annual report 2013

Global Industrial Gases 2013

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dustrial Gases

Global Industrial Gas Consultants

The Global Industrial

Gas Business

Annual Report

2013

The following document is for the exclusive and confidential use of the Authorised

Recipient(s) or Organisation to whom it is addressed. This report must not be copied,

reproduced, distributed in whole or part, neither by paper nor electronic means, to any

other party other than the Authorised Recipient without the prior written consent of Esprit

Associates. This document has been prepared to provide information on the industrial

gases business and/or to assist the recipient in its decision making process. Esprit

Associates warrants that all work carried out for this report was undertaken in good faith.

No representation or warranty, either expressed or limited, is made as to the reliability,

completeness or accuracy of this report. No responsibility or liability whatsoever is ac-

cepted by any person including Esprit Associates, its respective officers, employees or

associate consultants for any errors or omissions in this paper. It is for the Recipient to

decide what action to take based on this work without redress to Esprit Associates for

the consequences for such action.


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CONTENTS

Executive Summary

Page

1 Global Industrial Gas Business 2013 9

1.1 Introduction 9

1.2 Overview 10

1.3 Regional Analysis 25

1.4 Company Analysis 39

Appendix 1 Industrial Gases

Glossary


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EXECUTIVE SUMMMARY The Players

The year 2013 continued sluggish for the industrial gas business after slow real

growth in revenues and profits in 2012. In the so-called Tier 1 companies, inter-

national companies with revenues greater than US$1 billion, the underlying growth

rate, excluding utility, currency and acquisitions, was +2.8% compared with 2.9% in

2012. In the report we focus mainly on the biggest four companies, Air Liquide, Air

Products, Praxair and Linde, with the addition of Messer Group whose sales ex-

ceeded €1 billion for the first time in 2011. In the overviews statistics we also

include the Tier 1 companies Airgas and Taiyo Nippon Sanso (TNS) although

their businesses includes a significant amount of non-industrial gas revenues. In the

case of Messer as a private company some data is not available.

At the end of 2013 Linde appears marginally to be the market leader in the gases

business, mainly because of acquisitions, particularly of Lincare in the US in 2012.

However, Air Liquide is a very close second. Their market shares in US dollars fell

slightly because of the weakness of the Euro.

The purpose of the report, as in previous years, is to identify the performance, the

market positions and strategic thrusts of the majors and to position these within the


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drivers of the wider market. Not all international players are in all regions, mostly

because of their founding history but all but one continue to be interested in

certain higher growth countries like China and in high-growth product lines like

hydrogen. Their emphasis on any specific sector is a matter of history and strategy.

The Market

The market is dominated by three regions and unsurprisingly all the major players

participate in these. North America and Europe are the largest but slower growing

than the Asia Pacific region. Again the weakness of the Euro has underemphasized

the volumetric size of the European region

Market Growth


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The sluggish revenue growth during 2013 is perhaps a consequence of continued

economic uncertainties in the mature but underperforming markets of Europe and,

to an extent, North America.

Volumes were up by +1.6% on 2012, with sustained pricing discipline boosting pricing

by a further +1.2%, thus yielding an underlying growth rate of +2.8%. This was

boosted by acquisitions of a range of small businesses and one major acquisition by

Praxair in the CO2 business, which added a further +4.2% to revenue growth.

Currency fluctuation had a substantial negative impact of -1.5%, reflecting a shift

away from weaker currencies in Europe and in Japan during the year. This shift

largely favoured the US Dollar. Finally, higher Natural Gas pricing added to

revenues by 0.2%.

The industrial gas companies have continued to maintain a high level of investment

in new capacity during the year, with Capex as a proportion of revenues coming

to 15.0%, up 130 basis points year-on-year. This has been driven both by continued

expansion in Asia and a focus on environmental issues world-wide and by a major US

acquisition by Praxair of a CO2 distributor.

The business is a capital intensive business with typically $1 of revenues for $1

of investment and so ROCE is a key indicator. The companies have a target

to achieve 15% ROCE. Average ROCE on a fixed dollar basis rose by 20 basis

points to 11.6% reflecting slightly improve performance on a current dollar basis

is fell 50 basis points due to currency swings. The average ROCE is still dimin-

ished by TNSC’s ROCE partly because it is difficult to identify non-gas capital and

profits from its business and partly because the Japanese market has different finan-

cial goals. It is also significantly diminished by the two German companies with their


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debt issues although Messer is a private company and relatively immune from share-

holder targets. Linde often reports its ROCE excluding the more than a third of its

assets that are “goodwill” which brings its operating performance in line with the oth-

ers.

Airgas, which has grown by acquisition, has managed to stay in a more respectable

range.

The other issue that causes a lack of clarity is that most companies have non- in-

dustrial gas activities, such as engineering, power generation and chemical or

material products, w h i c h add to corporate revenues. These can distort the analy-

sis of the industry and have been excluded wherever possible in this report. We ex-

amine each of the companies in turn and look at their achievements, strategic di-

rection and potential weaknesses. We also examine the drivers for the business

which are constant and based primarily, either directly or indirectly, on environmen-

tal legislation. This is usually coupled with improving end-use processes and hence

economic efficiency.

Key drivers include:

• Improved transport fuels such as low sulphur diesel and maximising yield

per barrel. This has driven the hydrogen business with double digit growth

and continues to do so. Forthcoming legislation on marine diesel sulphur

levels will lead to a new growth in hydrogen and/or oxygen demand

• Oxygen substitution for air in many processes to reduce emissions and

improve efficiency through debottlenecking or not having to deal with

nitrogen. This has led to significant growth in the chemical and metal-

lurgical industries and continues into other sectors.


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• Coal-to-Chemicals and Coal-to Energy projects in China are driving the

largest growth in oxygen demand in any territory.

• Gas-to-liquids projects are still few but their industrial gas requirements

are very large with new announcements expected in 2014.

• Global wealth creation has led to a booming demand for high quality indus-

trial gases and services in the electronics industry and in the food pro-

cessing industry

• The aging population has led to numerous opportunities to supply the

homecare and healthcare markets even in developing economies. This

has met a varied response due to the involvement of government in the

supply chain. Linde and Air Liquide have established major world-wide busi-

nesses whilst others have been more selective.

• Long-term pressure on CO2 emissions will lead to a double digit growth

in the demand for oxygen for gasification in power generation in the longer

term. All new projects are heavily supported by national or regional gov-

ernments, but tax changes will eventually drive the business.

Esprit predicts based on recovering economies and new sources of feedstock in the

USA that the headline growth for the industrial gas business will approach the 7% per

annum that it enjoyed in the early 1990’s.


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1.0 THE GLOBAL INDUSTRIAL GAS BUSINESS

This annual report is designed to enable readers to support any business activities

that are dependent on industrial gases. It is addressed to those who are familiar

with the general nature of the industrial gas business, both in its products and its

business language. It follows a similar format to previous years, but we have

a g a i n reduced the repetition of unchanging information about the business. The

changes in capacity are fully reflected in the appended Excel™ spreadsheet. To

assist those who are less familiar, Appendix 1 is still included to give an introductory

overview of the business.

1.1 Introduction

This report covers the calendar year 2013 and is based on a mixture of published

information and estimates based on more limited data. One difficulty is that the

major industrial gas companies (Tier 1) have a variety of financial years; Air

Liquide, Linde and Praxair match the calendar year; Air Products runs October 1st

to September 31st and TNS and Airgas run April 1st to March 31st. In addition, some

companies such as Messer do not publish quarterly results, so Esprit has had to

make reasoned estimates based on what they have published and on previous

knowledge. Companies rarely provide more than sketchy information on their

business at particular locations or about delivery mode and sector revenues, but it

is possible to use the plant database and regional revenue knowledge to provide a

reasonable analysis.

The report is designed to provide insight rather than simple statistics and to identify

both the strategy and tactics of the main companies. Smaller companies are gener-

ally included in the category “others” or, where appropriate, are consolidated into

their Tier 1 partial owners. We have also tried to eliminate from the report double

revenue counting from wholesaling activities and revenues from non- industrial gas

activities, such as engineering and power generation. We have also identified ac-

quisitions and disposals within the Tier 1 companies to avoid overstating market

growth.

All information is given in US dollars but it must be recognised that currency effects

can change apparent market growth rates. Similarly, changes in power and natural

gas prices have a significant effect on revenues, but not usually on profits because

t h e s e cost changes are generally passed through to the end customer by contract.

The year 2013 was dominated by the companies trying to grow in an effectively flat

market in most developed countries. They applied various strategies to maintain

growth but they maintained their discipline in pricing practices to avoid erosion.


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1.1.1 Overview

1.1.1 Revenues and EBIT

2013 was a year of slow growth for the industrial gas business revenues after a fall

in the first quarter it then meandered on a constant currency basis. This followed a

similar trend to that in 2012 but with fewer “bumps”. Growth measured on every basis

was pretty similar with the exception of the Yen where currency effects were severe.


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There remained significant economic uncertainties in most economies and even

with relatively stabilised utility prices, revenues actually fell in Q1 and then grew

slowly over the next three quarters. He trend was to be repeated later by a fall in Q1

of 2014. The graphs above show how important it is to clearly identify the currency

basis of any analysis. From a Japanese viewpoint the market has been almost flat

in Yen terms for four years and suddenly appears to grow. The trend with inflation

removed shows that the business has a long term sound basis for revenue growth.

EBIT also fell during the first quarter and again in the third quarter even after elimina-

tion of “special” charges. However, the overall EBIT of the business is relatively stable.

1.1.2 Revenue Makeup

Analysis of the gas revenue streams of the Tier 1 gas companies and determination

of the drivers behind the performance of revenue growth for each company in 2013

when compared with 2012 is shown below. These are looked at in more detail for

each company in section 1.3.

Revenue growth has remained rather sluggish during 2013, perhaps a conse-

quence of continued economic uncertainties in the mature but debt-ridden markets

of Europe and, to an extent, North America.


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Volumes were up by +1.6% on 2012, with sustained pricing discipline boosting pricing

by a further +1.2%, thus yielding an underlying growth rate of +2.8%. This was boosted

by acquisitions of a range of small businesses and one major acquisition by Praxair in

the CO2 business, which added a further +4.2% to revenue growth.

Currency fluctuation had a substantial negative impact of -1.5%, reflecting a shift

away from weaker currencies in Europe and in Japan during the year. This shift

largely favoured the US Dollar. Finally, higher Natural Gas pricing added to revenues

by 0.2%.

Nonetheless, the industrial gas companies have continued to maintain a high level of

investment in new capacity during the year, with Capex as a proportion of revenues

coming to 13.3%, up 140 basis points year-on-year. This may be interpreted as a

reasonable degree of customer confidence in the medium term at least – notwithstand-

ing any short term uncertainties.


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The return of slow revenue growth is very is evident in Return on Capital Employed

(ROCE) for the seven industrial gas companies under review. This is down up by 10

basis points year-on-year, to 11.5%, reflecting increased revenues against a backdrop

of continuing investment in future capacity.

Because of this revenue growth and overall flat EBIT, profitability has fallen: overall EBIT

margin has been marginally eroded, by 30 basis points down to 17.1%. This is the result

of a continued focus on maintaining efficiencies and maximising economies where

possible, yielding more streamlined, relatively nimble organisations with which to

tackle economic challenges offset by more competition for a slower than usual demand

growth.

Predictably, it has been the onsite and healthcare businesses that have coped best with


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the unfavourable economic climate in developed countries. Onsites profits are protected

by long-term take-or-pay contracts which pass operating costs to the end-user and

healthcare is inherently ‘recession-proof’ as the world population gets richer and older.

Sales of cylinder and bulk gas have been markedly slower to grow. Praxair continue to

perform well in all sectors due to their inherently disciplined (hard-nosed) approach to

business.

By end-use sector, the usual highlights have been found within the refining (hydrogen),

chemical and steel industries, where a lot of new start-ups have seen significant

volumes of gas go on-stream. Often these new plants have been located in emerging

B R I C economies. By contrast, demand from the electronics and semiconductor in-

dustries has not yet regained its previous high growth patterns.

1.1.2.1 Quarter 1 2014

Results for the Annual performance come out about 4 to 6 months after the end of the

year and we have been able to put together a view of Q1 14 which shows that revenues

fell for the Tier 1 companies from Q4 13.

The headline growth rate of 3.4% is mainly driven by real growth year-on-year of 2.6%0f

volume and 2.7% of price improvement. This accounts for 5.3% of growth.

This is offset by significant currency movements of -2.6% due to the weakness of the US

dollar. Natural gas and power prices have been favourable adding 0.7% to growth.


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The worrying aspect of the figures is that the revenues in Q114 are 1.0% lower than

Q413 although this is an improvement on Q1 13 which was 1.4% lower than Q1 12.


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1.1.3 Global Revenues by Region

The total global industrial gas revenues in 2013 were US$80 billion strongly focused on Eu-

rope, North America and the Asia-Pacific region. In other regions the markets were still limited

by basic economic development or, in some cases

a reluctance to outsource. It is quite clear from the

growth rates that the Asia–Pacific Region lead the

global market by the end of the decade barring po-

litical disruption or another global recession. North

America is expected to show strong growth in the

next period based on the exploitation of new

sources of natural gas. Most of the EU seem de-

termined not to exploit these sources and will not

see such a spur to growth. The remaining regions

have a small base and modest growth rates, they also represent the most politically unstable

or at least “at risk” areas

US$ m

CAGR 2013-

18

North America 22078 6.1%

South America 3876 6.5%

Western Europe 22507 4.7%

Eastern Europe 4108 6.7%

North Pacific Rim 18377 9.6%

South Pacific Rim 4406 8.1%

Asia 1086 9.0%

Middle East 1765 6.7%

Africa 1783 7.6%

Total 79985 6.7%


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1.1.1 Global Revenues by Industry

Manufacturing industry is still the dominant customer for industrial gases, but mainly for bulk

and packaged gases. It has dropped from the 35% of industrial gas revenues a decade

ago to 29% now. Growth areas have been Chemicals and refining, up from 14% to nearly

20%, in spite of the lower natural gas pass-through and Metallurgy up from 12% to 16%.

All others except electronics, up 1%, and Food, up 1% have been essentially flat.

Refining revenues are driven mainly by environmental issues often based on better energy

e f f ic iency, o r on improved p roducts such as low sulphur diesel. The primary market

product is hydrogen which is very sensitive to the

price of natural gas. Natural gas prices have re-

mained fallen significantly, particularly in North

America, which reduces revenues from the refinery

sector, but not earnings. The second product is ox-

ygen which is experiencing significant growth due

to the coal-to-chemicals needs in China and poten-

tially due to further gas to liquid plants in other re-

gions. The upcoming reduction on bunker sulphur

in 2020 will lead to a significant increase in demand

for oxygen for gasification of long resid. The result-

ing syngas may be used for power or in the refinery

for product upgrading after conversion to hydrogen. Metallurgy also continues to be driven by

environmental issues particularly on blast furnace enrichment and by direct reduction of iron

to steel in grassroots plants in developing countries. Electronics has been driven by

industrial and technology growth demanding ever purer products in increasing volumes

US$ m

CAGR 2013-

18

Chemicals 10870 7.8%

Refining 4560 10.3%

Metallurgy 12490 6.8%

Mfing Industry 22841 6.0%

Food 5176 5.4%

Electronics 7641 9.3%

Pulp & Paper 570 5.9%

H/C 9519 6.1%

Glass 1171 5.5%

Other 5147 5.5%

Total 79985 6.7%

Chemicals14%

Refining6%

Metallurgy16%

Mfing Industry29%Food

6%

Electronics9%

Pulp & Paper1%

H/C12%

Glass1%

Other6%

Global Revenues 2013$80 Bn


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and by flat screen television market penetration. The Esprit model predicts that these

and maybe homecare through acquisitions will continue to be the fastest growing sectors

over the next 5 years.

