By the end of April \\$quot;“ most major gas companies had reported their 2005 financial information and sales (with the exception of Taiyo Nippon Sanso). As reported in Issue 11 of gasworld \\$quot;“ the industrial gases business reached $49bn in 2005.

2005 was a strong year for the industrial gas companies \\$quot;“ with both volumes and prices favourable in most regions and countries. As readers will be aware \\$quot;“ the industrial gases business is driven by the end-user sector and demand for all sorts of products from chemicals, plastics, steel, automotives, food and all the other products in which gases play an increasing role in their production.

So not surprisingly with the improving global economy, despite the high oil price, demand for gases or gas intensity continues to rise strongly \\$quot;“ 10 per cent in 2005.

To show evidence of what was behind the growth in 2005, we can look at the pool of the seven major gas companies and see that a number of factors helped drive demand for gases and revenues in 2005. Figure 1 shows the various drivers for 2005 showing that total revenues grew by 12.5 per cent for the pool of seven (Air Products, Air Liquide, Airgas, Linde, BOC, Praxair and TNSC). Higher natural gas prices which are generally passed through to the end-user contributed 1.5 per cent of this growth. This normally applies to those most active in the hydrogen production and supply scheme side of the business.

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There was also a smaller contribution from currency translations (as we measure the global business in US Dollars). A large contributor to the pool of seven growth was from acquisitions \\$quot;“ mainly associated with the Messer divestments made in 2004 and at the very end of 2005 which were consolidated in 2005. Despite the Messer acquisitions, there was continued M&A activity across the regions \\$quot;“ with distributors and homecare companies remaining of interest and also gas production assets belonging to the end-users. Acquisitions lead to a 4.1 per cent contribution to growth although for the global industry \\$quot;“ much of this drops out.

More importantly was the state of the underlying growth \\$quot;“ which reached 5.4 per cent in 2005 and was split two thirds from volume growth and a third from price rises. Clearly volume growth was driven by buoyant economies (e.g., China, India) or economies on the rebound (e.g the US, South Africa).

Gas companies were working in a challenging environment and higher energy costs and higher fuels costs (and subsequent impact on distribution costs) lead to gas companies pushing through gas prices which were inevitable in such inflationary times.

However, as we have mentioned before, higher oil prices also has a benefit of driving demand for industrial gases \\$quot;“ especially oxygen, which in tonnage volumes is relatively cheap and assists in reducing oil bills in any heating or furnace arrangements.

So how did the gas companies perform?

Most gas companies reported revenue growth above 10 per cent for the year, most notable was Airgas and TNSC \\$quot;“ both of which were boosted by M&A activity in late 2004 to 2005. Importantly for Airgas \\$quot;“ underlying growth was strong \\$quot;“ with the US economy on the rebound as we have already stated but from expanding their business offering into other sectors \\$quot;“ like bulk and also safety products.

Praxair reported a very healthy growth position as well, both at the top level but also the company experienced strong (8.8 per cent underlying growth in 2005). Meanwhile Air Products had a year in which top line growth was not as important as improving the bottom line. Air Products still grew healthily though, benefiting from increased revenues from natural gas pass-through, which being the largest player in hydrogen, is not surprising. Underlying growth was more like 4.5 per cent.

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The three European based companies had mixed results in terms of growth. Both Air Liquide and Linde experience very strong growth as well (10-11 per cent) with underlying growth around the five per cent level. BOC had gone through a period of re-structuring and through the sale of its packaged gases business, resulted in combined lost revenues of c.$250m and so not surprisingly, the company showed only a marginal improvement on the top line. However, underlying growth was improved, driven by increased activity in the on-sites sector.

In terms of Tier 2 type gas companies \\$quot;“ such as Messer, SOL, Air Water, Iwatani \\$quot;“ all showed solid growth as well. While we await some of the results \\$quot;“ all proved that it is not just the top seven gas companies benefiting from the upturn in the economies as well.

Regional growth - upside of traditional markets

Spiritus Consulting has recently completed its market analysis of 2005 showing that there were strong regional growth performances across the world (see Figure 2 for the global breakdown by region).

The North American market remains the largest market for industrial gases, reaching just over $16bn in 2005, a growth of 11 per cent over 2004. While the US market dominates \\$quot;“ both the Canadian and Mexican economies are leading to higher growth \\$quot;“ especially boosted by oil exploration and recovery where industrial gases are playing a major role in oil (tar sands) treatment and also Enhanced Oil Recovery (in Mexico).

