Background
Air Products has been in South Africa since 1969, when parent company APCI and UK-based Air Products Ltd realised there were business opportunities in the country, especially with heavy engineering and steel companies. A JV was formed in which the state-owned Iron & Steel Corporation (ISCOR), now Mittal Steel, took 50%, and a second JV between Air Products Ltd and Babcock & Wilcox, a UK based engineering company, shared the remaining 50%.

Major production complexes were originally set up at Vanderbijlpark, south of Johannesburg, and at Newcastle, in Kwa Zulu (KWZ) Natal. The company invested heavily in the steel industry, becoming a major supplier to the then South African-owned ISCOR organisation.

Over the following three decades many changes took place both in South Africa and in Air Products. Allan Cooper, MD of Air Products South Africa, tells us that the company started to supply bulk to the
merchant market, produced from liquefiers associated with the ASUs supplying ISCOR (Mittal Steel).

Before Air Products entered the South African market, BOC dominated the business. The major contracts gained by Air Products in the steel sector, however, provided good business opportunities down-stream, in heavy engineering etc.

Pressure on the South African government in the 1980s led to stagnation in the market, preventing real development, and when the ANC eventually gained power in the early 1990s, the South African economy was not in good shape. Consequently Air Products went through a major review of strategy in the mid-1990s, in which Allan was very much involved.

$quot;In the mid 1990s we were still a major supplier to the steel sector and we had a strong number two position in bulk - but we needed to change, extend our range and develop other growth platforms specific to the gases business in South Africa,$quot; he says. $quot;APCI was strong in hydrogen, HYCO and the petrochemicals sector elsewhere in the world. Working with our UK colleagues, we were awarded a major on-site
contract by Sasol for its chemical works in Sasolburg.$quot;

This was to be the largest ASU built in South Africa and due to the altitude of the Vaal triangle (at approximately 2,000 metres above sea level, where there is 18% less oxygen in the air) a larger plant was needed to provide the tonnage required.

$quot;We were also able to provide a backup to the ASU through a pipeline linked to our Vanderbijlpark complex where we had surplus capacity,$quot; he adds.

This was the start of the further development in the South African market. This was followed, uniquely for Air Products, by entry into the CO2 market when the company was awarded a major contract to supply 300tpd of CO2 to neutralise water supplies for Gauteng Province, supplied from a recovery unit at the Natref Refinery, 50kms away, and piped the pure CO2 to the waterworks.

$quot;We have not just focused on the Johannesburg area, we have had the opportunity to expand in the KWZ Zulu Natal Province around our Newcastle ASU complex. We built another CO2 recovery unit to
supply a chemical chrome plant with CO2 from the blast furnace gas of ISCOR. Building on the success of our parent company in hydrogen, we have introduced hydrogen PSA systems into the South African market to supply high purity hydrogen to both the ferrous and non-ferrous industries.$quot;

The industrial gases market
The industrial gases market in South Africa has certainly changed over the past decade, as the South African economy bounced back in the mid 1990s. In terms of supply, the biggest change was the acquisition by Air Liquide of Fedgas, the Messer Group's South African subsidiary, in 2002. This gave Air Liquide a larger market share but the company remains the number three player in size. In 2006, the industrial gases market has grown sharply - rising to an estimated (US $485m), an increase of some 9% over 2005 (in US $ terms). Afrox posted end of year results of R3.4bn in September, a rise of 21% over 2005, confirming the growth. Allan commented that Air Products had seen a rise of 15% in the year, due to the rise in demand for industrial gases across all supply modes.

$quot;Over the past 8 years since I have been MD of Air Products, the company has more than doubled its revenues in the country, confirming that the decision we made in the mid 1990s to re-focus was correct.$quot;

The South African economy
The current growth in the gases business in South Africa is
coming from its economy, with GDP expanding at 5-6% a year. This buoyant economy is being driven by exports, as South Africa exports more products into Africa and other worldwide markets.

