That provides a solid platform for the industry to build upon in the year ahead, something we may well need if a more cautious second-half of 2019 is anything to go by; I understand from conversations with various people up and down the gas and equipment supply chain that the last six months has seen a sense of hesitancy creep back into the business as a result of the widespread economic and geopolitical uncertainty across the globe.
But before we move on into 2020, let’s look back on the industrial gas year that’s just gone and some of our many learnings along the way. Here, I’d like to share some of my humble observations from 2019, both from developments in the industry and conversations with those within it. This is of course by no means a definitive or exhaustive list, but an abstract of four notable things we learned in 2019.
1. Air Products remains the benchmark in profitability
The last decade has seen a raft of mergers and acquisitions (M&A) in the global industrial gases business.
If we stretch that timeframe back just a little further, we can reflect on Linde’s capture of the BOC Group back in 2006/7 that really catapulted the newly formed The Linde Group to the forefront of the industry globally. That was the first ‘big deal’ in the business for many years and, for some time, it seemed like it might have been the last. The markets were in good shape for the industry, posting robust and regular growth.
In 2008/9, however, the global financial crisis of 2008/9 delivered us economic meltdown the world over and some austere years for the industry. Though typically robust and comparatively quick to return to strength, the years since the turn of this decade have seen many question where real organic growth is coming from. We were learning that trees don’t grow to the sky, I was told in many different adages, alluding to the sense of limit to the natural growth of the industry and its end-user markets.
When organic growth is in question, the business rationale tends to be to acquire growth and synergy and, after many quiet years on this front, the same question began to continually rear its head – is there room for one last big deal for the industry?
With Air Liquide’s $13.4bn acquisition of Airgas in 2015/16, we were given the answer to that question. But as it transpired, it was only part of the answer – the mega-merger of Praxair, Inc. and The Linde Group in 2018 compounded that response in the most comprehensive of manners.
While Air Liquide has been busy leveraging the benefits of its acquisition of Airgas almost four years ago, and the new Linde plc has been entrenched in getting to grips with its own integration and strategising synergies, another Tier One player has continued to plough a furrow in the industry with its admirably pragmatic and determined approach.
Air Products has become the gold standard in profitability and remains so as we move on into 2020. The company has excelled in its ‘laser focus’ on becoming the safest, most diverse and most profitable industrial gas company in the world since Chairman, President and CEO Seifi Ghasemi took the reins in 2014. In the five years since, the company has enjoyed five consecutive years of double-digit annual growth and its market capitalisation has leaped from $15bn to $50bn today.
According to analysis from gasworld Business Intelligence, Air Products again showed the highest underlying growth amongst the Tier One companies in 2019, ahead of its leading competitors, which are in a narrow range. Across all companies this underlying performance was driven by equal contributions from volume growth and the impact of pricing; in fact, pricing has made an accelerating contribution globally over the last three years, but that’s another story.
When it comes to Operating Return on Sales (OROS), a significant range in OROS has been seen across the Tier One competitors in 2019 (and historically) – with Air Products recording over 25%, a full five percentage points clear of the new Linde plc at just over 20%. Air Liquide, meanwhile, recorded OROS at a level of around 17% and TNSC was still below 10% despite the positive impact on margins of acquiring part of Praxair’s business in Europe.
It’s testament to the dogged determination of Ghasemi and his team that Air Products has continued to carve out such a foothold in these key metrics.
You get the impression that Ghasemi has been relatively happy to watch his fellow Tier One players distract themselves with their mega-mergers too, comfortable in the knowledge that Air Products is sustainably squeezing every last drop of profitability out of its operations and strategically shoring itself up where the future growth is. It’s no coincidence that the company has quietly gone about building its portfolio in gasification technologies, while at the same time building its geographical footprint in the high growth regions of both today and tomorrow like the Middle East, China and wider Asia.
And a key factor in the rising trend in global gases margins (such as OROS) has been the improvement in the Asia-Pacific for Tier One companies, which has risen close to profitability in the Americas and Europe. Air Products has clearly fortified its footprint in this region in recent years, particularly so in China.
As we close the book on 2019, it’s clear that Air Products is ticking many of the boxes for efficacy and financial success in the industry.
2. The market as we know it is changing…and fast
Something else I feel that we’ve really seen in earnest this year has been the changing face of the market – from the structure of the industry by company to the emerging applications windows of opportunity. The market as it was once known is most definitely changing.
As just discussed above, the Asia-Pacific region has certainly moved to the forefront as the destination market for high growth. Established economies like Europe and North America, while still robust, simply cannot compete with the high value opportunities offered in the Asia-Pacific right now.