1.1.2 Global Revenues by Company

The global revenues are dominated by 4 major players who account for 64% of the business

and 7 players account for 72%. Messer continues hold its position having returned to

Tier 1 status in 2011, with more than €1 billion of revenues, after only a few years as an

independent company, but as yet, has no presence in North America. The question of who

is the true market leader depends on what is in-

cluded in the revenue analysis. In total revenues

($20.2B) and gross declared gas revenues

($18.3B), Air Liquide is slightly smaller than Linde

in gases ($18.5B) and smaller overall than Linde

($22.1B). However Air Liquide has a large co-

generation business and significant wholesaling

in its gas revenues ($3.0B) as well as a large

engineering business. Linde also has as a major

engineering business but its wholesaling and other in its gas revenue is much smaller

($1.5B) than Air Liquide. On a gas only basis Linde is larger than Air Liquide This is mainly

due to Linde’s major acquisition of Lincare in the USA in Q3 12 which added just under $1B

to its revenues, however some of the Lincare revenues are services rather than gases and

should be discounted. Air Liquide has brought significant volume on stream since last year

US$ m

CAGR 2013-

18

Air Liquide 15406 6.1%

Air Products 10019 7.3%

Praxair 10158 6.8%

Linde 15473 6.5%

Messer 1498 9.1%

Airgas 2496 5.5%

TNS 3023 6.5%

Others 21913 7.1%

Total 79985 6.7%


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which has closed the gases gap significantly. Similarly the Praxair-Air Products position is

related to currency and shape as well as volume supplied. Air Products is more global

and can be more affected by currency changes but on a headline basis Praxair grew more

than Air Products by 4% against a long-term trend. The influence of the corporate raider

and the change of CEO in 2014 may add clarity to Air Products’ strategy and resume

the previous positive trend. What is clear is that Air Products should continue, in the long

term, to gain ground on others provided project execution is sound. This is due to their

focus on the high growth business areas such as refinery hydrogen and on onsite and

pipeline supply which is growing faster than other lines of business. There are clear indi-

cations that Air Liquide is pushing hard to gain onsite business but Linde is more focused

on Homecare. As we will see, Praxair is the best performer by all normal financial measures,

but it is at the expense of not taking any significant risk taking to build new business.

Praxair has the most stringent financial targets which often preclude strategic investments

to develop new territories and thus may limit long-term growth potential.


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1.1.3 Global Revenues by Line of Business

The breakdown of the business by delivery mode shows that over the last decade the

onsite share of the market has grown from 17% to more than 24% in spite of revenues

decreasing in the last four years due to a sustained weakness in natural gas and power

prices. During the same period the Bulk business has moved from 28% to 30%. As we

have said before, there is a natural progression for many users from cylinders to bulk

to onsite supply and this i s e n c o u r a g e d b y t h e f u l l r a n g e suppliers. Contracts

for Onsites are generally 10 to 20 years with a

high degree of take-or-pay, that at least protects

returns, and bulk contracts are for up to seven

years, often with similar provisions. The compa-

nies encourage upgrading and have developed

technology solutions to encourage this, provided

that they stay in control of the conversion process.

Clearly upgrading across lines of business can

have an impact on the line of business, reducing

the volume, and companies like to plan the process. Many companies allow the business

teams that run the bulk business to run the small onsites business to prevent unintended

internal competition. The growth in each section reflects both the growth in the underlying

use sectors and the conversion of captive capacity to onsites and the impact of micro-bulk

and liquid cylinders on the packaged gas users.

Onsite24%

Bulk30%

Packaged41%

Equipment5%

Global Revenues 2013 US$ 80 Bn

US$ m

CAGR 2013-

18



Praxair 10158 6.8%

Linde 15473 6.5%

Messer 1498 9.1%

Airgas 2496 5.5%

TNS 3023 6.5%

Others 21913 7.1%

Total 79985 6.7%


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The split of onsite revenues is determined as much by the history of the various companies

as by current strategy. Air Products invented the

onsite concept in the 1940s and have remained

firmly wedded to it as a key strategy for stable

growth and minimum risk. They have at various

times effectively withdrawn from the low value,

high logistics industrial packaged cylinders busi-

ness and then tried to become a full range supplier

again by their failed attempt to buy Airgas in

2011/2. At the other end of the scale, Airgas grew

by acquisition of “mamma and poppa” cylinder businesses and applying economies of scale

to their procurement of the fill. Subsequently through forced disposal by Linde of previous

BOC assets they acquired their own manufacturing plants and branched out into the mer-

chant bulk and small onsites businesses.

Taiyo Nippon Sanso, now a division of

Mitsubishi Chemicals, also grew from the mer-

ger of a number of smaller companies in the

fractured Japanese market. Their acquisition

of Matheson Tri-Gas reinforced their predomi-

nantly Merchant approach to the business.

Praxair is a full range supplier with a bays to

merchant probably because of their lack of

world-scale ASU onsite technology. Linde also

has a bias to the merchant end of the business, mainly because of their focus on healthcare

Air Liquide, 5134

Air Products, 3912

Praxair, 2573

Linde, 4186

Messer, 497

Airgas, 34

TNS, 309

Others, 2544

Global Onsite Revenues 2013$19.2 Bn

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

AirLiquide

AirProducts

Praxair Linde Messer Airgas TNS Others

Product Split 2013

OSP Bulk Packaged

Onsites US$ M

CAGR 2013-

18



Praxair 2573 8.8%

Linde 4186 8.6%

Messer 497 11.3%

Airgas 34 10.9%

TNS 309 9.4%

Others 2544 7.9%

Total 19189 8.5%


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and homecare and a sizeable good will mountain which limits their enthusiasm for large on-

sites. Air Liquide appears to match the market but only when non gas activities are excluded

and Messer is a pure play full range supplier, mainly because it has a significant presence in

what were originally markets served by local players in South-Eastern Europe and the Far

East.

The consequence of these structures is varied potential growth rates, a potential impact on

profitability in recession and a revenue sensitivity to utility and/or transport costs. All things

being equal Air Products would have the most stable profits and Airgas the least stable. In

the event other factors such as regional spread and general management competence have

a significant impact on growth and stability. The action of the corporate raider, Pershing

Square, in forcing the retirement of the CEO of Air Products, John McGlade, was based on

the premise that Air Products should be doing better than Praxair based on its business struc-

ture and had been ten years ago, but was now doing worse thanks to poor management

decisions. A bitter pill for the CEO to be replaced by somebody 3 years older and who’s only

experience was in the underperforming BOC, now part of Linde. Esprit is well aware that the

Hedge Fund companies and others frequently look at the major industrial gas companies with

a view to involvement or even purchase and break-up. In the greater scale of things, Air

Liquide has the easiest ride because its main finance market is less intrusive than Wall Street

and Linde has the benefit of strong support from German Banks. It will be interesting to see

what happens to TNCS, now that it has been taken over.


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1.1.4 Capital Expenditure – Capex

Every report that Esprit produces emphasises the capital intense nature of the Indus-

trial Gas Business, but it is the fundamental driver for many of its decisions. The sales-

to-asset ratios for new investments are as low as 0.5 for Air Gases and 1.0 for HyCO.

The industry went through a period of overinvestment in the mid 1990’s followed by

underinvestment in the early 2000’s which has taught the current leadership to be

more prudent. The amount of capital required by an individual company falls into two

categories, maintenance and market opportunity. The requirements for both are

shaped by the shape of the individual business and the latter by growth in the various

lines-of-business. Onsites always require more capital than bulk, which, in turn, re-

quires more capital than packaged gases. Given maintenance of market shares a

company like Air Products, with a significant onsite business, would thus require more

capital to than one at the other extreme like Airgas, which is primarily a packaged gas

business.

The Analysis of Capex shown above for the Tier 1 companies demonstrates the

long term nature of some lines of business. The investments in the onsite business

and liquid production are by their nature large and irregular whilst investments in

cylinder and bulk equipment can be smoothed. This would might lead to some

peaking but only if all decisions were on the same basis. Some peaking is evident

in Q4 to following Q1 each year, probably reflecting end-of-year decision making.

However it is clear be seen is that in spite of a slightly sluggish economy investment

has actually increased reflecting a long-term commitment by the industry and oppor-

tunities in both developed and developing countries as well as part of some acquisi-

tions from “others”. Capex was up 120 basis points year-on-year to 15.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

Q1

10

Q2

10

Q3

10

Q4

10

Q1

11

Q2

11

Q3

11

Q4

11

Q1

12

Q2

12

Q3

12

Q4

12

Q1

13

Q2

13

Q3

13

Q4

13

% R

eve

nu

es

CAPEX

actual US$

Q413 US$


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1.1.5 Return on Capital Employed - ROCE

Since the business is capital intensive a useful measure is return on capital em-

ployed. This can be used at the level of the industry and for individual companies.

The Tier 1 companies have seen their average ROCE rise by 20 basis points to

average 11.6% for the year on a constant dollar basis. This reflects the continued

drive to improved productivity and new facilities coming on stream. On a real dollar

basis the picture is different with a fall of 50 basis points from 12.1% last year. This

shows the influence of currency variations on apparent performance.

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

Q1 11 Q2 11 Q3 11 Q4 11 Q112 Q212 Q312 Q412 Q113 Q213 Q313 Q413

Quarterly Average ROCE

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

20.0%

Q1

11

Q2

11

Q3

11

Q4

11

Q1

12

Q2

12

Q3

12

Q4

12

Q1

13

Q2

13

Q3

13

Q4

13

% o

f G

as R

eve

nu

es

Quarterly Gas ROCE

Air Products

Air Liquide

Linde

Praxair

TNS

Airgas

Messer

Average


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1.2 REGIONAL ANALYSIS

Esprit breaks the world down into a number of regions to provide a manageable

basis for analysis and reporting. The regions are similar to those used by the

majority of industrial gas companies, although some are further subdivided or clus-

tered based on the particular company’s market presence. These regions are:

North America (NoAM)

South and Central America (SoAM) Western Europe (WE)

Eastern & Central Europe (EE)

Asia Comprising NPAC, SPAC, India, Africa and the ME

Companies have differing presences in these regions and, as can be seen in

Paragraph 1.1.3, some regions have relatively small or underdeveloped industrial

gas industries. However for the sake of completeness each of the major regions is

described in some detail.


26

© Esprit 2014

1.2.1 North America

Revenues rose in 2013 to US$ 22.0 billion up more than 5% from 2012 finally exceed-

ing significantly the 2008 highpoint of more than US$20 billion. This was in spite of

the continuing weakness in natural gas and power prices in the US and because vol-

umes finally exceeded 2008 levels. The market forecast for the next five years is

around 6.1 % per year which is nearing the pre-recessionary forecasts of 6.5% per

year. In this market the leader

is Praxair, very comfortable in

its home market and with a 25%

market share which allows it to

maintain a disciplined approach

to profitability. Air Products is

second mainly due to its sub-

stantial leadership in the on-

sites business, particularly in

hydrogen. It is held back by its lack of an industrial cylinder business, which was

clearly the incentive for the failed bid for Airgas in 2011/12. It will be interesting to see

what the new management do in 2014/15. Linde has grown significantly through ac-

quisitions in the Homecare market but we have discounted about half of this in our

analysis as non-gas. Air Liquide still has a relatively low share of this market and

clearly would like to increase this. The problem for Air Liquide is their lack of a signifi-

cant gulf coast hydrogen pipeline systems compared to the US majors. It also has a

limited ability to use political influence which it deploys to great effect in other regions.

The North American per capita consumption of industrial gas has increased slightly to

$35.1 the highest in any region except Western Europe.

Air Liquide12%

Air Products17%

Praxair26%

Linde13%

Messer0%

Airgas11%

TNS3%

Others18%

North America 2013 US$22 Bn

US$ Bn

CAGR 2013-

18



Praxair 5632 6.2%

Linde 2848 6.0%

Messer 0 0.0%

Airgas 2496 0.0%

TNS 559 5.5%

Others 4078 5.4%

Total 22078 6.1%


27

© Esprit 2014

North America is a well-developed economy with the full range of industries that

make it self-sufficient in everything. The benefits of shale gas discoveries have al-

ready shown themselves in lower energy costs and a bullishness in project activity.

The m e r c h a n t p a r t s o f t h e industrial gas business are sensitive to

economic factors, particularly in the large manufacturing bases which represents

28% of demand. This serves major sectors such as the car industry and aircraft,

which were badly affected by the 2009 recession, have now recovered. His has

had a positive effect on the

metallurgical sector whose

output serves these sectors

as does base chemicals,

glass and electronics. Only

Food and homecare are rela-

tively immune to economics

and similarly onsite profits,

but not revenues, are fixed by

contract. 2013 saw the re-

covery accelerate away from

worst downturn in recent

times where for the first time industrial gas revenues experienced a significant de-

cline. The table shows the predicted growth rates for the various sectors over the

next 5 years w h i c h h a s i n c r e a s e d f r o m l a s t y e a r . W h i l s t t h e s e

a r e l o w e r t h a n t h e Asian tiger economies they are based on a significant

base. They also demonstrate that they are a multiple of GDP growth because of the

ever increasing intensity of industrial gas use, often based on applications research

and development by the industrial gas companies aimed at specific sectors.

Chemicals9%

Refining10%

Metallurgy15%

Mfing Industry28%

Food6%

Electronics7%

Pulp & Paper1%

H/C15%

Glass2%

Other7%


US$ Bn

CAGR 2011-

16

Chemicals 2042 7.4%

Refining 2108 8.2%



Food 1295 3.9%



H/C 3252 6.3%

Glass 503 6.4%

Other 1510 3.6%

Total 22078 6.1%


28

© Esprit 2014

There is a large packaged gas sector in the US served primarily by local small gas

companies which causes prices to be low. Only Praxair of the Tier 1 companies

serves a full range of cylinder gases along with Airgas, whose business is 90% pack-

aged gases and equipment. Airgas has grown by acquisition of the “momma and

poppa” companies and has

generally managed to main-

tain the feel of a local busi-

ness for its customers. The

puzzle has always been just

how large the independent

sector is in revenue terms.

Our estimates are based on discussions with Tier 1 companies and pricing average

volumes. Most of the other majors have a limited interest in the “standard industrial”

cylinders, preferring to focus on speciality gases and, to some extent micro- and mini-

bulk gases. In general, they have restricted their interest to the high technology end

of the business or to the homecare supply.

A significant reason for a low interest in the “standard industrial” cylinder business

is that it is often based on annual or short-term contracts. The bulk contracts, up to

7 years, and onsite contracts, up to 20 years, are much more interesting for stable

growth. This emphasis may to some extent explain the higher growth rates in these

sectors, along with differential growth rates in the industries served.

Onsite21%

Bulk30%

Packaged44%

Equipment5%


US$ Bn

CAGR 2011-

16

Onsite 4594 7.6%

Bulk 6608 6.4%

Packaged 9779 5.3%

Equipment 1096 0.7%

Total 22078 6.1%


29

© Esprit 2014

1.2.1 South and Central America

The market grew in 2013 to $3.9 billion up from a revised $3.6 billion in 2012 and has

not yet fully recovered from the recession. The South American market is very difficult

to value and the revision was based on some Market studies in 2013 on Brazil, Chile

and Argentina. Eliminating wholesaling was a real challenge, we estimate it at more

than US$300. Until recently the

market has been unaffected by

the changes in global natural gas

prices but this will change if the re-

finery industry adopts the onsite

supply of hydrogen in common

with other regions. The dominant

company in the region is Praxair

through its subsidiary White Mar-

tins. It has a significant 40% mar-

ket share, up from 38% in 2012. Praxair is present in nearly all countries often with

a market leadership position. Linde, with 21%, is the second placed company

primarily through its acquisition of Aga in the 1990’s and BOC in the 2000’s. Air

Liquide is present in the largest markets and Air Products was mainly in Brazil

but has expanded into other countries by its acquisition of a 67% stake in Indura

which added a pro rata share of $300M to its revenues in 2013. The headline market

growth forecast is 5.6% per year still well below the pre-2009 6.9% per year forecast.

Overall, South America is developing reasonably well but is a diverse market with

significant difference between the most and least industrialised countries and con-

tinuing political unrest. Average industrial gas use is $10.3 per capita, versus the

US’s $35.1 so clearly significant long-term opportunities exist.

Air Liquide16%

Air Products10%

Praxair40%

Linde21%

Messer0%

Airgas0%

TNS0%

Others13%

SoAM Revenues 2013US$3.9 Bn

US$ M

CAGR

2013-18



Praxair 1541 5.2%

Linde 817 5.4%

Messer 18 6.3%

Airgas 0 N/A

TNS 0 N/A

Others 495 6.3%

Total 3876 5.6%


30

© Esprit 2014

The revenue spread is fairly typical of developing economies with a significant

predominance of manufacturing industry and metallurgy and a significant base chem-

icals sector. Food is consistent with a large population and in the more developed

countries healthcare is a significant item. The unusually low revenue stream in refining

reflect the nationalised status of

most refineries and the typical

preference in state industries

town everything. This may well be

put under pressure as new sul-

phur regulations come into play

and as the governments look to

reduce their debt levels. This lack

of one of the key drivers may

account for the overall lower

growth forecast. The disparity be-

tween various countries is well

illustrated by the growth prospects for glass and electronics. It is noticeable that

the international players in these sectors and in metallurgy have become a major

presence in the last few years so this may stimulate the market. The small size of

the pulp and paper industry in a region with so much wood is a reflection on the

antiquity of many of the existing plants.

