2019 has been a year of transformation in the competitive structure of the industrial gases market.
The Linde-Praxair merger required divestment of substantial business assets including most of Praxair’s European business (sold to Taiyo Nippon Sanso, representing its first significant entry into the region), part of Linde’s American business (primarily to Messer, representing its return to the region) and most of Linde’s South Korean business (to local investors) and regional parts of both companies in India (to Air Water).
The industrial gases industry serves virtually every industrial sector in the global economy with its wide range of products and applications and as such, is often seen as a bell-weather indicator of the global economy, while substantially driven by its slower development in 2019. gasworld regularly monitors the performance of Tier One gas companies along with key sectors which are closely linked to the industrial gases industry, such as welding, equipment suppliers and new technologies.
Tier One industrial gas companies (Linde plc, Air Liquide, Air Products and Taiyo Nippon Sanso) represent around 70% of the global industry with reported annual gas sales of around $66bn in 2019 (at the time of writing). A number of other companies have broken through the $1bn threshold in recent years although most, other than Messer, have limited geographic coverage currently, but some show wider ambitions.
Tier One gas companies report combined 2019 gases sales which are marginally lower than 2018. This largely reflects the divestment of Linde and Praxair businesses to new owners outside of the Tier One companies, with the net impact of such divestments and some smaller acquisitions around -3% negative. Energy cost pass-through has had a small negative impact on combined top line growth in 2019 after having had a major positive impact in the previous year, while currency also again had a negative impact.
After adjusting for the impact of currency changes, energy cost pass-through and net acquisitions/divestitures, the underlying growth of the gases businesses can be identified. At the time of writing, Tier One companies’ underlying global growth appears to have slowed significantly to around +3% for 2019, reflecting the slower momentum in macroeconomic drivers but remaining solidly positive. Air Products again showed the highest underlying growth amongst the Tier One companies, ahead of its leading competitors which are in a narrow range. Underlying growth at Tier Two gas companies also appears solid and has been combined with some key acquisitions.
Across all companies this underlying performance was driven by equal contributions from volume growth and the impact of pricing. 2018 saw gases volume growth significantly out-perform real macroeconomic growth for the first time in recent years, largely driven by a high rate of new project start-ups, but 2019 has seen this premium performance versus the economy virtually disappear. In contrast, however, pricing has made an accelerating contribution globally over the last three years.
Growth, metrics and margins
The Asia-Pacific region has again been the highest growth region in 2019, with revenues up 6-7.5% on an underlying basis and the Americas again up around 5% while Europe was up 2-3%. European growth was virtually entirely driven by pricing, which also contributed significantly to Americas growth, whereas in the Asia-Pacific this was substantially driven by volume.
Operating Return on Sales (OROS) in industrial gases continued the rising trend of recent years to reach a new high of around 19%. In contrast, Operating Return on Capital Employed (ROCE) resumed the declining trend of recent years towards less than 9%, a new low. This contrasting pattern of profitability rates reflects the growing capital intensity of the gases business substantially driven by a changing business mix towards tonnage onsites, and to a lesser extent bulk, and away from packaged gases. This has been significantly compounded by the balance sheet impact of recent major acquisitions and divestments through goodwill and retained cash. As a result, the ratio of capital employed to sales has risen by nearly 50% over the last five years.
A significant range in OROS has been seen across Tier One competitors in 2019 (and historically) with Air Product over 25%, the new Linde plc over 20%, Air Liquide at 17% and TNSC still below 10% despite the positive impact on margins of acquiring part of Praxair’s business in Europe. A key factor in the rising trend in global gases margins has been the improvement in the Asia-Pacific for Tier One companies, which has risen close to profitability in the Americas and Europe. This is despite indications of a persistently lower profitability in the major market of Japan, reflected in leading domestic competitors.
Important drivers for the improving global profitability trend have been an industry-wide long-term focus on efficiency and productivity, which generates annual savings of at least 1.5-2% per annum (p.a.) across leading gas companies. These have then been combined with further cost and revenue synergies from the various acquisitions and consolidations in recent years. These drivers are also underpinned by indications of improved capacity utilisation rates in global merchant capacity in 2019, although at a slower rate than in the previous year.
