gasworld goes behind the smokescreen of recession and the likely impact on our industry with John Raquet, Managing Director of Spiritus Consulting.

Global recession, economic downturn, financial crisis, however you may want to refer to it – when the storm clouds gather, all we want is answers and fast solutions.

Questions such as, how badly will my business and industry be affected? How do I prevent a serious erosion of my business? When will we see the ‘green shoots of recovery’?

Such questions cannot be answered simply, certainly not without the use of either a crystal ball or possibly respected advisors – in the latter case and on behalf of the industrial gases business, enter Spiritus Consulting.

John Raquet established Spiritus Consulting in 1995, to provide information and advice on the industrial gases business for a variety of businesses including gas companies, equipment suppliers, end users, law firms and financial institutes.

Since the company began 14 years ago, this independent consulting practice has grown from a two man venture, to a network of three offices and around 20 associate consultants located around the world.

Raquet brings with him a wealth of experience from his time spent at Air Products, Taylor Wharton, and then with Chem Systems as a consultant.

Now, as a gas industry-focused consultant and the company’s Managing Director, Raquet’s vast knowledge of the industry means he is well placed to offer gasworld readers some idea of the way in which our industry is being impacted by the credit crisis and how it can evolve.

Robust in recessionary times
Drawing on such a wealth of experience in the industry and having studied the gases business for the past two decades and beyond, Raquet is certainly one of the optimists as far as our industry is concerned.

The past few months have seen our news bulletins bombarded with reports of job cuts at Intel, IBM and Microsoft, as well as at many car manufacturers. The electronics, semiconductor, and automotive industries are clearly suffering dramatically as consumer demand wanes.

A natural assumption then, would be to suggest that the industrial gas companies – major suppliers to these industries – are taking a substantial hit as well.

“The impact is clearly there but maybe not as bad as it might seem.” Raquet explains, “In terms of the electronics industry, it covers a whole myriad of products, ranging from light bulb manufacturing, fibre optics, micro-chips, complex chips, LCD screens, plasma screens, and now photovoltaics.”

“There’s no doubt that in some of the electronics sectors, such as FAB plants or micro chip manufacturing, the closure or mothballing of facilities has had an impact on gas demand. Companies such as Air Products, Air Liquide and TNSC in particular will be suffering at this time. However, this decline is counter-balanced or partly off-set by growth in demand for LCD’s, plasma screens and photovoltaics which all consume various gases – many of them high in value.”

“These product lines,” he adds, “need a lot of helium, high purity nitrogen and special electronics gases – all high value gases.”

“If we take the automotive sector, we have all seen the headlines with car plants closing, companies going into ‘Chapter 11’ or seeking emergency funding (bail-outs). Again the analysts focus on what impact this has on the gases industry. At Linde’s recent press conference for their 2008 results, Linde gave out some interesting facts about the car industry – by their calculation there are €10 ($13) of gas consumed per car assembled.$quot;

$quot;However, if one undertakes a gas ‘life cycle’ type analysis, they have calculated that there are near enough €45 ($55) of gas consumed in the whole car (from steel, aluminium, plastics, electronics components). Based on this and keeping it brief, they calculated that a 20% downturn in the automotive industry will only impact on 1% of revenue for the company.”

What does that mean? Raquet claims our industry is ‘robust’ in recessionary times, because gas is used in so many different applications (and industries) and not all will suffer at the same time.

Food and medical are seen as two sectors which are relatively non-cyclical in recession, as he explains further, “People have to eat, and gases are increasingly being used in various parts of the food supply chain, therefore I see this sector as remaining robust and probably positive.”

“While medical care in most countries is subject to Government funding, medicine and hospitals have become more sophisticated around the world, so more gas per head is being consumed. Gas companies are developing more applications with the medical fraternity that use gases in different ways – take the growing use of xenon gas in anaesthesia which Air Liquide has been talking about and progressing with Food, Drug or Pharmaceutical legislators.$quot;

$quot;One area our industry is benefiting from is the growth in homecare services. Previously, the patient was the customer of the homecare provider and the homecare provider was the customer of the gas companies. Now, the gas companies are buying the homecare companies, and the patient has in turn, become the customer of the gas company.”

