its recent success with Verizon. Starent’s ST-series Multimedia Core Platforms connect to multiple types of access networks, including UMTS, WiMAX and LTE EPC. The core software runs StarOS, a variant on Linux, and the platforms incorporate hot swap capability, redundancy, and a variety of other carrier class features. Unlike the larger vendors, Starent and WiChorus offer software systems that are easier to scale for various uses and capacities. Their core products are purpose built and designed from the ground up.
A number of equipment vendors, including Hitachi, NEC, NSN and ZTE, offer modified Advanced Telecommunications Computing Architecture (ATCA) platforms as the basis for their packet core nodes. These “Big Iron” packet core nodes have a multi slot chassis populated with high capacity cards and often have network processors/ASICs/switching devices. The network processors/ASICs are useful for deep packet inspection (DPI) that, allows the node to shape/police/report traffic based on embedded content although no operator will publicly admit it. Companies such as Ericsson and Starent rely on custom-built platforms to address this market.
Ready and not
It will be interesting to see Juniper’s roadmap for the packet core network as it is fleshed out over the next few months. Juniper was supposed to partner with Starent, but instead was acquired by Cisco. Juniper also partnered with Ericsson for the 3G packet core (GGSN), but won’t be involved on 4G equipment. And Ericsson’s 2006 acquisition of Redback appears prescient as it provides credibility for the company’s IP technology with the service provider network.
Some reports have Alcatel-Lucent addressing the packet core by adding functions to the 7750 service router platform, which they gained in the TiMetra acquisition and saw significant success with in the metro Ethernet space. This also has high credibility with service providers.
Lastly, Huawei’s success in Europe and Asia does not make it a major player in the North American market. Observers indicate Huawei’s presence depressed bids and profits of European manufacturers of next generation packet cores.
We are at the forefront of an exciting period for data center design and innovation driven by what is occurring in three separate-but-fast-converging market segments: co-location businesses, managed services vendors and cloud providers.
Our view today is that the future, and fortunes, of each segment is inextricably linked and that the relationship of key conditions in each segment — capacity for co-lo, profit margin for managed services and technology innovation for cloud providers — will meaningfully define the opportunities, challenges and performance of what we see as a truly amalgamated marketplace in the next 10 years. Briefly, here is what PGR’s network is reporting:
Capacity — Enterprises suffer a data center capacity shortage brought on by a dearth of viable real estate, a state of affairs that PGR’s network consistently characterizes as fundamental rather than temporary. The capacity squeeze is made worse by growing demand from SMBs among others that want to get out of the data center business with its acute heat/power problems.
Margin — Right now, SMBs and enterprises are willing to pay a premium for the value added by managed services providers. We believe this will result in continued high margins for managed services providers over the foreseeable future.
Technology innovation — While it is clear that elements like SAAS are accelerating, all of the technologies related to bill-back, security and private clouds and back-end support for performance enhancement among others are immature. A lot of heads are “in the clouds” right now and speculation about what is coming and what will occur as a result is intense.
Looking at the three segment reports above, it is clear that developments and conditions in one segment weigh strongly on the others. Thus, factors that impact co-location vendors inevitably affect the prices enterprises are willing to pay managed services providers and create opportunities for cloud providers to innovate to solve IT challenges.
PGR’s network believes BIDU has the most to gain should GOOG pull out of China. However, others stand to gain as well including MSFT’s Bing, SOHU’s Sogo, Alibaba, SINA, and SOHU albeit to a far lesser extent. Why? Well, GOOG was very good at monetizing traffic, thus its revenue pie would not likely transition altogether to other players who monetize less effectively.
Experts note that BIDU’s Phoenix Nest continues to weigh on ad spending at the site in the near term as improving click-throughs give advertisers the same results for less, reducing ad spending. Longer term, marketers believe BIDU’s improved performance will attract more dollars by providing more qualified leads and higher conversions.
Of course GOOG hasn’t quit China yet and at least one network expert suggested China’s government may quietly accede to uncensored search results. The rationale being that information on Google.cn is less threatening than what could potentially occur in web 2.0, which is where censorship is focused today.
Referencing spending plans, PGR’s network sees strong growth in Chinese and global online advertising in 2010. Experts also note increased experimentation with advertising on Chinese social-networking and video sites, where usage is growing strongly.