Western Europe, remains the next largest market (c. $14bn) and experienced solid growth of 6 per cent over 2004. There were mixed results here as the economies of various countries suffered a little in 2005. While Spain\\$quot;s economy was buoyant, Italy stuttered and both the German and UK economies remained sluggish. However, this did not appear to affect industrial gas consumption and gas intensity still appears to be growing strongly \\$quot;“ even in stuttering economies. Effectively, we consume more gases per unit of production than we did the year before \\$quot;“ which is good news for European active gas companies.

Western Europe, remains the next largest market (c. $14bn) and experienced solid growth of 6 per cent over 2004. There were mixed results here as the economies of various countries suffered a little in 2005. While Spain\\$quot;s economy was buoyant, Italy stuttered and both the German and UK economies remained sluggish. However, this did not appear to affect industrial gas consumption and gas intensity still appears to be growing strongly \\$quot;“ even in stuttering economies. Effectively, we consume more gases per unit of production than we did the year before \\$quot;“ which is good news for European active gas companies.

The next largest region is the North Pacific Rim (Japan, China, Taiwan and South Korea) in which the region experienced 11 per cent growth. Clearly Japan accounts for two thirds of the size of the market but even the Japanese market show a much healthier growth than in the previous decade. The one country dominating growth though is China. All major gas companies have been reporting major project activity and also very strong growth figures for the country. While there are concerns of a possible economic slowdown there are no signs of it and if there were \\$quot;“ we assume that imports would suffer and that growth in gases would continue at the 15-20 per cent level of the next five years.

cific Rim, Asia, the Middle East and South America \\$quot;“ all showed good to strong growth. There is a lot of focus on the Middle East at present \\$quot;“ with high oil prices, the oil-rich states have renewed their long list of projects in refining, petrochemicals and GTLs which will require huge tonnage of industrial gases if they all proceed. Some major gas companies such as Air Liquide and Linde have certainly been raising their presence in the region over the past two years.

What about the future?

According to Spiritus, the industrial gases business is going to show healthy growth of around 7.5 per cent per year over the next five years. This forecast has been generated from looking at the end-user sector growth profiles in some 70 or so countries and actually supports the growth expectations announced by some of the major gas companies in the past six months. Air Liquide state they expect to grow in the 7-9 per cent range for the foreseeable future and other have expressed similar optimism. Short-term this may be even higher as the project pool of several of the majors is extensive \\$quot;“ including major projects in Mexico, Canada, Eastern Europe, the Far East as well as some of the more mature markets in the US and Western Europe.

Drivers to growth (see figure 3) will include hydrogen demand in refining activities \\$quot;“ which is legislation driven but the need for additional molecules of hydrogen and the trend by refiners to outsource this \\$quot;“ raises good opportunities for the major gas companies.

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Chemicals, which need oxygen (ethylene glycol, vinyl chloride etc.), are also in high demand and so we expect to see more oxygen tonnage built supplying such facilities. At present, the major GTL projects being planned for the Middle East, which will consume vast tonnage of oxygen \\$quot;“ are likely to steer towards own production and so does not form part of Spiritus\\$quot;s forecast in chemicals.

Steel is still driving demand for both oxygen and nitrogen. There is mopre caution here in that steel plants have been working overtime to satisfy the demand from China \\$quot;“ hence boosting volumes in all major steel producing countries. However, if the Chinese economy falter, there are concerns of a down turn in steel production in various countries. However, we are optimistic as the actual volume of oxygen consumed in producing one ton of steel continues to rise as the steep producers continue to improve efficiency and quality.

Medical is another sector that is growing healthily. While demand for gases in hospitals grows as a more realistic pace of 4-6 per cent, the gas companies are benefiting from the requirement for more homecare services for supplying respiratory services. Age, smoking and other respiratory complaints and the desire to move patient care out from the hospital as soon as possible is boosting the demand for homecare services \\$quot;“ especially in North America and Europe. There has been and will continue to be major growth opportunities for gas companies in this sector.

Electronics sector again shows very healthy growth but also exhibits more cyclic activity, depending on consumer purchasing habits and the advancement of electronic gadgets. However, the demand for plasma or LCD TV screens, the continued growth in the telecommunications sector give rise to differing gas types, products and services which is also driving demand. While production is being more focused on the Far East \\$quot;“ the major gas companies are already well positioned in these markets to supply the variety of gases needed for such specialised production.

Spiritus is optimistic for the next five years on the growth in our industry. This optimism is showing through in the presentations made by gas companies to the financial community. Supporting companies (equipment manufacturers) have also experience strong demand for their products \\$quot;“ whether it is high pressure cylinders, cryogenic tanks, gas production units or parts for the industry. Evidence at the half way mark in 2006 points to another strong year supporting this optimism.