Last month we looked at the Central & Eastern Europe gases business, a market worth around $2.3bn in 2008 gas revenues. Now, however, we turn our attentions to the industrial gas markets of the Commonwealth of Independent States (CIS).
The Ukraine forms a key part of our analysis this month, together with Russia and ‘other’ CIS countries such as Kazakhstan. The country saw industrial gas revenues grow 12% year-on-year in 2008, as revenues grew from $72m in 2007 to around $81m in 2008.
This is an industrial gas market dominated by The Linde Group in terms of the major Tier 1 players, based on 2007 figures. The company operated with around a 27% share of the Ukraine market in 2007, compared to the 5% market share of the Messer Group for example.
This is put in the shade, however, when considering the market dominance of the independent producers and distributors – independent producers account for up to 46% of the market and independent distributors around 22% respectively.
In terms of revenues by supply mode, Ukraine is a gases industry dominated by a trend for packaged gases; cylinder-supplied gases made up approx. $54m in revenues in 2007, compared to $15m in bulk and an almost non existent onsite/pipeline business. This perhaps epitomises the lack of investment in the region so far, with a gases business that is more geared to gases trucked in via bulk or packaged means.
By end-use sector, this CIS country comprises of a strong manufacturing and metallurgy trade while comparatively little gas revenues are derived from typically strong growth drivers such as chemicals/petrochemicals, food & beverages, and glass. Manufacturing produced up to $38m gas revenues, metallurgy around $16m and healthcare $9m, compared to revenues of $3m from the chemicals sector, $2m from food & beverage, and $1m from glass.
Ukraine is also placing a lot of emphasis on establishing a basis for tourism. Keen to position itself as a prime tourist attraction, the country is embracing Western customs and cultures and has already adopted Western-style residential complexes, stylish restaurants, and opened modern, prestige hotels.
Changes to visa rules in 2005 have allowed for greater visitor liberation, though much of this cultural acceptance can be traced back to Ukrainian independence gained at the turn of the millennium (1991). What was perhaps once regarded as an impregnable region or cluster of countries, is now a destination open to all.
Just as Ukraine is group hugging many Western influences, the Eastern Europe gases business as a whole is keen to embrace the investment and expertise of established Western gas companies. The region currently operates an under-valued industrial gas sector and is driven on by a need to modernise ageing equipment.
Economic transformation has seen the region spring forward, yet the need exists to implement modern, energy efficient technologies and bring the Eastern Europe gases business in line with its Western neighbours. We also understand that the involvement of established Western business models and practices is just as important.
With a similar complexion and objective to Ukraine is a collective of countries described for the purposes of this analysis as ‘CIS Other’. With 2007 gas revenues of $105m and a further 14% growth in 2008 to achieve revenues of $120m, these young gas markets (when revenues are combined) share similar growth rates and sales to those of Ukraine.
How do we define the CIS states? Technically, the CIS countries are listed as Armenia, Azerbaijan, Belarus, Kazakhstan, Kyrgyzstan, Moldova, Russia, Tajikistan Uzbekistan (all official members), Turkmenistan (unofficial associate member), and Ukraine (non-participating member). Strictly speaking, Georgia withdrew its membership effective as of 2009.
We’ve already covered Ukraine, we’ll move on to Russia later, and so for the purposes of discussing the so-called CIS Other we’ll focus on the Republic of Kazakhstan.
The Republic, ranked as the ninth largest country in the world, is rich in resource and development potential. The country has made significant progress toward developing a market economy since its independence in 1991 and has enjoyed significant economic growth since 2000 – partly due to its large oil, gas, and mineral reserves, and buoyed by high world crude oil prices.
Perhaps most significant for economic development, Kazakhstan is reported to have the 11th largest proven reserves of both oil and natural gas. And while there is said to be only three refineries within the country, situated in Atyrau, Pavlodar and Shymkent (much of total crude output is therefore exported to Russia), there’s a great deal of attentive eyes looking upon this country.
Overall, the combined revenues of the ‘Other CIS’ countries comprise a gases market worth $120m in 2008, as aforementioned. When considered in terms of market share (as of 2007), 58% belongs to independent producers and 42% to independent distributors; such statistics are again, akin to the kind of dynamics or trends in Ukraine, while also pointing to a lack of in-roads made by the industrial gas majors.
By far the largest and most dominant of the CIS member countries is Russia, easily the largest country in the world and covering more than a tenth of the Earth’s land area.
This colossal country is considered the ninth most populous nation in the world with an estimated 142 million people, and also boasts the world’s largest reserves of mineral and energy resource.
While Russia’s industrial gas business undoubtedly has issues of its own, its size dwarfs the gas prospects of neighbouring CIS states just as its physical geography does. In 2007 Russia operated an industrial gas business valued at around $599m, which then grew to a worth of $698m in 2008 – growth of 17%.
The independents are again the leading lights where this vast geography is concerned: independent producers comprise 65% of the Russian gases scene; independent distributors 20%; Linde around 10%; and Air Liquide 5%.
Again, there’s a strong drift towards both bulk and packaged gases where supply mode is concerned (2007 data) as bulk accounts for $150m in gas revenues and packaged gases at $411m.
When you consider that the Russia gases market alone stood at $599m in 2007 and further still, that the overall CIS market was valued at $899m in 2008 ($776m: 2007), this is a sizeable packaged gas business. It might also be suggested that there’s plenty of scope for investment & implementation of onsite/pipeline projects from Western influences.
And the aforementioned issues? An issue identified through a number of gasworld interviews has been the replacement of ageing, tired, inefficient and ‘obsolete’ equipment throughout the country’s gas business.
Secondly, is the need for structure. Russian companies in particular are thought to be eager to embrace established, Western business models and structure.
After the economic car-crash of the global recession, shockwaves rippled throughout Europe and the outlook is still a little hazy even at this stage. It’s a gradual upward curve and surely only a matter of time before these hungry, aspiring industrial gas markets begin to realise their potential.
Despite the strength of Kazakhstan’s economy for most of the first decade of the 21st century, it’s thought that the global financial crisis of has exposed some fundamental weaknesses in the country’s economy. The year-on-year growth of Kazakhstan’s GDP reportedly dropped 19.81% in 2008, while four of its major banks were rescued by the government at the end of 2008 and real estate prices have declined.
Concerns over the political scene and perceived instability perhaps remain for those casting a cautious eye over the region, while the attitude or approach to interested investors from overseas might also be at the back of one’s mind.
However, gasworld is reliably informed that growth rates better than those of Western Europe are expected to return following the global recession, and there’s significant potential to be explored.
*All figures based on data provided by the Spiritus Group.