In a new addition to gasworld magazine, the ‘Hot Topic’ addresses the important issues related to our industry. This month, Katie Hill looks at what we can expect in 2010.
This time last year, things were already looking bleak for many industries, especially for ours. Gas company CEO’s and Managers were reviewing monthly sales stats that had turned red in and around October 2008, and were deepening in colour as 2009 evolved. What was happening and how to react were the key questions being asked.
Economists were in turmoil, and getting a consistent set of macro-economic forecasts was nigh on impossible – how deep would the global recession go?
In Air Products’ fiscal 2009 first quarter earnings release, Chairman, President and
Chief Executive Officer John McGlade commented, “Over the quarter, we saw further deterioration in business conditions, resulting in one of the weakest economic environments we’ve ever seen.”
He added, “It was evident that the shocks to the global economy have shattered consumer confidence, which has significantly impacted customers’ operating rates across most of our end markets. In response, we continue to take aggressive actions to reduce our costs and drive to a lower cost structure.”
There was no doubt that 2009 would be a year in which the gases industry declined for the first time since before 1980. True, we had gone through recessions in the early 1980s, 1990s and even in 2001/2, but our industry had remained robust and while growth had slowed, it had not shrunk.
In previous recessions, not all industries went into decline (some had staggered declines and others had remained positive) but 2009 has seen all industrial sectors that are important to gases decline at once – apart from medical.
Throughout the year however, all of the major players in the industry reported strategies similar to that which McGlade discusses; reducing costs and realising savings from ongoing productivity initiatives (Steve Angel, Praxair), and generating strong free cash flow, used to reduce debt and increase dividend (Peter McCausland, Airgas). These quick-thinking efforts helped to offset the impact of recession and prevented irreparable damage.
According to John Raquet, Managing Director of Spiritus, 2009 will end up being about 10% down on 2008 and total around $60bn in value. Part of that impact is the lower natural gas prices around the world, but there has been a significant drop in volumes as well.
In the last few months, conditions appear to have eased; fourth quarter results are expected to show some improvement – Air Liquide showed sequential improvement since Q1 2009.
The year ahead
The overall extent of the damage caused by recession and the level of lost volumes, especially in the merchant gases business, won’t be known for some time; but the improving figures we have seen of late at least suggest we are on the upward curve now, having struggled out of the trough of recession.
It’s thought the next set of quarterly results will show continued sequential improvement, but Spiritus Consulting considers that we won’t see a return to 2008 levels of revenues until beyond 2011 or later.
Forecasts for 2010 suggest an improvement of 3-4% at best on 2009, although financial analysts are more bullish as re-stocking (increased inventories of end-users) and volume growth from new projects coming on-stream in developing regions off-sets the continued slow recovery in the developed markets. It means that the recession in 2009 was short and that we have weathered the storm and are on the up.
The rate of improvement will inevitably differ between sectors.
The non-cyclical sectors, predominantly food and healthcare, have remained stable throughout the financial crisis, keeping industrial gas companies’ heads above water, and will continue a steady growth in the years to come.
The more badly hit sectors however, like manufacturing, electronics and steel, will take longer to recover. Those in the know aren’t expecting anything more than about 6% growth in the manufacturing sector between now and 2011, but believe the electronics sector for example could grow by as much as 20% on a sharp rebound.
In Praxair’s third quarter results, released in October 2009, CEO and Chairman Steve Angel said, “Volumes in North America and Europe [also] improved from the 2009 second quarter, due primarily to increased production by our metals, chemicals and electronics customers. Overall demand from general manufacturing markets in these regions remains relatively weak and has yet to show meaningful signs of recovery.”
It’s a tricky one to forecast, but there is a consensus among analysts that China, India and emerging regions such as the Middle East will drive demand forward, the question is how will North America and the European Union recover?
We have to remember, our industry is resilient and the current drive for clean burn technologies, coal gasification projects, cleaner transport fuels and the environment are all reliant on gas technologies and will boost our industry moving beyond 2010.
Positivity and a bullish, brave approach will be crucial in the coming months; the only way is up.