Over recent months the industrial gas sector has enjoyed a buoyant return to revenue, but undoubtedly the most pressing revelation of recent fiscal reports was the climbing value of industrial gas to emerging economies.
Indeed, the acronyms ‘BRIC’ and ‘CIVET’ are now near unavoidable in corporate conversation. But with recent quarterly reports in mind, and a 2012 calendar looming, just where do the fairest forecasts lie?
What better place to discover more than at the Cambridge Judge Business School’s CIBAM (Centre for International Business and Management) Global Business Symposium, titled BRIC’s and Beyond?
John Hawksworth, Chief Economist at PwC, began by outlining the current consensus of opinion, “Well I think for the moment we have a situation where vast economies like the US and the big European markets still account for the majority of the world economy as measured by GDP. But what we have seen over the last ten years has been very rapid growth in economies like China, India, Brazil, Russia, Mexico, Turkey and Indonesia and therefore that their influence is becoming more important.”
Hawksworth continued, “They have not had the same kind of disastrous recessions we have had; China has kept growing at around 10% a year, India has kept growing at 8% per year, and they are influencing all sorts of political spheres; everything from the IMF and the G20 to the world climate change negotiation… So I think we have increasingly realised that we are in a world where these emerging economies are more influential in both economic and political terms.”
Hawksworth didn’t just offer general trends. Indeed thanks to intensive in-house research, the PwC commentator supplied some specific projections, albeit that the precise numbers are inevitably subject to many uncertainties.
He said, “In our updated base case projections, the E7 emerging economies (China, India, Brazil, Mexico, Russia, Indonesia and Turkey) will be around 50% larger than the current G7 (US, Japan, Germany, UK, France, Italy and Canada) by 2050. China is expected to overtake the US as the largest economy by around 2030 in these updated projections, while India is now assessed as having the potential to catch-up with the US by 2050 or soon after. We are now even more optimistic than in our original 2006 report about these two economies given their recent very strong performance.”
As Hawksworth mentioned, the PwC study entitled ‘The World in 2050’ has seen several revisions following its 2006 publication with the latest update in January 2011 taking account of the impact of the global financial crisis. In this latest report in the series, the firm has also identified a number of other emerging countries in addition to the E7 which display considerable potential for rapid long-term growth, including Vietnam and Nigeria.
Indeed, a PwC comparison of potential economic growth rates up until 2050 revealed that the top ten countries in terms of GDP growth in US dollar terms are projected as being emerging economies. Specifically, Vietnam has the potential to lead on annual average growth to 2050 on this measure, with India and Nigeria also expected to perform strongly.
Furthermore, average G7 GDP annual growth was projected at only around 2% over the period to 2050, while the emerging economy average growth rate was around 6% after allowing for potential real appreciation of currencies against the US dollar.
Interestingly, the industrial gas sector is well positioned to reflect future growth. With infrastructural investment, we inevitably see an associated rise in demand for industrial gas; from the welding gases necessary to construction plans, to the CO2 needed to balance a boost in carbonated beverage sales.
And indeed, analysis of recent financial reports tends to support the PwC study.
Air Liquide, a stable Tier One player, reflected PwC projections in its first half 2011 financial statements. Benoit Potier, Chairman and CEO at Air Liquide, commented on the results, “Our global presence, combined with our pioneering positions in high-growth markets, allows us to reinforce our fundamentals and continue our long-term development.”
Moreover, in accordance with the firm’s ALMA 2015 programme, its presence in developing economies is ever increasing. According to Potier, by today alone, developing markets represent 21% of Gas and Services sales.
Fellow Tier One major, The Linde Group, echoed Air Liquide’s findings. Professor Dr Wolfgang Reitzle, CEO for the firm, highlighted “consistently dynamic trends in the emerging economies, especially in Asia.” Similarly, Steve Angel, Chairman and CEO for Praxair, Inc., remarked upon the modest growth seen in North America during Q2 2011, which contrasts markedly against the ‘continued strong growth’ observed in Asia and South America over the same period.
But this final statement doesn’t just depict an imminent shift in the major global markets. Angel also illustrates the converse side of the surge – that while one market soars another sinks.
It is a point that Stephen King, Group Chief Economist and Head of Asset Allocation Research at HSBC, emphasised, “I think that there is a big discussion about globalisation that infers it is good for everyone all of the time, basically output rises and everyone is better off. However, when you look at the effects of the BRICs on the rest of the world, we are increasingly finding that there are big shifts in prices.”
King elaborated, “For example, relative prices go up and commodity prices go down and as a result around the world you find obvious winners, relative losers and absolute losers. One example is the UK where we observe relatively high inflation and low wage growth. The high inflation partly reflects the higher commodity prices and in turn these partly reflect the demand coming through from China and India.”
Nevertheless, with an understanding of these dynamics, established western markets can also benefit. It was a point reiterated by Hawksworth: “From a business perspective, one needs to recognise two things: First, that emerging economies will provide increasingly strong competitors for Western companies as there will be an influx of important new companies coming from China, India and Brazil competing with us – we need to recognise and prepare for this challenge. Second, however, we need to recognise the huge opportunity provided by rapidly growing emerging consumer markets for Western companies that can really seize these chances and make a success over there.”
The importance of expanding consumer markets was also a point emphasised by Anna Stupnytska, Executive Director, Goldman Sachs Asset Management. Moreover, the Macroeconomist highlighted the still ongoing growth of the BRICs themselves.
She advised, “The interesting thing, and the most impressive aspect of the whole story, is that the development of the BRICs is not over yet. The last decade was about investors and companies becoming more familiar and waking-up to their existence. Now what is interesting is that the BRIC consumer is going to dominate the global landscape, and in the next 10 years we can expect a cross-over when the BRIC consumers might challenge the US consumer. And that is why we are still talking about the BRICs remaining the most important story over the next decades.”
And so, perhaps the key to ongoing industrial gas growth is to focus not upon the remedial potential offered by already excelling economies such as the BRIC nations. But also, to be bold and champion the longer-term growth opportunities – the sustainable cure.