Chemicals13%

Refining3%

Metallurgy19%

Mfing Industry36%

Food8%

Electronics2%

Pulp & Paper

1% H/C11%

Glass1%

Other6% SoAM Revenues 2013

$ 3.9 Bn

US$ M

CAGR

2013-18

Chemicals 488 5.6%

Refining 134 7.6%

Metallurgy 749 5.2%


Food 291 5.6%

Electronics 81 6.8%


H/C 416 5.3%

Glass 37 3.8%

Other 242 5.2%

Total 3876 5.6%


31

© Esprit 2014

The size of the package gas business as a proportion of the total market is smaller than

would normally be expected in a developing region. It may be that in the less devel-

oped regions the security of bulk liquid supplies or small onsites are preferable to

unreliable cylinder supplies. In ad-

dition the logistics of de l i ve r y i n

many count r ies , including se-

curity issues, might favour infre-

quent long-distance delivery of

bulk or liquid cylinders rather than

compressed gas cylinders. To

some extent it also reflects the lack of homogeneity in the region with well-developed

industrial areas in the larger countries distorting the regional picture for the less

developed areas. There are a significant number of small independent packaged

gas suppliers who probably buy liquid from the majors, thus increasing the bulk

market. This would also lead to a relatively low price for locally delivered cylinders.

It might also explain why the growth forecast for bulk is higher than for packaged

gases and higher than onsites.

Onsite22%

Bulk32%

Packaged41%

Equipment5%

SoAM Revenues 2013$ 3.9 Bn

US$ M

CAGR

2013-18

Onsite 834 6.4%

Bulk 1235 6.2%

Packaged 1603 4.9%

Equipment 205 4.9%

Total 3876 5.6%


1.2.2 Western Europe

Western Europe grew reasonably well in 2013 from a revised US$21.3 billion to US$

22.5 billion. Growth of was helped by the Euro strengthening against the US$ by

nearly 4%. Some small amount of the growth was due a rise in natural gas prices,

which are still regulated in much of Europe. The mature economies of Western Europe

have fewer opportunities for

spectacular industrial growth,

much investment emphasis is

given to the central and east-

ern Europe economies where

there is much more oppor-

tunity. The forecast growth for

the next five years of 4.7% per

year reflects this maturity but

it is above last year’s 2.9%

which proved to be pessimistic. Even so the forecast is well above general industrial

growth forecasts for the region reflecting industrial gas intensity multipliers. Air Liquide

dominates the region with 37% of in the market with Linde as a strong number two

with 28%. Praxair are showing more interest in selected areas of Europe with a strong

presence in Antwerp and some parts of southern Europe. Messer is still building its

business from the previous ban on the German market. The regions maturity is shown

by its per capita use of US$41.4, significantly higher than the USA.

Air Liquide37%

Air Products13%

Praxair7%

Linde28%

Messer2%

Airgas0% TNS

0%

Others13%

W Europe Revenues 2013 $22.5 bn

US$ Bn

CAGR 2013-

18



Praxair 1654 5.0%

Linde 6303 4.6%

Messer 449 4.5%

Airgas 0 0.0%

TNS 24 3.9%

Others 2865 4.5%

Total 22507 4.7%


The industry sector split is typical for a developed region but with a high level of

chemical revenues because of the excellent deep water facilities around the whole

region which allow easy access to feedstocks and the availability of natural gas. Man-

ufacturing industry has shrunk over the

years as heavy manufacturing such as

shipbuilding has moved to the Far East.

However, the remaining manufacturing

is generally high tech and has a high in-

dustrial gas intensity. The electronics

industry is almost derisory; it appears

that Western Europe has effectively

surrendered manufacturing to the

United S t a te s an d t h e Fa r Ea s t .

Most growth rates are similar but refin-

ery hydrogen and chemicals are still fast growing. Most of the others are growing

at a small addition to GDP.

Chemicals17%

Refining6%

Metallurgy17%

Mfing Industry24%

Food9%

Electronics3%

Pulp & Paper1%

H/C14%

Glass2% Other

7%


US$ Bn

CAGR 2013-

18

Chemicals 3959 4.3%

Refining 1358 8.6%



Food 2102 4.5%



H/C 3240 5.0%

Glass 361 3.1%

Other 1544 3.6%

Total 22507 4.7%

Western Europe is the most focused region on Onsite and Bulk delivery. In the case

of onsites, this is mainly because of the extensive pipeline systems in the major

economies offer gases at lower prices. The Western Europe bulk market is well

served with liquid plants and offered the incoming companies an opportunity

to develop their markets

outside of their home territo-

ries. The competition meant

that short delivery distances

were the norm which reduced

the delivered price for liquid. It

was a strange phenomenon

that competitors were encouraged to develop new markets by swap arrangements

and even joint-venture production units. The availability of liquid has encouraged the

development of the use of the “liquid” cylinders and “micro- bulk” to avoid the relatively

high transport costs of cylinders. In all other regions payload weight percentages are

typically lower for similar gas volumes adding to price. All of the companies serve the

packaged gas business in Western Europe because margins are high due to a lack

of independents. This allows companies more easily to “upscale” clients to suit their

production capability. It can be seen, particularly when the unit cost of gas is taken

into account that Onsites continues to grow faster than and bulk remains steady as

packaged gas revenues effectively decrease.

Onsite29%

Bulk31%

Packaged36%

Equipment4%


US$ Bq

CAGR 2013-

18

Onsite 6513 5.9%

Bulk 6906 4.5%

Packaged 8069 4.0%

Equipment 1018 1.0%

Total 22507 4.7%


32

1.2.3 Eastern Europe

Eastern Europe includes most of the former Soviet Union and The Balkan States. It

has a very diverse set of economies from the new members of the European Union

to microstates from the breakup of the former Yugoslavia. The 2013 revenues at

$4.1 billion are up 7% from the

$3.8 billion in 2012. The re-

gion has long been of interest

to the majors. Linde are the

market leader due mainly to

acquisitions and the reestab-

lishment of old links when the

market opened up in the

1990s. Messer Group are still

the second biggest player

and particularly active in the Balkans. Air Products is present in most large countries

and has grown its market share significantly over time. Air Liquide and Praxair have

made a real effort in recent years. Air Liquide focused on in joint ventures in Russia

and Poland and future onsites in the Ukraine and Bulgaria. Praxair have also made

investments in joint ventures in Russia. The market power of both these companies

will increase slightly in the next few years but unless they hold a controlling interest in

a joint venture, the revenues will still be shown under others.

The market forecast for the region is stronger than for Western Europe at an

average 6.7% per annum, up from the previous forecast of 4.9% per annum.

Many of these countries are members of the EU and subject to the same problems

caused by uncertainties about the Euro. The forecast excludes a growing trend of

captive to onsite conversion in Russia which will lead to an increase in the growth.

Air Liquide

5%

Air Products11%

Praxair1%

Linde33%Messer

15%

Airgas0%

TNS0%

Others35%

E Europe Revenues 2013 $4.1 bn

US$ Bn

CAGR 2013-

18



Praxair 19 8.6%

Linde 1361 7.7%

Messer 627 7.6%

Airgas 0 N/A

TNS 0 N/A

Others 1449 5.1%

Total 4108 6.7%


33

The region still has the classic configuration of a developing economy, with high levels

of manufacturing industry, metallurgy and base chemicals, and lower levels of elec-

tronics, glass and healthcare. The lack of pulp and paper revenues is probably similar

to South America in that it reflects the continuing obsolete nature of the paper making

plants rather than a lack of production.

The early penetration of the refinery

business in the Central European part

of the region is a recognition of the

need for the refineries to produce

white products that meet European

specifications if they are to survive.

Onsite supply reduces the need for

capital investment by the refineries

and allows earlier upgrades. This

has allowed some development of the

refinery hydrogen business; although the very survivability of the refineries has

limited the number of industrial gas players that wish to participate. Only Linde has

really leveraged its position with the Leuna pipeline in eastern Germany and also its

pre-war relationships in Hungary. Growth rates are variable but all above Western

European growth rates. The lower growth in the large manufacturing sector is sig-

nificantly offset by the need to upgrade production methods in the metallurgy sector

and good growth expectations in refining and chemicals and food. As the region

becomes more affluent growth in Electronics, Healthcare and Glass should be

maintained at a multiple of GDP.

Chemicals15%

Refining5%

Metallurgy20%Mfing Industry

36%

Food6%

Electronics3%

Pulp & Paper0% H/C

9%

Glass1%

Other5%


US$ Bn

CAGR 2013-

18

Chemicals 591 8.9%

Refining 214 8.6%

Metallurgy 801 8.5%


Food 257 7.5%


Pulp & Paper 8 1.8%

H/C 373 6.1%

Glass 45 6.1%

Other 207 6.1%

Total 4108 6.7%


34

The general supply split is typical of a developing region with significant packaged

gas business serviced by numerous small local companies. The development has

been patchy with more re-

cently “democratised” coun-

tries still having a command

economy mentality which

resists the onsite concept.

However, significant pro-

gress has been made in

many countries thanks to the efforts of the majors. Onsites have gone from a few

percent of the market only ten years ago to 18% in 2013. There are in fact a

number of joint ventures, particularly in Russia, that may well increase this bal-

ance as existing captive capacity is absorbed into onsite supply and hence the

high growth rate prediction. The region still offers ample opportunities for growth

provided the political situation remains under control along the Russian border.

Specific consumption of only $13.6 per capita emphasises the opportunity.

1.2.4 Asia

Onsite18%

Bulk27%

Packaged51%

Equipment4%


US$ Bn

CAGR 2013-

18

Onsite 743 10.0%

Bulk 1112 6.7%

Packaged 2076 5.8%

Equipment 177 2.4%

Total 4108 6.7%


35

The region s t i l l contains large proportion of independent companies, some of

whom have some trading relationship with the majors. However, this has reduced in

the last 15 years from 70% to 47%. The dominance of the packaged gas business in

developing countries means that the majors can only grow significantly by substitution,

acquisition of joint venture. There are obvious ly significant variations from country

to country and the shape of the

joint ventures between the ma-

jors and between majors

and loca ls has changed over

time as more investment is

needed and the relationships

have matured. Japan with

j u s t o v e r 30% of the mar-

ket is the slowest growing and

has lost 1% market share

whilst the second largest, China with 24% of the market is the fastest and has gained

1% market share. The revenues in the region were up nearly 9% from 2012 to

US$27.4 billion. This

was mainly due to the

many new projects

coming on stream in the

most dynamic parts of

the region. This region

usually called “rest of

the world”, with such a

diverse set of coun-

tries. Most of the

smaller countries have

been through revolutionary change which inhibits inward investment and many others

have political systems that make it difficult for inward investors without a local partner.

A number that have been closed to inward investment now welcome it but have yet to

Air Liquide13%

Air Products9%

Praxair5%

Linde15%

Messer2%Airgas

0%

TNS9%

Others47%

Asia Revenues 2013$29.5 Bn

US$ Bn

CAGR

2013-18



Praxair 1313 12.4%

Linde 4143 9.3%

Messer 544 15.1%

Airgas 0 N/A

TNS 2440 6.7%

Others 12885 8.4%

Total 27417 9.0%

US$ Bn US$ Bn Change

SPAC 4081 4406 8.0%

NPAC 16758 18377 9.7%

Japan 7922 8387 5.9%

Korea 1265 1388 9.7%

China 5794 6593 13.8%

ME 1644 1765 7.4%

Saudi Arabia 579 625 8.1%

India 988 1086 9.9%

Africa 1655 1783 7.7%

South Africa 729 765 5.1%

Total 25126 27417 9.1%


36

make clear legal provision to safeguard the investor. Finally there is so much endemic

corruption that many western companies have difficulty operating. All of the trials of

the region have dampened growth to a small but this is still the region with the most

long-term potential.

The growth in headline terms was

very significant particularly with

relatively stable or falling utility

prices and a global slow GDP

growth. China, South Korea and

India continue to achieve near

double digit growth increasing

f rom last year w h i l s t Japan

has only just exceeded its 2008

revenues in dollar terms in spite

of the strengthening of the Yen.

The market forecast for the re-

gion is 9.0% per annum, significantly up from 5.7% forecast Last year. This varies

for 4.8% per annum in the Japan to 7.9% per annum in India and 11.6% in China.

Even within regions there are significant differences. South Africa, the largest

industrial gas user in Africa, has lower growth than many other African countries,

albeit from a much higher base. In the North Pacific Rim, China is the tiger, South

Korea the Lion, but Japan, the largest user, is the house cat with the lowest

growth prospects. Linde is the market leader, mainly through its acquisition of

BOC which focused on Asia and Africa. Air Liquide is a strong second through its

ownership of Japan Air Gases but the two American companies are showing the

highest growth through their deliberate focus on opportunities outside Japan. TNSC

is the largest industrial gas company in Japan and accounts for 78% of its sales in

the region.

US$ Bn

CAGR

2013-18

SPAC 4406 6.9%

NPAC 18377 8.0%

Japan 8387 4.8%

Korea 1138 8.5%

China 6593 11.6%

ME 1765 5.7%

Saudi Arabia 625 6.1%

India 1086 7.9%

Africa 1783 6.5%

South Africa 765 4.0%

Total 27417 9.0%


37

The structure of the region is again typical of developing regions with emphasis on

manufacturing supported by metallurgy and base chemicals. Developing regions

often use their low labour costs to produce manufactured goods for export and also

to meet the growing purchasing power of

their own populations. The chemical vol-

umes are high for two reasons, China’s

growing coal gasification use which

drives oxygen demand and the expan-

sion of oil producing areas into finished

products The Pacific Rim is the elec-

tronics region of the world. Other sectors

are relatively underdeveloped. Rev-

enues in food, glass and homecare

tend to increase with populat ion size and wealth. People are l iving

longer in most regions and have more disposable income as industrial-

isat ion takes place, so these sectors wil l grow in the more developed

countries.

Chemicals12% Refining

5%

Metallurgy14%

Mfing Industry31%

Food4%

Electronics19%

Pulp & Paper0%

H/C8%

Glass1% Other

6%


US$ Bn

CAGR

2013-18

Chemicals 3266 9.4%

Refining 1270 13.4%



Food 1231 8.0%



H/C 2239 7.4%

Glass 224 7.2%

Other 1643 9.0%

Total 27417 9.0%


38

The delivery mechanism is also strongly biased towards packaged gases which

reflect the low level of industrialisation in many countries in the region. The market

region reflects the global averages quite well with, as expected, slightly lower level

of onsites. The number of new projects announced and the increasing tendency

to outsource supply in the rapidly growing countries such as China and India

means that onsites could soon

pass the global average. In the

last 15 years packaged has fallen

from 53% to the current 41% In-

ward investors genera l ly

prefer an onsite a n d b u l k ap-

proach to gas supply but the number of joint ventures in countries, like China and

India, between the supplier and the end-user display nervousness on both sides. A

recent study of the ASU market undertaken by Esprit showed that, by tonnage, half of

all new oxygen capacity would be in China for the next 5-10 years will be in China

mainly as major onsites.

With an average per capita use of about US$ 7.6 the region obviously has enor-

mous growth opportunity

Onsite24%

Bulk29%

Packaged41%

Equipment6%


US$ Bn

CAGR

2013-18

Onsite 6502 11.3%

Bulk 8009 9.1%

Packaged 11289 7.7%

Equipment 1617 1.4%

Total 27417 9.0%


39

1.4 COMPANY ANALYSIS

All the Tier 1 companies break their business into different reporting sectors and in

many cases include different components in their revenues. In this section we focus

on the four largest companies, Air Liquide, Air Products, Linde and Praxair. Infor-

mation is also available about Airgas, Messer and TNSC, but their impact on most

large users is less important. The table below shows the confusion of reporting years

and even of the names of those years which are a minefield for the unwary. Since

TNSC does not report its final information for Calendar 2013 until July 2014 it delays

the completion of the report. Messer makes few intermediate reports because it is a

private company.

In the analysis, Esprit has focused on gas revenues, but it should be recognised

that some of the breakdowns by sector, line of business or region may be on slightly

different bases to the overall performance.

There are also double impacts of currency, an often undisclosed rate in converting

reported performance by companies in their home currency and a disclosed effect in

reporting all financial information in US$. This means that the comparison of an indi-

vidual company’s non-volume, non-pricing changes from year to year or quarter to

quarter cannot be simply summed to give a view of the performance of all companies.

When presenting the impact of , say, currency on the sales of say Air Liquide, we take

their view in local currency and then also include the effect of converting their Euro

results to current US$. We report these as a percentage of the 3012 revenues. Acqui-

sitions and utility pass-throughs are only subject to the second currency effect.

We have tried to reduce repetition in the report. For example any explanation of the

business by region would have a strong overlap with any explanation by sector

or line of business and so we have only discussed the latter two a global level.

We have eliminated previous Overview and SWOT analysis for each company; the

former being easily available on an up-to-the minute basis on the companies’ websites

and the latter changing little from year to year. Esprit intends to carry out new SWOT

analyses at the end of 2014 which it will review with them before the next annual report.

