Air Products focuses on industrial gases for growth, but still sees potential in chemicals

Growth expectations

23 June 2008 00:00  [Source: ICB]

Air Products' sharper focus on its less cyclical industrial gases business is driving growth, but it does not mean chemicals have been sidelined completely

John Baker/London

AIR PRODUCTS' strategy to become a more focused, less cyclical business is evidently paying dividends. The share price has been rising and financial performance steadily improving.

"Investors love us," comments Erwin Zwicky, the US-based industrial gases company's new president for Europe. "The gases business is a good and steady one," the chemical engineer from Chile explains. "And investors value the ability to predict performance and growth."

This is one of the reasons, he adds, that Air Products has exited much of its chemical business in recent years. The business had, he notes, a different dynamic, "being much more cyclical."

That is not to say the chemicals have been abandoned altogether - the company still has ambitions to have $1bn (€646m) of sales in chemicals - now included in its electronics and performance materials unit - by 2010. But today, the product line is much more focused on specialty chemicals, notably additives that make a big difference to customers' products when used in small amounts (see box).

The departure from the more commodity-based side of the chemical business was completed recently, with the sales of the high-purity process chemical business to Texas, US-based specialty chemical producer and distributor KMG Chemicals and Air Products' 50% share in its vinyl acetate ethylene (VAE) polymer emulsions joint venture (JV) to German partner Wacker Chemie. This month, it completed the further divestment of its nonpressure emulsions businesses to the US's Ashland, with production in two plants in the US.

"For a while, we were happy with chemicals," explains Zwicky. But in recent years, increasingly high and volatile raw material inputs have made the business much more demanding. "We were in a difficult position in the supply chain in terms of passing on costs and in the end, we decided to move forwards and become a less cyclical business."

Today, Air Products delivers 65% of its global $10bn in sales from the sale of merchant and tonnage gases, with a further 22% coming from its electronics and performance materials segment. The balance is more or less evenly split between health care, and equipment and energy. As part of the strategic repositioning, all business are now run on a global basis.

The industrial gases business is growing at a fast enough pace to satisfy Air Products' growth perspective and achieve good margins, says Zwicky. He sees plenty of opportunities, both in terms of new and expanded applications and geographies and points to a number of factors that will help to drive gases growth.

HIGH ENERGY COSTS DRIVE GASES

High energy costs will see increasing demand for oxygen, as customers seek to increase efficiencies environmental pressures will drive demand for hydrogen in clean fuels and for new gases applications and greater global trade in liquified natural gas (LNG) will see increased demand for nitrogen.

In the latter instance, nitrogen is blended with imported LNG so that the natural gas fed into the grid is of the appropriate calorific specification. Air Products has won two large contracts in the UK for this purpose and now blends no less than 10% of the UK's natural gas needs for industrial and domestic use. It expects to announce a third contract in the near future.

The existing contracts, both of which involved construction of new air separation units, are with the UK's Grain LNG, which imports some 3.3m tonnes/year of LNG supplied by UK major BP and Algerian state energy company Sonatrach, and with Dragon LNG, also of the UK, with a similar import capacity. "This has been a very good business lately," notes Zwicky.

On the geographic front, Air Products is seeing solid growth in Asia and expanding operations in Eastern and Central Europe. Its presence there was boosted substantially last year through the €370m ($480m) acquisition of BOC's Polish gases operations as a result of Linde's takeover of the UK major in 2007.

EMPHASIS ON EASTERN EUROPE...

Air Products has rapidly integrated the purchase in its European network and is now the No. 1 supplier in Poland. It is expanding production capacity at its Kedzierzyn-Kozle facility there, from 400 to 800 tonnes/day of liquid oxygen, with the plant expected to be on stream in early 2009.

"We are very happy with the business, which is confirming our expectations in terms of growth. We have acquired a strong organization and will use it as a base to continue our expansion eastwards in Europe," says Zwicky. Air Products is already active in Russia through a few projects and, confirms Zwicky, "we are looking at further orders here - it is the place to be."

Zwicky also points to further investment in the region through a new hydrogen facility it is building in Novaky, in Slovakia.

On Russia, he adds that Air Products is viewing this as having longer-term potential. "We want to be very careful on how we proceed, and need to balance the risks with the benefits. But, we do want to participate here, we feel it will be a very important source of growth." In his view, the main potential will be realized when Russian refineries upgrade and modernize.

And, although the Russian government is keen to control the energy sector, there will be opportunities as it continues to privatize other sectors such as steel and other traditionally gas-consuming industries. Besides, he feels there is potential to further develop the merchant gas business in the country, as what activity there is, is fragmented.

Air Products has also recently made its first major gases moves in the Middle East, with projects that will supply nitrogen and hydrogen to a float glass company in Abu Dhabi and oxygen and nitrogen to an iron and steel producer in Sohar, Oman. Both are being executed with a local JV partner, Abdullah Hashim Group, based in Saudi Arabia.

