Slowing economy fails to halt industrial gas price hikes
Despite a drop in many other commodity prices, industrial gases buck the trend.
By Gordon Graff -- Purchasing, 11/13/2008 2:00:00 AM
Buyers of industrial gases could normally expect today's cooling economy and declining energy costs to put the brakes on industrial gas prices that have been escalating for much of the year. But buyers' expectations have been squashed the past few months and they have seen no let-up in the steady drumbeat of higher price announcements from gas producers.
Part of the reason, say market watchers, is that the energy costs gas producers pay don't yet reflect the recent drops in crude oil prices. Moreover, some subsectors of the industrial gas industry continue to report adequate demand to keep prices high. Gases used in healthcare and cleaner fuels production, for example, may not be recession-proof, but they are less sensitive to economic downturns. In addition, the demand for industrial gases has historically been slow to respond to the ups and downs of the economy. So, recession or not, it's still business as usual for many gas producers.
In a survey of industrial gas buyers conducted by Purchasing earlier this year, 81% of respondents said they were paying more for gas supplies than the previous year. (See Purchasing, April 10, 2008.) That inflationary trend continues. Praxair, for example, boosted rates by 10–20% for nitrogen, oxygen, argon, hydrogen and carbon dioxide, effective July 1. And Air Products announced hikes of 12–30% for various liquid and bulk gases, effective October 1. Both firms attributed the increases to costlier energy and freight.
There is little doubt that gas producers are being pinched by utility and fuel costs. Electricity is "maybe the biggest single cost factor" in the air separation processes used to produce such high-volume gases as oxygen and nitrogen, says Dean Peters, an analyst with The Freedonia Group in Cleveland. Over the past few years, electricity rates have been rising nearly continuously, he points out. Meanwhile, transportation fuel, needed to truck liquefied gases to customers, rose for much of the past year, he says.
And while the recent slide in energy prices has had little impact on the pace of rate hikes for industrial gases, that could soon change, says John Campbell, president of J.R. Campbell & Associates, a Lexington, Mass.-based consulting firm that tracks the industrial gas business. Over the past two years, he says, it is the end users of the gases who have borne the brunt of the rate increases. Intermediate distributors, on the other hand, have been slower in passing along the increases to their own customers.
Rising prices are a big concern at one large consumer of specialty gases, Texas Instruments (TI), which uses the gases in its semiconductor wafer processing. According to Bryan Vonfeldt, the company's manager for worldwide chemical, gas and CMP (chemical mechanical planarization) procurement, TI is using various approaches to mitigate the impact of costlier gases. The Dallas-based firm has stepped up its gas conservation and recovery efforts, he says, and has worked to reduce supply/demand imbalances in its supply chain. Where possible, adds Vonfeldt, TI tries to source its gases directly from manufacturers, instead of distributors. It also tries to buy gases in larger and more efficient packaging and distribution modes. (The three main delivery modes of gases are pipelines, tanker trucks and cylinders.) If appropriate, Vonfeldt continues, TI may consider switching to alternative materials, alternative grades of materials, or new sources of materials from other regions of the world.
Right now "there are no supply issues" on the U.S. industrial gas scene, says Peters. Frequent talk of a helium "shortage" is misleading, he adds, because buyers can for the most part get as much as they want. But as a commodity, helium is becoming scarcer and more expensive because it is a finite resource, similar in that respect to crude oil.
At TI, Vonfeldt says that "we've experienced spot issues" with supplies of some gases the company purchases. His firm has resolved the situations "by having strong relationships with multiple qualified suppliers for the products and by relying upon their inventories and ours."
As with so many areas of the chemical industry, there has recently been a spate of consolidations among primary producers of industrial gases. For example, two years ago the Linde Group, based in Germany, absorbed the BOC Group, a giant British gas producer. And Airgas, a major industrial gas player in North America, has grown rapidly by acquiring smaller gas producers that were divested by larger companies. According to Peters, consolidation has reached the point where just four companies—Air Liquide (France), The Linde Group (Germany), Praxair (U.S.) and Air Products (U.S.)—account for 77% of the global industrial gas supply in terms of sales. The consolidation trend "does not necessarily concern us," says Vonfeldt, "as long as we maintain solid competition for all of our [purchased] products and do not end up with materials from single sources."
With some areas of the economy seemingly in free fall, demand for industrial gases has displayed remarkable resilience. The average growth rate in sales for this sector in the U.S. between 2006 through mid-2008 was in the 6–7% range, Campbell estimates, with about half that increase due to price and half due to volume. Around August of this year, demand began to level off, he notes. While prices are still increasing, says Campbell, volume growth "has slowed down towards the zero mark." That growth hasn't turned negative yet, he adds, although it may by the first quarter of 2009.
Part of the reason industrial gases remain relatively strong, says Campbell, is that they tend to lag the business cycle by anywhere from 6 to 18 months. So some sectors, like automotive, began to slow down dramatically a year ago, while as of yet there has been no comparable drop in gases.
In addition, Campbell observes that there are some markets for gases that are not too sensitive to recessions. One of them is healthcare, which consumes oxygen and many other gases. Another is advanced technology, such as the manufacture of large-area photovoltaic arrays, which requires a wide range of specialty gases. The current U.S. drive for energy independence will augment the domestic need for hydrogen, which is required in gasoline production. Hydrogen is also needed in desulfurization processes that make cleaner fuels, which are increasingly mandated by legislation. Peters notes that the food and beverage industries, which are huge consumers of nitrogen and carbon dioxide, are relatively impervious to recessions.
| Item | 2006 | Projected 2011 | Growth rate, 2006–2011 (%) |
| Source: The Freedonia Group | |||
| All industrial gases | 26.4 | 36.8 | 6.9 |
| Metals manufacturing and fabricating | 9.0 | 12.7 | 7.0 |
| Chemicals and refining | 4.4 | 6.1 | 6.7 |
| Electronics | 2.7 | 4.0 | 7.9 |
| Food and beverages | 2.9 | 3.5 | 4.4 |
| Medical and health | 1.3 | 1.9 | 8.4 |
| Other markets | 6.1 | 8.6 | 7.1 |
| Products | Percent change, producer price index, Aug. 2007–Aug. 2008 |
| Source: Bureau of Labor Statistics The pace of hikes is expected to slacken in the next few months as the demand for industrial gases in the manufacturing sector begins to wane. |
|
| All industrial gases | 26.6 |
| Oxygen | 9.6 |
| Nitrogen | 10.0 |
| Carbon dioxide | 27.8 |
| Acetylene | 5.7 |
| Other industrial gases, including helium, argonand hydrogen | 43.9 |
| *Source: The Freedonia Group | |
| Global market* | $26.4 billion in 2006, $36.8 billion projected for 2011 |
| Average annual global growth rate, 2006–2011* | 6.9% |
| Forecast percent of market demand by region, 2011* | Asia/Pacific 38%, North America 26%, Western Europe 21%, Other regions 15% |
| North American producers and market share* | Praxair 29%, Air Products 22%, Air Liquide 20%, Airgas 11%, Linde Group 8%, Other 9% |
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