The country is also growing from a number of government initiatives. Infrastructure is already being constructed for the 2010 World Cup, boosting the demand for steel and cement. Motor manufacturing is also booming, the country is now exporting a significant number of vehicles and, importantly, South Africa is the sole exporter of right hand drive cars for a number of leading brands. This has caused a lot of growth in the motor industry, with a corresponding impact on the supporting secondary industries - steel, tyres, wheels, chassis etc.

$quot;South Africa is very competitive with these products and we have a low cost base,$quot; says Allan, $quot;due to relatively low labour and raw materials cost. A lot of our raw materials are sourced locally and of course our electricity is amongst the cheapest in the world as our power generation is not oil-based. Our power costs rise at only three to five percent annually.$quot;

$quot;The bad news is that it's by no means certain that we can sustain this level of growth. We are identifying shortages of electricity and other inputs like water and cement. In addition, we're running out of refinery capacity and have started importing refined fuels where we used to export them.$quot;

$quot;On top of this, we are short of labour and especially skilled labour. The skill shortage is a major problem. We still have very high unemployment, in the region of 35 to 40%. The government is looking at initiatives to create jobs, and more and more people are being employed in the country, but job creation does not necessarily bring the skills needed to grow. The GDP is very healthy, but it could be even higher if we could resolve the skills shortage.$quot;

The Government's initiative of Broad Based Black Economic Empowerment (BBBEE) to bring previously disadvantaged people into management positions and ownership is addressing some of the disparities of the past. The Department of trade and Industries recently released the 2nd phase of the Codes of Good Conduct which will drive the initiative. The impact on the gas industry has been small but now that certainty is in the market place changes should occur in the industry.

Hopefully BBBEE will also address the skills shortage in the industry and the country although it will take some time for qualified technician to come through the process.

South African gases business today
A buoyant economy is good news for the industrial gases market but clearly there are some current issues to address. None are more important than the current tight supply in several industrial gases, such as argon, helium, nitrogen, CO2 and LPG.

$quot;We have sufficient atmospheric gas capacity but we are aware of the liquid argon shortage and we are looking at possible ways of increasing capacity to meet future demand,$quot; says Allan. $quot;Air Products, like other gas companies, has been on restricted helium supplies recently, due to the plant outages around the world and the slow start-up of new capacity, but we are able to meet the demand.$quot;

However, there have been notable shortages in some gases in 2006. CO2 has been in short supply due to plant turnarounds within South Africa. This caused severe supply problems to the beverage industry at some of their bottling plants. Unlike Air Products, Afrox has a large LPG business but found the product in tight supply from local refineries and was forced to import LPG directly to satisfy demand.

$quot;Air Products does have sufficient atmospheric gas capacity to meet all its customer's requirements but it appears there is an industry shortage which could get worse in the future across several key products,$quot; said Allan.

This is confirmed by Afrox's announcement that it is investing in new CO2 capacity and in more atmospheric gas production capacity in 2007.

Air Products today
The strategic review in the mid 1990s set the company on the course to where it is today. One area of Air Product's business that has grown rapidly of late is the cylinder market. Air Products has doubled its business in packaged gases in the last couple of years as the South African economy has picked up.

The company has focused on the mineral resources of the country and has recently been awarded contracts to supply two of the world's largest platinum producers. This required the construction of a new 300tpd ASU at Rustenburg, followed by a new onsite facility in Springs, to the east of Johannesburg.

Allan believes that Air Products has certainly changed over the past 10 years.

$quot;I believe that as a company, we have become more reliable in servicing our customers' needs in South Africa,$quot; he said. $quot;We have become more customer focused and we have certainly raised the bar in safety in our industry.$quot;

Air Products has received Platinum Grading from the National Occupational Safety Association (NOSA).

Due to the dynamics of the South African economy and the richness in mineral resources, APSAP is unable to follow the four APCI general sector growth platforms as some do not apply in the country -
e.g. electronics.

