The industrial gas market in Russia is undergoing gradual development. Drivers for growth may come and go as the years pass by, but the unperturbed interest of western businesses remains, keen to invest in tomorrow’s growth.
The Russian gases industry is a scenario which could perhaps be described as ‘fire beneath the ashes’ – ageing and obsolete plants and equipment characterise the country’s gas business, while younger and newer technologies are slowly driving the industry forward.
Eager to be a part of this push forward and ‘capture tomorrow’s growth in emerging economies’ is Air Liquide.
In recent months the company announced that it would be constructing an ASU east of Moscow in the Republic of Tatartstan, in a move which demonstrates a healthy belief in the Russian gases market.
Keen to follow this up and explore the company’s unswerving faith in the market potential, gasworld interviewed Dominique Bertoncini, Managing Director of Air Liquide Russia.
During our exclusive discussion with Mr Bertoncini, we learned just how enthusiastic Air Liquide is towards the industrial gas business in Russia and its obvious potential.
The building of a new ASU in Republic of Tatarstan is seen as another key step in the company’s investment in Russia and its long-term vision of capturing growth.
Located 900km east of Moscow and in the Special Economic Zone of Alabuga, the air separation unit will have a production capacity of 40 tonnes per day (tpd) of gaseous oxygen when complete.
This will supply, by pipeline, Preiss-Daimler-Tatneft’s fibreglass production unit, while around 200 tpd of liquid oxygen and liquid nitrogen will supply customers in the region’s merchant market too.
With commissioning of the unit set to take place in the first half of 2011, the development represents an investment of around €35m and perhaps more importantly for Air Liquide, a significant investment in the local liquid market.
Mr Bertoncini tells us, “Production is not primarily designed to supply the fibreglass company because we aim to supply the region with liquid oxygen and nitrogen. Last year we started another ASU in Ryazan producing liquid oxygen and nitrogen. We also supply Guardian Industries producing float glass with industrial gases. In Tatarstan, it’s like our plant in Ryazan, we apply the same principle: to make a plant with initially larger production capacity that is asked by the customer in order to have a base for developing the liquid business. It allows us to create some synergies with a customer that could have been supplied with an onsite unit.”
“Our decision to go in Tatarstan,” he affirms, “was really because we believe in the dynamics of the region, we believe in the growth of the region. We would like to supply various industries in the region, and to develop our liquid business.”
Building a platform for the liquid product business certainly appears to be one of the important strategic aspirations for Air Liquide in Russia at present – a far cry from its original objectives in the country back in the early 20th century.
Air Liquide was the first major gas company to enter the Russian market in 1911, originally based in St Petersburg or Petrograd as it was formerly known in those days.
The onset of the Russian revolution and subsequent formation of the Soviet Union in 1917 caused the company to halt activities.
Mr Bertoncini explains, “After six successful years we had to forget it. We only came back in 1989, first with the sale of equipment. We have continuing engineering activity in our group and this team also sells equipment to third parties. This equipment sales team re-started our activity in Russia. As early as in 1991 we started rare gases production in Russia, and in 1995 we signed our first gas customer and started investing in the gases business on a small scale.”
“We really re-launched gas activity in 2005, by creating the company that it is today. That’s when we really made the decision to go fully in Russia. This was a decision that really reaped rewards, as the company secured a significant contract with Russia’s leading steel producer Severstal.$quot;
$quot;The deal would see Air Liquide enter a joint venture agreement with the steel giant and later construct an ASU. It was the first big steps signaling the Group’s commitment in Russia. Air Liquide has 75% and Severstal 25% in the joint venture. It’s a very big contract that has foreseen an ASU construction with a 3000 tpd of oxygen”.
The ASU has been in operation since 2007.
“Thanks to this project we established ourselves in the gas business in Russia. Operations have been very good since then, we have a good relationship and the plant started on time, on budget, and is operating well,” the 45 year old Managing Director said.
Such an ambitious stride forward allowed the group to establish a strong foothold in the market.
Mr Bertoncini notes that maintaining this position and gradually building is the target during the currently troublesome economic environment – though growth is still there to be captured.
Asked about any future developments with Severstal, Mr Bertoncini said, “We’ll see. For the moment we are focusing on managing operations and as you know, it’s not a very easy year with the economic downturn. I would say we are at the beginning of the partnership. There are no other concrete plans to be mentioned right now.”
“Since 2005 we have been growing thanks to many projects. Being in the partnerships with Severstal and Guardian, we started the activity of delivering liquid gases to customers in 2007/2008 and we have been building that business up since then.”