All major companies have activities that are not purely industrial gas and gas

Industrial gas reporting

Airgas Q2 01 Q3 01 Q4 01 Q1 02 Q2 02 Q3 02 Q4 02 Called Fiscal 02

Air Liquide Q2 01 Q3 01 Q4 01 Q1 02 Q2 02 Q3 02 Q4 02 Calendar = Fiscal 02

Air Products Q2 01 Q3 01 Q4 01 Q1 02 Q2 02 Q3 02 Q4 02 Fiscal 02

Linde Q2 01 Q3 01 Q4 01 Q1 02 Q2 02 Q3 02 Q4 02 Calendar = Fiscal

Messer Q2 01 Q3 01 Q4 01 Q1 02 Q2 02 Q3 02 Q4 02 Called Fiscal 02

Praxair Q2 01 Q3 01 Q4 01 Q1 02 Q2 02 Q3 02 Q4 02 Calendar = Fiscal

TNSC Q2 01 Q3 01 Q4 01 Q1 02 Q2 02 Q3 02 Q4 02 Called Fiscal 01


40

service sales. Linde and Air Liquide have substantial engineering divisions which

supply chemical and petrochemical equipment on various bases up to full turnkey.

The only pure play is Messer, but probably because their welding equipment

business, owned by the Messer family, is separate from the industrial gas com-

pany. Air Liquide also has an m or energy business which is difficult to detach from

its gas supplies. Air Products has a rump chemical business which it has subsumed

into its speciality activities and also has an active equipment sales activity particu-

larly in LNG heat exchangers. Praxair has a surface technology business which is

identified separately and a small equipment business which is not. The detailed

investments are shown in the attached Excel™ database of selected regions.


1 © Esprit Associates

1.4.1 Air Liquide

Headlines

Revenues were up 3.4% Year-on-year ADV1, and up 0.3% CDV.

Underlying growth came to +3.8% ADV with volumes contributing +1.5%

and pricing +2.2% and 3.7% CDV with pricing contributing 1.5%

Reported currency impact was: -3.8% CDV and -0.7% ADV;

Acquisitions contributed +1.0% to revenues with Energy and Natural Gas

pricing effect of -0.6% on both bases.

EBIT was flat at 18.6% and ROCE fell 60 basis points to 14.1% reflecting

a14% rise in CAPEX and 4.2% rise in Capital Employed

Underlying growth was good in view of continuing economic weaknesses in many

regions. Air Liquide is a truly global player and is often able to offset weakness in

one sector or region by new investments and effort in a more favourable sector or

region. The general effect has been an increase in the percentage of revenues

from Asia and Eastern Europe and a reduction of 1.5% in relative revenues from

Europe.

Highlights

1 ADV = actual dollar values on quarterly basis, CDV = based on Q413 and hence effectively reporting cur-rency

NoAm17%

SoAm4%

WE54%

EE2%

Asia23%

Air Liquide 2013 US$15.4 bn



Q1

Air Liquide Industrial US acquired Oklahoma-based oilfield services company Pro-

gressive Resources (PRI) to increase its service offering

AN MOU was signed with Gazprom for future helium cooperation linked to the East

Siberian Gas Programme. (Along with Linde and Matheson Tri-Gas)

An additional €65m was announced for investment in the Rotterdam basin, for a

new carbon monoxide production unit in the Port of Rotterdam.

Announced two long-term contracts in China to supply ultra-pure carrier molecules

to two cutting-edge flat panel display fabs. Nanjing Plant will be connected to a

pipeline system to supply customers in Nanjing Crystal Park

The quarter was also marked by a serious accident, with the explosion at an Air

Liquide specialty gas facility in La Porte, Texas that took the life of one employee

and seriously injured another.

Q2

Large Industries US LP announced two new refurbishment projects in Freeport,

Texas for its Gulf Coast Pipeline (GCPL) and Hydrogen/Syngas businesses.

These were upgrades of a PSA system and 25% additional LOX storage and va-

porisation’

A long-term contract was announced with Fujian Shenyuan New Materials Co., Ltd

to supply industrial gases for its caprolactam production project located in Lianjiang

Kemen EDS, Fujian, South-East of China. The project would be served by two

2000 tpd ASUs.

An agreement was made to acquire Voltaix Inc., a US-based electronics materials

company. This acquisition strengthens Air Liquide’s position in speciality chemicals

for the electronics industry

Q3

RasGas, together with Air Liquide, started up the world’s largest helium purification

and liquefaction unit – Qatar II. The Plant at Ras Laffan Industrial City, Qatar has

a nameplate capacity of 38 million cubic metres of helium per year which with the

phase 1 plant makes Qatar the world’s second-largest producer of helium with 25%

of global production.

Poland-based home healthcare companies – HELP! and Ventamed were acquired

to strengthen the Homecare portfolio



An additional investment of €50m in the Antwerp basin was announced to supply

BASF with carbon monoxide by Q1 15. The unit would be an addition to the exist-

ing SMR.

A captive to onsite acquisition was announced of the 450 tpd ASU 5 of AHMSA in

Monclova, northern Mexico to strengthen its existing position of a 1600 tpd supply

to AHMSA. In addition another 600 tpd ASU was to be built

Q4

Announcement of a new production site at Chimgrad, Russia, a station for receiv-

ing, storing and distributing air separation products.



1.4.2 Air Products

Headlines

Sales were +3.1% year-on-year;

Underlying growth was -2.7%, with volumes contributing -2.3% and

pricing -0.4%;

A slightly weaker US currency imparted a positive impact of 0.3%;

Higher Energy and Natural Gas pricing added 2.6% in revenues.

M&A caused a rise of 3.0% in revenues mainly by full year revenues

from the acquisition of a majority share of Indura in Chile and other coun-

tries in South America in Q312

The pie-chart above show a 1% movement to Asia and 2% to South Amer-

ica mainly at the expense of Greater Europe

EBIT rose 5% during the year and 30 basis points to 17.2%

ROCE fell 20 basis points to 12.1% due to an increase in capital employed

of 6.8% and CAPEX increase of 5.9%

NoAm38%

SoAm4%

WE29%

EE4%

Asia25%

Air Products 2013US$ 10.0 bn



Highlights

Q1

Phase one of its two-stage carbon capture project in Port Arthur, Texas came on-

stream, described by the US Department of Energy (DOE) as a milestone in its

Industrial Carbon Capture and Storage (ICCS) programme.

The 2 by 2000 tpd ASUs came on-stream the gold production facility in Pueblo

Viejo, in the Dominican Republic. This is the largest pressure oxidation gold recov-

ery facility I the world.

The second-largest ASU onsite order ever awarded to the company for a single

project.ws announced as a long-term contract was signed with Shanxi Lu’An Min-

ing (Group) Co. Ltd. It was announced that Air Products would build, own and op-

erate no less than four 2500 tpd ASUs to serve Lu’An’s multiple train coal gasifi-

cation facility in Changzhi City, Shanxi Province.

Q2

Air Products and Technip celebrated the 20-year milestone of the longest and most

productive global hydrogen alliance (originally signed by Keith Guy)

Air Products signed up to future helium cooperation with Gazprom.

A major LNG heat exchanger order was received for the first US-based liquefaction

project

Indura announced that Air Products would build a new merchant liquid plant in

Antofagasta, Chile, and expand the capacity of its Graneros plant, near Santiago,

at a combined investment of more than $15m.

The North American liquid CO2 producer EPCO Carbon Dioxide Products, Inc.

was acquired late in the quarter giving Air Products a significant increase in its

market share of the CO2 business

Q3

Following the activity of the Pershing Square Hedge fund buying nearly 10% of

APCI stock, the market expected changes. Air Products had clearly underper-

formed compared to its US rival Praxair over a number of years. Yet inherently Air

Products business base was sound and so the problem was laid at the door of the

executive management. Wall Street and its various commentators expected

changes. It was announced that three new independent directors would join its

Board and that it would and would commence a search to identify a successor the

Chairman and CEO John E. McGlade who would retire in 2014. Subsequently in



2014 he has been replaced by somebody three years older whose industrial gas

experience was gained from the Board of the underperforming BOC. To be fair, he

ran the US operation which was the best performing region. Time will tell but the

rise in stock price since has made one corporate raider very happy.

Q4

A long-term agreement was signed with Bharat Petroleum Corporation Limited

(BPCL) to build, own, and operate several new industrial gas production facilities

in Kochi, Kerala, India. These include 165 mmscfd Reformers and an ASU of un-

disclosed size to be on-stream by 2015/6

A new liquid nitrogen production facility was announced for Odessa, West Texas

to serve the oil and gas industry in the Permian Basin. Capacity 250 tpd and to be

on-stream in 2015

A new project was announced to build a Helium recovery plant to extract helium

from a naturally occurring underground carbon dioxide source. The CO2 gas

source is being processed by Kinder Morgan CO2 Company, LP at a facility in Doe

Canyon, Colorado. The plant will produce 230 mmscf per year, as much as the

BLM sells.

A new world-scale hydrogen production plant in Scotford, Alberta, Canada was

announced, producing over 150 mmscfd of hydrogen to serve Shell and other pet-

rochemical customers from the Heartland hydrogen pipeline.

A contract was signed to supply both gaseous and liquid nitrogen to Prime Evolue

Singapore



1.4.2 L i n d e

Headlines

Headline gas revenues were +9.7% Year-on-year ADV and +6.4% CDV;

Underlying growth was +4.1% ADV, with volumes contributing +2.6%

and pricing +1.5%; +3.9% CDV with volume +2.5% and price +1.4%

Currency impact was: -4.5% CDV and -1.4% ADV

Acquisitions contributed +6.9% CDV; =7.1% ADV but Energy and Natural

Gas effects were neutral

EBIT margin fell nearly 140 basis points to 14.9% because while revenues

rose profit fell

ROCE fell by 80 basis points to 7.9% which reflects the increased capital

employed from the Lincare acquisition in 2012 and the fall in profits. LINDE

has more than a third of its capital employed as good will. Based only on

assets the ROCE would rise to nearer 12%

NoAm18% SoAm

5%

WE41%

EE9%

Asia27%

Linde 2013US$ 15.5 bn



Highlights

Q1

A contract was announced to build six 3400 tpd ASUs for Shenhua Ningxia Coal

Industry Group Co. Ltd and Shenhua Logistics Group Co. Ltd in Yinchuan in the

Ningxia Hui Autonomous Region in Northwest China for Shenhua Ningxia’s Coal-

to-Liquid (CTL) complex at Ningdong Energy Chemical Base.

A new 300 tpd merchant carbon dioxide plant was announced for Map Ta Phut,

Thailand

Linde also signed MoU’s with Gazprom for future helium cooperation linked to the

East Siberian Gas Programme

Q2A

A major contract was announced with Reliance Industries to build 4 world-scale

ASUs of more than 5000 tpd each to feed Petroleum Coke gasifiers and additional

equipment to generate and purify various gases in Jamnagar, India The first phase

of the project will come on stream in 2015 and may be followed by a further phase

if the project is successful

Investments in both Russia and the US were announced , with a new, state-of-the-

art 1,340 tpd on-site ammonia plant to be constructed in Russia and a 2000 tpd ,

ASU and gasification train to be built in La Porte, Texas.

Linde announced it would now be managing the gas supply infrastructure of SIBUR

at its Dzerzhinsk site in the Nizhny Novgorod region of Russia, as well as building

and operating two new ASUs in the country, investing €70m in the two latter pro-

jects.

Q3

A contract was announced to build the world’s largest carbon dioxide purification

and liquefaction plant for Jubail United Petrochemical Company, an affiliate of

SABIC, in Saudi Arabia

The Supervisory Board of Linde AG appointed Dr. Wolfgang Büchele (54) as a

member of the Executive Board effective 1st May 2014 and as CEO designate. He

would succeed the current CEO Prof. Dr Wolfgang Reitzle (64) after the annual

general meeting in May 2014.

Q4

Linde-BOC revealed the availability of Opteon® YF (R1234yf) in the UK and Ire-

land, as a new environmentally friendly refrigerant for cars



1.4.4 Praxair

Headlines

Sales were +6.2%% Year-on-year;

Underlying growth came to +4.8%, with volumes contributing +3.0%

and pricing +1.8%;

Acquisitions added 2.6% mainly from the acquisition of NuCO2 which

contributed US$250 million to revenues in 2013

A weaker US currency caused a negative impact of -1.3%;

Higher Energy and Natura l Gas p r ic ing cau sed a+0.5% rise in

r evenues.

EBIT margin rose very slightly by 15 basis points to 22.5%

ROCE rose slightly by 10 basis points to 17.2% and is by far the best in

the industry.

NoAm56%SoAm

15%

WE16%

EE0%

Asia13%

Praxair 2013US$ 10.3bn



Highlights

Q1

Praxair entered into an agreement to acquire NuCO2 Inc., the leading national

provider of beverage carbonation solutions in the US, from the Aurora Capital

Group for $1.1bn in cash. The acquisition was expected to add US$250 million to

revenues in 203

Q2

White Martins and Praxair Bahrain, started-up new small ASUs in Brazil and the

Kingdom of Bahrain, to serve the merchant market

Praxair Offshore Services Limited acquired Scotland-based Dominion Technology

Gases Investment Limited The deal enhances Praxair’s ability to serve the off-

shore oil industry. Dominion had been a potential entry for other Tier 1 players

such as Airgas or Messer

The construction of a second ASU of about 1300 tpd was announced together with

the extension of the pipeline system to serve the Port of Antwerp,

Q3

Praxair entered into an agreement to form a joint venture with OJSC Kuibyshe-

vAzot, in central Russia’s Samara region, to produce and sell industrial gases. .

The 2000 tpd total gases ASU at the Samsung semiconductor facility in Hwasung,

Korea was started up successfully.

A second nitrogen plant with a capacity of 500 tpd of gas and 200 tpd of liquid was

started up at its facility in Kirtland, New Mexico. The plant meets the growing de-

mand for the gas in the San Juan basin.

Praxair India Private Limited signed two long-term contracts with JSW Steel, to

operate small on-site nitrogen plants in support of the company’s expansion efforts

in the cities of Kalameshwar and Tarapur

Q4

A new 450 tpd carbon dioxide (CO2) purification facility was brought on stream at

the Honeywell Resins & Chemicals site in Hopewell, Virginia



1.4.5 Messer

Headlines

We have included a brief view of Messer in this report for the first time since they

have become a significant global player and offer a real alternative to the four ma-

jors in many regions. Esprit has a significant experience of Messer and can add to

the information on request.

Revenues were -2.0% ADV and -5.0% ADV mainly due to compliance with

financial accounting rules which removed about 6% of revenues

Underlying growth was -5.1% ADV of which volume was +5.2% and price

was -10.3%; on a CDV basis growth was -5.0% with volume + 5.0% and

price -10.0%

Currency effects were +2.0% ADV and -1.1% CDV

Acquisitions were +1.0% on both bases.

Market share by region was unchanged from 2012

EBIT margin flat at 10.3%

ROCE down 50 basis points at 6.1%

Because Messer is a private company it is not bound but the market expec-

tations of investors. Its target is growth.

NoAm0%

SoAm1%

WE28%

EE38%

Asia33%

Messer 2013US$ 1.6 bn



1.4.6 Taiyo Nippon Sanso Company

Headlines

We include a brief overview of Taiyo Nippon Sanso Company because they now

have a significant presence in the USA through their subsidiary Matheson Tri-Gas

which has started to expand its business with new investments in Bulk Liquid

plants and a joint venture with Air Products for Liquid Helium. Esprit believes that

by 2014 they will have significantly increased their business in North America as

his new capacity comes on stream.

Revenue growth year-on-year +7.0% CDV and -10.5% ADV showing the

more than 12% drop in the value of the Yen against the US$

Underlying growth 3.0% CDV of which volume +0.5% and pricing +2.5%;

ADV growth was 2.4% of which volume was +.4% and pricing +2.0%

Currency effects were +6.9% CDV and -12.6% ADV reflecting the positive

impact on Yen based performance from the US subsidiary and the negative

effect when expressed in real US$

Power and natural gas pass-through effects were +0.3% on both bases and

disposals were -0.7% CDV and -0.6% ADV

EBIT up slightly at 14.2% and ROCE down 40 points to 7.6%

The change from 2012 in market split is a 2% increase in the US proportion and a

2% decrease in the Asian part. Neither the USA nor Japan are high growth regions;

most of TNSCs business (95%) is in these two countries.

NoAm18%

SoAm0%

WE1%

EE0%

Asia81%

TNSC 2013US$ 3.0 bn



1.4.7 Airgas

Airgas Inc. is included for the sake of completeness. They are currently exclusively

in North America but are looking for opportunities to grow outside. In the last 10

years they have gone from being exclusively a packaged gas company to having

20% bulk liquid business and 2% onsites, with a plan to grow these.

