Izumi Ohe provides an insight into the Japanese gases market and discusses business opportunities throughout the global recession for the industrial gas players.

Exactly one year has passed since the bankruptcy of the Lehman Brothers all at once plunged the world into an economic recession. The Japanese manufacturing industry and the industrial gas market alike, were of course hard hit by the recession.

The consolidated business results of Taiyo Nippon Sanso for FY2009 ending March showed sales of around ¥500bn, down by 2.4% over the previous year. Ordinary profit amounted to ¥28bn or less, likewise a drop of 27.4%.

Since the ‘Lehman Shock’, the drop during the fourth quarter from January to March of this year, was very great and sales for the fourth quarter were down by 13% over the same period of the previous year – with operating profit down by 65%.

This was a complete turn around from the first half of the year, which had done so well, resulting in a major plunge.

In contrast, the sales of second-placed Air Water, in its consolidated financial statement of March, amounted to around ¥450bn, up by 5.3% over the previous year – with ordinary profit about the same as that of Taiyo Nippon Sanso, ¥28bn and up by 0.6%, making for an increase in both earnings and profit.

However, looking at just the January-March quarter, sales were down by 6.8% and working profit down by 24.3%, resulting in a drop in both earnings and profit.

Entering into the first quarter of 2010 (April-June), for all of the companies the effects of the slump stood out clearly indeed. Sales of Taiyo Nippon Sanso during the first quarter were down by 22.6% over the same quarter of the previous year, while working profit was down by 49.8%. Air Water sales were down by 8.7%, and ordinary profit by 15.9%.

For Taiyo Nippon Sanso, the ratio of sales from the iron and steel, electronics and overseas sectors is very large, ensuring that the serious blow they suffered in these sectors had reverberations as a consequence. In contrast, while Air Water does have major customers in the iron and steel sectors, its ratio of sales in the electronics and overseas sectors is low.

The weight accounted for by its domestic business such as the healthcare, energy, and food sectors, which are relatively immune to the economic situation, is high.

That the effects of the recession on Air Water were less profound than they were on Taiyo Nippon Sanso was largely for this reason.

The fact that neither of the two Japanese majors mentioned above reached ¥500bn in sales is indicative of the position the Japanese market finds itself in.

Third-placed Iwatani and also Japan Air Gases (JAG) are estimated to have about the same levels of decreased earnings and profit. Especially for JAG, for which the financial statement for the entire year covers the period of January to December, the financial results for the January to June period of 2009 is estimated to have been a tough one indeed, because the ratio accounted for by the electronics sector is large.

Nevertheless, taking into account that the automotive and electronics companies were compelled to record red figures, in the sense that the industrial gas firms were able to secure a profit, the industrial gas business is indeed a stable one.

On the road to recovery?
Looking at the demand for gas during the January to March period shows that, due to the slump in the electronics sector including silicon wafers and in the iron and steel sector, oxygen was down by 10-15% over the same period of the previous year – while nitrogen was down by 15-20% and argon by 20-30%.

Still, since June, from a steel perspective exports to China have recovered. The policy of assistance of environmental protection (carried out by the government to stimulate the economy) is having an effect, while this has called forward a demand for cars to cope with the environment and home appliances.

The demand for steel is also headed towards recovery. In addition, the industrial gas market has bottomed out and has been heading upwards compared to the January-March quarter. Still, in comparison with the previous year this as yet cannot really be called a clear recovery.

Since July, industrial gas companies have been looking towards growth, but it would depend on other external factors such as whether the government aid would continue.

This is especially relevant since September, as the administration that led the government for 55 years was changed and it is unclear now what affect this will have on government policy. There are also concerns regarding public investment, due to the change in government.

Due to such issues, there is a strongly held view that a full-scale recovery will take place as of 2010. What is of importance in considering the demand for gas is in what form the major users, such as those in the automotive, chemical, steel, and electronics industries, will take action.

Hopes placed on solar cells
To head towards recovery, one of the key concepts to appear in industry overall involves environmental improvement.

The government is stimulating the economy by implementing a tax reduction when cars and home appliances are purchased. In the automotive industry, which had been dealt a severe blow between the autumn of last year and early this year, companies have gradually begun to restart production of small to medium size cars, of the type which takes the environment into consideration.

In addition, producers of home appliances are gradually increasing production of their energy saving products. The results of these activities have now started to appear. The iron and steel sectors, as well as the chemical industries, are placing hopes for growth based on the materials they supply for use with these products.

When it comes to the environment, both the public and private sectors are putting their efforts into solar cells in particular. In Japan, power companies monopolise the supply of electric power, but when solar cell panels are brought into homes, power companies are obliged to purchase the surplus power generated from these at twice the ongoing rate.

Based on this, the market for solar cell panels for use with homes has been expanding rapidly. This is an area which holds great prospects for further growth, and is very important if the demand for gas is to grow.

Technology and overseas expansion
Japanese companies have, in the past, been at a top level globally in terms of energy conservation technology.

Although this is a personal opinion, the feeling of this author is that, “Japan can wield its competitive ability as the cost of energy goes up.”

From this point of view, Japanese gas producers might well expand the field of their activity. The motivation in such major applications as iron and steel, chemicals, and shipbuilding is centered basically on aspects such as the improvement of quality, energy savings, reduction of costs, safety, and environmental improvements.

The more the economic slump deepens, wherever production is undertaken plants forge ahead towards these five goals, so that areas of gas activities can only increase – which might well be said to mark the arrival of potential new business opportunities.

For companies that have globalised, how to move into the overseas market and especially the Asian market, is very important. For Taiyo Nippon Sanso, overseas sales (primarily in the US and Asia) account for over 30% of total sales.

The company has recently entered the home therapy business in Shanghai though a joint venture with a local producer. Air Water too, has established an overseas bureau and is thought to be looking for business in neighbouring China. Iwatani is also looking into the new expansion in Asia.

The issue, however, is that the US and European majors have a strong presence in the Asian region. For Japanese gas companies, with a very precise kind of service, the key to success lies in to what extent they will be able to wield originality.

About the author
Izumi Ohe is President and Publisher of The Gas Review, which he established as one of the founding members in 1981.

He has assumed the position of Chief Analyst, a role he has held since April 2004.

Gasworld would like to extend its sincere thanks to Mr Ohe for his insights into the Japanese gases market.