The industrial gas industry has been pioneering the industrial development in Central and Eastern Europe (CEE) since the break up of the iron curtain. Visionary leadership and pragmatic business sense have been the cornerstones of a buoyant industrial gas business
development.

The industrial gases business in the CEE region has grown strongly at between 7 \\$quot;“ 10 per cent per year and is forecasted to grow at a similar pace over the next five years. The total industrial gases business in Eastern Europe was valued at approximately €1.75bn (including Russia and CIS) in 2005. The growth is mainly driven by the activity in Central and South Eastern European (CSEE) countries and the swing from manufacturing in Western Europe to the lower cost base of the region.

Two major gas companies dominate the industrial gas business in the region; Linde Gas and the Messer Group. SIAD, the Italian based company, is a smaller player but is showing strong performance due to investments in modern production/distribution facilities and highly qualified people.

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\\$quot;Growth in the industrial gases business is strongly correlated with growth in industrial production. With the application of gases, customers can become more cost-efficient in their processes, meet better environmental compliance, compensate energy costs and/or increase quality of their products,\\$quot; says Dr. Hans-Hermann Kremer, general manager of Region Europe Central of Linde Gas Division.

The main drivers for growth have been the metallurgy (mainly steel), chemicals, automotive and their related industries as well as food and beverages.

\\$quot;Due to our application technologies we could benefit from the management of application know-how and such growth drivers,\\$quot; stated Helge Kreiker, general manager Austria and Johann Ringhofer, general manager of Messer Hungary. They continued: \\$quot;In 2005 Messer opened two research and development centres in Europe - a metallurgy centre in Austria and a food and beverage centre in France. We will continue this progress in 2006 and beyond.\\$quot;

While Hans Hermann Kremer stressed Linde\\$quot;˜s strength in capitalizing business opportunities of the existing customer base, Linde Gas has shown early commitment with huge investment in the region (e.g. the Czech Republic and Hungary). He said: \\$quot;We have built modern production and distribution facilities, developed experienced staff in all functions as well as lean, customer-oriented processes. This is paying off because customers appreciate reliability, safety and technical know-how.\\$quot;

Ivo Lukas, general manager of SIAD Czech Republic, concludes that SIAD has grown by 26 per cent year on year in 2005 and expects to grow in the same pace in 2006. \\$quot;We, as a smaller player, have to focus on niches where we have a competitive edge, for example in the automotive sector and the related sub-supplier network.\\$quot;

What about Eastern Europe?

Russia and Ukraine are large industrialised markets with relatively low involvement of the international industrial gas companies. How do the business leaders rate the opportunities and risks of Russia and the Ukraine as growth markets for the future?

\\$quot;Both countries provide great opportunities due to a relatively developed industrial base and growing markets but special attention must be given to the political and cultural development of these countries,\\$quot; Kreiker and Ringhofer emphasize.

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\\$quot;For us, with regard to market size and economic development, Russia opens up better opportunities,\\$quot; Kremer states, and continues: \\$quot;Growth opportunities afford big investments. To give you some examples, Linde entered into a contract to supply a steelworks for the Russian Maksi Group in Berezovsky (Sverdlovsk region) with oxygen, nitrogen and argon. The long-term contract covers the construction of a new ASU and we will use its liquid capacity to supply the local market. The capital expenditure was more than €25m.

\\$quot;However, we are also acitive in Ukraine where we have built a new ASU in the Donetsk region. The ASU will supply a mini mill via pipeline and will have a liquid capacity for the merchant market supply in the Eastern part of Ukraine.\\$quot;

How are energy costs impacting growth

In contrast to their Western European colleagues (gasworld April Issue \\$quot;“ Changing Markets in Western Europe) the business leaders interviewed didn\\$quot;˜t consider increasing energy, fuel and natural gas prices as major issue for the profitability of their businesses.

\\$quot;We have to pass these higher costs to the customers if they cannot be compensated through our ongoing in-house cost efficiency programmes,\\$quot; comments Kremer.

\\$quot;The impact is generally less in the on-site businesses due to long-term contracts with price escalation clauses. It is far more difficult in the bulk and cylinder business to transfer the energy price increases to the market.\\$quot;\\$quot;

All agree that general surcharges to pass costs to the market are not applicable, only case by case dependent on the individual situation and corresponding market.

Poland

Large market, strong growth, profitable?
The industrial gas usage in Poland was valued at €273m last year. Table 1 indicates the key economical drivers for growth, showing that Industrial Production Index (IPI) have fluctuated but remain strong.

Positive economic development has created a favourable market situation for the past few years. This has had a significant impact on the dynamic growth of the industrial gas business. Positive climate, the increased by the FDI and local investments in different gas consuming sectors, also helped. Demand markets attracted most of the regional key players such as Linde, Messer and some of the other global players such as BOC, Air Liquide and Air Products.

\\$quot;Despite such strong competition Messer Poland established itself successfully on the Polish market, especially in the engineering & metal goods, automotive, transport, food & beverages, petrochemicals, rubber and plastics, and primary metals sectors, all of which will attract continued significant investments in the years to come. Messer Polska\\$quot;˜s CAGR between 2000 and 2006 amounted to 12 per cent p.a,\\$quot; said Kreiker.

Market development, profitability, business activities 2006 and beyond

Kreiker and Ringhofer state that the market situation improved significantly in 2005. \\$quot;The macro economic trend is positive, supported by measures of the Polish government to ad here to strict budget expenses control and a commitment to simplification of the tax system.\\$quot;

Kremer points to the fact that the industrial production and GDP growth were relatively high compared with other EU countries. \\$quot;As already stated, it is a fact that industrial gas sales development is usually strongly correlated with the growth of the industrial production. We are taking advantage of the positive market situation in Poland, by developing strongly in the various growing market segments,\\$quot; stresses Kremer.