“We have liquid at the Cherepovets plant and liquid at the Ryazan plant - in Ryazan it’s mainly liquid and some product for Guardian. We could have done just the onsites, but it was our decision to over-invest to be able to deliver liquid to the Moscow region too that is really important. I think there is enough growth and growth potential to be captured. We see that there is enough growth to support the investment in plants.”
Our interviewee is clearly in no doubt about the growth to come in the Russian gases market.
“As you know, our business is not done in one year, it’s a lot of medium-to-long term commitments, especially when you start-up and you look more at larger customers. First of all, our ambition for this year is to manage the economic slowdown, obviously that requires some attention.”
“We are also preparing for the post-crisis period, because the business will pick-up again when the economy is in better shape. It is important to be ready for that moment. We have made the decision to invest in the plant in Tatarstan too, which was another important step. So I would say that’s the bulk of the key points for us this year.”
Just as is the case with many other gas companies around the world, Air Liquide Russia is focused on being well positioned after economic recovery. Quite when this will be depends largely on the shape of the economic recovery.
For the industrial gas companies, much will depend on the type of industries which recover both the fastest and strongest. Non-cyclical sectors such as health and food & beverages have remained relatively buoyant, while other applications such as the steel industry and manufacturing have been particularly hit by the deepened downturn.
The Russian economy has quite publicly felt the full force of the recession, with a slowdown of business the most noticeable effect for Air Liquide.
So what was driving industrial gas growth in Russia before the onset of recession? And what will be driving growth in future?
As Mr Bertoncini explains, it’s not simply a case of one or two industries in particular that are propelling growth in the country.
Russia is still something of a ‘young’ industrial gases market and the emphasis is geared more towards new technologies applications, the replacement of ageing equipment and implementation of supply chain.
“Right now it is a little bit difficult due to the downturn, but if we look back at the recent months and years, growth in Russia is not yet driven by technology or applications. The main driver that we see is the outsourcing of gas, and new green-field customer plants. The replacement of obsolete production units is the main issue in Russia at present.”
“Today the balance is more towards the need for production means, however in the nearest future the balance will move more towards applications and technology,” Mr Bertoncini enlightened.
“We also have seen specific sectors which have developed very fast, especially glass - float and flat glass, fiberglass and automotive. Currently, the automotive sector has been seriously affected by the economic crisis, but before then it was one of the main growth drivers in Russia. Steel also, steel is obviously a very important sector for us in Russia.”
With the aforementioned young and progressive market for industrial gas in Russia, development depends on a number of factors.
The replacement of ageing technology is a crucial step forward, but just as important is the involvement of experienced, established western companies such as Air Liquide.
As our interview progresses, we understand that the business and dynamics of the Russian gases industry is already moving towards a Western Europe business model, but this evolution is gradual and more of a long-term transition. It appears to be key or fundamental to this development that the western companies continue to enter the fray.
Mr Bertoncini gave gasworld his thoughts, “There are business practices, but there is no real business model established. I would say that the market lacks maturity, in all senses of the word - there are not enough answers, not enough application, there is not enough modern logistics.”
“In many ways, it is not a mature market and there is no market leader: the market remains fragmented. It’s not a market where all the rules are already established. The trend that we see now, especially through Western competitors and Air Liquide, is that we are trying to orientate this market towards our business practice in Western Europe. We see it happening for the moment, slowly but surely.”
“We are quite positive about it, I think it will depend on a number of factors, but it will also depend on competition.”
With a sense of both optimism and encouragement, our interviewee concludes, “The more competitors with a Western business model that enter the Russian market, fast and aggressively, the more that we will see these market trends evolve.”
What makes Air Liquide Russia so competitive?
“I think we have some very key points or strengths. The first point is that we bring the knowledge and experience of the Air Liquide group. We bring the potential of the Air Liquide group to Russia,” Bertonicini stated with zest.
“The second point that is important, is that we have experience in Russia, especially that we have been able to prove to the market that we have managed small, medium and very large projects such as Severstal in Russia - that’s very valuable. It gives us a competitive edge, because we are a believable player in the Russian market now.”
“The third point which I’d like to mention and something which I believe is also a competitive factor, is that we have a very good and very motivated team. We have invested a lot of time in selecting the right people, training them, motivating them and today we are very happy with the competitive edge it gives us.”
“We bring the potential of Air Liquide to Russia, we bring competence, we bring know-how, we bring innovation, we bring relationships with industrial customers, and we have a good image - we are considered as a serious partner,” he concluded.