The future for the region was looking bright with double-digit growth and a wealth of potential expected across South and Central America. This is likely to change in 2009 –10, as gasworld investigates.
Ahead of this month’s South American conference, which gasworld will be hosting in Chile, we investigate what has been happening and what challenging times the region’s industrial gases companies face over the next few years – following 3-4 years of solid growth.
South America is a huge continent and possesses a large mineral resource, increasingly discovered oil and gas reserves and a large agricultural base – all pointers for growing optimism for the potential in the region, widely regarded as a land of opportunity.
So why such positive vibes?
Well, the economic landscape in South America is evolving, shaped by an almost seismic shift in domestic economic fortunes and generally strong GDP growth in a number of countries which could trigger increased levels of disposable income and in turn, growth in markets such as food applications and a range of services.
Add to that the growing shift for export-orientated processing, and manufacturing has boosted demand for industrial gases in the past few years. According to Spiritus Consulting, the industrial gases market in South and Central America reached $3.2bn in 2007, an increase of 18% over 2006 and expected to continue by a further 18% in 2008.
The region is still very much dominated by Brazil – which saw total gas revenues reach $1.8bn in 2007 – representing 57% of the total market. On a global scale, South America accounts for 5% of the worldwide gases business and is the fourth largest region after North America, Western Europe and the Far East.
Strong demand from the chemicals, metallurgy and manufacturing sectors continues to drive the South American gases industry.
Based on recent growth trends, the South American market was expected to continue to generate double digit growth over the next five years. However, looming very much on the horizon for 2009 and 2010 is the global credit crunch and the impact other regions will have on the export focused economies of South America.
Spiritus has issued revised forecasts for the region, showing that economists see a slowing in industrial production for the region as the worldwide economy flattens.
There is no doubt that South American currencies are also susceptible to US dollar and Euro currencies and this will also have an impact, resulting in an expected decline in US dollar value in the South American market in 2009 and 2010, with a pick up in 2011- resulting in a CAGR of just over 4% p.a. over the next five years.
Clearly oil & gas exploration and processing is expected to gather momentum – with some interesting LNG projects planned and additional refining capacity to be added. There are also some significant plans to increase both ferrous and non-ferrous production across the region, but Spiritus expects some of these projects to be put on hold over the coming couple of years.
Hence, growth from these sectors may show a lower performance in US Dollars than previously forecast.
Spiritus believes that the metals sector will grow at over 5% p.a. compared with over 4% for the chemicals and refining sector.
The region’s healthcare services are likely to continue to grow as a result of the general improved economic trends, despite the predicted slowdown.
So while the near future presents a challenging time due to both economic and currency issues, a positive complexion does still front the region’s gases market. How does this look on a country performance level?
Benefiting from strong agriculture, mining and manufacturing sectors, Brazil boasted a robust GDP level and the largest market in the region - rising from gas revenues of $1.4bn in 2006 to just under $1.8bn in 2007, a very healthy year on year growth rate of 20% - in part achieved by the strengthening of the Brazilian Real.
With the solid foundations laid, all eyes will be on Brazil’s other emerging growth drivers such as energy and steel.
Domestic steel production reached a record 34 million metric tons in 2007 and is forecast to grow to nearly 88 million metric tons by 2015, according to the Brazilian Materials and Metallurgy Association (ABM). Meeting the resulting demand while also keeping prices competitive, is likely to be the challenge ahead for those in Brazil.
Thrown into the energy spotlight following two major offshore discoveries in 2007, Brazil is prospering from recent oil and gas exploration and the country’s government recently announced a plan to invest significantly in the sector between 2007 and 2010.
Potentially massive refinery and petrochemical projects could be in the pipeline as a result, with gas major Air Liquide ready to capitalise.
The group is looking to build on its South America portfolio and is believed to be planning to invest over $200m through to the end of 2009, eyeing the steel, petrochemical, and pulp & paper markets.
In terms of the major players in the Brazilian market, Praxair’s subsidiary White Martins is thought to be the dominating force with a 65% market share.
Linde estimates it occupies a 15% share of the market, while Air Products maintains a 10% share.
Describing the significance of the Brazilian market, White Martins CEO Domingos Bulus told ICIS news earlier this year, “As the biggest economy of South America, Brazil is a key market for Praxair, representing more than 80% of the sales in the region.”
According to the same ICIS report, the four major players in the South American region, notably Air Liquide, Air Products, Linde and White Martins, plan to invest a total of $440m in Brazil in 2008 to meet growing demand.
While Brazil has prospered with an impressive 20% growth rate in 2007, Argentina by contrast continued to experience difficult business conditions and only showed an 8% growth in 2007 reaching $342m, compared with $316m in 2006.
The country is both rich in natural resources and boasts a large industrial base, with Argentina holding the second largest share of the South American gases industry at around 11%. The potential is certainly there, but will not be realised until the economy is sorted out.
Closely behind Argentina as the third largest market in the region, lies Chile, which accounts for 9% of the South American Market, reaching $290 m in value.
However, there has been a slight slowing in economic growth in 2007 following very strong growth in 2004-2006. The Chilean industrial gas business still progressed at a steady 7% in 2007, up from $271m the year before.
As the main industrial gas and welding company in the country, Indura dominates the Chilean market and provided perhaps the most notable news item from the region of late too.
Indura declared a turnover of around $211m in 2006, 68% of which was generated in Chile itself. Building on this, the company purchased The Linde Group’s Colombian subsidiary Cryogas S.A. at an enterprise value of around €90m (US$115m) in spring this year - adding the company’s 2007 sales of €49m (US$63m) to its group business.
Gas revenues may have grown by 20% in Colombia during 2006 to reach marginally above $200m, but there was no such repeat performance in 2007 as the market continued with modest growth.
An increase of 7% last year saw revenues total $216m and attain a 7% share of the South and Central American market.
As the fifth largest market in the South America region, Venezuela occupies a 5% share and revenues of $146m - a rise of 4% in the past year as the country’s market grew from its previous value of $141m in 2006.
Business conditions remain difficult as the Government continues with its socialist restructuring of the country.
A new LNG project is well underway in planning and the country has definitely benefited from the recent high energy prices of late.
Next up is Peru, situated in western South America and the former home of the legendary Inca Empire, and with a previously undeveloped gases market. Spiritus figures suggest revenues have risen from a strong level in 2006 to reach around $90m in 2007.
This highlights a marked improvement for the country’s gases market and an immediate leap forward ahead of neighbouring Ecuador and slightly smaller Uruguay. Peru accounts for 3% of the South America gases market. The country is also rich in copper deposits.
Ecuador, Bolivia, Uruguay, Paraguay
Of the remaining four countries comprising the South America region, Uruguay has experienced the highest growth rate of 14% as industrial gas revenues rose to $45m in 2007. Almost as impressive was the revenue rise seen by the Republic of Ecuador, as the equator-straddling country amassed $50m.
Paraguay and Bolivia however, only showed single-digit growth in 2007 as these countries simply saw marginal revenue increases last year. Paraguay’s industrial gas revenues reached $19m, while in Bolivia a growth of 5% saw totals of $20m.
Looking ahead for the South American industrial gas market, it appears the optimism shown in the past few years will be neutered somewhat by the global trading conditions that are expected to be seen over the next 2 years.
The expected double-digit growth for the region is unlikely to happen unless the region exhibits a very low cost base compared with other regions around the world. The conditions exist for strong growth, but economic and currency issues are expected to lead to a lower growth over the next five years.
Spiritus expects a good performance for 2008 – with the region expected to grow to $3.7bn, but a significant correction is likely in 2009 and 2010.