Any number of pundits will tell you BRCD is on the ropes, hanging by a fingernail, ready to succumb to a combination of 1.) flat growth rates in FC and, consequently, no TAM to fuel BRCD’s expansion in the data center; 2.) technology obsolescence at the hands of FCoE and big price and margin erosion in core storage products due to insufficient differentiation; then 3.) a plunge into the really deep end with the Foundry acquisition, which the punditry avers will destroy BRCD’s very foundation.
Sounds pretty bad. But wait! Our checks show BRCD is far from rolling over, taking it on the chin or moving to the Jersey Shore. In fact, PGR’s network accentuates the positive noting BRCD style and panache that should stand it very well this year. Check it out:
FC demand is robust because of refreshes and green-field opportunities. If someone counted the total number of FC cable, HBAS and switches in 2010 vs. 2009, they might not see a big difference but it seems no one is counting the huge “rip and replace” opportunity in the ongoing storage and data center consolidation build out.
There is a huge co-location capacity squeeze. New co-lo space is expected to come on line throughout 2010. And, although SANs by and large do not saturate BRCD 8Gb/sec Director class switches, it is only an INCREMENTAL cost to refresh the SAN with high-performance products as part of an upgrade in the co-los. Furthermore, BRCD is well positioned to handle FCoE when it becomes real. That and CSCO has stopped attempting to “buy accounts” with the largely unimpressive Andiamo legacy products. Hence, we do not expect accelerating product erosion.
Everyone likes to say that if BRCD could “do it over again,” they would have given the Foundry acquisition a second thought. However, the reality is that BRCD controls its own destiny if it can manage the integration of the Foundry products well. In that scenario, it is quite possible for BRCD to “pick off” some incremental share from the likes of JNPR. And, with sufficient effort, they can move up in the networking hierarchy. HPQ’s acquisition of COMS is the end of any possible merger with BRCD because the war in the data center between CSCO and HPQ will center around the winner of the storage battle. All that and BRCD is a free agent that can join either side.
Checks with PGR’s network show an outlook for continued healthy sales revenue from BCSI but at the expense of some margin going forward as price pressure from Websense (WBSN) and others forced BCSI to add a free year of maintenance to lock in contracts. PGR experts also note that to make real headway against WBSN, Cisco’s Ironport and others, BCSI needs a better price point and product in the mid-market range. That said, BCSI’s 9000 series is seeing a good adoption rate among high-end users who were “waiting for this.” So, with sales and near-term pipeline in good shape, BCSI’s margins and future product to penetrate the mid-market are concerns.
Calix, a strong player in the growing wireline access (GPON/DSL/IPTV pipes) segment has a singular focus on Tier-2/Tier-3 markets, which in the near-term bodes quite well as the Tier-2/3 segment is in line to receive most of the funds made available through the federal government’s Broadband Stimulus Program to build out the nation’s broadband network, part of the multi-billion-dollar American Recovery & Reinvestment Act’s (ARRP). Tier-1 companies largely passed on Broadband Stimulus.
Calix focuses on wireline access solutions of all types: DSL, GPON and ActiveEthernet. The company’s systems allow service providers to go beyond mere connectivity and reach for the brass ring of extended communications services and revenues that is driving the transformation from legacy circuit to packet; from narrowband to broadband; and from copper to fiber networks.
Wireline is the true grail. Industry headlines may all be about next-generation wireless but wireline access deployment is the key to the reliable, cost-effective, very-high-speed pipes that are the foundation for Telcos’ entry to the IPTV space.
Calix provides the entire solution ecosystem for the wireline systems. Though it started as a DSL/next-gen voice company called Broadband Loop Carrier, Calix added GPON capabilities through the acquisition of Optical Solutions Inc., and carried out a technology refresh to evolve its product portfolio from ATM to IP/Ethernet. There’s a lot to like: Calix enjoys a strong market position and is the market leader in the Tier-2 segment with good customer traction. The company has a strong, comprehensive product portfolio that is well positioned to address all wireline access market needs. As noted they are a beneficiary of Stimulus funds over the next 12-18 months and Calix is aggressively addressing growth markets such as IPTV and GPON.
