Could there be a worse time to be discussing business, industries as growth drivers, and the state of the present financial environment?
There’s certainly been brighter days to have analysed the shape of the industrial gases business and its future outlook, but let’s not be too disheartened by the global gloom that surrounds us.
After all, the gases industry has continued to grow for 25 successive years or more and at a fairly resounding pace too. Despite the economic dejection and fiscal turbulence, the industrial gases industry is expected to have maintained this trend by the close of 2009, albeit at a slightly slower rate.
The outlook is toned down somewhat and double-digit progression could be in question, yet it’s important that some rate of growth is still expected for 2009 by Spiritus Consulting – a sign of optimism that we should perhaps not lose sight of.
So what of 2008? And how will business
fare throughout 2009
Amidst all of the economic chaos and the ‘deepening downturn’, the strong performance of the gases business in 2008 was perhaps lost among the shocking headlines and pecuniary panic of the fourth quarter.
Figures show that 2008 was in fact a good year for our industry, as the global gases market grew at an estimated 11% over 2007 to reach a value of around $66bn. All that, despite a tumultuous final few months.
The real impact of the monetary madness has been seen in the first quarter of 2009, as manufacturing struggles and countless companies in that sector capitulate, while the major gas companies re-adjust their future forecasts for the months to come.
Frugality and an astute approach have seen the major players escape relatively unscathed and indeed, leading gases company Air Liquide appears strategically solid for both the year ahead and beyond.
As the company announced its 2008 annual results a sense of optimism was in the air, with revenues rising 11% to reach a more-than-healthy €13.1bn and operating income also up 8.6% to €1.9bn. Such a positive performance also translated into net profit of €1.22bn – at a rise of 10.%.
Air Liquide noted that growth throughout 2008 was principally derived from ‘new start-ups in Large Industries, solid demand and pricing in Industrial Merchant, resilience in Electronics and sustained growth in Healthcare’. The results appeared to affirm the notion too that by and large, 2008 was still a strong year for the gases business.
Building on this robust performance in 2008, Air Liquide notes that it is now ‘reaping the positive effects of positions recently taken in high-growth regions’ and an ‘increasing number of start-ups and ramp-ups of new production units’.
It’s anticipated that these new production units should provide additional sales revenue of €1bn over the period 2009-2010, while structural advantages such as market mix and a diverse portfolio are also expected to pay dividends as the year unfolds.
There’s clearly much to be said for a cautious approach and rapid reactions to a changing economic environment, something the major gas companies all seem to have exemplified.
Air Products too for example, has moved swiftly to adapt to a shifting economic landscape and gradually move to a lower cost structure. Reflecting on the US company’s fiscal 2009 first quarter earnings, Chairman, President and CEO John McGlade explained, “Over the quarter, we saw further deterioration in business conditions, resulting in one of the weakest economic environments we’ve ever seen.”
“It was evident that 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.”
It’s established then, that 2008 was a strong year for the industrial gases business and furthermore, that the major gas companies at least, are well prepared to deal with the economic slump we’re entrenched in at present.
But what are the business trends? And what can we expect for 2009? Well, it’s generally accepted that a negative second quarter is to be expected this year as the downturn continues to deepen.
However, gasworld understands that many industry insiders expect to see the recovery begin by mid-November. Growth for the industry overall is also likely to prevail and in twelve months time, it is not inconceivable that we could be reflecting on an industrial gas business that has broken the $70bn revenues barrier.
The trends – what’s driving growth?
The economic slowdown of the last quarter of 2008 saw something of a cruel decline for many customers or end-users, with this perhaps seen the greatest in the automotive, steel, chemicals, electronics, and welding sectors.
Air Liquide alone, registered ‘significant falls in demand’ for specific segments such as oxygen for steel production or electronic specialty gases for the faltering electronics industry. Similarly, as tier 1 gases player Praxair revealed its fourth quarter 2008 results the company reflected on weaker volumes in most end markets in North America - particularly metals, chemicals and electronics.
In South America, where Praxair enjoys an extensive regional footprint, the company saw overall growth mitigated by lower on-site volumes to commodity producers, though sales did increase to customers in the food & beverage, healthcare, and general manufacturing sectors.
Fellow US gases major Air Products also conveyed the worrying trends sweeping the end-user markets at present, through its fiscal 2009 first quarter earnings release.
Air Products experienced an 8% decline in Merchant Gases sales of $925m, with operating income from this sector declining 15% largely due to weaker volumes across all regions and unfavourable currency impacts. Tonnage Gas sales of $744m were also down, by 6%, while operating income for this division decreased 2% to $109m - due to both currency impacts, and lower volumes from weakening steel and chemicals end markets.
While there are those that believe the industry has sidestepped the worst of the recession, the significance of the collapse in manufacturing for example is not lost on others.
In 2007, the manufacturing sector accounted for just over $17.5bn of revenues for the industrial gas industry, while chemicals represented the second biggest growth driver at $9.4bn of revenues, and metallurgy was close behind as it accounted for $8.5bn. With the business trends rarely changing too rapidly year-on-year, surely the suffering of these three biggest gases growth drivers is a worrying sign?
It would certainly appear so, with vehicle production in a state of disarray and countless automotive manufacturers appealing for government bail-outs just to survive. The bad news keeps on coming thick and fast with every month that passes, so the knock-on effects of this chain reaction will perhaps be felt for some time yet.
In its Winter 2009 edition, Japan’s Gas Review Nippon reports how ‘there seems to be no countermeasure with regard to the financial crises’ and the usually resilient gases business has suffered in the North Pacific Rim.
The volume of gas sold apparently began to drop as early as October last year, plunging sharply between November and December, while even early this year a 30% drop in demand has continued for separated gas.
The report also notes how the current slump in manufacturing has dealt a ‘much harder blow’ to those Asian countries with weak economies which rely heavily on exports, including the emerging gases powerhouse that is China.
Crippling consumer confidence and faltering demand for electronics products has already taken its toll on Air Products, with the company revealing in its Q1 2009 results that Electronics and Performance Materials Sales
of $407m declined 21%.
It’s not all bad news however, and the trends for decline appear to vary across the different geographies. Sustained strength in the healthcare and food sectors is apparent, and these resilient industries will perhaps always remain undeterred, such is their fundamental nature and resistance to cyclical factors.
Air Liquide attributed much of its resounding revenues growth in 2008 to the healthcare and electronics sectors, while we have already noted how Praxair witnessed increased sales to customers in food & beverage and healthcare markets in South America in Q4 2008.
There is also strong demand to be seen for hydrogen from refining, while the overall energy market has continued to present an unwavering driver for gases consumption.
Air Liquide noted how sectors such as refining have been ‘resilient’, where hydrogen demand is stable, and Praxair cited ‘higher sales to energy markets due to strong demand for hydrogen by refiners’ as offsetting its lower volumes in most other markets in North America in Q4 2008.
The natural conclusion would be to say, that overall 2009 will prove to have been an extremely tough year.
On the upside however, a number of new projects and capacity are due to be brought on stream both this year and over the course of the next few years.
gasworld also understands that we may see signs of the recovery within the next six months, while stable demand from the refining, healthcare, and food sectors is encouraging and provides a welcome balance to the declining manufacturing, chemicals and metals markets.