Despite significantly lower oil prices, Raquet believes that we can still look to the refining and chemicals sectors as those which will help carry our industry through recession.

“The gas companies have reported higher volume growth in the chemicals and refining sectors, particularly in the production of clean fuels, in oil & gas services and oxy-combustion (coal gasification projects).”

So summarising, he clearly feels that the chemicals, refining, energy, food and homecare sectors will keep our industry bubbling along and offset some of the lower volumes being experienced in other industrial sectors.

And on a geographical level…
One can gain an insight into the extent of the damage caused by recession, by looking to the countries which have experienced the most rapid growth. We asked Raquet if he thought the ever-growing Chinese market would be badly hit.

He replied, “The Chinese economy is a well-planned economy. The country’s GDP growth over the past three or four years has ranged between 12-20% per year – phenomenal growth, and we have seen the gases industry also grow at a considerable rate. Economists predict that that the Chinese economy will slow to about 10-11% in 2009/10 – that’s still very high, so gas demand in China will still be very strong.”

“In fact, gas companies have announced further plans and investments in China, because there is still going to be growth.”

However, there is a word of caution as the level of exports in China in the last quarter of 2008 dropped by 25%, “so if the country that views itself as the manufacturer of the world has seen a drop of 25%, that’s got to have impacted on the Chinese manufacturers and the economy in a way; however, when you see that for the next five years the Chinese economy is expected to average about 13% GDP growth, then you know that the gas demand is going to be above that, so that’s an area that despite it being affected, will still be very strong compared with other regions.”

Raquet does, however, believe that there growth in the emerging economies will continue, particularly in the Middle East, Asia and India for example. He explains, “These regions still have strong growth prospects, both in the economy and in gas demand; they are all going to continue to be regional drivers for the gas business”.

“Regions like North America and Western Europe will be those that show lower growth expectations, and they make up two thirds of the gases business, so it is not surprising then that the overall gas business will exhibit lower growth over the next five years than previously forecast.”

Light at the end of the tunnel?
Raquet is a self confessed optimist, “I have to be,” he says, “that’s my job.” He does however, have good reason to believe the economic downturn won’t cripple the gas companies.

He explains, “If you look at the track record of the industrial gas industry over the last 30 years, whenever there’s been an economic correction the gases business has indeed slowed, but has suffered less than general economic activity – as witnessed when you compare gas growth versus GDP or Industrial Production Index.$quot;

$quot;When there has been a slow down, our industry has generally recovered quickly on the upturn. To my knowledge and in Dollar terms, our industry has never seen a real decline in value over the past 30 years – certainly there have been a couple of periods of flattening out, but not decline.”

“The industrial gas industry services or supplies every single industry you can possibly think of (apart from banking and insurance!). I’m optimistic because the track record in the industry is that we continue to consume more gases per ton of product produced on a year on year basis, so our industry should be optimistic, because the gas intensity continues to grow.”

So will we still be seeing growth in our industry in 2009 after everything that’s happened? Raquet says simply, “possibly.”

“In the last quarter of 2008 there were a lot of dramatic changes as the recession kicked in, and many economists started reviewing their figures. Spiritus also undertook a new forecast, with revised macro-economic data including revised GDP and Industrial Production Index data. Our latest forecast is based on world GDP slowing to about 0.8% for the world in 2009, down from 2.5% in 2008. However, this morning the IMF produced a figure that world GDP will be
negative 0.8%.”

“Based on the positive figure for 2009, Spiritus forecasts our industry will still show growth of between 3-4%, significantly lower than in 2007-08 but positive. This latest figure from the IMF is disturbing, but you can see the differential and it is possible that gas growth will still remain positive in 2009.”

