Industrial gases companies surge forward in China

Industrial gas  players have enjoyed prolonged, stellar growth in Asia. But how long is it likely to last, and will the sector disappoint in the long term?

Consultant’s corner
Jon Warnke/John Warnke Consulting

THE STEADY rise in manufacturing growth over the past few years in a wide range of market sectors, together with a continuing upward trend in energy demand, has sustained double-digit sales and earnings growth for all the industrial gas companies.

But against a backdrop of uncertainty and volatility in economic markets, the question remains: can such extraordinary growth be maintained?

The leading companies, Germany-based Linde, France’sAir Liquide, US-based Air Products and Praxair, are united in their strategy in the emerging markets, and particularly to developing and extending their position in China. Consolidation and continuing high utilization rates have formed the bedrock of exceptional performance. Can this continue, or will the Asian bubble burst and leave investors disappointed?

In many ways, the consolidation of the industrial gas industry, with the top four companies now controlling more than 60% of the global market, has developed a platform that is well-disciplined and has benefited from sustained and selected investment across a wide range of market sectors.

GASES RISE WITH ECONOMIES

Many of these companies have enjoyed exceptional growth, as the Chinese, Indian and Southeast Asian markets have developed integrated industries with increasing levels of downstream investments. However, the industrial gas business cuts across a number of markets that are exposed to differing levels of growth and investment cycles, compared to chemicals.

This has considerably assisted the gas companies in reducing the cyclicality of their business. The two main tonnage drivers, other than chemicals, are refining and metals, both of which have shown strong investment in Asia, and will continue to support and drive future returns for the gas companies.

By positioning themselves in clusters, gas companies have enjoyed significant growth and profitability. While this strategy is well practiced in the US and Europe, it is only recently that Asian investment has followed this model. In many ways, it benefits not only the gas company, but allows the end-user to gain from scale and availability where individual investments would otherwise prove unattractive. It also cuts across the whole spectrum of large-scale industrial demand to the multiple requirements of merchant and on-site markets.

THE SINGAPORE EXAMPLE

This is exemplified by the industrial development of Singapore, where the government-led initiative has focused on the development of infrastructure, manufacturing, marketing and regional distribution to provide a cost-competitive environment. Large or small, commodity or technology-based, chemical and industrial players will require a source of gases and services. The same story can be found in other Asian clusters, such as Mab Ta Phut in Thailand, and Nanjing and Shanghai, in China.

The simple answer is that success brings with it sustained growth and additional benefits to the gas players.

Notwithstanding the economic success within Asia, the recent restructuring of various gas joint ventures, as a consequence of the acquisition of BOC by Linde, has produced more consolidation, and probably better structured vehicles to growth.

Air Liquide now fully controls equity in its subsidiaries in Singapore, Thailand, Vietnam, Indonesia and the Philippines, and has doubled its market share in Japan. Linde similarly increased its position in Malaysia and Hong Kong through the acquisition of Air Liquide assets.

The main focus for investment and growth has been China. The key for much sustainable growth is the associated engineering arms of the industrial gas majors, where early involvement and proven experience has enabled these companies to succeed where many have failed.

The experience of Linde is representative of the close links between the market, customers and the introduction of new technologies and markets. To date, Linde has 147 purpose-built plants in China and 82 units in South and Southeast Asia, covering air-separation units, gas processing, petrochemical plants, wastewater treatment and sulfur recovery.

The relationships that have developed over many years act as a catalyst for growth, and the experience gained through similar global operations enables best operations and practice to be delivered. Air Liquide’s purchase of German engineering group Lurgi follows the pattern of Linde and Air Products in having a strong engineering arm, and will increase its technological portfolio in areas where Chinese opportunities abound, namely in hydrogen and synthetic gas production processes, biofuels and methanol. Perhaps more importantly, it will give Air Liquide a foothold in the coal-to-liquid and coal-to-chemical (CTC) markets.

A key feature of growth is the development of the business parks, which helps improve access to China’s own growing consumer class.

Typical is the development around Nanjing, in Jiangsu province, which has seen not only substantial investment by Chinese and international investors, but also exploitation of coal gasification technology. With both German chemical group Celanese and UK oil and chemical group BP investing in worldscale acetic acid production in Nanjing, and German chemical giant BASF developing a “Verbund” site, and with other majors investing, the scope for growth in industrial gases is considerable. The development of clusters like Nanjing reflects the focus of regional centers for investment but also the ability of gas companies to make significant advances in growth.

However, the challenge for all the gas companies is to maintain the impetus of growth. In China, as well as elsewhere, this is not easy. The scale and complexity of major projects has increased substantially in the past few years, but costs continue to escalate, creating concern among domestic as well as global investors. Environmental concerns are also growing. For China, with its enormous coal reserves, CTC opportunities present a whole new driver in industrial gas demand.

China abounds with coal gasification projects, and while many are speculative, those planned and coming to fruition will require significant amounts of industrial gases, particularly oxygen.

Major developments include Dow Chemical and Shenhua Group, the world’s largest coal producer, collaborating on a two-year feasibility study for the construction of a worldscale CTC complex in Shaanxi, China.

The project will adopt “clean coal” processes to convert coal to methanol for the manufacture of ethylene and propylene. The complex will also include a chlor-alkali unit, to produce caustic soda, vinyl chloride monomer (VCM) and chlorinated organic compounds.

One major influence on the long-term outlook for industrial gases in China is the development of methanol and the potential for dimethyl ether (DME) for fuel applications and as a partial replacement in gasoline. Stumbling blocks remain, but it seems that China will make significant levels of investment in both DME and methanol based on coal technology.

NOT THE ONLY GAME IN TOWN

While chemicals make an important contribution to industrial gas demand, there are other areas that are equally important in maintaining long-term growth, namely the steel and refining sectors.

In steel, the main areas for new plants are China, India, and South Korea. All the gas companies have developed strong regional and customer positions, and have tended to build on incumbent positions, as well as new growth opportunities. With steel production in China growing at 16-18%/year, this represents a growing sector for gas use, and it is easy to underestimate the scale of investment that in many areas has exceeded that of chemicals.

Further resilience for the gas companies rests in refining, with forecast growth in hydrogen due to more stringent clean fuel regulations, and the need to upgrade heavier, sour crudes. The gas companies are already responding in the US and Western European markets, and in the future, such regulatory developments will impact Asian refiners and provide another growth opportunity.

 Jon Warnke is an independent management consultant specializing in the chemicals and allied industries. He can be contacted at jgwarnke@aol.com