When it comes to the development of the industrial gases business in the Commonwealth of Independent States (CIS) region, it appears to be very much a case of making the right call at the right time.

That was certainly the vibe picked-up during gasworld’s first-ever East Europe Conference in Kiev, Ukraine last year. A panel of esteemed, established figures spoke not only of the huge potential that exists in the region, but also of the need to make the right decisions to realise that potential.

It is, after all, a gases business that is firmly in the throes of development. From ageing plants and equipment to investment in distribution and efficient distribution systems, the challenges are there to be met. The major industrial gas and equipment companies are rising to this challenge and appear keen to make in-roads into the region’s gases market.

October 2010 saw both Praxair and Air Liquide publicise new contracts in Russia. Just weeks before Cryo-Expo 2010 was due to get underway in Moscow, Praxair announced that its Praxair Volgograd subsidiary had embarked on a long-term supply contract with a leading Russian chemical company.

According to the agreement, Praxair Volgograd will provide oxygen, nitrogen and compressed air to Plastkard, a division of the Nikochem Group. Plastkard is Russia’s third largest producer of polyvinyl chloride, a commonly used plastic.

Similarly, in the same month, Air Liquide announced a long-term agreement with RusVinyl; a joint venture firm combining the Russian chemical company Sibur and the Belgian PolyVinyl Chloride (PVC) major Solvin. Under the new contract, Air Liquide will invest, build and operate a new ASU, which will boast a daily capacity of more than 350 tonnes of oxygen.

The facility will be located in Kstovo and is scheduled to start-up at the end of 2012. Furthermore, Air Liquide will produce a large quantity of liquid air gases, such as oxygen, nitrogen and argon, to meet regional demand.

The companies illustrated their enthusiasm for the CIS region in their respective press releases, both describing the encouraging signs for the gases business in Russia.

Todd Skare, President of Praxair Europe and Middle East, expressed interest in the company’s recent investment. He said at the time of the announcement, “As Russia continues to invest in its industrial infrastructure, demand for industrial gases is accelerating. We look forward to working with Nikochem and other customers in Russia to bring energy-efficiency, productivity and environmental benefits to their operations.”

Speaking of the €60m investment by Air Liquide, Guy Salzgeber, Member of the Air Liquide Group Executive Committee and Vice President of North and Central Europe, said in a statement, “We are very proud of RusVinyl and its shareholders have selected Air Liquide to become their long-term partner for their new facility in Nizhny Novgorod region.”

“This new investment allows us to expand our activities on a long term basis with a major player of the chemical industry in Russia and create a solid basis for future developments of gas sales in a very promising economic region of Russia.”

It’s not just in the chemicals industry of Russia that Air Liquide is expanding its activities, having earlier in the year committed to a contract for the outsourcing of industrial gases at Severstal’s integrated steel mill in Cherepovets.

Following an ebb in development, metallurgy in Russia is set to grow over the next four years. Estimates predict an average annual growth of 6%, while volume is expected to breach 80 million tonnes of steel production output in 2014, according to the July 2010 press release of Air Liquide.

With such promise, it is perhaps unsurprising that Air Liquide entered into the new contract with Severstal, building on the two companies’ existing relationship.

Salzgeber had said of the announcement, “We are very pleased to see that, after more than two years of operation in Cherepovets, the cooperation based on mutual long-term trust between our two companies is now being reinforced. This new contract is symbolic of our development potential in this expanding area.”

From an equipment point of view, as an example, November saw Lincoln Electric announce the recent acquired the Russian Welding Consumables Manufacturer, Mezhgosmetiz-Mtsensk OAO (MGM).

MGM is a privately held welding wire manufacturer which is based in the Orel region of Russia, and the acquisition will offer Lincoln its first manufacturing operation in Russia. The move will also see Lincoln Electric benefit from MGM’s established distribution channels within Russian and Commonwealth Independent States’ (CIS) welding markets.

John Stropki, Chairman and CEO for Lincoln, commented, “Lincoln already has solid brand recognition and market presence in Russia through imports of our high technology welding products for the energy and infrastructure segments.”

What lies ahead?
A number of factors or challenges are thought to be on the horizon for the gases community in East Europe, and the CIS in particular.

Upgrading cylinder assets, for example, is one area where some estimates suggest there will exist a need for action. During his presentation at the aforementioned gasworld conference in Kiev, Ukraine in May of last year, Worthington Cylinders’ Andrey Ruban explained, “The major problems that gas cylinder companies have, is the very old age of cylinders. There is a big captive market of cylinders here in the region.”

“The cylinders that are being used here still comprise of low weight and low thickness. Another problem is still the issue of the absence of the relevant ownership infrastructure.”