...AND BEYOND

Air Products has been active in the Middle East through the supply of gases, equipment and operations expertise in the gas-to-liquids, LNG and refining sectors for some time.

It has operated a helium and specialty cylinder gases filling and distribution facility in the United Arab Emirates since 1990, and last year opened an office in Doha, Qatar. The new projects, says Zwicky, enable Air Products to enter into the next step in the chain, with industrial gases. "There is a lot of potential here and again, we want to participate in a bigger way as a gases supplier."

But Western Europe remains a major focus for Zwicky. Even here, the traditional ongoing gases businesses has seen volume growth - both organic and through innovative new uses and services. But the company has seen a lot of cost pressures, especially from energy - a key feedstock for its gases operations - and transport fuels. "These are going up a lot and are very volatile, which makes things very challenging. We need to try and pass these costs on."

Even in this mature market, there are some areas that look poised for strong growth. Zwicky points to photovoltaic panels, which are taking off rapidly in Europe. Air Products is pursuing several projects in Italy, Spain and Germany in this area, he confirms. And in addition to the UK LNG projects, there are quite a few plans for import terminals in Italy, Portugal, and other countries, which represent potentially big business for nitrogen.

A third area is the environment, where applications continue to grow as concerns about pollution continue to increase. An example of how Air Products expects to do well here is through its expertise with hydrogen filling stations. It is already involved in several hydrogen-powered transport initiatives in the UK: in London, with Transport for London (TFL), in Birmingham, with the University of Birmingham, and in Scotland's Outer Hebrides.

In that venture, it is supplying a hydrogen fueling station and storage facility so that hydrogen from renewable resources can be used in a test fleet of hydrogen-fueled cars being run by the Western Isles council in Stornoway on the island of Lewis. The project, known as H2Seed, is part of the Council's Hebridean Hydrogen Park plan to establish a renewably generated hydrogen supply chain in the Outer Hebrides.

The hydrogen will be produced via electrolysis using renewably generated electricity. In the first instance, this will be sourced from a biogas generator at the council's integrated waste management facility.

For TFL, Air Products is supplying the hydrogen filling equipment and the hydrogen from its facility in Rotterdam, the Netherlands. The hydrogen will be used to test a fleet of buses in London, from 2010.

These and the many other prospects for new business in the future will help Air Products deliver on its strategy for growth. For merchant gases it is seeking double-digit growth and a 20% operating margin, while for electronics and performance materials, the same double-digit growth is on the cards, with a 15% operating margin targeted. For tonnage gases, the company expects 10-15%/year growth in hydrogen and significant large bidding opportunities in oxygen as well.

As Zwicky concludes, the goal for 2008 and beyond is a more focused, less cyclical Air Products delivering higher growth and higher returns.

AIR TO CHEMICALS

Chemicals may not feature by name in the Air Products annual report these days, but they are still very much part of the business, explains Maurizio Garlaschelli, head of the performance materials business in Europe. This global business unit is seeing double-digit growth at present and he expects it easily to surpass the $1bn (€646m) turnover target by 2010.

"It is very successful and we want it to be a lot bigger," he says, adding that it will achieve this by increasing market share and through acquisitions and formation of joint ventures.

Europe is an important market for the performance materials business, accounting for around a third of its sales. There is one production facility in Europe, at Clayton, UK, which produces polyurethane (PU), epoxy additives and water-based additives for sale on a global basis. The business also has a couple of toll manufacturing agreements for some of its products. The Clayton facility was originally acquired in 1988 as part of the purchase of Anchor Chemicals, one of the first moves Air Products made in the buildup of its specialty chemical business.

Performance materials is the slightly smaller partner in Air Products' $2bn-plus turnover electronics and performance materials unit, which itself is seeing 15%/year growth. It includes three main global chemical lines: PU additives (catalysts and silicones), epoxy additives (curing agents and modifiers), and additives for water-based coatings and inks (wetting agents and defoamers). The first two are grouped into the performance products business unit, the third in the performance solutions unit.

In addition, there is a fourth, mainly US-based line in additives for industrial and institutional cleaning products and mining chemicals, based on the Tomah business Air Products acquired a few years ago.

All the product lines have two factors in common - they are used in small volumes and help customers achieve performance in their products, explains Garlaschelli. As such, the businesses work closely with customers in product and technical development, to help solve market needs. "We need to understand our customers' customers' needs," he notes, "and develop products with our customers and our R&D [research and development] and technical organization after seeing what the market needs."

Garlaschelli points to several innovations that have helped drive market share and new business. For example, it has developed curing agents for water-based epoxy flooring that allow customers to replace the traditional systems with highly efficient and higher-performance, yet "greener," systems.

"We have a very solid strategy to expand our product range and grow market share," affirms Garlaschelli. Air Products has substantial expertise in surface treatments and will also use knowledge from the electronics side of the business to expand its chemical offering, in areas such as printed electronics, with a focus on organic light emitting diodes. Another area that is being targeted to expand into is vinyl technology, for defoamers and rheological modifiers, for coating applications.

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