The market should maintain a healthy rate of growth in 2007, with an estimated 7-8 percent increase in volume over the next 5 years. With our global theme, we take this opportunity to look at the key drivers for growth this year. Also, following the issuing of 2006's financial reports, we examine the costs and the cash behind last year's revenues and acquisitions of the major gas companies.
2006 - A review
2006 closed on a high, with good growth and a level of M&A activity not seen for some time. Steel is the big story of recent years, proving a major driver to growth. Demand from the petrochemical and pharmaceutical industries has remained buoyant, despite high oil prices. The refining capacity of the oil industry reached a maximum output last year, making a positive impact on industry sales. New plants were also a feature, with new ASU's and hydrogen plants planned and coming on-stream. Oxygen capacity also proved a boom sector this year with considerable growth in China and Asia.
Oil & chemicals
The global chemical industry still appears to be in an expansionary mode with year on year growth 2006/2007 expected of around 4.4 percent, although leading indicators of global industrial production suggest that the current growth cycle may have peaked. However, gas sales to the chemical industry show the best rate of growth amongst the end user market, with a 12 percent increase. This is fueled by the continuing demand for plastics such as polyethylene and we foresee continuing growth in fertilisers, chemicals and pharmaceuticals. We expect average annual increases of around 9 percent through to 2010.
The oil industry is also a growth market with refineries outsourcing their hydrogen needs, and high oil prices increasing capital expenditure projects that use gas technologies. Using enhanced oil recovery or EOR, oil is squeezed from old or tired wells by injecting nitrogen or CO2 into them to recover further supplies. Some gas companies are now focusing hard on the EOR applications, and Steve Angel from Praxair explains more in this month's interview. Analysts believe that outsourced hydrogen demand will continue to grow, with a conservative estimate of 10 percent annually past 2010.
Metallurgy (Steel and non-ferrous)
Between now and 2015, global steel demand is likely to grow by 3.5 percent a year, with China's needs expanding at 4-5 percent, and those of the rest of the world at 3 percent. Analysts suggest that the industry may become less dependent on China as Japan's construction sector revives and demand reaches a rhythm in South America and Eastern Europe. But, as in so many other fields, hopes of expanding the market for steel are focusing on India, where potential for growth remains high.
With modern day steel mills consuming more oxygen per ton of steel produced than 20 years ago, industrial gas demand in the metallurgy sector has more than doubled this decade. Led by China, rises in demand have led to a series of upgrades, revamps and expansions across the globe, as well as new steelworks. The availability of natural resources is an important factor in the growth of the steel industry, and countries with coke deposits such as Brazil, Russia and India should grow rapidly. Between 2000 and 2005 the metallurgical gas market grew 8.6 percent and we expect a smooth onward path to 2010 of around the same figure.
Although rates of expansion for production and new orders have moderated, conditions in the global manufacturing sector remain solid overall. Growth in 2006 was split well between consumer and business lines and for 2007, rising industry consumption and business investment will both have an impact. A new round of industry restructuring provides an opportunity for China to become a strong player in the manufacturing sector, and the extensive application of information technology is quickening industrialization dramatically across the developing world.
Gas use in this sector covers a wide range of applications, and construction activity is likely to remain a key growth area as infrastructure development increases in the emerging economies.
An increase in quality of life and expectations should also fuel demand for luxury products such as cars and white goods, which will expand the potential for gas usage. From 2000 to 2005 the manufacturing gas market achieved an average 5.4 percent growth per year but analysts expect this to rise (due to bullish manufacturing plans) to above 7 percent per annum by 2010.
The global food and beverage market will continue to grow in 2007, largely in the developing countries such as India and China, although Asia-Pacific should see increased activity in terms of production and demand. Mexico, in particular, is an extremely attractive retail sector, where the opportunities for organized retailing are increasing rapidly. These developments together with a push towards convenience and food safety should fuel the use of better freezing and chilling techniques and gas-based preservation of food, such as modified atmosphere packaging (MAP).
The challenge for the gases industry is that although gases are a reliable method of freezing they must provide a competitive technology against mechanical refrigeration and chilling systems. The food gases market reached a high of 6.2 percent average annual growth between 2000 and 2005, however, higher gas prices in Europe and the US has resulted in some loss of volume in the past 2 years. The forecast growth rate for this sector is expected to be 5 percent per annum through to 2010.
Rising costs and expanding market demand will characterise healthcare in this decade. Simply put, healthcare organisations face a growing inbalance of supply and demand. On the demand side is a large population of aging patients in deteriorating health who demand more services, pharmaceuticals, and medical breakthroughs. However a shrinking pool of investment capital, and aging facilities, are straining under the current volume of patients.
In terms of gas use, the medical world is split between institutional (hospitals) and homecare services. The institutional use of oxygen and other gases is growing slowly in the West, due to lower government expenditure and slow population growth. However, this is partly offset by an improvement in hospital provision in developing nations, as healthcare systems develop. Homecare is receiving a lot of attention lately, and offers great potential with double-digit growth in Europe and single digit market increases in the US (5-10 years ahead of Europe in application) Gas demand in the healthcare sector is expected to rise by 7.5 percent per annum through to 2010.
Analysts say the spread of globalisation has seen Western Europe lose a share of global electronics manufacturing, though it remains a key market. Opportunities throughout China continue to increase their share of global production, and will be the key growth market over the next five years. As the key producer of advanced products the long awaited Japanese recovery should also help boost the global market as should the emergence of East & Central Europe as a regional manufacturing hub.