Gas revenue change year-on-year +4%

Underlying revenue change +3.4% of which volume +3.7% and pricing -

0.3%

Acquisitions +1.0% and natural gas and power effects negligible

Air gas EBIT margin is 14.0% and ROCE is 13.0% both of which are mar-

ginally improved on 2012 and reflect both the business and the growth of

the company by acquisition

We predict that Airgas will expand outside North America by 2015



APPENDIX 1

1 INDUSTRIAL GASES

1.1 Introduction

Esprit believes that it is very important to explain what the industrial gas industry is all about, as it is somewhat unique in nature and role and is fundamentally different to the chemicals industry.

1.2 Definition of the Industrial Gases Business

1.2.1 Definition of Industry The supply of industrial gas and related services by three supply modes; on-site and pipeline, bulk and packaged gases (cylinders), to an end-user (consumer). It does not include equipment sales (gas production plant, application technologies or cutting & welding equipment) it does not include associated business, such as power generation and engineering, nor dedicated LPG and natural gas businesses. It is important to note that industries often can operate without using industrial gases but: “Industries generally operate their processes, more efficiently, more cost effectively and have lower environmental impact with the use of the industrial gases”. The industrial gases business can be split into 4 lines of business (LOB):

On-site/ pipeline supply(OSP)

Bulk (mainly liquid) supplies

Packaged gases(cylinders)

Other equipment and services

Most of the major gas companies market their businesses by regions and by markets supplied, but manage their cost base through their “lines of business” or supply mode. Although most of the major gas companies recognised the advantage of this and have re-structured accordingly, others are just doing so and some still do not appreciate or understand this concept: A modern Industrial Gas company manages its costs by line of business but manages its growth by market sector.

1.2.2 Sale of Gas versus Captive Supply (Buy v Make) a) The End-User An end-user of industrial gases has a fundamental decision to make, does it or can it produce its own gas or does it purchase from a supplier? Since industrial gases are generally used as part of its overall operation, the end-user needs to assess the cost of production (and the capital investment required) compared with the opportunity to purchase its gaseous requirements. If the end-user is a small consumer of gases (a few cubic metres), the decision is straight forward; it would not be eco-nomic. If the end-user demand is moderate to high the question becomes more relevant and then depends on the type of gas required. Production by an end-user for its own consumption is termed “captive” or “in-house”. In recent years in-house production has either been limited to major producers of steel and chemicals (where large volumes of gas are required) or limited to those companies requiring smaller quanti-ties of less pure gases which may also be in an isolated location (e.g. oil rigs, food packaging facto-ries etc.). Industrial gases companies are those that sell gases to end-users. Increasingly, even large users turned to the specialist gas companies for their supplies as economies of scale meant that medium scale users could not produce cost effectively (although more recent non-cryogenic technology is beginning to displace merchant supplies for some applications. However, in a few large nations



such as CIS states and China, most production is still captive and of total world capacity about 50% still falls into this category - but it is reducing all the time. In analysing the make-up of the industrial gases business, it is primarily the merchant market which will be addressed. However, merchant market growth can be influenced by the conversion of in-house production to merchant suppliers.

b) Supplier of Gases

In general, a gas company is one who produces and distributes gases in whatever from to the end-user. However, the distribution channel may involve direct supply to the customer (the “retail” business) or it may involve intermediate companies who distribute the gases from the gas producer to the end-user, these are generally classified as distributors or in some cases agents. In the latter two cases the gas producer may “wholesale” gas products to the distributor who then retails the gases to the end-user.



1.3 DEFINITION OF INDUSTRIAL GASES

1.3.1 Classification of Gases There are five broad categories of gas: Industrial - gases sold for general (industrial) use; Medical - gases intended for use in the medical field; Special - rare, uncommon or speciality gases used in small quantities; Fuel Gases - gases such as LPG or its components Refrigerants - gases used in the refrigeration cycle in cooling technologies. For the purposes of our industry , which has been mainly based on air gases and other associated gases , we focus on the first three but recognise that some of the industrial gases companies have moved into supplying (not producing) the latter two categories. We would also state that Natural Gas is not covered in the true definition of industrial gases and neither is LPG (tonnage, bulk and cylinders for heating and cooking). The industrial category accounts for the majority of the sales by industrial gas companies, in some countries industrial gases are called “technical gases” to avoid using the same general term for the industry as the industrial sub-group. Although there is not universal agreement on whether certain gases are treated as “industrial” or “special” (e.g. welding mixtures), we use the definitions shown below.

1.3.2 The “Industrial” Gases This category covers the traditional gases used in industrial and commercial applications, often in large quantities: The “air” gases - oxygen, nitrogen, argon, (and air!);

acetylene;

carbon dioxide;

hydrogen;

carbon monoxide;

Mixtures of any of the above (especially for welding).

1.3.2 The “Medical” Gases This category covers the traditional gases (but not modern anaesthetics which are pharmaceuti-cals) used in medicine:

“medical” oxygen and air;

nitrous oxide (traditional anaesthetic known as laughing gas);

“medical” carbon dioxide;

breathing mixtures of any of the above and others such as helium (the

commonest mixture is oxygen/nitrous oxide, or “entonox” );

Blood component mixtures.

In the case of “medical” oxygen, air and carbon dioxide, the gas purity is more strictly controlled than for industrial sales.

1.3.4 The “Special” Gases This category generally includes all the minor gases on general sale which are used in specialised applications or ultra-high purities of the other gases. Often these are purchased in bulk and re-packaged to strict quality standards for re-sale:

helium;

the “rare” or “noble” air gases - krypton, xenon, neon;

special gas mixtures for the lighting industry;

ultra-pure gases for the electronics industry;



calibration gas mixtures (many of them toxic or flammable)

Fumigation gases.

1.3.4 Other Gases These are gases which the industrial gas companies normally purchase in bulk from and re-package or mix before utilising their distribution network to sell in smaller lots to their own clients:

“fuel” gases: butane, propane and mixtures;

refrigerant gases;

fire-fighting gases;



2 THE GLOBAL MARKET

2.1 INTRODUCTION

The reader should note that the global market is defined as the value of gas sales

and related services to the end-user. The revenues highlighted exclude any cap-

tive (own produced) figures, equipment sales to end-users and welding consuma-

bles

2.2 SUMMARY OF GLOBAL DEMAND

In 1992, the total industrial gases business was valued at US$ 23 billion. In 1997,

the world-wide value of the industrial gases market reached US$31 billion repre-

senting an average annual growth over the 5 years of 5.5%. By 2010, the business

had grown to US$68 Billion by 2014 US$80 billion.

See Report for full position



3 MANUFACTURE OF INDUSTRIAL GASES

3.1 INTRODUCTION

We describe the industrial gas business as a “service” industry because of the

heavy emphasis on the supply mode of the business but the production of indus-

trial gases is also important to the industry. We therefore believe that it is important

to discuss the methods of manufacturing or recovering gases and what the current

trends are.

The industry was basically started when air was split into its pure gas components,

oxygen, nitrogen and then later argon and rare gases.

3.2 CRYOGENIC AIR SEPARATION

The original process developed over 100 years ago, was developed by compres-

sion of air followed by rapid expansion that resulted in the cooling down of the air

stream. This “cooled” air was then used to cool down more compressed air in a

heat exchanger and which on expansion cooled to an even lower temperature and

so on. When the temperature falls below –180oC fractional distillation of liquid air

can take place. (Cryogenic means operating at temperatures below –100oC).

This “cryogenic” distillation takes place in a column or tower where the gas com-

ponents are separated, in an “air separation unit” (ASU) at very low temperatures

and high pressures. Although the basic technology has been used for over a cen-

tury major developments in the scale and efficiencies of the ASUs has taken place,

driven by the gas companies.

Figure 3.2.1 provides a schematic for an ASU operation to help explain how air is

broken down into its components, oxygen and nitrogen and argon.

Air is compressed to about 5 bar g and passes through an adsorber bed where

water, carbon dioxide and other air contaminants that would be solid at cryogenic

temperatures are removed. The air stream is then split into a major and minor

portion. The minor portion is further compressed to provide a refrigeration stream.

This stream is cooled down in the main heat exchangers before being expanded

in a turbine, which drives the compression stage. This expansion causes cooling

and provides refrigeration for the plant. The major part of the air is cooled in the

main heat exchangers to about -170 oC by effluent product streams and waste

streams.

The components of the air components are separated by distillation in a double

column (the various component gases vaporise at different temperatures) from

which they are extracted as gas or liquid. If argon is required the “side-arm” col-

umn shown is also used. The gas products leaving the system are warmed to



ambient temperature in the main heat exchangers and in doing so they cool down

the incoming air. Additional heat exchangers are used at various points in the

cycle to optimise efficiency. Although the principle is simple, the engineering is

very sophisticated and additional equipment would allow even the rare gases to

be separated.

Depending on their purpose, ASUs are either built primarily as “gas plants” for

gaseous output (with a small amount available as liquid to storage to provide back

up for reliability) or, with additional refrigeration capacity, as “liquid plants” with

much of the output being stored in liquid tanks. Usually they are operated to co-

produce oxygen (normally of 99.5% purity), nitrogen (5ppm impurity) and argon

since there is a ready market for these gases. However, somewhat simpler ASUs

for nitrogen only (nitrogen generators) or oxygen (oxygen generators) which vent

the other impure components of air are also manufactured. Occasionally on large

plants the rare gases neon and krypton/xenon are also produced. It is not normal

to separate helium from air as natural deposits are a cheaper source despite the

additional distribution costs entailed.

ASUs capacities are normally expressed in metric tons per day (tpd) or cubic me-

tres per hour of oxygen and they can range in size from as little as 5 tpd up to

several thousand (currently 5000) tpd.

21 Esprit

FIGURE 3.2.1 THE AIR SEPARATION PROCESS Courtesy of Air Products

22 © Esprit 2014

3.3 Non-Cryogenic Air Separation

The cryogenic process is very power intensive and so over the past 50 years com-

panies have developed a lower power consuming process to separate air. There

are two forms of commercially available non-cryogenic air separation technologies

which have been developed over the last 30 years and which now provide cost

effective solutions under certain limited circumstances:

3.3.1 Adsorption

Pressure swing adsorption (PSA), or VSA (where vacuum is employed) utilise the

differential adsorption rate of oxygen and nitrogen by a molecular sieve material

(carbon for nitrogen, zeolite for oxygen). They can be used to economically pro-

duce oxygen or nitrogen (but not both together) of lower purity (circa 93-98%) in

gaseous from only for quantities up to about 100 tpd.

A PSA or VSA unit consists of two or more low pressure vessels to hold the mo-

lecular sieve, interconnecting pipe-work and switching valves operated by a pro-

grammable solid state controller and an air blower/compressor for the air feed.

(VSA also includes a vacuum pump). The vessels holding the sieve are pressur-

ised and de-pressurised according to pre-set cycles. There can also be a buffer

storage vessel for the oxygen or nitrogen produced, which is usually at a few at-

mospheres pressure. Higher purity is gained at the expense of throughput.

Figure 3.3.1 shows a basic layout of a PSA system (Oxygen).

3.3.2 Membrane

Membrane methods, which pass the air through narrow hollow polymer fibres

whose walls act as semi permeable membranes and allow the oxygen to permeate

through. They can be used to produce (circa 95-99% purity) nitrogen in gaseous

from in small quantities (but many units can be connected in parallel).

A membrane “unit” usually consists of a number of modules holding the membrane

fibres connected to a low pressure air blower which operates continuously rather

than cycling as in PSA/VSA. It is even simpler to operate than a nitrogen PSA unit

but of somewhat lower purity output.

These non-cryogenic technologies are much simpler to operate than the cryogenic

ASU method. In terms of power consumption per unit of output (specific power),

they can be competitive with smaller ASUs for lower purity gas. However, they do

not exhibit the same economies of scale as ASUs since the major cost components

are the sieve or membrane, the amount of which is directly proportional to the plant

capacity. Consequently, they are currently confined to smaller supply situations or

special situations such as sea-going or offshore installations.



Whereas the cryogenic technology is “mature”, these non-cryogenic technologies

are still undergoing continual development and pushing out the boundaries at

which they can be cost effective. Figure 3.2.3 presents a schematic of a mem-

brane unit.


24 Esprit

FIGURE 3.3.1 PSA/VSA SCHEMATIC Courtesy of Messer AGS


25 Esprit

FIGURE 3.3.2 SCHEMATIC OF A MEMBRANE UNIT

Courtesy of Air Products

26 © Esprit 2014

3.3.3 Applicability of Non-Cryogenic Technology.

Figure 3.3.3 shows the conditions of flow and purity where non-cryogenic nitrogen

production technology can effectively compete with cryogenic on basic cost.

FIGURE 3.3.3

APPLICABILITY OF NITROGEN PRODUCTION TECHNOLOGIES

In practice the impact of these alternative technologies on the business of the in-

dustrial gas companies has been wholly favourable. Nearly all installations are

owned by industrial gas companies or supplied and serviced by them. The reason

is that most users want a reliable supply of gas and therefore need assured back-

up supplies, usually of liquid nitrogen or oxygen that can be vaporised to maintain

supply when the production plant fails. A number of large “blue-chip” corporations

have tried to enter the industrial gas business and have eventually sold out to in-

dustrial gas companies, because of the inability of the new entrants to provide back

up and the natural unwillingness of the industrial gas companies to support them.

Smaller companies have tried to break into niche markets for small volume users

based on the smaller companies lower overhead cost position. In the end, these

too have been acquired by or formed alliances with industrial gas companies. The

industrial gas companies have been pro-active in converting any vulnerable liquid

accounts to small gas-supply accounts.

There are enough potential suppliers of such technology, that any industrial gas


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company can access it and use it when required. The position for oxygen non-

cryogenic production is similar, with a further limitation that it is only really compet-

itive at purities below about 93% oxygen.


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3.4 CARBON DIOXIDE (CO2)

Carbon Dioxide is available naturally in the ground or is generally produced as a by-product of a burning (combustion) or chemical process. The sources of carbon di-oxide are either by direct manufacture in dedicated plants or by recovery and purifi-cation of pre-existing impure gas streams:

By combustion of hydrocarbons (natural gas, LPG, kerosene, heavy fuel oil,

etc.) in a purpose built industrial plant. This is the usual method when natural

deposits or by-product CO2 is unavailable.

By recovery and purification of naturally occurring deposits. Wells are drilled

to tap the underground source, which can produce at a good pressure over

many years. This can be the most economic source where the well is located

close to major consumption centre (the market value of the product cannot

support long distribution chains). Unfortunately such wells are few in number

as they are only present in unusual and often remote geological formations.

as a by-product of the steam reforming process (a reaction between steam

and a hydrocarbon such as methane or methanol, etc.) which is usually em-

ployed for producing hydrogen in large quantities as described in the next sec-

tion. The by-product CO2 can be cheaper than from dedicated combustion

plants as hydrogen or carbon monoxide are the high value products.

As a by-product of fermentation processes, especially beer production. This

can be a large source of CO2 but care must be taken to remove any traces of

smell, which may taint food products.

As a waste stream from sugar cane processing (molasses production). It is

difficult to remove the smelly trace compounds to make it of food grade so this

source is not much favoured.

As a by -product of chemical synthesis such as ammonia or ethylene oxide

production. This can be a large, cost effective source of CO2 and is a common

production source in many countries.

The gas is stored in liquid from following the liquefaction process.


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3.5 HYDROGEN

Hydrogen is used in many chemical reactions and processes (see Section 5.0).

Some of these uses in refineries (hydrogen de-sulphurisation) require large quan-

tities (greater than 1 000 nm3/hr.) of hydrogen.

Hydrogen can actually be sourced from within refineries or chemical plants as it is

produced as a by-product of splitting organic chemicals or polymers. However,

hydrogen can be produced by on-purpose splitting of chemicals or gases e.g.

steam reforming or partial oxidation of hydrocarbons. Other methods are only suit-

able for small-scale production.

Steam reforming is the most universally used method for large hydrogen plants.

It is a catalytic reaction that converts steam and lighter hydrocarbons, natural gas,

LPG or refinery off-gas, into hydrogen and carbon monoxide (syngas). The syn-

gas is “shifted” in a further reaction to give more hydrogen and carbon dioxide:

CH4 + H2O = CO +3H2 ;

CO +H2O = CO2 + H2

Methanol can be used in a variation of the process which does not require the

shift reactor and high temperatures if hydrocarbons are unavailable:

CH3OH + H2O = CO2 + 3H2

The first process requires rather expensive metallurgy due to high pressure

and high temperature. The viability of the methanol reformer, which is simpler

in design, depends crucially on the price of methanol. Both are well estab-

lished technologies for large plants (they do not scale down well).

