The Chinese gases market grew by 12 percent in 2006 and according to industry analysts, is set to accelerate to over 19 percent per year for the next 5 years. China is the theme of this month's edition and gasworld investigated further the current dynamics of the Chinese market.
The Chinese industrial gases market reached $2.3bn in 2006, an increase of 12 percent over 2005. According to Spiritus Consulting's latest analysis of China, gas demand has grown in both the steel and petrochemical sectors as well as in the fast growing electronics sector. The current rate of growth means that this year, China is expected to match the size of the German gases market and accelerate past Germany
to become the 3rd largest gases market in the world.
Investment by the major international Tier 1 gas companies continues to take place, through a combination of gas company owned projects, joint ventures with other major gas companies or joint ventures with the end-users themselves. The Chinese market is becoming ever more interesting to observe as the major international gas companies jockey for position to be the No.1 supplier in China, while Chinese companies continue to look at investing in this business as well (to date there are no significant Chinese gas companies that can challenge the presence of the major internationals).
Also behind the scenes, equipment manufacturers are expanding capacity to meet the ever-growing domestic demand and the realisation that there is an international market to be catered for as well.
Size of market
As discussed, the Chinese market is valued at around $2.3bn. Figure 1, shows the current breakdown of the market by end-user sector. The chart shows that manufacturing is still very much the largest consuming sector for industrial gases (in terms of value) supplied by gas companies. However, the real investment being made by the major international gas companies is in the steel, petrochemicals and electronics sectors.
China has been sucking in large imports of steel, polymers and other chemical intermediates, with companies then turning these into the products that the domestic market, as well as the international market, needs. However, there is a drive to become self sufficient in the basic materials needed for manufacturing, so both Chinese and international companies have been investing at a high rate in steel and petrochemicals production. This has been good news for major international gas companies as they have been well placed to service this potential.
Let us not forget that over 80 percent of the installed capacity to produce oxygen in China is still captively owned (owned and operated by the end-user company) and these volumes are excluded from the figures produced by Spiritus Consulting. However, there is a growing trend to outsource gas supply to the major gas companies and this can be seen with the announcements made over the past 5 years by the gas companies to build, own and operate the ASUs and supply the end-user with gas.
According to Spiritus, the future demand for gases will be very much driven by manufacturing output in China but sectors such as electronics, chemicals and steel are likely to be major drivers as well. The consultancy also believes that while the environment has not been the top level of concern within the Chinese Government until now, recent chemical spillages in major rivers, the Olympic Games and concerns over air pollution are beginning to take much higher priority within the Government. This is good news for the gases companies, as major Chinese processing and manufacturing complexes will have to clean up their act and industrial gas use can help them achieve this. One immediate sector that comes to mind is that of refineries and the massive rise in demand for transport fuels. Chinese refineries will be obliged to produce cleaner fuels using hydrogen, so Spiritus expects growing project activity in this sector over the next 5 years.
The insatiable demand for power is a problem for the Chinese and the apparent need to build 2 power stations a week will present a problem for the environment unless clean burn technologies are used. Several of the major gas companies have mentioned the drive towards coal gasification projects for power generation. These will require vast quantities of oxygen if China goes down this route and again the major industrial gas companies are well positioned to supply either gases, or the plants for such projects.
No market analysis is complete without reference to the market position of the major players. Figure 2 presents the Chinese gases market split by major players.
The chart also shows that the major international gas companies now account for 36 percent of the total retail market in China and that Linde/BOC appears to have the largest market share, followed closely by Praxair, Air Products, Air Liquide and Messer. Other majors with a presence include Taiyo Nippon Sanso and Iwatani.
What is noticeable is that the domestic producers and distributors still account for 64 percent of the value, which is not surprising when looking at the business mix (supply mode) within China, which is still very much a packaged gas (cylinder) market despite the high growth in on-site supply.
Major gas companies are focusing on the on-site business, bulk gases to a lesser degree and speciality gases. At present, the large number of players in the packaged gases business (cylinders) and the relatively fragmented state of standards actually applied to this mode of gas delivery, does not currently attract the international gas companies.
To keep pace with demand, the major international gas companies continue to commit further capital expenditure in China. Some companies believe that the actual market share of the players is not important in this very dynamic market, as the country is large and the investment in the end-user markets means that there are a significant number of projects that will continue to rise and gas companies will become more selective. The ideal situation is for a major gas company to participate in a project that generates a cluster opportunity to supply several companies via pipeline. These continue to present themselves as opportunities which the major gas companies have realised and will continue to look for.
The major international industrial gas companies have continued with their large investment programme in the on-site business during 2006 and mid 2007, and we outline some of these projects below.
Linde Gas (including BOC)
Clearly Linde is consolidating both of its business units in China and also the HKO business managed out of Hong Kong. However, investment plans still have to be met.
Linde/BOC is near completion of a large ASU built for the joint venture with Shanghai Petrochemical (SPC) to supply the company and the local merchant market with gases. Linde commissioned one large HYCO unit to supply Bayer at the end of 2006 and is realising the benefits of full operation in 2007. A second unit is being built, which is due on-stream next year (2008).