“The main amount of cylinders available in the region were manufactured in the 1980s, we believe, so there is a period of time approaching when the cylinders will need to be replaced.”

Another issue that may soon be coming to the fore is a rapidly evolving food processing and packaging market, gasworld understands. From what we understand from discussions with a leading equipment player in the modified atmosphere packaging (MAP) field, the next few years will be a key period for this market in the CIS region and Eastern Europe as a whole.

As the demands placed on the food packaging and distribution industry heighten, especially in the CIS where this sector often skips a step and is undergoing rapid development in its drive for efficiencies and new technologies, a new gap exists in the market for MAP technologies and applications. In short, it seems a promising period of growth lay ahead for the maturing food processing market in the region.

Make the right call
To rise to the challenges ahead, it’s key to make the right decisions going forward, as emphasised last May in Kiev at the gasworld conference.

Respected industrial gas consultant Daniel Gambet, of AA Green and an associate consultant for the Spiritus Group, provided an argument for the outsourcing of industrial gases and highlighted the need to make the right call when it comes to supply mode and the concept of over-the-fence supply.

“…what is over-the-fence? This is a long-standing practice in the western world, but it has been a long-term development. It didn’t happen in one day – it has been ongoing for more than 50 years,” Gambet explained.

“Why outsourcing? There are many reasons, the main of which is probably cost savings. The other major reason is the focus on core business. More and more companies need to focus on their own business, and cannot afford for resources to be used for other, non-core business/applications.”

“There are also additional by-products. If you are optimising energy efficiency, then you are also optimising and streamlining manufacturing costs.”

“When a new investment is needed, it really is a good time to consider whether outsourcing is right for you. It is also linked to capital investment and resource, both financial and human. You need the skills and human resource. And you always need to be cost-competitive. Working on a worldwide market, availability and efficiency are crucial.”

Fellow guest speaker, Hannes Rucker of CryoGo, discussed the significance of making the right decision when it comes to distribution and payload of tankers. This might be considered especially relevant for the Eastern Europe and CIS market in particular, where on-site supply has traditionally been very much in the minority compared to bulk supply and the use of packaged gases (cylinders).

In fact, based on 2007 figures from the Spiritus Group, up to $411m of gas revenues in Russia were delivered via packaged gases, with up to $150m then attributable to bulk supply. In the Ukraine too, of the $72m in the country’s industrial gas revenues, $54m is accounted for via packaged gases and $15m via bulk supply.

Understanding the importance of trucked-in gases in the region, Rucker said at the conference in Kiev, “Cryogenic tankers are investment heavy, but will be in your fleet for a long time, so it is crucial to get your investment right. Choosing the right design and the optimum software is part of that decision making.”

“We need to save costs, we need to become more efficient. And maximising payload is important in achieving that goal.”

“It’s a key decision to invest in an ASU or plant, because once you go for that plant, it is going to be there for a long time. It is a long-term investment. What we do in-between the plant and the customer site is very important… the message is very clear, it is coming across loud and clear: we need to save costs, we need to become more efficient. And maximising payload is important in achieving that goal.”

Expectations
In terms of expectations for the market ahead, it’s an optimistic outlook. With the global industrial gas business likely to pick-up in 2011 toward a return to 2008 levels, we’re informed, we can perhaps expect the fast-growing CIS market to exhibit solid growth in the year ahead.

A more competitive market is anticipated in the years to come, as more and more companies look to enter this geography and an increasingly Western presence builds in the region. Ukraine’s second largest producer of industrial gases, Dary Prirody, appears to share this vision and in summer 2010 announced the restructuring of its operations as it strives to become the number one player in the country.

Keen to build on more than 18 years of successful supply to customers across the country and ‘better meet’ the needs of its customers, Dary Prirody has set in motion a ‘massive restructuring’ of the company and its operations, which has resulted in the creation of new companies to work with its partners – DP Air Gas and DP Engineering.

It’s anticipated that the restructuring will both benefit new and existing customers, and increase the competition in the Ukraine gases business.

For the CIS region as a whole, it’s expected that rapid growth will be seen across a number of sectors. As mentioned earlier, we understand that an evolving food processing sector will drive growth for MAP technologies and applications, while gasworld is also under the impression that petrochemicals is a considerably flourishing business.

While at the Cryogen-Expo 2010 event in November, gasworld learned that new technologies like petrochemical technologies are developing ‘very quickly compared with the rest of the world’.

Rapid growth in the coming years is affirmed by the belief of the major industrial gas and equipment companies, which appears to be very strong. Air Liquide alone for example, plans to invest in the region significantly in the next
half-decade. Speaking at the Cryogen-Expo event in Moscow, Dominique Bertoncini, General Director of Air Liquide Russia, described the company’s plans to invest around €1bn in the region by 2015.