In partial oxidation, hydrocarbon feed-stock reacts (over a catalyst) with oxygen and steam at a high temperature to produce syngas which has a higher carbon monoxide to hydrogen ratio than that produced by steam reformers making it an ideal source for synthesis of various chemicals. In methanol cracking, methanol vapour is heated in a catalytic bed to produce syngas with little moisture and CO2 (useful for heat treating metal):


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CH3OH = CO + 2 H2

However, there is a danger of producing soot (especially if temperatures are

too low):

CH3OH = C(soot) + H2O + H2

The overall cost depends heavily on the methanol price and together with the

soot problem this means it has not been widely adopted.

Ammonia dissociation takes place at high temperatures in a furnace in the pres-ence of a nickel catalyst: 2NH3 = N2 + 3H2

This is a well-established technology for small-scale plants and preferred for

applications requiring hydrogen-nitrogen mixtures.

Endo generators are well established in heat treating industry. Hydrocarbon feed is mixed with air and passed over a heated nickel catalyst bed. The amount of air (i.e. oxygen) is regulated to prevent the formation of CO2 or H2O: 2CH4 + O2 = 2CO +4 H2 Electrolysis of water is probably the most widely used technology for small-scale production and oxygen is also produced at 99.7% purity. DC power is supplied to a bank of cells containing caustic potash electrolyte. It is not suitable where power costs are very high.

3.6 HELIUM

Helium is a gas which is generally contained in natural gas wells in the ground.

The percentage of Helium present in the natural gas varies from negligible to 1-

2%. Helium is therefore usually obtained as a by-product of natural gas recovery

and liquefaction from natural gas wells. There is a significant recovery of natural

gas and in part of the purification process the helium containment becomes en-

riched and as a result is more viable to recover. The wells with higher percentage

presence of helium are limited (e.g. USA, Poland, and Russia). However, the vast

recovery and liquefaction plants in the Middle East (Algeria and Qatar) means that

while the helium contained is at low levels, the liquefaction process makes recov-

ery viable and economic.

Helium is gained from either nitrogen rejection processes (in order to get the calo-

rific value of the gas higher) or from the purge gas stream from liquefaction and


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separation of NGLs. Nevertheless, it is more economical to recover the helium

from these sources and ship it around the globe than attempt to separate it from

air where it is only present in minute amounts.

3.7 ACETYLENE (C2H2)

Acetylene is one of the oldest industrial gases used for lighting (now obsolete) and

oxy-acetylene cutting and welding. It is manufactured commercially by immersing

calcium dicarbide (calcium carbide) in water, lime being a by-product.

CaC2 + H2O = C2 H2 + CaO

The acetylene gas is pumped into a gas holder before being filled into cylinders.

Although acetylene can be liquefied at ordinary temperatures under high pressure,

this is not practised as the liquid is violently explosive. Instead, the cylinders con-

tain a porous mass steeped in acetone in which the acetylene gas dissolves under

pressure.

3.8 NITROUS OXIDE

Nitrous oxide is manufactured almost universally by thermal decomposition of am-

monium nitrate at around 250OC, the overall process being represented by:

NH4NO3 N2O + 2H2O

Following purification the gas is usually held in a gas holder before filling into cyl-

inders where it remains as liquid under its own vapour pressure at ambient tem-

perature.

3.9 GAS MIXTURES

Gas mixtures are prepared using mixing various gases together, under safe and

controlled conditions. Mixing panels, together with either volumetric or gravimetric

measuring systems are used by companies to determine the right gas mixture

combination and specifications. For classification of gases, particularly related to

speciality gases, quality checks use gas chromatography for certification.


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The most widely used mixtures are for medical purposes or for welding and cutting

processes.

3.10 HYCO

Hydrogen and carbon monoxide (syngas) mixtures are produced in any ratio from

pure carbon monoxide to nearly pure hydrogen. Typically syngas ratios range from

1:1 to 2.1: 1 for a range of hydrocarbon products.

Steam reforming is the most universally used method for large syngas plants. It

is a catalytic reaction that converts steam and lighter hydrocarbons, natural gas,

LPG or refinery off-gas, into hydrogen and carbon monoxide. The syngas is

“shifted” if necessary in a further reaction to give more hydrogen and carbon diox-

ide:

CH4 + H2O = CO +3H2 ;

CO +H2O = CO2 + H2

This plant typically produces 2.2:1 Syngas but by the use of suitable catalysts and

with some CO2 recycle can produce nearer 1:1.

With the advent of biomass and assorted waste products, gasifiers are enjoying

resurgence, particularly since CO2 capture is less costly from a gasifiers than from

a combustion process. In partial oxidation, hydrocarbon feed-stock reacts (over

a catalyst) with oxygen and steam at a high temperature to produce syngas which

has a higher carbon monoxide to hydrogen ratio than that produced by steam re-

formers making it an ideal source for synthesis of various chemicals.

The production of carbon monoxide from synthesis gas is relatively straight forward

if the specification for the CO is not too severe and the feedstock does not contain

significant quantities of nitrogen. CO with about 97% purity can be produced from

syngas using cryogenic condensation where the gas is cooled in heat exchangers

until the CO condenses, but the hydrogen stays as a gas. The two phases are

separated and warmed up in the same heat exchangers that were used to cool the

mixture. Thus little refrigeration is required and the whole plant “bootstraps” itself

cold

When higher CO purity is required or when significant amounts of nitrogen are

present a problem arises because Nitrogen and CO are virtually identical in their

physical properties and difficult to separate. The separation can be achieved in a

much more complex cryogenic process which uses liquid methane as a scrubbing

agent and involves several cryogenic distillations trains. Whilst this can produce

very high purity CO it adds significantly to the capital and operating costs of the


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plant.

3.11 INTRODUCTION

In principle, the “gases” can be distributed in gaseous, liquid or solid forms. In practice, the only one to be sold in solid from is carbon dioxide when it is referred to as “dry ice”. In general the gases are delivered in one or more of three ways:

by pipeline as gas to major consumers (on-site or pipeline supply);

as bulk products

o liquid in cryogenic tanks transported by road, rail or sea;

o gas in tube trailers transported by road;

as packaged gas in “compressed” high pressure gas cylinders

o the contents may be liquid (CO2 or acetylene) with gas vaporised as the valve

is opened) or small even liquid Dewars or liquid cylinders.

o cylinders are delivered by road or are collected by the customer from the gas

company or distributor.

For current breakdown see report

A breakdown of gases volumes supplied would show onsite and pipeline to be the

largest and packaged gases, in cylinders, the smallest, because of their relative

prices. Onsite and pipeline having the lowest price per ton and packaged com-

pressed gases the highest.

The proportion of sales in these categories in any national market depends upon

the stage of economic development of the country. In under-developed economies

c packaged compressed gases for small scale industries can represent the largest

sector, whereas highly developed economies which have large process industries

will have substantial demand for pipeline and liquid supplies. However, as labour

costs are less but capital costs higher in underdeveloped countries, the price dif-

ferential between the supply modes tend to be somewhat less. (This also limits the

growth of bulk and on-site volumes.)


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Figure 4.1.1 provides a simplified schematic of the modes of supply one can obtain

from gas production (assuming air gases).

FIGURE 4.1.2

TYPICAL SUPPLY MODE OPTIONS

3.12 PIPELINE/ON-SITE SUPPLIES

On-site/pipeline (OSP) supplies are the preferred (and least cost solution) where some or all of the following conditions exist for the major air gases, carbon dioxide and hydrogen:

there are major consumers relatively close to the production location of

the gas;

the demand is for medium to large volumes of gas;

there is a steady demand pattern -preferably steady volumes for 24

hours a day mirroring production plant operating patterns.

Stand-Alone Liquid Plants

LOX/LIN/LAR

Stand-Alone Liquid Plants

LOX/LIN/LAR

Large OSP PlantsLarge OSP Plants

Stand-Alone Cryo/Plants &

N2 Generators

Stand-Alone Cryo/Plants &

N2 Generators

Production Distribution The Market

LIQ

LIQ

LIQLIQLIQ Customers

Cylinder Customers

•HP Cylinders

•Liquid Cylinders

Tube Trailer Customers

Large Pipeline or On-site

Customers

LIQ

N2 Gas

HP Cyl Fill

LC Cyl Fill Tube Trailer

Cylinder Truck

LIQ

NonCryo Plants


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OSP refers two type modes of supply of gaseous product. The first being supplied from a pipeline network connected to centrally located ASU(s), hydrogen or carbon dioxide production plants which can supply a cluster of customers from the same plant. By producing large (sometimes called tonnage) volumes in the gaseous state, production costs (especially power) are minimised since the costs of liquefac-tion can be somewhat reduced or avoided and pipeline distribution costs (product compression power and pipeline capital cost amortised over several years) are nor-mally lower than liquid distribution costs. The second mode or terminology is called on-site supply, in which the gas produc-tion plant is either located on the customer’s site or on the “other side of the fence” (immediately outside the customer’s boundary). However if the consumer owns and operates his own plant it is an in-house or captive supply in which the gas company has no interest apart from the possible plant sale or management agreement. Pipeline supplies are often “backed up” by reserves of liquid gas which can be va-porised and fed into the pipeline should there be a peak in demand or production plant shut-down. In the case of air gases, on-site supplies, particularly those that do not require liquid back-up, can be from non-cryogenic as well as cryogenic plant, if the purity and scale of plant is appropriate. A large, centrally located gas company’s ASU can provide a least cost solution for pipeline customers if (as is usual) the gas company can utilise most of the co-pro-duced oxygen, nitrogen and argon for a number of customers, (liquid and com-pressed as well as pipeline) along with benefiting from economies of scale. This is the economic rationale on which “tonnage” supply schemes (long-term pipeline sup-ply contracts between the gas company and pipeline customer) have developed. The major (Tier 1) industrial gas companies are also developing the “utility islands” concept whereby they supply steam and power alongside the traditional gases to a cluster of customers.

3.13 BULK GASES

ASU plants producing liquid were developed in the 1950’s which allowed the cry-

ogenic properties of nitrogen to be exploited. They also provided a means of con-

verting larger packaged gases customers to a lower cost solution. Such customers

may not have sufficient volume or the steady demand pattern required for an OSP

supply but their demand is large enough for the capital costs of liquid storage tanks

to be more than offset by the lower production and distribution costs of bulk sup-

plies. Alternatively, they may need to use the cold properties of the liquid. Helium,

carbon dioxide and nitrous oxide are also frequently shipped as bulk liquids.

The basic concept is that the liquid gas is transferred from a holding storage tank

at the gas company’s production site, into a double skinned tanker, usually able to


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take between 10 and 20 metric tons of products. The liquid is maintained by the

insulated tank which operates at between 2 –15 bar pressure, depending on the

gas.

The delivery tanker (usually road but can be rail) transports the liquid gas to the

customer’s site from where the liquid gas is transferred to a storage tank via pres-

sure fill or cryogenic pump.

There are examples of bulk delivery in a tube trailer, which consists of “horizontal”

high-pressure cylinders or tubes, which are charges with gas to much higher pres-

sures. This mode of transport is favoured if the end use is in high pressure gas.

[4.4] PACKAGED GASES

“Packaged” gas, mostly in the form of cylinder gases, was the traditional way of

selling industrial and medical gases in small volumes. In terms of supply volumes

it is at the opposite end of the spectrum to pipeline supplies and is still the most

cost effective supply mode where customers have small demands.

Typically, gas cylinders are made of steel (or possibly aluminium) and weigh about

50 kgs empty. The water volume content is usually between 40 and 50 litres ca-

pacity. Depending on the type of cylinder and age, cylinders can be charged with

gas to between 150 bar and 300 bar pressure. It is common to find pressures at

between 150 and 175 bar in developing countries where the cylinders are not as

good quality or to “western” specification. Higher average ambient temperatures

also play a factor in the charging pressures.

In Western Europe, there is a trend towards using cylinders which can be charged

up to 300 bar pressure. This makes a difference of a gas content ranging between

6.5 cubic metres to over 10 cubic metres.

Speciality gases invariably fall into this category, but small repair shops and fabri-

cators and many medical applications also take cylinder supplies.

Gas companies also have developed concepts of packing or bundling cylinders

together (in a steel frame and manifolded in order to transport a greater number of


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cylinders to a slightly higher consumer of gases.

Another option is the use of liquid cylinders which are vacuum insulated tanks

(mini) made of stainless steel and contain liquid gases under pressure (5-15 bars).

This is an effective from of supply as a liquid cylinder can contain as much as 15

– 18 HP cylinders worth of gas.

Hydrogen is usually supplied as compressed gas either in normal cylinders (singly

or in cylinder “bundles” which can be on dedicated trailers) as liquefaction costs

are very high. (One exception is the space industry where rocket fuel must be held

in liquid from).


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4 THE USES OF INDUSTRIAL GASES

4.1 INTRODUCTION

The diverse physical and chemical properties of industrial gases means their uses,

or gases applications, are legion and the industrial gases companies are con-

stantly seeking to develop new applications in order to expand the market place.

For this sales development effort to be successful requires a good understanding

on the part of the gas supplier of the industrial and medical processes which utilise

the gases.

The major gas companies employ specialists in particular fields of application, sup-

ported by an ability to design and supply specialised equipment for effective use

of the gas in the customer’s processes. The marketing effort is often organised

around particular “market sectors” or industry groupings to capitalise on the spe-

cialist knowledge. Typical market sector groups encompass:

Metals

Minerals

Food & Beverages

Electronics

Chemicals & Petroleum

Glass

Environmental

Fabrication

Medical

Research

These market sectors may utilise a variety of gases and there are many applica-

tions outside these particular groupings which are still of importance. The diverse

chemical and physical properties of the air gases, as well as the other industrial

gases, lead to a multitude of uses, which have been continuously expanded and

developed by the major gases companies in collaboration with their customers.

It is no exaggeration to say that without the industrial gases both industry and med-

icine would have been unable to develop to their current extent. Industrial gases

are an essential part of the industrial and economic infrastructure of modern life.

Volume growth is generally reckoned to run at 1.5-2.0 times the national GDP

growth regardless of the current development stage of an economy, so there is no


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sign of their importance or growth being in decline.

4.2 COMPOSITION OF AIR

As the air gases are so important in industry and their manufacture mostly depends

on air separation technologies, we shall begin with a review of the gaseous com-

ponents of air and their boiling points at normal barometric pressure, together with

an indication of whether the cryogenic air separation unit (ASU) can be employed:

TABLE 4.2.1.

GASEOUS COMPOSITION OF AIR

Gas Sym-bol

Chemical Type

Volume parts per million

Boiling point oC

Nitrogen N2 Active2 780 840 -195.76 Oxygen O2 Active 209 460 -182.96 Argon Ar Inert 9 340 -185.86 Carbon dioxide CO2 Active 300 -78.47 Neon Ne Inert 18 -246.98 Helium He Inert 5 -268.93 Krypton Kr Inert 1 -153.34 Xenon Xe Inert 0.09 -108.11 Hydrogen H2 Active 0.5 -252.88

Common “impurities” found in air are water vapour, methane, carbon monoxide,

sulphur dioxide, nitrous oxide, ozone, nitrogen dioxide, radon and nitric oxide. In

addition there can be dust, pollen and local “pollutants” from industrial and chemi-

cal processes, vehicle exhausts, etc.

It will be seen that the main constituents of air are nitrogen (78%), oxygen (21%)

and to a lesser extent argon (0.9%). The other constituents are minute in compar-

ison. Nonetheless, special steps have to be taken in the cryogenic production pro-

cess to remove the impurities and CO2 from the air before liquefaction.

It will be seen from the above table that the three major constituents, nitrogen,

2 Nitrogen is often thought to be inert, but it reacts with many substances in the presence of a suitable cata-lyst such as hydrogen to produce ammonia. It also forms brittle nitrides with some hot ferrous metals.


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oxygen and argon have boiling points, which are quite similar. This is convenient

for the cryogenic process (fractional distillation of air) where these three products

are usually co-produced in the ASU. Normally, the other constituents of air are

vented in a waste product stream, although in small measure they remain as im-

purities in the main product. Occasionally, where the plant size is sufficient to make

the process economic, the rare gases - neon, krypton, xenon are also distilled from

the air in “specialised” side columns operating in the appropriate temperature

range. Given their very low boiling points close to absolute zero (-273 OC) and

small concentrations, helium and hydrogen are not recovered from air but obtained

by other means. CO2 is removed as an impurity prior to air separation in an ASU

and is manufactured by different and more economic processes.