Air Products announced the formation of a jv with China National Offshore Oil Corp (CNOOC) to build and operate an ASU and liquefier in Putian, Fujian Province. This project is somewhat unique in that it is using cold energy from the LNG facility to help cool air down for separation.
Praxair China commissioned a new 400tpd ASU for LianZhong Stainless Steel Corp in Guangzhou. Contributing to the company's total spend in the Province of over $100m, this project is the 26th large facility involving Praxair in China.
The Praxair China and Semiconductor
Manufacturing International Corp. (SMIC) signed a contract to supply industrial gases to SMIC's new FAB 8 facility in Shanghai, China. Praxair will upgrade its existing facility and pipelines in the Zhangjiang Hi-Tech Park to supply ultra-high-purity N2, O2, argon, H2 and He to the semiconductor plant. Praxair will also build and operate the purification and gas-monitoring systems located on the site.
Praxair's China operation also signed a contract to build and operate Asia's largest ASU for Chinese company Jiangsu SOPO (Group) Co. The state-of-the-art ASU, due operational in 2009, will have a capacity of 3,000tpd and will be integrated with SOPO's acetic acid plant. In addition, the ASU will also supply LOX, LIN and LAR to the growing market in East China.
Last year, Praxair China announced that it would build 3 non-cryo (VSAs) to supply Jinlong Copper of Anhui Province. Total capacity of the facility will be 500tpd of oxygen and is due on-stream the second half of 2007.
Air Liquide continues to invest in China and several projects announced in 2006 will come on-stream in 2007 and 2008. The company appears to have lagged behind its peer group gas companies but recent announcements regarding its future capital expenditure doubling to €2bn a year will ensure that the company catches up in China. Air Liquide will also benefit from now having free reign over Guangdong Province following its divestment from Hong Kong Oxygen (the former BOC/AL jv).
The company is building a plant to supply gases to Tianjin LG Bohai, an integrated EDC/PVC facility located at the Lingang Park. Air Liquide is also building two new ASUs in a jv with Tianjin Soda (Air Liquide 55%), each with a capacity to produce 2,000tpd of oxygen. The plants are due to be commissioned in 2008.
Air Liquide announced in Q1 of this year that it had secured an agreement to build two 2,000tpd ASUs to supply oxygen, nitrogen and argon to Shagang Steel Mill in Zhanjiagang, Jiangsu Province. The units are scheduled to start in Q2 2009.
The company also entered into a new long-term agreement with Qingdao Refining & Chemical Co. Ltd to supply GAN via pipeline. The contract necessitates Air Liquide to expand its pipeline network in the region and the company will also invest €20m in a new ASU.
Messer continues to expand its position in China. The company started up a hydrogen plant and an ASU in Zhangjiagang last year which will be fully contributing to turnover in 2007. A new ASU (2nd unit) was started up at the end of 2006 in Foshan which will greatly enhance business in the region. Messer is building another ASU at a steelworks in Xiangang due to be commissioned in October 2007. Messer is also benefiting from the Helium transfill facility it brought on-stream in 2006 and from the speciality gas filling facilities built at Wujiang and Chengdu.
The Equipment Support Industry
As we said in the introduction, the gases business is very dynamic at present and the same can be said of the equipment manufacturing business. What is interesting, and seen first hand over the past 2 years, is the desire and will, together with the access to finance for companies investing in Greenfield, $quot;state of the art$quot; manufacturing facilities, to not only produce better quality products for the Chinese market but also manufacture to international codes for export purposes. Already, we have seen ASUs being built for international markets by Chinese manufacturers and this has been boosted in the past year when the Messer Group tied up with Hang Yang to manufacture all their future ASU requirements - especially for the European market. This is a great boost to the Chinese manufacturers where, in the past, quality had been an issue despite the lower costs associated with manufacturing in China.
The packaged gas markets around the world are now seeing better quality Chinese cylinders being sold into these markets - much to the shock of established European and US manufacturers. While there are a number of gas associations still needing reassurance that the safety and technical specifications meet local requirements, it is only a matter of time when the quality reaches these international standards - if not already.
International equipment manufacturers have invested in the Chinese market (e.g. Harsco GasServe and Chart) and while this move has been to address the domestic market in China there will be a growing urge to export to other markets.
China is expected to maintain a very bullish economic growth pattern over the next 5 years and this will in part drag the industrial gases business along with it, but will also present opportunities for the industry to expand its product offering within China as well.
Outsourcing continues to gather pace which the major international gas companies are benefiting from - especially in steel and petrochemicals. The drive towards more sophisticated manufacturing (e.g. electronics, western branded car production etc.) means that there will be a requirement for more complex gases and mixtures which will drive the value of the gases business in China.
China will feature very much on the agenda of the major international gas over the coming years. What will be interesting to see is what will happen in the largest part of the merchant market - the cylinders business over the same period and whether some business order and safety governance is successfully introduced.