“As you can see, nobody really knows what’s going to happen; we’re still too early into 2009 to have any clear idea. We’ve based our forecast on a lower GDP for the next five years, averaging around the 3% mark. So for the global gases industry, we’re talking about a growth of somewhere between 6.5 and 7.0% per annum for the next five years.”

“It’s unlikely that we’re going to see the double digit growth rates observed in 2007 and 2008, but we are still optimistic that there will be some growth in our industry in 2009.”

With such optimism then, are we close to seeing that elusive light at the end of the tunnel?

When asked whether Raquet thought we’d reached the bottom of the curve yet, he replied, “No, looking at the year-end quarterly results for the gas companies and their views on what’s been happening in January and February, there are definite signs that there may be a bit worse to come, for the quarter and maybe even the first half of this year.”

“This is why I believe that you may have more success using a crystal ball in this exercise, because none of economists or the gas companies really have a view to what is going to happen in 2009. There are signs of optimism that the second half will be better, but to answer your question have we reached the trough, I don’t think so, not at the moment.”

So when will we see some improvement? Raquet looks to the second half of the year as the time when we will start to see improvement in operating conditions and consumer demand.

What about the support industry?
With the uncertainty of recession and the response of the major gas companies looking inward to cut costs and become more efficient, we must not forget the support industry – those equipment manufacturers servicing the gas companies – such as cylinder, tank, valve, compressor and other associated equipment manufacturers.

Where do they stand at present?

“I think what has shocked analysts or followers of the gas companies, is the speed of reaction several of the major companies have made since November last year. Air Products and Praxair have announced head count reductions and Linde and Air Liquide certainly put a cap on travel and clamped down on operational expenditure.”

“This has cascaded down to the support industry with many reporting a sudden drop-off in orders for equipment and postponement of projects. Some describe it as serious and like hitting a wall after, what for them, was a record year in 2008.”

“However,” Raquet explains, “I believe that those companies that remain innovative and can supply the technology and equipment that can deliver efficiency gains for the gas companies, will continue to see a good order book and I believe that the sudden halt is only temporary and there will be an improvement in the second half.$quot;

$quot;The support industry cannot expect to see the high life experienced between 2006/08, when manufacturers were putting customers on ‘call-off orders’ in order to guarantee product supply!”

“There is certainly evidence that the support industry is cutting back on head count themselves, reducing promotional budgets in the form of branding or event participation – but is that the answer? Recession presents opportunities and I believe that the wisest companies can gain market share in recessionary periods, if they remain strong and continue to innovate and brand themselves.”

The future
So how does Spiritus see the future shaping-up for the gases industry overall? In terms of companies and the major players, it’s very much subjective how they will perform individually and which of these may emerge from the economic downturn the strongest.

“While there are many similarities between the gas companies there are some differences and so it is difficult to say who will emerge stronger but one thing is for sure, the gas companies are looking closely at their business model to see how they can become more efficient. I think 2009 will see our industry focus on cost reduction and efficiency to address the current downward pressure on margins.”

“It’s not just my belief, the industrial gas companies themselves have said it, and they’ve announced efficiency programmes to improve the supply chain across all the main operations (cylinder, bulk and on-sites). Some have been doing this well for years, while some are focusing on it now more than ever before. I truly believe there are still gains to be squeezed out of the operational side of our industry – especially in the supply chain.”

In conclusion, Raquet encourages a positive approach, “It’s clear everyone’s facing challenging times. However, you only have to look at the numbers, at history, at our industry and the fact that gases are needed right across the industrial spectrum. The gas industry is here to stay, but it will not stagnate as we are an industry of innovation and we will continue to grow through technology and gas developments.”

“I am forever an optimist in our industry because the proof is there. Our industry is never going to be an exciting, fast growing industry, it’s going to be a progressive industry. It’s never going to be a highly profitable industry, but it will continue to provide good cash flow and shareholder value and despite our immediate challenges, there has to be optimism for our industry even in the near future.”