The Initial Public Offering (IPO) of Yingde Gases, completed 12 months ago, has drawn attention to both the business opportunities that exist within China, and the overall performance of the major international players operating in the country.
China is of huge significance to the international industrial gas community; according to Spiritus, the size of industrial gases market reached $3.9bn in 2009 and exceeded that of Germany for the first time and thus made China the third largest market in the world. Continued high growth (forecast 15% p.a.) will propel China towards and beyond that of Japan by 2015.
All the major gas companies, with exception of Airgas, are present in the market – either directly or through joint ventures.
If gas revenues for all business ventures are taken as 100% revenues, Linde remained the number one player in the market in 2009 (12% market share) but Air Liquide and Praxair are not far behind and have a number of projects coming on-stream in 2010 and 2011 that may change the order of power, but not the message – that the major players are very much growing their business in China.
Market size & structure
Firstly, Spiritus points out, it is important to define what is meant by the term ‘market’. Most of the major gas companies, when analysing the gas markets across the world are interested in the value the end-users pay for the gas and services supplied by such companies.
Essentially the gases that are produced and consumed by the end-users themselves, commonly known as ‘captive’ production are excluded.
Why? Well it is difficult to really value this market and most captive producers cannot even tell you what their costs of production are either.
For clarity, Spiritus explains that, “The Chinese market, like any other market around the world, is valued based on the revenues generated by supplying tonnage, liquid or cylinder gases (and services) to a variety of industrial sectors or end-users.”
In terms of supply mode, gases supplied by gas plants (tonnage) or via pipeline, accounted for 29% of the market but by far the largest market is still that for gases supplied in high pressure cylinders (packaged gases).
In terms of market size, as mentioned earlier, the Chinese market reached US$3.9bn in 2009 to become the third largest gases market after the US and Japan. In 2009, China exceeded the size of the German gases market – by far the largest in Europe – yet a decade ago the Chinese market was valued at just under $1bn and was only the seventh largest market in the world at the time.
What’s been driving growth?
The desire for China to be the ‘manufacturing base’ for the world is one reason why demand has grown so rapidly over the past ten years. Many industries have shifted their manufacturing base from developed markets in the West, eastwards and largely into China – resulting in a dramatic increase in gas demand.
However, to become the ‘global supplier’, Chinese companies have also had to improve their quality of goods and products and industrial gases have greatly influenced this, as seen in the improved quality of steels and petrochemicals produced and more latterly, in the electronics sector as well. The size of its population and the internal demand for ‘western products’ has also been a growth driver.
Spiritus notes that a fourth and significant part of the market dynamics and growth in China is the shift from ‘captive’ capacity to out-sourcing supply to gas companies. Large Chinese end-users of old used to buy and operate their own industrial gas plants (for example, ASUs) and looking back as far as 1999, Spiritus would estimate that close to 90% of the installed oxygen base was captive – and therefore not included in the market data.
The major international gas companies have penetrated the Chinese market over the past decade, converting large captive producers to ‘on-site supply schemes’. This has resulted in the gas companies gaining 40-45% penetration of the installed oxygen capacity in China today. Now, only 55-60% is thought to be captive.
Market share – The players
This is always an interesting debate for both the industrial gases community and for the financial institutes as well.
Firstly, one has to look at the structure of the market and see that there are close to 3000 companies operating in the gas market – ranging from gas companies and gas distributors, to equipment (OEM) suppliers.
Spiritus estimates that there are probably between 2000-2500 companies directly associated with supplying gases within China, many of these being very small and operating in the packaged gases end of the market.
Most of the focus has been on the position of the major international gas companies present in China and that in itself has been challenging for analysts; the structure of the market (100% owned subsidiaries operate alongside joint ventures between international players and Chinese end-users or between gas companies themselves) provides for a confusing picture.
Spiritus would like to shed some clarity on this and presents two views of the current market, based on assessing revenue streams from those subsidiaries that are consolidated (accounted for in the annual reports) and those that reside in the ‘equity affiliate’ or JV category and are not necessarily consolidated. (Further information on this can be found by contacting Spiritus directly).
There has been considerable growth achieved by all the majors in China. Major projects have been installed and commissioned over the past five years – with Air Liquide leading the way in terms of investment and in project ‘wins’.
Linde ‘acquired’ its large position through the takeover of BOC in late 2006 and Air Products and Praxair have been steadily increasing investment and activity in the country. Messer has also evolved as a serious player in the Chinese market. While privately owned since 2004, the company re-structured its business from 2002-2004 to become a very important player in the country.
What about the ‘new kid on the block’?
All eyes have been focused on Yingde Gases since it went through an IPO in November 2009. The company has achieved considerable growth over the five years since its formation – but how has this been achieved?
Spiritus explains, “The company has copied the major international gas company business model for on-site supply schemes and applied it to the slightly smaller tonnage and indigenous Chinese end-users that were not on the major international player’s radar (who were focusing on large tonnage consumers and the international investors).”
Yingde’s success has been driven by securing a high number of medium-sized on-site supply schemes (21 by the end of 2009) to the smaller and medium-sized Chinese companies – over 80% of its revenues are thought to be obtained via these contracts.
There is an argument to say that Yingde’s strategy has been somewhat higher risk than it declared in the IPO documentation and that some contracts were secured without all the necessary planning consents. The company has, however, stated that it would contemplate a more considered approach and ensure the customer’s facilities had the relevant planning consents before committing Capex to these projects.
In Spiritus’ view, it is clear that at present Yingde’s focus is on the mid-range on-site projects (500-800 tpd GOX) whereas the major international players have focused on projects that generally exceed 1500 tpd.
Yingde also has the disadvantage that it has to acquire its gas production plants, whereas the others design and build their own. So for the time being – with project activity high in China at present – Spiritus feels that there is sufficient differentiation in market focus between Yingde and the major international players that will result in all companies gaining successful business in their respective customer bases.
There is a consensus that China is one country that will continue to provide high growth prospects for all players over the next decade.
Drivers for growth are multiple: industrial production for one; continued quality-driven production is another; and environmental solutions are expected to ‘rear their head’ over the next 10 years.
Already, research has proved that increased oxygen use in steel blast furnaces reduces carbon dioxide emissions. Coal-to-liquids (CTL) and coal-to-energy projects, several of which have been announced in the past 18 months, will also be a driver for demand for industrial gases. The main growth drivers will be in the steel, refining/energy, chemicals and electronics sectors, we’re informed.