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Gases Still on the Rise

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Bolstered by demand from the energy sector and a strong global manufacturing environment, industrial gases makers seem immune to rumblings of an industry slowdown.

Sector revenues hit $55.4 billion in 2007, up 7%, on solid volume growth, higher selling prices, and currency exchange effects, says John Campbell, president of consulting firm J.R. Campbell & Associates (Lexington, MA). Major industry players forecast another strong year, as ou r cover story shows (p. 17).

Consolidation and fortunate exposure to some of industry’s most attractive growth opportunities—most notably energy, health care, and industrial development in emerging markets—has placed gases makers in a very comfortable position.

A report from Citi’s North American chemical analyst team, led by P.J. Juvekar, bears this out. The report issued last week dubs the past 10 years for U.S. chemical makers as the “Lost Decade,” with share prices for many companies moving sideways.

There were clear performance differences among sub-segments in the U.S. chemical industry, Citi says. Commodity chemical makers on average delivered an annualized return of 3.3%, compared to 5.9% for companies in the S&P500 index. Specialty chemical makers beat the S&P with a return of 8.3%/year, while industrial gases firms were the strongest performers with returns of 14%/year.

“Gases took advantage of consolidation and benefited from high energy prices,” Juvekar says. Consolidation has helped producers generate pricing momentum while exhibiting better capital discipline, as the number of global gases companies dwindled from 10 in the mid-1990s to only 4 today, he adds. “Gases are not economic to transport long distances and that makes [gases] a nonglobal industry,” Juvekar says. That type of barrier combined with key growth drivers—including projected increases in hydrogen, coal gasification and oxy-combustion applications—are expected “to have a significant impact on earnings going forward,” he adds.

The long-term nature of their contracts provides clear operating visibility for industrial gases makers and, barring a global economic meltdown, producers are well-positioned to continue to deliver solid results into the foreseeable future.

—robert westervelt robw@chemweek.com

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