The market is changing at a business model level too. In its analysis of the 2019 financial year, gasworld Business Intelligence notes that the growing capital intensity of the gases business has been substantially driven by a changing business mix towards tonnage onsites, and to a lesser extent bulk, and away from packaged gases.
Whilst the Operating Return on Sales (OROS) in industrial gases continued the rising trend of recent years to reach a new high of around 19% in 2019, in contrast, Operating Return on Capital Employed (ROCE) resumed a declining trend of recent years towards less than 9%, a new low. This contrasting pattern of profitability rates reflects the growing capital intensity of the industry, which has been significantly compounded by the balance sheet impact of recent major acquisitions and divestments through goodwill and retained cash. As a result, the ratio of ROCE to sales has risen by nearly 50% over the last five years.
In terms of specific supply chains, two particular gases are the subject of significant change right now, namely helium and CO2. As you can read in gasworld magazine’s upcoming January 2020 edition, the global helium business is about to change in a big way in the years ahead, with a swinging pendulum in geographical demand hotspots and change in how and where helium is sourced. This is arguably one of the most enterprising and exciting aspects of the ‘new normal’ helium business, challenging the established notion of this industry’s complex, costly and fragile supply chain.
“The subject of ‘circular economies’ and the CO2 business has been a regular talking point this year, and it’s clear that this supply chain is evolving beyond previous perceptions…”
Geologists and geophysicists for these companies are constantly striving to find new areas that they think are attractive for helium exploration, and it is true that these exploration efforts will still be subject to lengthy processes in surveying, permitting, and operational set-up. They may also be subject to seasonal factors or unforeseen complications. But they key differential is that they will not be linked to natural gas production – these will be helium-led explorations and scoped as such from the start.
And with so many significant new sources set to come on-stream from 2021 onwards, it’s projected that we could see a whole ‘new normal’ helium market by 2025 where over-supply is more likely than shortage.
The CO2 supply chain is also diversifying, again out of sheer necessity but also driven by the rise of clean energies projects that present opportunities in capturing waste CO2 streams and utilising that by-product. The subject of ‘circular economies’ and the CO2 business has been a regular talking point this year, and it’s clear that this supply chain is evolving beyond previous perceptions.
The geopolitical pendulum keeps swinging too, and has been an inescapable factor in the 2019 industrial gas year. While once we were all awash with the prospect of a Trump Administration four years ago, that soon became old news as ‘Brexit’ took centre stage in Europe, trade tariffs escalated between countries across the world, and now issues such as uprisings in Hong Kong challenge the world order as we knew it. Meanwhile, the debacle of Brexit still rumbles on…
Finally, there is change in evidence at an applications level too. The same non-cyclical markets (think medical or food and beverages) remain robust, if not full of growth opportunities, as we move into 2020 and will remain so by their very nature. Population growth, coupled with advances in technology, continue to pep up these steady markets.
But a number of newer, attractive and high-growth applications have really made the grade in the last year – think CO2 usage in marijuana growth which has been particularly huge in North America, or the rise of additive manufacturing (AM) and the use of a range of industrial and specialty gases in these processes. The clean energies sector has also grown in significance in 2019, which we’ll talk more about later.
3. Industry 4.0 has firmly arrived
As if there could have really been any doubt in the last few years, I believe 2019 has been a year of firmly announcing the arrival of Industry 4.0 and the digitisation of the gases industry. It’s been inescapable and I was proud to be part of leading the debate on this topic at gasworld’s Future-Proofing Industrial Gases Summit in Singapore in June.
From automation to e-commerce and virtual reality (VR) in-between, the industry is rapidly changing right in front of us, for the better. With digitisation we stand on the brink of a technological revolution that will fundamentally alter the way we live, work, and relate to one another.
This was not lost on Sanjiv Lamba, Executive Board Member for Linde plc and opening keynote at our Summit in Singapore. “As an industry, we need to recognise that the future is here today – some would argue that it was here yesterday. So the challenge ahead of us, in our industry, is enormous and it’s up to us to decide which parts of this are best or most important for us,” he said.
“It is a revolution that is happening – it is a revolution and it is a huge opportunity.”
Leveraging digital technologies has been another regular talking point this year, both publicly at conferences and events, and also on the sidelines of those gatherings and in interviews we’ve conducted throughout 2019. On the same stage in Singapore, Air Liquide’s Virginie Cavalli had enthused, “Digitisation is not a finite project, it’s a very exciting journey and a moving target.”
So far, we have arguably only taken the baby steps of this moving target being implemented in the industry, but there’s little doubt that 2019 was a pivotal year for digitisation in the gases industry and 2020 will see this accelerate further. That means the onus is on not getting left behind, as Anova CEO Chet Reshamwala explained at gasworld’s MENA Industrial Gases Conference 2019 in Dubai (UAE) earlier this month.