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4.3 NITROGEN

In the early years of the industrial gases business, oxygen was the main product

along with acetylene. Although this is still the case in developed markets, generally

speaking the volume of nitrogen sold is now well in excess of oxygen. There are

three key properties of nitrogen from which its main uses arise:

as a gas it is inert (un-reactive) under normal conditions;

as a liquid (LN or LIN for short) it is very cold (-196OC);

as either a gas or in liquid from it is non-toxic

It is impossible to list every single application of nitrogen (this would take a whole

book and the list is growing all the time), but market sectors and the major appli-

cations which rely on the inert or non-toxic characteristics of nitrogen and/or the

cryogenic properties of the liquefied gas include (but are not limited to):

4.3.1 Food and Beverage:

Food preservation (controlled atmospheres for packaging or MAP - modified at-

mosphere packaging), storage/blanketing of fresh produce and beverages in ware-

houses, storage silos, liquid tanks, cellars, etc. and transport of fresh foods and

beverages under conditions of controlled atmosphere (composition and tempera-

ture) for national and international distribution. These techniques provide a means

of keeping food fresh in the best possible condition throughout the food chain from

the point of harvesting to point of consumption in the home, thus increasing shelf

life of the food products.

Food freezing and chilling rely on both the non-toxic and cold properties of liquid

nitrogen. In many countries, food freezing/chilling is the largest single application

for liquid nitrogen. Although carbon dioxide and mechanical refrigeration methods

can be employed, liquid nitrogen has advantages in speed of freezing (and there-

fore in quality and productivity measures). Food freezing/chilling can be performed

at the initial food preparation stage, or at the food processing stage through to the

distribution chain of the food (in-transit refrigeration).

Freeze grinding is a relatively minor use but it can also be employed in spice grind-

ing to improve the quality of the spices.


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4.3.2 Metals

a) Primary Metal Production

In steel-making nitrogen, which is relatively inert, can be used for ladle stirring,

reduced oxygen atmospheres in pouring stages and stainless steel production.

b) Secondary Metal Production

In controlled atmospheres for annealing (toughening by heat treatment), galvanis-

ing, hardening and tempering. In powder technologies such as atomising, brazing,

and thermal spraying. Liquid nitrogen is used in the shrink fitting of metals.

4.3.3 Glass

Substantial quantities of gaseous nitrogen, mixed with about 5% hydrogen, are

used in float glass manufacture to create an oxygen free reducing atmosphere

where the molten glass floats on the tin.

4.3.4 Chemicals & Petroleum

The inert properties of nitrogen are crucial for safe operations in many chemical

and petroleum plant processes and these industries represent a very substantial

market for nitrogen. The uses mainly fall under the headings of inerting/blanketing,

purging, sparging, pressure transfer of products and pressure testing. In addition

it can be used in chemical synthesis, for cooling to control chemical reactions and

for adding to natural gas to control the calorific value of towns’ gas supplies. Liquid

nitrogen can be employed in solvent recovery and recycling of chemicals. It is also

used in enhanced oil recovery to force oil from difficult or nearly exhausted wells.

4.3.5 Electronics

The electronics industry is a major consumer of nitrogen, particularly in the manu-

facture of microchips (where special gases are also important) and the production

of high quality circuit boards. Other such applications classified under electronics

are light bulb manufacture, fibre optics etc.

4.3.6 Other Processes

It can be used for cooling purposes in concrete mixing, soil freezing, blow moulding

of plastic and glass containers and blown plastic film. As a liquid it is also used in

cryosurgery, cryogenic storage of organs and biotechnology. Another liquid appli-

cation is fog dispersal. Nitrogen is also used as an assist gas in laser cutting and

for light bulbs (mixed with argon). It is used as a fire suppressant in mine fires and

for filling aircraft tyres.

In the oil industry nitrogen can be used for the purging and cleaning of pipelines

and also in enhanced oil recovery.


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4.4 OXYGEN

Oxygen is a very reactive gas and features in a variety of chemical (oxidation)

processes. It also possesses two remarkable properties - it supports combustion

and is essential to life. Oxygen was the foundation stone of industrial gases as it

has been used in welding and medicine since the turn of the century. Today, chem-

ical processes, combustion and environmental applications have expanded the

market enormously:

4.4.1 Chemicals and Petroleum

Oxygen is used as either an effective substitute for air or an enriching agent to air

in the production of several commodity chemicals and petrochemicals (vinyl chlo-

ride, vinyl acetate, propylene oxide and ethylene oxide to name a few). It can also

be used in the de-bottlenecking of refinery fluidised catalytic cracking units by ox-

ygen enrichment and Claus sulphur recovery plants.

Other major uses include the use in primary or secondary reforming operations

and partial oxidation processes which are commonly used in the production of am-

monia, methanol and hydrogen.

Oxygen can also be used in the production of inorganic products such as Titanium

Dioxide, Carbon Black and Nitric Acid etc.

These are usually consumed in tonnage volumes, which require large ASU pro-

duction supplies.

4.4.2 Metals

Primary Metal Production

The steel industry is the largest user of oxygen world-wide. Processes which orig-

inally utilised air have been vastly improved by using oxygen in the reaction and

new oxygen based processes have been invented. As a result the tonnage of ox-

ygen used per tonne of steel produced has steadily (and sometimes dramatically)

risen through the decades.

In integrated steel plants oxygen is used for enrichment in blast furnaces and in

BOS (basic oxygen steel-making) converters to produce the molten steel. New

technologies in blast furnace operation, such as oxy-coal injection (to avoid expen-

sive and polluting coke ovens) increase the oxygen requirement. The Corex pro-

cess which is an innovative large scale steel-making process consumes almost

one tonne of oxygen per tonne of steel and utilises the largest cryogenic air sepa-

ration units which can be built.

On a smaller scale, electric arc furnaces (EAF) require oxygen (enriched air) to be

introduced into the furnace. This requirement can be met by a pipeline supply, on-

site supply from an oxygen generator (cryogenic) or oxygen PSA plants or vapor-

ised liquid oxygen, depending on the volume of demand.


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Oxygen is widely used in oxy-fuel burners in the smelting of ores (Copper, Nickel

and Zinc) and in specialist applications such as gold recovery from tailings where

it reduces cyanide usage and increases the leaching rate.

Secondary Metal Fabrication

Oxygen is used in secondary metal fabrication in enhanced furnace heating tech-

nologies in which it increases furnace temperatures whilst reducing fuel usage.

4.4.3 Other Combustion Processes

Oxygen is widely used in other furnace enrichment and oxy-fuel burning applica-

tions where it improves fuel economics, heat transfer rates and reduces unwanted

Nitrous Oxides (NOX) emissions. Besides steelworks it is used in glass furnaces,

cupolas and ceramics and brick-making. Oxygen is used in fluidised combustion

processes, particularly coal gasification for combined heat and power plants or the

production of synthetic fuels. It is also used in incinerators for solid waste disposal.

4.4.4 Fabrication

Welding and cutting operations are traditional users of oxygen. It is used in oxy-

acetylene welding, oxy-cutting, brazing, flame hardening, re-heating and moulding.

The users are in shipbuilding, engineering industries, building, assembly, metal

fabrication, ship-breaking and scrap yards.

4.4.5 Environmental

Oxygen is used in water purification processes. This includes the oxygenation of

rivers, the treatment of sewage, and the purification of drinking water (ozone is

generated from oxygen). It is also used in the treatment of industrial effluents.

4.4.6 Health Care

Oxygen is vital to healthcare and hospitals are the main users. They pipe supplies

(usually from liquid storage) or use cylinder supplies for operating theatres, emer-

gency wards, intensive care units and to supply individual beds. Oxygen therapy

is also used in the home, supplied in cylinders or from oxygen concentrators (small-

scale PSA units). Oxygen is also used in the breeding and transport of fish.

4.4.7 Other Applications

Oxygen is used for de-lignification in the paper pulp industry. Another use is to

speed up fermentation processes in brewing and pharmaceuticals. It is also used

in liquid from as a rocket propellant.

4.5 Argon

Although less than one per cent of the atmosphere, this gas is of increasing im-

portance as it is absolutely inert (more so than nitrogen). While for most metallur-

gical applications nitrogen is sufficiently inert, argon is the choice when extreme

conditions (higher temperatures etc.) are used.


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4.5.1 Primary Metal Production

One of argon’s main uses is in the steel and stainless steel industry where it is

used to stir molten metal (in ladles) and “eject” traces of carbon and nitrogen (to

prevent nitrides formation). In stainless steel, a licensed process is that of argon

oxygen decarburisation (AOD) which was invented by Union Carbide (now Prax-

air).

Argon is also used in some other, rarer metal production and in some Aluminium

smelting operations.

4.5.2 Welding Shielding Gases

Argon is a common component of welding gases and gas mixtures for TIG and

MIG welding (and more recently laser welding) where it is used as a shielding gas

to prevent oxidation of the weld. These welding gas mixtures are generally used

in the more developed industrialised countries where welding techniques are more

advanced.

4.5.3 Electronics

The gas is also commonly used to fill household light bulbs (its inertness prolongs

filament life) and fluorescent tubes. In electronics it is used for cleaning silicon

chips, producing fibre optics and in some lasers.


Argon is also widely used as a carrier gas in research and laboratory operations,

again due to its inert nature.

4.6 The Noble (or Rare) Gases - Neon, Krypton, Xenon

Between them, these gases represent less than two thousandths of one per cent

of air. However, they are worth separating in large ASUs because each has its

own unique applications. Due to their rarity and cost they from part of the Special

Gases portfolio.

The main uses of neon are in (“neon”) lighting, display signs and electronic tubes.

It is also used with helium in continuous lasers. Krypton is also used in ex-

imer lasers, particularly in surgery. Krypton is used as a barrier gas in double glaz-

ing and in energy saving light bulbs (together with argon). Xenon is used in special


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lighting applications such as flash-lighting, high performance automobile head-

lights, lighthouses and xerography. It is also present in some eximer lasers. A new

application is in ion engines for deep space propulsion. In the field of medicine it

can be used as an anaesthetic and in medical imaging.

4.7 Carbon Dioxide

Carbon Dioxide (CO2) is soluble in water, 0.9 volumes of the gas dissolving in 1

volume of water at 200C to produce a mildly acidic solution. Like a number of other

gases, the relatively inert qualities of CO2 under normal conditions, makes it useful

for suppressing combustion or oxidation. Another importance characteristic of CO2

is its bacteriostatic nature (does not support life and respiration of aerobic microbes

and beings).

Being non-toxic it can also be used in food applications. CO2 in its liquid from,

besides being a good source of cold (-780C), has a unique character in that whilst

it is kept under pressure will remain a liquid but when the pressure is released

(when expanded rapidly) it solidifies. This property allows solid carbon dioxide to

be produced as snow, in pellets or blocks as “dry ice”. Dry ice possesses the

useful property that it does not melt as a liquid but turns into gas (sublimes) without

leaving any residue.

4.7.1 Beverage Industry

A major use of CO2 is in the manufacture of carbonated beverages where, when

dissolved under a pressure of 2-5 atmospheres, it causes effervescence (fizz).

Hence all the carbonated drinks produced by companies such as Coca Cola, Pepsi

etc. and the carbonated mineral water, use carbon dioxide to generate the “fizz”.

CO2 is also used in the production of beer (both alcoholic and non-alcoholic) where

it is used in various stages of the beer processes, from carbonation, bottling and

barrelling as well as mass transfer of liquids.

In most developing countries, the use of CO2 in these applications usually ac-

counts from between 50 and 75% of the total demand for the gas.

The CO2 is also used in the dispensing of soft drinks and beers in pubs and fast

food chains.

4.7.2 Food Processing and Transportation

Liquid CO2 is much used as a refrigerant in food freezing and chilling, especially

where the use of LIN is too extreme in temperature or too volatile (high boil off

rate). Dry ice and CO2 snow is used in food preservation. In gaseous from it can

be used in protective atmospheres for the transport and storage of food or as an


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inert gas for purging of pipelines.

A relatively new application includes in-transit refrigeration where additional cold

is required above that provided by mechanical refrigeration units or instead of

these units. Other food related applications includes MAP of food (like nitrogen).

4.7.3 Chemical Production

CO2 is used in smaller chemical processes and in the manufacture of pharmaceu-

tical products and sweeteners. In the chemicals industry it is used in the Solvay

process to manufacture soda ash. It is also used to correct syngas ratios in carbon

chemistry and in the production of urea from Ammonia.

4.7.4 Waste Water Treatment

CO2 can be used in two main forms of waste water treatment, firstly for reducing

the pH value of the water in high alkaline conditions and secondly to remove min-

erals and heavy metals.

4.7.5 Horticulture

Another large use of CO2 is in the horticulture business in those countries with

slightly lower light levels (all year round) in order to stimulate growth and increase

crop yield in green house grown produce.

4.7.6 Nuclear

CO2 is the gas used in gas cooled nuclear reactors, particularly in the UK.


Foaming of plastics and rubber usually rely on CO2.

As a liquid it is also used as a cooling agent in many non-food industries such

as metal casting.

CO2 is used for fire fighting

Use as an anaesthetic gas in cattle slaughter

4.8 Hydrogen

Hydrogen (H2) is the simplest chemical element and forms 75% of the mass of the

universe but less than 1% of the mass of the earth. It is highly reactive and com-

bines readily with oxygen (explosively if not controlled) and many non-metals. It

also combines with some metals to from hydrides. It is commonly used as a reduc-

ing agent.

The reducing properties of hydrogen are used to remove oxygen during high-tem-

perature processes such as metal treatment or float glass production. The reac-

tive/reducing properties of hydrogen are utilised to a great extent in intermediate


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processes in the chemicals/petrochemicals and refinery industries where it is usu-

ally produced on-site. Hydrogen is also used to hydrogenate unsaturated fats and

oils to thicken them and reduces oxidation. This process finds applications in the

manufacture of margarine and edible oils as well as shampoos, lubricants, house-

hold cleaners and a variety of industrial products. Hydrogen is a key gas in micro-

chip manufacture where it is used in atmospheres for growing crystals, etching,

annealing and bonding. Hydrogen is used in welding mixtures and cutting appli-

cations. Waste hydrogen is often burnt as a fuel gas. A dramatic use for liquid

hydrogen, along with liquid oxygen, is for rocket propulsion.

4.9 HELIUM

Helium is one of the noble gases and is the second most abundant element in the

universe after hydrogen but only minute amounts are present in air. It occurs on

earth mainly in the presence of natural gas in which it has resulted from radioactive

decay. Helium is very inert and has a uniquely low boiling point within a few de-

grees of absolute zero (-268.90C).

Its inertness makes it ideal for helium based shielding gases in welding applica-

tions (stainless steel, aluminium, copper alloys). It is also used as an inerting me-

dium in the manufacture of optical fibres. As a small molecule it is also highly

“leaky” and is used for leak detection in vessels and pipe-work. It can be used for

heat transfer in nuclear reactors because it remains chemically inert and non-radi-

oactive. Being so light and inert it is used for balloons. Helium is used in breathing

gas mixtures by divers, where it replaces the nitrogen. Another medical use is in

breathing mixtures to relieve respiratory difficulties. The very low temperature of

liquid helium is utilised in super conducting magnets which are used in medical

MRI scanners and specialised research apparatus.

4.10 ACETYLENE

This is an explosive gas which in the presence of the right amount of oxygen burns

with a brilliant flame at a temperature of about 30000C. Hence the oxy-acetylene

blowtorch is widely used in welding and cutting metals with high melting points and

this forms almost the sole use for the gas. For chemical synthesis it has been

replaced by ethylene and its use for lighting has been superseded by high perfor-

mance lamps using the noble gases. For cutting operations where the highest tem-

perature and speed are not necessary it has lost market share to cheaper LPG

and consequently, acetylene is usually in low or even negative growth.


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4.11 NITROUS OXIDE

The principal use of nitrous oxide is as an anaesthetic in medicine. When inhaled

in pure from, it is asphyxiating, but in high concentrations (80% plus) with oxygen

it induces rapid but rather shallow anaesthesia (which is insufficient for major sur-

gery). The gas is useful for analgesia and sedation and as a background anaes-

thetic in conjunction with more potent additives for major surgery. It is still the most

widely used anaesthetic gas. Non-medical uses are much smaller and include aer-

osol propellants, leak testing, food packaging, refrigeration and spectroscopy.

4.12 SPECIAL GASES

The noble gases - helium, neon, krypton and xenon are usually marketed as “special gases” as are ultra-high purity oxygen and nitrogen. However, there are many other special gases sold in cylinders, which are either simple chemical compounds or more often are mixtures of gases. Many are complex and formulated to the highest level of purity. Some are made specifically for a single customer. The major indus-trial gases companies market up to 20 000 special gases and mixtures, with very high values per cylinder.


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5 COSTS AND PRICING

5.1 INTRODUCTION

An understanding of the cost structure or cost drivers applicable to each type of

industrial gas provides an understanding of the reasons for the various modes of

supply and the price levels which result. With the exception of special gases and

(to a degree) argon, the industrial gases are not traded internationally and pricing

is therefore generally done on a national or even local basis to reflect local produc-

tion costs and the immediate competitive environment. Domestic/national produc-

tion costs can differ markedly between countries depending on the available pro-

duction or recovery methods, the scale of these local facilities, feed-stock and en-

ergy costs.

