Industrial Gas Market Faces Upward Pricing Pressure from High Energy Costs

14 May 2001 00:00  [Source: ICB Americas]

By Eleanor Van Savage

High energy and electricity costs, combined with weakening demand in certain segments, is placing margin pressure on industrial gas producers. Producers have responded with price increases as they try to recover input costs and improve margins.

Energy costs remain a significant issue, as electricity is the single largest component of the cost-of-goods-sold line item for industrial gas producers. Continuing a trend in the first quarter, the major players have announced price increases to keep up with rising energy costs.

Praxair Inc. announced the latest, on May 2, notifying its US merchant customers that nitrogen and oxygen prices are increasing from 7 to 13 percent, and prices for argon, hydrogen, carbon dioxide and helium will go up by 12 to 18 percent. Surcharges were also increased for nitrogen and oxygen, depending on plant conditions. Helium surcharges were added based on rising feedstock costs.

Air Liquide America Corp. introduced two price increases--one in January and one in May. "We have no choice but to pass on these increases to our customers. Energy-related costs are 60 percent of our production costs. The goal is to maintain margins and recover cost increases," says Francois Venet, senior vice-president, industrial customers, Air Liquide America.

In March, Air Products & Chemicals Inc. announced price increases, effective April 16, for liquid/bulk oxygen and nitrogen of 10 percent. Argon increased by 20 percent, helium by 15 percent, and hydrogen by 20 percent.

The company also increased its monthly service charge for existing customers and will begin charging for upfront costs of tank installations in North America.

The company had earlier announced a reduction of discounts in cylinder/dewar rentals, effective February 1 and increased freight fees and hazardous material fees to help offset increasing costs.

"We have had some successful price initiatives in the US, over and above the surcharges required to recover extraordinary energy (power and natural gas), and transportation costs (fuel and drivers). The tenor and tone of pricing has changed, and we are getting the marketplace to respond. In addition, we have begun charging for services where we previously had not," says an Air Products official.

BOC, which does not make public its price increases, says that its price increases have stuck because "customers recognize that energy costs are real and changing, and they have these costs in their own businesses," says Stan Borowiec, BOC vice-president of marketing and product management. "Just look at the blackouts rolling through California right now," he adds.

The energy situation is not only affecting pricing, but also industrial gas supply, particularly in hard hit energy areas in California. "There is undersupply related to the availability of power. For example, the West Coast is in an undersupply position. If a plant is shut down for one hour, it can lose from one-third to one-half of production for the day. It can take from four to 10 hours to go back up to commercial grade. Some markets, of course, are oversupplied, mainly the Northeast," says Air Liquide's Mr. Venet.

Industry operating rates are at roughly 80 to 82 percent, but some see improvement in the supply/demand balance. "The industrial gas industry's manufacturing capacity footprint exceeds current demand, due in part to the aggressive capital expenditure cycle of the industrial gas majors in the 1990s," says Lehman Brothers analyst Timothy Gerdeman. "But the good news is that they now understand this critical issue, and have become much more rational as it relates to future capacity additions/expansions, which will allow demand to catch up with capacity, and the eventual increase in capacity utilization rates will drive up financial returns," he notes.

The $34 billion global industrial gas market is expected to reach $38 billion by 2002. It historically grows at a 1.5x-2.0x multiple of industrial production, according JP Morgan estimates. Real annual growth in the worldwide gas business is projected at least 4.5 percent through 2006, according to J.R. Campbell & Associates Inc..

However, in the near-term, the current supply/demand balance may shift some production to on-site capacity. "Demand increase was significant until six months ago when it became stagnant. But it has pushed capacity to almost fully loaded in some parts. Then when plants have to go down, there's not much flywheel reserve and things get tight. And not much merchant capacity is coming on line. A further uptick in demand will probably shift supply to more of the dedicated on-sites, shifting that liquid capacity to smaller customers at higher prices," says John R. Campbell, president of J.R. Campbell & Associates and publisher of CryoGas International.

The weakening US economy is also pressuring certain segments. "While the steel and auto industries are soft, other applications are less sensitive to demand. The good thing about our industry is that it's diversified, and we do serve different parts of the economy that show steady demand, such as food freezing, the blanketing of chemicals, refining and medical applications," says John Walsh, president, BOC process gas solutions, North America. Primary metals, including steel, account for roughly one-third of industrial gas demand. Chemicals and refining-related areas one-third and food, medical and electronics one-third.

To stimulate growth, producers are targeting technology improvements and higher growth markets in areas such as electronics. For example, in March Praxair expanded its patented CoJet injection system into the basic oxygen furnace (BOF) market for the steel industry. The product is currently available in the electric arc furnace (EAF) area. The company says it can typically save integrated steel companies up to $5 per ton, and from $2 to $4 per ton for the EAF market.

The CoJet system "continues to have good success with the EAF segment. It is now licensed to operate in 38 EAF steel mills located in several countries, and the licensing has been extended to non-Praxair industrial gas customers," says a Praxair spokesperson. "BOF CoJet system trials continue, and the development program data is being broadened to include customer-specific requests to understand and optimize certain operating parameters."

Air Liquide says it intends to compete in the steel marketplace with its wallmounted supersonic oxygen technology used in EAF steel mills. "We acquired intellectual property from American Combustion Inc. (ACI). That company commercialized technology in the early 90s, and we continue to market ACI Pyrejet technology," says Matt Wigle, vice-president, marketing and technology, Air Liquide America.

"We're working on new steel technology as well, and will be introducing our own in the near future," says BOC's Walsh. Other technology being developed includes freezing tunnels for food freezing, new combustion for the glass industry, and helium recovery to serve the fiber optics market.

Air Products says that its competitive strategy "remains focused on faster growing markets" such as the chemical process industries (CPI) and electronics. "This is a result of our deliberate strategy to focus on growth sectors and preferentially place resources there. Whereas the gas industry has about 25 percent of its sales in these two markets, Air Products has over 40 percent," says a company official.

POTASSIUM and SODIUM PRODUCTS--General Chemical Corporation has increased schedule and off-schedule prices of sodium and potassium hydroxide pellets and potassium nitrite by 5c. per pound, effective April 10, or as contracts permit. Also, schedule and off-schedule prices of potassium tetraborate were increased by 3c. per pound.

SALTS--Cargill Salt will raise prices on all its salt products, except for bulk de-icing products, effective June 11. The average increase ranges from $4 to $5 per ton, depending on product.

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