“The industrial gas supply chain is rapidly digitising, and companies that don’t embrace new technologies risk being left behind…You need to leverage the power of data, and we will partner with you in doing just that,” he said.
It’s clear that there will be so much potential to be leveraged in digitisation and reaching a level of ‘Digital maturity’ in industrial gases, and next year we will start to see the real fruits of these efficiencies emerge right across the value chain.
What digitisation will bring is a different way of thinking and interpreting connectivity and collaboration that already exists in our industry. We will take in new ways of collaborating, with each other and with our customers, taking the value add to whole new levels while also enhancing the efficiency gains. We will even collaborate subconsciously, and this will be crucial for the SMEs among us, as the first movers blaze the trail in digital and lay down the blueprints for smaller players to eventually follow.
We will arguably be better connected than ever before, not just in technology terms but in the local relationships and rapport that these technologies will inevitably enhance. We will be closer to our customers and meeting their needs than ever before. And our operations will be better connected over cyber-physical networks.
In future-proofing for digitisation, we are simply looking at a more connective gases industry. IG4.0, perhaps: a reinvigoration of our core pillars and values, a convergence of the new and existing and, hopefully, a whole new wave of growth and efficiencies. And what we learned in 2019 is that this is already happening, it’s here.
4. The industry has a major role to play in the clean energies transition
This is hardly anything ‘new’ as such, but in 2019 we have seen a crystallisation in the understanding of our industry’s imperative role in the clean energies transition.
The transition is simply impossible without the industry’s expertise in carbon capture, it’s knowledge of hydrogen as a molecule and energy vector, and it’s role in the safe and efficient distribution of LNG via road, rail and sea.
LNG will continue to grow in significance next year as IMO 2020 takes effect and the maritime industry implements a new sulfur cap on its fuels. Under the new global cap, in force from 1st January 2020 by the International Maritime Organisation (IMO), ships will have to use marine fuels with a sulfur content of no more than 0.50% against the current limit of 3.50%, in an effort to reduce the amount of sulfur oxide. The Emission Control Areas (ECAs) will remain at the 2015 standard of 0.1%S content.
It will also be another pivotal year ahead for hydrogen. This year was something of a breakout year for hydrogen energy, with recognition of its role in the energy transition only expanding and developments in technology, commercialisation and infrastructure build only accelerating. This was part of the reason for our launch of H2 View, a dedicated platform for hydrogen to press home this progression, to champion the challenges and opportunities it faces, and the exciting vision of the future. This was undoubtedly one of my proudest achievements personally and professionally this year.
The industrial gas and equipment business has an invaluable role to play in the hydrogen energy sector, in fact one might even describe it as being fundamental to its successful development, such is the industry’s knowledge and expertise of the molecule, its storage, handling and application. This is a point not lost on William J. Kroll, industry stalwart and gasworld Editorial Advisory Board member, who recently mused, “The use of hydrogen in all forms of vehicle fuelling is one of the bigger bright spots I’ve seen in my tenure with the industrial gases business industry.”
2019 has seen many very visible steps forward in this arena, and Linde taking a 20% share in UK clean energy firm ITM Power in October was very much a sign of the times. Not only was it a sign of the continued strength of ITM Power and a deepening of its five-year relationship with Linde, it was also another move into the hydrogen energy space by a Tier One industrial gases major.
In January 2019 we saw Air Liquide – via wholly-owned subsidiary the Hydrogen Company – acquire a stake in hydrogen generation technology specialist Hydrogenics Corporation on a private placement basis. Following completion, Air Liquide’s interest in Hydrogenics was expected to be approximately 18.6%. It also saw the appointment of Air Liquide’s Pierre-Etienne Franc to the Hydrogenics Board of Directors, effective immediately.
We also saw Linde invest in Swiss green hydrogen producer and supplier Hydrospider in August, taking a 10% stake in the company and reaffirming its commitment to hydrogen mobility in the process. Owned equally by H2 Energy and Alpiq, now with a 40% share each to Linde’s 10%, Hydrospider is building Switzerland’s first commercial hydrogen production plant. And then came the news of Linde’s investment in ITM Power.
It’s all a sign of the times, and the increasing emphasis placed on hydrogen as part of the energy transition and our industry’s role within that.
In summary
What a year it has been for our industry, for us all. It’s been a year of learning on so many levels – of geopolitical change, of business model evolution and perception change – not least in our industry and how it sits within others. And growth has been maintained throughout these times of change.
These are just four areas that I think have been worthy of mention, the question is, how many more could there be next year? Will we still be talking about these same points and their realisation, or will new hot topics emerge in 2020? Whatever happens, I can’t wait to share the journey with you all and you can be sure gasworld will have it covered.
See you then – thanks for your loyal support, and Season’s Greetings!