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In the last two years, distributors have begun to see price increases
from their industrial gas suppliers steeper than many have seen in recent
memory. What's behind the increases? To get the answer, Welding & Gases
Today spoke with Air Liquide America L.P. President Kim Denney.
Editor's Note: BOC Gases and Praxair representatives
declined to be interviewed on the subject of prices. An Air Products representative
was only available via e-mail.
Welding & Gases Today: What
is behind the price increases distributors have been seeing?
Kim Denney: A very healthy U.S. economy. Distributors are seeing
significant growth, which has increased demand and tightened the supply,
particularly since early 2006. We've also seen the prices of production-
and distribution-related raw materials go up, such as gasoline, diesel
fuel and electricity, and new technology is creating new markets, which
increases manufacturing demands.
Are there any gases for which prices haven't gone
up?
I can't think of a gas that we haven't been forced to raise prices on
in the last year. Transportation and other costs have ultimately resulted
in increased costs for distributors.
What other factors go into the decision to raise
prices?
The one thing that is most important to our distributors is reliability.
It's critically important that they have the product they need when they
need it, and part of assuring that reliability is having sufficient capacity.
To increase capacity for production, we need to be able to justify reinvestment
in the business, and our pricing must reflect that.
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| “We're looking at opportunities for individual customers
to use substitute sources of material, i.e., an on-site nitrogen
generator instead of liquid supply.” |
— Kim Denney
Air Liquide America L.P. |
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Why is reinvestment so important right now?
In the late 1990s and early 2000s, prices were down or flat for many products
because there was excess supply. As a result, many large industrial gas
companies likely went for an extended period of time without having to
invest in liquid oxygen, liquid nitrogen and argon capacity in the U.S.
Now demand has risen above or to the level of supply capability in certain
U.S. markets. It's an accepted business principle that prices need to
reflect enough return to justify putting more plants in the ground, and
higher raw material and construction costs mean it costs more to build
a plant today than it did ten years ago. For many years, if a plant went
down, we were easily able to make deliveries to a distributor with very
little added cost because a nearby plant would have excess capacity. Today,
with all the plants running at a higher rate, we may have to ship product
from farther away, which costs more money.
How much greater is supply now, compared to when
demand and prices were lower?
I would estimate that, industry-wide, capacity utilization has increased
by 10 to 15 percent since that period of time. Demand has outpaced growth.
Many industrial gas companies have started publicly announcing construction
of new plants. These new plants should help to better match supply and
demand, while producing better ROI than the industry experienced in the
1980s.
What is Air Liquide doing to help increase the
available supply of gases?
We're building air separation plants, de-bottlenecking existing facilities
and adding argon capacity. We're also looking at opportunities for individual
customers to use substitute sources of material. For example, some customers
who take liquid supply can use an on-site nitrogen generator that provides
them with gaseous supply, which frees up that liquid. We're increasing
storage capacity and our fleet of trucks and rail cars. We are constantly
reviewing and trying to improve operational efficiencies.
Will prices stabilize?
Distributors and industrial gas manufacturers absorbed a lot of costs
though efficiency programs during the late '90s and early 2000s. If demand
is ever-increasing, we're going to need the capability to reinvest in
the business. So will it stabilize? I am sure prices will stabilize when
demand and supply are more in balance than they are today.
How has Air Liquide communicated with distributors
about rising prices?
We've been communicating with them about the supply/demand situation.
At the 2005 GAWDA Convention, I told our distributors that argon was getting
tight and it was very important that they make sure they had solid contracts
with their customers and suppliers. Certainly we have price announcements
that go out to the media, but, more important, we have one-on-one discussions
with our distributors. If costs are going up, our distributors need to
be educated so they can educate their customers.
What advice do you have for distributors facing
increased gas prices?
Distributors need to be educated about supply and understand what affects
pricing so they can educate their customers. I'm a firm believer in education,
and understanding really does help a distributor's relationships with
his or her customers. So if there's any advice, it's to make sure those
end-users clearly understand what affects market prices.
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