$quot;We have focused on serving the non-ferrous metal industry and maintain strong links with Mittal Steel. The steel mills in South Africa rank as two of the top five most efficient steel mills in Mittal Steel's facilities worldwide.$quot;

$quot;Mittal Steel has confidence in South African steel manufacturing and is undergoing a three year investment in Vanderbijlpark, Newcastle and Saldanha to increase steel capacity by two million tons. This will lead to increased demand for atmospheric gases when complete.$quot;

$quot;We also introduced a new mini-bulk service in 2005, following the successful supply model of CryoService in the UK (25% owned by Air Products Ltd) and this continues to grow rapidly in South Africa and meets the requirements of the laser cutting market where Air Products is the market leader.$quot;

Neighbouring countries in Southern Africa
South Africa itself has a relatively large influence on its neighbouring countries and gasworld wondered what was happening in the industrial gas markets in southern Africa as well as South Africa. Our special feature on Africa presented on page 24 shows that the Southern African market is valued at approximately US$575m in 2005, with South Africa accounting for 83%. The country exhibiting most interest to Air Products is Zambia - in which the company has been very much associated with the important Copper Belt in Northern Zambia.

Air Products first entered the Zambian market when it was asked to build an ASU at the Chambishi Smelter for cobalt recovery in 1997/8. Since then the company has supplied 5 ASUs to the Copperbelt - all linked with Copper Smelters based in Kitwe, Nkana, Koncola and Solwezi. Some of these are full on-site supply agreements and some are plant sale with an operational and management (O&M) contract. A new ASU is currently being built, due on stream in 2007. This has been much of Air Products' focus and investment outside of South Africa.
Air Products does supply bulk gases into Mozambique through a local distributor but the company has not entered the gases market which is considered small and dominated by an independently owned gas company - MOGAS.

While there is off-shore natural gas in Mozambique, this is piped directly to South Africa and does not involve any liquefaction process which Air Products would had an interest.

$quot;Air Products is interested in solid projects outside South Africa if they demonstrate a good business opportunity which is both financially secure and for the long-term,$quot; says Allan. $quot;At present the political situation in Zimbabwe does not offer such opportunities or security. Angola has a wealth of resources, but again the financial position and stability does not meet Air Products's internal requirements for investments. However, Botswana does present a possibility and we are watching developments carefully for potential investment.

At this time Air Products is only active in the South African and Zambian industrial gas markets.$quot;

$quot;However, I would like to mention that Air Products is building two very large ASUs for the Gas to Liquid (GTL) project in Nigeria and the company also has a helium production JV in Algeria that supplies helium to the European market - both managed from the European head office in the UK.$quot;

Future growth constrained by resource shortage
Allan believes there are very good opportunities in the South African market over the next 5 years or so, boosted by staging the Football World Cup in 2010. However, he feels the biggest challenge is how companies address the lack of resource in knowledge and skills.

$quot;We are suffering from historic problems. The basic engineering and manufacturing skills have either left the country or the training has been neglected. This is causing our customers a problem in meeting the demand for manufactured products within the country, the roll-on effect of that is a restriction in growth in gas use. If we can solve the skills shortage then we can accelerate growth well beyond that of GDP.$quot;

$quot;It is true we have a low cost base but lack of training and knowledge means that it remains less productive or efficient than countries we compete with. All companies are trying to remedy the situation but we need more help from the government to support this need.$quot;

South Africa, despite being rich in mineral resources, is currently experiencing power shortages, skilled technicians and engineers and infrastructure (roads, rail and harbours) which is constraining growth. Air Products is continually making investments to meet their customers requirements with innovative offerings e.g. the new ASU and hydrogen pipeline to Springs.

$quot;Air Products has a strong future in South Africa. We have a unique position here: our growth platforms vary greatly from our parent's strategic growth platforms, but we have grown both revenue streams and profitability. We are structured to continue to produce good results as the South African economy grows.$quot;