INSIGHT: Industrial gases rising above turbulence

27 June 2008 17:18  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS news)--Where’s a good place to be in times of economic uncertainty and inflating energy and feedstock costs? The industrial gases business.

Closely tied to industrial production, gases growth tends to remain relatively steady. Long-term customer contracts militate against the impact of economic downturns. In other words, the sector does not have to be excessively cyclical.

Growth will trend up and down, certainly, but the outlook for most gases businesses is robust.

Costs are increasing, and companies such as Praxair, the largest industrial gases company in the Americas, have been forced to implement across-the-board price increases.

But cost pressures are nowhere near as great as they are in mainstream chemicals.

"Industrial gas companies' strong business models allow them to largely pass on higher energy and raw material costs to customers," Standard & Poor's credit analyst Tobias Mock, said in a report released this week.

They are also relatively sheltered from economic downturns because their volumes are only partially affected by lower demand, the S&P report added.

Gases demand growth could be at least twice the rate of expansion of GDP, the credit ratings agency says. The industrial gases companies have continued to invest for growth but production overcapacity does not look as though it will be a problem.

S&P assesses the credit risk of five of the sector majors and points out that their sales growth has averaged 8.4% a year since 1998.

Attention has been drawn to mergers and acquisitions but the period of intense activity appears to be over, although smaller bolt-on acquisitions are likely. Credit quality, therefore, is likely to improve with time.

Mocks says he expects the gases majors to reinvest a larger portion of their cashflows in the business and make more modest payouts to shareholders, which will also support their credit profiles.

The four major players - Air Liquide, Linde, Praxair and Air Products - now account for about 65% of the external gases market and sector consolidation has come at the right time.

The majors’ sales are widely diversified by geography and by customer. They are protected greatly by significant barriers to entry in technology, infrastructure and capital intensity needs of the business.

This does not necessarily mean that the industry is without its problems and individual companies without issues that need over time to be addressed. But opportunities for profitable growth remain strong.

Not surprisingly the greatest lie in Asia, and in China and India in particular. In both countries, gases demand is linked closely to the expanding industrial base and not necessarily, or rather, solely, to chemicals as the main driver.

Gases companies such as Linde want to grow faster in India to tap into the growth of the country’s steel and metals sector. New steel plants will be built in China, India and South Korea.

Gases producers are building on well-established relationships to drive growth.

Linde has 147 purpose-built plants in China and 82 across south and southeast Asia. These cover air separation units, gas processing, petrochemical plants, wastewater treatment and sulphur recovery.

And the breadth of the gases offering will prove to be significant.

Development of China’s coal reserves, for instance, to produce chemicals and particularly the fuel alternative dimethyl ether (DME) will require huge amounts of oxygen.

Coal gasification and environmental protection projects will also require input from the industrial gases firms.

The world’s need for industrial gases will slow with the economy but the opportunities for growth will remain at the very least relatively strong. S&P believes that sector firms can rise above economic turbulence.

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By: Nigel Davis
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