But Calix also has significant challenges. The company has not succeeded in expanding into Tier-1 or international accounts where strong, well-established players maintain deep, long-standing relationships with their customers. As a result, its upside potential is limited because once ARRP infrastructure funds to Tier-2/3 carriers are deployed, Calix has little opportunity to grow at a rate higher than the organic growth of the Tier-2/3 segment in the U.S. Add to that concern over the long-term competitiveness and operational viability of many Tier 2 & 3 carriers, Stimulus funds notwithstanding, and the wireline access market is fiercely competitive with margins under 30% and relatively high R&D costs.
Overall, this is a growth market characterized by a few technology shifts. Verizon’s bold FTTP initiative has spurred a deep-fiber build out by many other carriers, enabled to a much greater degree by the ARRA Broadband Stimulus program. Calix stands to gain significantly from this build out as it has focused on Tier-2 and Independent Operating Companies (IOCs)/Rurals, again, those that are in line to receive the bulk of the funds.
The next-gen wireline access market is segmented by types of customers, and different players have strengths in different segments. Also, with almost no international presence, Calix is viable only in North America. Still, Calix’s focus on the Tier-2/Tier-3 market of North American wireline carriers brings a long customer list to bear that includes CenturyLink, Windstream, TDS Telecom and many other smaller companies.
Looking at the competitive landscape, the Tier One customers (AT&T, Verizon, Qwest) are largely the domain of Alcatel-Lucent, Motorola, Adtran and Ericsson. The Tier-2 customers (CenturyLink, Windstream, Frontier etc.) are serviced by Calix and Adtran and Tier-3 customers (IOCs/ Rurals, etc) see Calix, Enablence and Occam.
After a brief lull due to capital budget freezes and uncertainty around the specifics of the HITECH Act, there appears to be real progress in the adoption of Electronic Health Records (EHRs) and Revenue Cycle Management (RCM) systems.
A combination of HITECH money, an increasing number of Pay-for-Performance programs and favorable financing options from IT vendors is driving the adoption of EHRs. And, with a clearer definition of Meaningful Use, even more deals are expected to close.
Our network reports an obvious increase in deals in Q4; activity that is expected to continue to ramp up through late Q1 and into early Q2 as pressure increases to be online by the 2011 deadline.
So, has this activity got legs or is it a one-time spike for the major players – MDRX, QSII, MCK, ATHN? Too early to say, frankly, but of these names ATHN appears best positioned to sustain growth with a best-of-breed RCM product and a market focus that includes sectors such as large physicians’ groups that do not directly benefit from the stimulus plan.
Silicon prices from major producers have declined almost 20 percent over the past few months and, while a couple of producers maintain they are holding fast, the fact that most have reduced prices will be pressure enough to create equilibrium on the low end. As to pricing trends in 2010, our network thinks silicon prices will hold steady into Q1-10 as wafer/cell/module vendors buy raw material in preparation for Q2-10 demand from Germany (especially if they expect a FiT reduction on July 1). Past that, however, raw material purchases are expected to slow by May 2010, at which point prices will soften again as it takes about 2 months for polysilicon to be converted to modules.
After delays and speculation over the release of more stimulus money for genomics research, the National Institute of General Medical Sciences/NIH granted $42.3 million to 14 research teams last week. http://bit.ly/4OtM5U
Up until this announcement, most experts in the next-generation sequencing space had been underwhelmed by the support received by labs. They expected a lot more funding to be made available in 2010, and this has been manifested in these Grand Opportunity grants. While this is definitely a win for the research industry, there are still questions from those in the sequencing space of how much money will actually be invested in a technology that has yet to prove a significant ROI. Pharmaceutical companies, especially with their tighter research budgets, are gun-shy after being burned from their investments in microarray and genomics technologies. But for the long-term thinkers, there is no doubt that the sequencing and gene expression platforms from ILMN, LIFE, Roche, and other up-and-coming companies will transform biomedical research and personalized medicine.
With most of the business coming from research labs, and with an unprecedented amount of grant writing observed by the PGR network, all the major players in the sequencing and gene expression space are expected to benefit from the stimulus funding. In addition to research labs, small biotechs and services companies that recognize the power of these tools are popping up and will reap the rewards as DNA, RNA, and protein analysis becomes a ubiquitous practice in developing diagnostics and drug development. In a time when pharmaceutical and hospital spending is down, the research arm is where the future lies.
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