Capital expenditure by gas majors at close to $9bn in 2019 again showed a marginal increase to a record high. The capex/sales ratio was also maintained at around 14% compared to recent troughs of close to 10% and peaks of approaching 16% in 2008/9 and 2012/13. Air Products continues to show the highest capex/sales ratio at over 20%, while TNSC and Air Liquide are both closer to 10%. Linde plc, combining much of the former Linde and Praxair businesses, has now emerged as the highest absolute investor, with over $3bn annual capex accounting for nearly 40% of the majors’ combined investment.
It is estimated that around 40% of capex in 2019 is in the Americas (dominated by the Gulf region of the US), with a further 40% in the Asia-Pacific (particularly China) and 20% in Europe/Middle East/Africa (helped by major projects in the Middle Eastern Gulf). This means that the capex-to-sales ratio is highest in the Asia-Pacific region, followed by the Americas and EMEA. This also indicates that the Asia-Pacific will continue to increase its importance in the global gases business in the coming years as this higher level of capex translates into top line growth.
Features of the accelerating capital expenditure in 2019 and beyond continue to be the number of major HyCO/syngas projects for refineries and derived products and large-scale gasification projects, while new projects in traditional onsites markets, particularly steel, remain more limited.
The backlog of major sale of gas projects appears to have risen again to over $8bn, reflecting the rate and increasing scale of recent major new contract awards. This mirrors the trend in other engineering companies where stable sales continued into Q2. Capex on support equipment appears to be moderating as indicated by slowing growth in demand for equipment suppliers to the gas industry.
This cyclical pattern of capital expenditure of Tier One industrial gas companies may be impacting the third party sale of plant and equipment activities in leading gas companies. Third party sales and orders appear to have declined for these companies, but appear to be rising for specialist cryogenic engineering and equipment companies.
It appears that onsites have continued to grow faster than merchant (liquid bulk and packaged gases), which is expected to continue given the current project backlog, while healthcare maintains its premium growth performance of recent years. Slowing growth in the packaged gases business globally is reflected in a downturn in sales of some leading suppliers of cylinders in 2019. However, increasing prices for cylinders appear to have boosted operating margins in 2019 towards high single digits.
The pattern of slowing gases growth in 2019 is also mirrored in the welding equipment and consumables industry, which is closely allied to industrial gases. Leading welding companies (Lincoln, ESAB and ITW) show flat growth in 2019 with negative volumes and the contribution from pricing halved versus last year’s peak. However, profitability (OROS) in welding appears to have continued at around its 13% historic rate of recent years, although given the relatively lower capital intensity of the welding business this translates into a higher ROCE.
Weaker or negative growth in the global electronics industry has translated into slower gases sales to this market, although this hides a range of performance across product lines with advanced products showing higher growth but slower equipment sales driven by lower capex by cutomers. This is also reflected in a sharp downturn in growth in specialist electronic materials suppliers (Versum and Entegris), where underlying growth turned negative in 2019 – although maintaining margins around 20%, comparable to those of leading industrial gas companies.
Traditionally the industrial gas industry identifies itself as a technology-driven industry, but R&D expenditure across the major companies remains close to 1% of sales in 2019 after a significant long-term reduction in its historic ratio to a level lower than most other industries. The industry does, however, continue to create a wide range of new applications and gas production technologies. A key technology for the future appears to be the hydrogen economy, particularly hydrogen mobility. While major gas companies have engaged with this sector, there are also a number of small and start-up companies who are achieving top line growth in such technologies from a small sales base, but as yet have been unable to create profitable businesses from them.
The outlook for 2020 is expected to be driven again by the economic environment – forecasters indicate another year of solid and slightly higher macroeconomic growth, although downside risks (particularly a potential international trade war) appear to outweigh upside potential. Expect to see a further focus on synergies from recent consolidations while successfully bringing the current high level of capex on-stream.
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gasworld analyses the quarterly financial performance of leading companies in industrial gases, welding, equipment, electronic materials and new technologies.
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