An update from the air separation industry, 20160711: The glory days of bulk gases are over – why are specialty gases in demand?

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Under the current circumstances, the conventional gas industry is likely to face more difficulties, while specialty gases stand out as the exception~~ The glory days of bulk gases are over; why are specialty gases so favored? ——Excerpt from “Zhuochuang Consulting Industrial Gases” Introduction: Driven by industries such as steel, chemicals, oil and gas, photovoltaics, and electronics, the market for bulk gases in China has seen rapid development in recent years, with high enthusiasm for investment in this sector. However, factors such as an economic downturn, weak trends in commodity prices, and increased efforts to reduce steel production have constrained market development, resulting in a poor overall performance for the specialty gases industry. As the bright side of this industry becomes obscured, many companies have begun to seek new paths forward. At this time, what advantages can the rise of special gases bring to the market? Can they serve as another bright element on the path forward for the industrial gases sector? 1. Review: What sparked the enthusiasm for bulk gases? China’s industrial gas market is considered the most dynamic in the world, and driven by industries such as steel, chemicals, oil and gas, photovoltaics, and electronics, the sector is experiencing rapid growth. Since 2000, China’s air separation industry has entered a period of rapid development, with large-scale air separation units being commissioned one after another. The annual growth rate of industrial gases has reached as high as 23%, fueling a surge in market investment. Essential and indispensable – capacity of this \"industrial blood\" is increasing rapidly. According to data from Zhuochuang, in 2014 China’s production capacity for liquid products obtained through air separation totaled 18.3327 million Nm3/h, representing an increase of 8.68% compared to 2013. In 2015, China’s production capacity for liquid products derived from air separation amounted to 20.0977 million Nm3/h, representing a 9.63% increase compared to 2014. This represents an increase of 0.95 percentage points, higher than the 8.68% growth rate seen in 2014. Gas outsourcing is highly sought after, with its market share gradually expanding. As new production capacity is continuously brought online in the domestic market, the gas outsourcing service is very popular. According to data from Zhuochuang, in 2015, the share of air separation capacity provided by domestic and foreign specialized gas companies accounted for 42%, up by 6 percentage points compared to 2013. Among them, foreign giant gas companies accounted for 20% of this total capacity; Linde and Air Liquide together accounted for 53% of the capacity produced by international giant gas companies, ranking at the top. Among domestic professional gas companies, Yingde and Hangyang have the largest air separation production capacity; followed by companies such as Baosteel and Shaanxi Gas Turbine, whose market share in China is also gradually increasing. The sluggish performance of downstream industries has severely impacted the profits of gas companies. While capacity expansion accelerates, demand fails to keep up. Affected by the poor conditions in downstream industries, some air separation units remain shut down for extended periods. Low prices and low operation rates further compress the profit margins of these gas companies. In 2015, Linde’s revenue amounted to 1,7944 million euros, representing a 5.3% increase compared to the previous year ； In 2015, operating profit was 4,131 million euros, representing a 5.38% increase compared to 2014, placing it in first place. Air Liquide’s revenue in 2015 was 1,6380 million euros, representing a 6.7% increase compared to the previous year. Meanwhile, Air Products and Praxair’s revenue amounted to 9690 million dollars and 10776 million dollars respectively, showing a year-on-year decline of 7.3% and 12.2%. Among domestic professional gas companies, Yingde’s net profit declined by 40.71% in 2015 compared to the previous year; although Hangyang Shareholding achieved positive growth during the same period, the increase was modest. The glory days are gone; finding a path through adversity. Although, initially driven by industries in the downstream sector, China’s industrial gas industry enjoyed a prosperous period that helped to write new chapters in the domestic gas market. However, due to the weak economy over the past two years, weak demand has gradually overshadowed the bright side of bulk gases; the industry is performing poorly and there is a lack of confidence in the market. Following the laws of market development, although the glory of previous years is no longer there, many companies in difficult circumstances are seeking new paths and constantly working on transformation. So what vitality does the rise of specialty gases bring to the market