5.2 GENERIC COST FACTORS

Before turning our attention to each gas it is useful to classify the main cost drivers into:

prime production/recovery costs:

o raw materials/feed-stock price

o energy

o capital cost recovery

o production labour

distribution costs:

o “repackaging” (for different supply modes)

o delivery of gases

administrative costs:

o marketing

o applications & product development

o sales effort

o order processing

o accounting and general admin.

These are not dissimilar to what other industries face or incur but in the case of most industrial gases the two main costs are the power and the distribution costs.

5.3 PRIME COSTS

Most industrial gases are either raw material or energy intensive (but not both) and

reasonably capital intensive to manufacture/recover. Labour costs are moderate

at the prime cost level. Table 6.3.1 presents a comparison of the importance of


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each prime cost factors (on a scale from nil to high) in determining prime produc-

tion unit costs according to the gas and method. It also indicates how well the

process “scales up” (i.e. the advantages of scale):

TABLE 6.3.1.

IMPACT OF COST FACTORS ON PRIME COSTS

Gas – Process Scale Feeds Energy Capital

Labour

Air Gases:

- cryogenic High Nil High high Low

- non cryogenic Low Nil High med. Low

Carbon Dioxide:

- recovery systems High High Low high Low

- combustion med. High Low med. Low

- reforming/syngas High High Low high Low

Hydrogen:

- reforming/syngas High High Low high Low

- partial oxidation High High Low high Low

- recovery systems High High Low high Low

- cracking Low High Low high Low

- electrolysis Low Low High high Low

Carbon monoxide

-reforming/syngas High High low high Low

Helium (recovery) High Low high high Low

Acetylene Low High low med. Med.

Nitrous Oxide Low High low med. Med.

Special Gases Low Med. low med. Med.

Gases are generally produced in expensive process plant, which leads to capital

intensity and advantages of scale3 (but low labour costs). Exceptions are acetylene

and nitrous oxide where the process plant is simple, raw material costs crucial and

operating labour significant.

The main method of producing the air gases, oxygen, nitrogen, argon and the no-

ble gases (excluding helium) remains the cryogenic distillation of air. It has the

advantage of being capable of producing high purity gases in large volumes. How-

ever it is capital and energy intensive.

3 It should be emphasised that the advantages of the economies of scale refer to production costs and do not generally apply to distribution costs.


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Typical power consumption levels for producing air gases by cryogenic means in-

clude:

Large GOX/GAN 0.55 kWh/Nm3

Large LOX/LIN 0.60- 0.75 kWh/Nm3

Small LOX/LIN 1.40 – 2.50 kWh/Nm3

In the case of non-cryogenic nitrogen and oxygen, capital costs are more moderate

than with cryogenic processes providing the purities are not high and the plant can

be operated round the clock. However, the processes do not scale up well since

the amount of sieve or membrane material (the major component of plant cost) is

directly proportional to the output capacity and electricity costs are still high. It is

impractical to liquefy the products. A typical power consumption level for an O2

VPSA (1000 nm3/h) would be 0.55-0.60 Kwh/nm3 of gas

Syngas production for H2, CO and CO2 and recovery systems for these gases en-

tail capital intensive plants where economies of scale are highly significant. How-

ever, feed-stock costs are a crucial determinant of final product cost and usually

decide the method to be used. On the other hand, hydrogen production from am-

monia cracking or electrolysis are in small-scale processes which do not scale up

well. The cost of ammonia is crucial to the first and the cost of electricity to the

second. Dedicated combustion plants for CO2 are a moderate expense but fuel

cost is all important. Helium recovery is capital and energy intensive since lique-

faction of helium requires a great deal of energy.


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5.4 DISTRIBUTION COSTS

For the sake of convenience, we include in this category the costs associated with

changing the state or packaging of the product in order to effect one or more supply

modes (pipeline or on-site, bulk or compressed), as well as the physical costs of

distribution to the customer.

Distribution costs are minimised where gases can be delivered directly to the cus-

tomer’s process by pipeline. In this case they are limited to the operating costs of

the pipeline - pipeline capital costs, maintenance and pipeline compression. This

is the basis for tonnage/on-site supply schemes to major customers with steady

24 hour demand patterns.

For liquid supplies - required by customers with variable demand, (this includes

back-up to pipeline supplies), those that have insufficient volume to warrant a pipe-

line or those requiring to use the cryogenic properties of a gas - there is often an

additional cost to that of the production on cost for liquid for delivery by road or rail

to the customer. These costs include the capital of the cryogenic tanker, labour

and fuel costs. Usually this is relatively high in Europe (€1.75-€2.25 per ton per

km) compared with that in the US.

Compressed gases, unless produced directly at the prime production stage (ni-

trous oxide, acetylene) entail additional compression costs. To reduce overall dis-

tribution costs, cylinders are often filled in regional centres (compressing stations)

remote from the production centres from which they are shipped in bulk.

For compressed gas/cylinder supplies the labour element of filling cylinders, main-

taining cylinders and cylinder fittings and delivering cylinders to customers are con-

siderable. (The initial cost of a cylinder is also considerable relative to the amount

of gas held, although they have a long life e.g. $150 per cylinder). In developed

economies especially, this makes cylinder gases much more expensive than bulk

supplies, but small customers cannot justify the cost of liquid storage and in all

markets there is a very large population of customers who use a few cylinders of

gases per year.

It will be evident that distribution costs per unit increase as customer volume de-

creases and the prime reasons for the different supply modes result from a trade-

off between capital and other distribution costs.

Pipeline distribution costs are very low and depend more on market price levels

than cost allocation. Many companies write their pipeline down over a long period

and capital charges are low. Operating costs are negligible for all except CO pipe-

lines which are generally avoided.


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5.5 ADMINISTRATIVE COSTS

The different methods of supply and the customer profiles that help to determine

this have an impact on the sales and administrative costs of doing business.

For marketing to large scale users, whether pipeline or bulk, it is necessary to have

applications expertise within the gases company which can assist the customer in

the efficient use of the gases to improve his own costs and quality. Indeed the gas

companies are eager to demonstrate such an expertise in order to expand their

market and as far as possible differentiate themselves from competitors. Even in

the case of compressed gases (for example in welding) it is advantageous to be

knowledgeable about customers’ processes and requirements, but pipeline and

liquid customers require the most effort.

In terms of winning contracts, it takes effort and specialist engineering and com-

mercial knowledge to be able to construct appropriate supply schemes for pipeline

supplies. Liquid customers on average require more sales effort and order pro-

cessing per ton sold, while compressed supplies require well-honed systems of

order processing, customer account management and cylinder management.

The management accounting for production and sales is simplest for pipeline sup-

plies and the most complex for cylinder supplies which involve further production

and distribution costs and a myriad of customers.

5.6 COST-VOLUME RELATIONSHIPS

Although there are additional costs incurred as one moves from pipeline to bulk to

packaged supplies, the trade-off between capital and other costs is volume related

and this determines the most appropriate supply mode for a particular customer.

In general, it is possible to construct cost versus volume curves, which will indicate

the correct choice, subject to special uses or demand patterns. The cost scale will

reflect local supply structures (economies of scale, power costs, feed-stock prices,

labour costs, etc.) and the cross-over points on the volume axis will vary some-

what, but a typical set of curves for air gases will show a pattern similar to those

presented in Figure 5.6.1.


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FIGURE 5.6.1 COST-VOLUME RELATIONSHIP (Indicative only)

5.7 PRICING ISSUES

Prices naturally tend to follow the pattern of costs. The pattern of costs is heavily

influenced by the available supply modes. The absolute levels are also determined

by the available sources of supply, the scale of production and the unit costs of the

factors of supply - energy costs, fed-stock costs, labour rates, etc. and these can

vary widely from one country to another.

In highly developed economies the cost variations between supply modes tend to

be larger than in developing economies because:

labour costs are higher

economies of scale are greater

distribution costs are higher

administrative costs are higher

and therefore the differential impact is greater. In Europe, the unit prices of liquid

oxygen are typically 4-5 times pipeline prices and compressed oxygen can be 15-

30 times pipeline prices depending on annual volume.

The pricing mechanisms in use to recover costs and make adequate returns on

investment are discussed in the next section. However the ability to apply premium

pricing to low volume packaged gases can make this a very profitable business

Cost - Volume Relationships

Packaged Bulk Pipeline

Volumes >>>>

Un

it C

ost

Bulk

Pipeline

Packaged


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57 © Esprit 2014

6 [ COMMERCIAL PRACTICES

6.1 INTRODUCTION

It is important to understand typical commercial practices within the industrial

gases business, since these are common to all the main players in the industry,

especially in developed industrialised countries. For the developing markets, even

the major gas companies have to initially bow to local market conditions and prac-

tices but eventually a major player (or 2) will bring pricing discipline to the market.

We have therefore covered for the purposes of this briefing the main commercial

practices commonly observed in the industry.

6.2 PIPELINE/ON-SITE SUPPLIES

Pipeline or on-site supplies are individually negotiated between the gas company

and the client. This requires both an engineering and commercial input.

The gas company needs to understand the customer’s demand pattern as well as

purities, flow rates, pressures and other variables. Besides pipeline supplies, back

up liquid storage may also be required (on-site or by the gas company vaporising

liquid on its own premises to pressurise the pipeline). There are invariably several

engineering solutions, which can be considered to achieve an adequate continuity

of supply. Also, there may be a need to supply specialist equipment for applying

the gas in the customer’s process.

Supply scheme contracts are normally negotiated for 15 years supply (but some-

times shorter) in order to be able to recover the substantial capital investment in

production and distribution plant at a reasonable unit price to the customer. Great

care has to be exercised by the gas company to ensure that it obtains a worthwhile

return over this long period of time as supply scheme contracts cannot be unilat-

erally re-negotiated. The tariff therefore has to be “indexed” for changing cost lev-

els throughout the term.

Supply scheme tariffs can comprise several elements:

“facility” (or fixed) charge, usually invoiced as a lump sum each month. This is to

recover the fixed costs which are incurred for as long as the facilities are at the dis-

posal of the customer (but not necessarily operating, such as during customer shut-

down periods). This facility charge usually includes an amount for obtaining the nec-

essary financial return on the capital investment. It is usual for this charge to be at

least partly indexed to a general cost inflation index so that the supply scheme profits

are protected in real terms.


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“primary” production charge, which is designed to recover the minimum operat-

ing costs incurred for holding the plant in a production state (normal situation), re-

gardless of whether any gas is produced. This is designed to recover the unavoida-

ble semi-fixed operating costs (at maximum plant turn-down) during short-term ces-

sation or reduction of supplies. This is usually a lump sum amount indexed to rele-

vant cost indices such as for power and labour. It may change in a step-wise fashion

if several plant items can be progressively switched off as output falls.

unit gas charge (expressed as an amount per ton or per cubic metre) for each gas

supplied. There may be different gas charges for back-up liquids or gas obtained

from liquid stocks than from gaseous product obtained directly from the production

plant. These gas charges are designed to recover the variable operating costs, of

which power and/or feed-stock costs are usually the main item but which can also

include labour and maintenance costs. Gas charges are invariably indexed to the

main input costs - power, feed-stock, labour.

6.3 BULK SUPPLIES

Bulk supplies normally entail some capital expenditure by the gas company to in-

stall its own storage and pipeline systems on the customer’s premises and perhaps

purchase specialised delivery vehicles. The gas companies usually prefer the

equipment to be owned by themselves rather than the customer in order to dis-

courage competitor’s access to the customer.

Given the infrastructure investment required, it is normal for gas companies to

charge “rent” on a monthly basis for bulk supplies (and sometimes an up-front

charge for unrecoverable expenditure related to specific equipment relevant to the

customer’s particular application) and to have a contractual period of up to 5 years

(maximum 3 years in the EU). In addition there is a unit charge for the gas con-

sumed, usually specific to a particular customer unless competition laws dictate

otherwise. Prices are normally indexed to power costs and a labour or general

inflation index.

6.4 PACKAGED SUPPLIES

Since cylinders (compressed or liquid) are expensive relative to the value of gas they contain, it is essential for the gas companies to achieve tight control of their cylinder population and because cylinders are expensive assets, which are usually owned by the gas company, there is usually an understanding between the compa-nies that they will not refill each other’s cylinders (in developed markets).


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Gas companies need to have charging mechanisms, which recover a fair contribu-tion to their cost and maintenance from each class of customer. Therefore they usu-ally employ several “revenue streams” rather than having only a single all-inclusive unit price of gas, such as:

cylinder deposits

cylinder rentals

transaction/admin. Charges

gas charges

delivery charges

The capital costs of cylinders can be recovered either through charging a returnable deposit for the cylinder or cylinder rent on a monthly or annual basis. Cylinder de-posits have the disadvantage that some customers may prefer to buy their own and over the life of a cylinder (30 years or more) the initial deposit becomes negligible and of little motivation for the customer to return under-utilised cylinders. However, in some countries where customers are difficult to trace or there are difficulties with credit payments, this can be the best option. Cylinder rentals are a more dynamic means of ensuring the customer does not hoard cylinders as he pays for each cylin-der currently held. As a pricing mechanism, they can also be easily changed with an immediate impact on revenues. It is not unusual for one third of a gas company’s revenue from packaged gases to be from cylinder rentals. In countries where order processing costs are high, a fixed charge per order is sometimes applied. Gas prices (expressed as cost of gas per cylinder and depending on cylinder size, or as a per cubic metre cost) can be kept low when “fixed costs” of cylinders and or-ders are being separately recovered. This has the effect of favouring the large cus-tomer who orders in large lots and has a rapid turn-round of cylinders and therefore most closely mirrors the real cost of serving the customer (whether large or small). Delivery charges are often levied as some customers (especially small, local cli-ents) prefer to collect from the gas company direct. It is usual for gas companies to have published “list” prices for these various ele-ments of cylinder supplies which can be changed at will to reflect the current cost or competitive environment. The gas companies often sell welding equipment and consumables alongside their cylinder gases in order to offer a “one stop” shop for “gas and gear” to their welding customers. Such equipment may be manufactured by the gas company itself or merely traded.

60 © Esprit 2014

Glossary Esprit has used some of the following commonly used terminology or abbreviations in this briefing.

Abbreviation Definition

A1000 / 250L ASU with nominal 1000 tpd GOX capacity and 250 tpd Liquid (LOX, LIN, LAR) AL Air Liquide AP Air Products ASU Air Separation Plant

BOC The former BOC Group now a division of Linde AG Bulk Gases Gases supplied as liquid or by tube trailer CAGR Compound Annual Growth Rate Captive Industrial Gas Plants owned by the end-user of the gas Compressed Gases Synonymous with Packaged Gases CSEE Central and South Eastern Europe Distribution Centre Cylinder preparation and “warehousing” to serve local area EE Eastern Europe GAN Gaseous Nitrogen GOX Gaseous Oxygen H2 Hydrogen HYCO or HyCO Hydrogen and Carbon Monoxide (Plant) Industrial Cylinder Gases

Relatively low value products such as oxygen, nitrogen, acetylene and other gases which are only differentiated by service quality

L Linde LAR Liquid Argon LCO2 Liquid Carbon Dioxide LIN Liquid Nitrogen LOX Liquid Oxygen

M Messer MIG Metal Inert Gas (welding) N2 (O2) Nitrogen (Oxygen) generator Nameplate Capac-ity

Nominal Design Capacity

O&M Operate and Maintain (A type of contractual arrangement) OSP On-site and/or pipeline supply P Praxair Packaged Gases Generally gases supplied in high-pressure gas cylinders. Product Swapping Agreement between competitors to supply of product in one region in ex-

change for supply of the same or equivalent product in another region, usu-ally without financial payment

SBY Plant on Standby (Not supplying) Speciality Cylinder Gases

Gases and gas mixtures that are high value-added because of rarity, compo-sition, purity or difficulty of production and which command high price premia for quality and service.

Syngas Synthesis Gas , usually a mixture of Hydrogen and Carbon Monoxide for or-ganic chemical production (or occasionally Hydrogen and Nitrogen for Am-monia production)

TIG Tungsten Inert Gas (welding) Tpd Metric tons per day

Industrial Gas Business 2010 READERS

© Esprit Associates 2011 Page 61

Trans-fill Liquid distribution “warehouse” VSA or VPSA Pressure swing adsorption plant with vacuum system WE Western Europe

Tier 1 Gas Companies: Include Air Products, Praxair, Air Liquide, Linde, Taiyo Nippon Sanso and Air-gas (as well as Messer for any pre-2003 and post 2009 comparison). Tier 2 Gas Companies: Include Iwatani, and Air Water, both Japanese and not relevant in Europe. SOL Spa, SIAD Group, Westfalen AG and Yara, all European

annual report 2013

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