The midterm financial reports of the major Japanese industrial gas producers have now been released, and following along in the footsteps of the March closings, business has been strong in Japan and major gas producers have been achieving record profits.
There are several reasons for the increase in earnings, these include the recent strategy by Japanese producers to improve efficiency through reorganization, the continuing healthy growth in the US economy, the high demand from China (especially steel) and the internal Japanese demand for gases from such basic industries as steel, shipbuilding, machinery, chemicals as well as the strong position of electronics sector.
Major drivers for 2006 include the restructuring of the gas producers, especially in efficiency and cost reduction, resulted in stronger performance and capability to service the growing demand within Japan. Secondly, with a more robust Japanese economy, the gas producers were able to push through price increases in gases for the first time in many years, which were accepted across many end-user industries. Bulk gas prices have increased by an average 10-15 percent and this certainly reverses the weak market position in the past.
The major gas companies
There are three major Japanese gas companies, which supply a large distributor network - these are Taiyo Nippon Sanso, Air Water, and Japan Air Gases (the Air Liquide and former BOC jv). A fourth important gas company is Iwatani International. Sales of Taiyo Nippon Sanso Corporation (TNSC) and Air Water are at the Â¥400 billion (US$3.4 Bn) level, and the Japanese gas market has entered into an era of two Japanese owned giants which both hold the two prominent positions for the time being but in competition with the internationally owned JAG.
What has been very much in evidence with Taiyo Nippon Sanso is their recent thrust with respect to M&A activities overseas. The company's major acquisitions include the acquisition of Linweld, a local US gas producer in the Midwest of the United States and the purchase of some of the former BOC helium business in the US, Russia and Poland. They expanded their business in the US by acquiring the gas business in the US Southwest in 2004, which was acquired when Air Liquide had to sell some assets during the acquisition of Messer Group.
However, TNSC has also been vigorously engaged in investing in Asia. Last year they installed facilities at their plants in Shanghai, Suzhou, Vietnam, and the Philippines. In Korea, they are constructing the largest special gas filling station in Asia. With all of this activity TNSC is accelerating the establishment of a tri-polar stance composed of businesses in the US, Asia, and Japan.
TNSC is aiming at sales of Â¥450 billion in 2008, with a long-term target of Â¥500 billion so that a further thrust by them is expected. In Japan it is putting effort into adjusting their distribution network, and expanding their medical business. It is also raising corporate investment capacity through M&A.
Air Water, which is strongly positioned in the Japanese market, is aiming at expanding areas related to their chemical, medical and energy core businesses. Through a reorganisation within the company, which is progressing, the company is in the process of constructing a comprehensive research centre where the latest research facilities and qualified personnel will be gathered under one roof. This investment is about creating a company, which has the technological capabilities to meet future demand.
For example, separation technologies such as Vacuum Swing Adsorption (VSU), hydrogen generators, nitriding treatment, carbon gas cleaning and lightweight LNG containers are all various future technologies, which are blossoming in Japan.
JAG, while slightly smaller than its Japanese competitors discussed above, has improved both turnover and profit over the past two to three years, resulting in the company exhibiting the highest profitability of the majors in Japan. However, the Japanese industry is watching with interest the outcome of any changes following the recent acquisition of BOC by Linde. We understand that the jv has to be dissolved and the two companies are currently discussing terms.
Not to be left out, Iwatani International has been investing in hydrogen technology, commissioning a hydrogen generator (supplied by Linde) to supply hydrogen to the H II A. Further investments in the hydrogen economy will be watched with interest.
The renewed optimism in the Japanese economy, which is progressing to increased investment in production capabilities to meet the demand from both the major global market of the United States and the high growth market in China. However, the Japanese companies are looking at the added value end of the market. For example, liquid crystal and plasma TV panels, thin plate, high tensile steel, machine tools, and precision machinery all shine in terms of investment in the high added value area. The Japanese shipbuilding industry is also buoyant, fuelled by the demand for Very Large Cargo Carriers (VLCC) and LNG vessels.
The global shortage of products ranging from raw materials to components is re-addressing the need for excellence and for Japanese added value technology. The more prices skyrocket, such as those of crude oil, the more competitive Japanese energy saving technology becomes. To this extent, in terms of production, the position of Japanese companies is becoming relatively competitive. Not only the increase in demand in Asia and the restructuring in the industry, but also the robustness of the industrial structure of Japanese industry is coming into play, contributing to the good business environment.
The electronics gas market
The Japanese industrial gas market is said to be valued in the order of Â¥500 billion (2005), of which the electronics sector accounts for just over Â¥100 billion or 20 percent. Adding in gas related equipment brings this to Â¥150 billion. While this was, in fact, a decline of some 7.7 percent from 2004 the electronics sector is of major importance to the overall Japanese gases business and worth investigating further.
In terms of production, the liquid crystal and semiconductor production lines, which had been part of the investment of the previous year, entered into full-scale production, so that overall production moved along at a high level. Because of this, while gas showed an increase in consumption averaging around 10 percent, there was a drop of around 20 percent in reaction to the high level of investment in equipment and installation made in 2004.
In terms of value, the electronics business has remained at around the Â¥150 billion level for the past 10 years. However, there has been a steep rise in gas volumes in this sector. If one compares the volumes consumed ten years ago in 1996 with those in 2005, nitrogen gas volumes increased 1.7 billon m3 to 3.0 billion m3 in 2005, almost a two-fold increase. Monosilane went from 131 tons to 289 tons, also a two-fold increase. NF3 went from 52 tons to 632 tons, a multiple of 12. As for equipment, while mass flow controllers and valves cannot be compared easily on a unit basis, there was in fact a two-fold increase in demand.
As for the individual projects, the Sharp plant in Kameyama has a nitrogen production capacity of 18,000 m3/h for use with liquid crystals. Next year, along with putting Plant #2 for wide screen liquid crystal TVs into operation, they plan to put a new nitrogen plant into operation with a capacity of 25,000 m3/h. Silicon single crystals are used as the substrates for semiconductors and crystal type solar batteries. Argon is used as the atmospheric gas for raising single crystals. Major Japanese silicon wafer producers such as Shin-Etsu Handotai, SUMCO, and Komatsu Electric Metals, account for 70 percent of the share of the market for the 300 mm substrate and they are continuing to expand production. In 2008, the production setup will be 2.5 times what it is now, and the consumption of argon will dramatically increase. There are limitations to the sources of argon, however, and the situation is such that scenarios concerning short supply are arising.
Despite the buoyant investment mood and high volume growth, electronic gas prices have been weakening, seemingly in reverse proportion to the increase in volumes. The drop during the past five years in particular has been very sharp. With the market in terms of volume continuing to expand, companies are coping with this by expanding their capacities. The electronics gas market, due to the diversification of applications ranging from silicon semiconductors to LCDs, solar batteries, and compound semiconductors and MENS, sees unlimited potential for the use of gas.
Technological capability with mega sizing
Up to now, gas producers have addressed the expansion in the electronics sector through mergers and restructuring of their businesses but there is evidence that the electronics sector is moving towards higher technology needs.
For example, in the field of specialty materials and gas, high quality needs, a shift to organo-compound technology and the mass volumes involved, technology enabling production at a low price will be required. An expansion of the supply network and the mode of supply, together with technology developments and the need for mass production will be the challenges that face the major Japanese and international gas companies in the next few years.