In the past the Polish industrial gas market lacked profitability but will probably increase over the next few years. If it does, what will be the major drivers?

Messer provided its profitability objectives: \\$quot;Our EBITDA ratio of 21 per cent in 2006 will grow to 26 per cent by 2010.\\$quot;

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Both Linde and Messer agree that the primary tasks are to increase their operation efficiency and to develop and implement value-adding applications and services. In addition they expect prices reach Western European levels within the next couple of years.

As for supply modes; they see growing opportunities for the on-site business. \\$quot;However, cylinders 15 per cent and bulk seven per cent growth rates show excellent development,\\$quot; stated the Messer management. \\$quot;However, the cylinder business will not sustain such an exceptional level of growth in 2006.

\\$quot;Linde Gas always choose the appropriate supply mode aligned to specific customer needs. Gas consumption volume is one of the key decisive factors. At present, sales in bulk and cylinders dominate, but in the future on-site projects open up the possibility to strengthen our position in that supply mode,\\$quot; comments Kremer.

Messer considers the acquisition of BOC by Linde and the necessary divestment of the BOC assets as the most exciting change drivers for the next year. Kreiker and Ringhofer stress the fact that this will change market shares, in line with further consolidation of the Polish industrial gas market.

Czech Republic - sustained growth

The industrial gas business in the Czech Republic was valued at approximately €230m in 2005. Table 1 gives an overview on the key macro economic figures showing very strong IPI output in the past few years.

Market growth was eight per cent in 2005 year on year. The drivers for growth according to both Linde and Messer, the two largest companies in the Czech merchant market, were the bulk and on-site businesses while the cylinder business continued to slow. However, the decline in traditional products such as cylinder oxygen, acetylene and carbon dioxide was offset by the growth of argon gas mixtures, laser gases and specialty gases such as helium.

High FDI inflow resulted in positive industrial production. The business leaders interviewed agreed on the main underlying drivers, which were the automotive industry (cars and components), metal fabrication (laser and heat treatment), primary metal output and the chemical industry.

Kremer continued that Linde built Czech Republic\\$quot;s biggest ASU in Vresova. \\$quot;Our investment was more than €60m to supply oxygen and nitrogen to our customer Sokolovska Uhelna. The energy company uses the oxygen for the partial oxidation of lignite. Electricity is produced based on clean coal technology, a process that is much more environmentally friendly than the burning of lignite. We also invested in a hydrogen filling plant in Ostrava at BZ-MCHZ.\\$quot;

Not to be outdone, SIAD has invested in new CEE centre (ASU, filling and distribution) in Rajhradice close to Brno. \\$quot;˜\\$quot;˜This investment strengthens our position while demonstrating our long-term commitment to the CEE region,\\$quot;\\$quot; says Ivo Lukas.

Hungary - stable growth

The industrial gas business was valued at €129m in 2005. The economic indicators are provided in Table 1.

Similar to the Czech market, the Hungarian market has shown strong market growth at six per cent, mainly due to on-site and bulk business.

Ringhofer adds that in the traditional cylinder business the declining sales in products like acetylene, oxygen and carbon dioxide are compensated by growing revenues in specialty gases and welding gases for new applications like laser and plasma cutting and welding. \\$quot;Furthermore we see an increasing demand on dedicated food gases and medical services.\\$quot;

While Kremer outlines his strategy for growth, the chemicals industry is one of the most important growing sectors in Hungary. Linde brought into operation a new ASU and HYCO plant in Kazincbarcika at one of its most important customers, BorsodChem RT. \\$quot;Moreover, we have been successful in the field of cryo-condensation in the pharmaceutical industry, in food, metallurgy and specialty gases.\\$quot;

Another growing sector is the automotive sector. In this area the suppliers of electronic components for vehicles are dominant. The electronic industry, the food industry, and \\$quot;“ after EU accession \\$quot;“ water treatment to comply to the EU environmental guidelines are other sectors for growth, Ringhofer.

Slovak Republic - CEE\\$quot;s Detroit!

The industrial gas market in the Slovak Republic amounted to €53m in 2005. The key economic drivers are provided in Table 1.

The high growth of seven per cent in the industrial gas industry derives mainly from the high FDI inflow in the automotive sectors. The carmakers KIA and Peugeot attracted many different sub-suppliers.

\\$quot;Messer Tatragas is a major supplier of all three automotive plants projects (VW, PSA, KIA) and also for the transmissions producer Getrag Ford Transmissions. The automotive sector needs more than a simple delivery of gas molecules but a complete turn key solution,\\$quot; stressed Kreiker.

\\$quot;The underlying economical drivers are a combination of the flat tax rate (19 per cent), lower personal costs and a highly skilled labour force. We at Messer take on the role as guide for new gas consuming investors by supporting them in the early phases of the project. This kind of integration of gas customers processes becomes more and more important e.g. Danfoss A/S selected the Messer Group as a business partner for the Slovak Republic and in three other countries.\\$quot;

Linde\\$quot;˜s Kremer is generally positive about the business development in the Slovak Republic, he expects the cylinder and bulk business to grow while SIAD stresses their dynamic growth objective of more than 25 per cent for 2006, though in a very competitive climate.

Editors Note: CEE includes Baltic States, Czech Republic, Slovak Republic, Hungary, Romania, Bulgaria, the Balkan States, Russia and the CIS States.