The use of gases in the electronics industry this decade has been strongly driven by chip manufacturing although, large growth in volume and revenues has come from flat TV panel and LCD (liquid crystal displays) manufacturing, mainly in the Pacific Rim countries (China, Taiwan and S Korea). Attention will focus on these three countries and Japan, but India is now emerging as a potential market for electronic gases (see Air Liquide announcement page 16). Analysts predict healthy growth in electronics and associated gases of 10 percent per year through to 2010.
The gas company response
Mergers and acquisitions between the major players have been a key feature of the industrial gas landscape in 2006. The completed take over of BOC by Linde in September 2006 has had a major impact on the structure of the global business as Linde embarked on a complicated round of divestitures. We examine the movers and shakers of the industry in 2006 and what to expect in 2007. Figure 2 shows the estimated market share breakdown of the global gases business for 2006 (which excludes much of the recently announced re-structuring which will take effect in 2007).
The Linde Group was the big winner in 2006 as they managed to both triple annual profits, and become the undisputed market leader. Including one-time items, net figures rose to â‚¬1.84bn ($2.42 billion) from â‚¬514m ($684m) a year earlier. This is also reflected in their revenue (gas and engineering), which gained 31 percent to reach â‚¬12.4bn ($16.6bn).
Excluding the BOC effect, the company said they benefited from investment in the energy industry and higher margin medical products. CEO, Wolfgang Reitzle credits corporate multi-tasking, saying, $quot;We were able to meet all of our business objectives and tackle the difficult challenges of Linde's extensive corporate restructuring at the same time.$quot;
The company has now completed (subject to regulatory approval) the required divestments in its portfolio and can focus on its remaining core gases business and concentrate on realising the synergies of consolidating the BOC business into the Linde fold, which will likely result in additional strategic divestments.
Air Liquide performed well in 2006, reporting a 7.4 percent rise in net profit and acquiring full ownership of several jv's in the Far East. Final figures reached a record â‚¬1bn ($1.31bn), up from â‚¬933m in 2005. As a result of their strong performance the group has raised its growth and profit target for the next five years, forecasting good opportunities in the energy, environment and healthcare sectors.
Speaking about their results, Chairman and CEO, Benoit Poitier forecasts that the demand for oxygen and hydrogen gas from the petrochemical and steel-making industries will increase over the coming years. Air Liquide's business plan expects an annual growth in net profit of 10 to 13 percent.
Praxair, Inc. has recorded the highest sales in the company's history in 2006, with sales in the fourth quarter of $2.12bn, and for the year were $8.3bn. Praxair says it achieved this strong growth from new business and the start-up of new supply systems in every geography and end market. Sales growth was 10 percent, excluding the effect of lower natural gas costs passed through in hydrogen prices.
Outgoing Praxair chairman, Dennis H. Reilly, outlined his concerns and plans for the future saying, $quot;Praxair has positioned itself to be a major player in specific segments of the energy market. We are also playing an active role in providing gases for enhanced oil recovery from existing fields as well as future sources of oil such as the tar sands in Canada.$quot; Our interview with new CEO - Steve Angel tackles the expectations for 2007 and beyond.
Air Products delivered solid growth in 2006 with a net income of $3.18m compared to $3.08m in 2005. Merchant gases, tonnage gases, electronics and performance materials showed significant improvement in their results and increased pricing to recover higher costs in merchant gases also increased sales. However, revenues did decline a little due to lower pricing in electronics and performance materials.
The company is forecasting a strong 2007 and expects domestic (US) manufacturing growth of between 2 and 3 percent for the year saying, $quot;Merchant gases should benefit from operating leverage on existing assets, increased productivity, improved pricing, and new investments, particularly in Asia. Tonnage gases should also benefit from the full-year impact of the new hydrogen facilities brought on-stream during 2006.$quot;
Taiyo Nippon Sanso Corp. (TNSC)
Taiyo Nippon Sanso Corporation has been restructuring in the past year and has set high hopes for the future. 2006 was a good base year to work from for the company, as net sales grew 16 per cent in the first nine months of 2006.
Figures from the group show that this year's sales are up from Â¥283bn ($2.4bn) in 2005, to Â¥328bn ($3.2bn) over the last 12 months. Financial reports show business benefited from, $quot;steady shipments to domestic and overseas customers in our principal customer industries, and our US subsidiary also posted a favourable performance in line with our expectations.$quot; Their American arm Matheson Tri-Gas looks set to repeat a good performance as it plans new plants and ASU's in a number of US states this year.
Airgas has come a long way in the last five years in terms of growth and have acquired ASU and bulk business assets from Linde that can only raise their trajectory. As the new owner of a share of Linde's divested US gas operations, stock brokers are marking Airgas the one to watch.
The group reported strong growth in sales, operating income, and earnings up to and including the third quarter. Sales totalled $2.4bn, an increase of 13 percent from the prior year period. $quot;We had a great quarter,$quot; said Airgas chairman and chief executive officer Peter McCausland. $quot;Trends in non-residential construction, industrial production, and energy markets continued to support core revenue growth, and our strategic product platforms were strong.$quot;
The indications given by the major Tier 1 gas companies point to a strong 2007 but more importantly, consistently strong growth through to 2010. Major gas companies see the oil and energy sector as a growth driver, and growth in steel should remain solid. Manufacturing remains bullish in certain regions and will generally continue to shift to countries with lower labour costs. Finally, you may think that consolidation has reached its end but Q1 2007 shows clear evidence that the restructuring and $quot;asset swaps$quot; within the industry continue.