at this time? 2. The reality: The electronics industry is developing at a rapid pace, and specialty gases are in high demand. China’s specialty gas market started developing relatively late, which means there is a certain gap in technical capabilities compared to foreign giants; as a result, the specialty gas market has long been dominated by foreign companies. However, with the development of the national economy, and particularly the rapid progress of China’s electronics industry since the 21st century, domestic specialty gas companies have come to realize the importance of proprietary technology. China has made significant breakthroughs in areas such as the production and storage of specialty gases; many of these electronic specialty gases are now produced domestically, and in particular, ultra-pure ammonia and xenon have largely broken the monopoly held by foreign companies. The path toward domestic production has been embarked upon, with superpure ammonia experiencing rapid growth. Superpure ammonia is an essential electronic gas used in the production of LEDs, semiconductors, and photovoltaic devices. According to Zhuochuang Information, the domestic production of truly pure ammonia in China began in 2010. At that time, the only domestic manufacturers of pure ammonia were Collide, Guangmingyuan, and Lianhua Linde, with a total production capacity of only 6,500 tons per year. However, with the advancement of technology, ultra-pure ammonia in China has seen rapid development; in particular, it experienced a 184.6% year-on-year increase in 2011 and a 43.2% year-on-year increase in 2012. Subsequently, the supply shortage in the market was alleviated, and the growth rate of the ultra-pure ammonia market slowed down to 17.5%-22.6%. By 2016, China’s capacity for ultra-pure ammonia production reached 45,700 tons per year. Xenon has broken through technical barriers, enabling self-sufficiency in this \"golden gas\". China’s xenon market has developed rapidly; in 2010, the country’s production capacity of xenon was only 768 cubic meters per year, and domestic demand for xenon had to be met through imports. However, after 2010, the Chinese xenon market showed strong demand, prompting domestic manufacturers to start production. Especially after China overcame the technical barriers, the annual production capacity of xenon in the country reached 2,340 cubic meters by 2016; it shifted from relying largely on imports to achieving self-sufficiency, and now there is some export as well. 3. Future Outlook: Radiating into high-tech fields – great potential for specialty gases. The downstream applications of specialty gases are primarily found in high-tech sectors such as LEDs, photovoltaics, semiconductors, optical fibers and cables, integrated circuits, and research. Following the investment boom in the period 2010–2011, the LED upstream chip industry saw a rapid increase in the stock of MOCVD equipment, which is essential for the production of epitaxial wafers; the growth rate in 2011 was 145.6%. From 2012 to 2014, the industry gradually returned to a more rational state, with the domestic stock of MOCVD equipment growing at an average rate of 14.35%. This also means that the demand for electronic specialty gases in the LED industry will continue to increase at a rate of over 15% per year. In 2015, China’s new photovoltaic capacity added reached 16.5 GW, keeping it in the lead globally; the total installed capacity is expected to exceed 43 GW, surpassing Germany to become the country with the largest total photovoltaic capacity in the world. Our country has become the world’s most important manufacturer of photovoltaic products and the fastest-growing market for photovoltaic applications. In the integrated circuit industry, there is a trend of consolidation and mergers and acquisitions in the Chinese market, with several Chinese companies offering specific bids, indicating China’s ambition to enter this field. Although China’s overall economic growth rate has slowed down recently, the electronics sector – including LED, photovoltaics, semiconductors, optical fibers and cables, as well as research and development – continues to experience rapid development. It is expected that China’s installed capacity for photovoltaic systems will reach 23 GW by 2016. Overall, the traditional bulk gas market has performed weakly due to the capacity reduction in industries such as steel manufacturing. The high-tech downstream industries in the specialty gas market undoubtedly represent the key areas for development of the national economy in the future. Under such circumstances, the specialty gas market is bound to gain more momentum. Furthermore, in terms of the industry life cycle, China’s specialty gas market is at a critical stage as it moves from the growth phase to the maturity phase. **The importance of specialty gases in high-tech industries has been recognized, and relevant policies provide strong support and regulation; as a result, the potential of China’s specialty gas market is enormous.