“Where Has All The Argon Gone?”

Distributors have been asking this question a lot this past year. They were hearing: demand increase...short supply...damage post-Katrina. They were wondering: Is capacity kept tight to drive up pricing?...Does Wall Street pressure to show short-term performance?...Are hurricanes an excuse to raise prices, like oil?

Welding & Gases Today contacted the three largest U.S. producers of argon: Praxair (34%), Air Liquide (25%) and Air Products & Chemicals (18%) to find answers to Distributors' questions. One of them, Air Products & Chemicals, declined to comment. Representatives from Praxair and Air Liquide were gracious in shedding light on the situation and offered suggestions for Distributors.

Why is argon in such short supply at your company?
David Mudd: There were disruptions last year - hurricanes being one of them - that affected the oxygen demand on Air Liquide's pipeline networks. And of course when oxygen demand is reduced, argon production is also reduced. Perhaps more importantly, the industry has not built significant new capacity since 2005.

Kim Denney: This, coupled with the natural growth in the market for argon consumers, has raised demand to meet the available supply.

Peter Campbell: The hurricanes did not affect Praxair's level of installed capacity. The hurricanes did affect the rate at which some of Praxair's customers operate, affecting oxygen demand and, therefore, argon production capacity.

Dave Marek: Last year, Praxair experienced a downturn from many of our large steel producers, all of whom have a great demand for oxygen. Argon being the co-product of oxygen production, when one goes down, both go down. As the economy began to recover, the demand for argon increased, especially in the stainless steel and electronics industries. With less production in some areas and more demand for product in others, the argon supply equaled the argon demand.

Are all your air separation plants operating at maximum capacity?
Peter Campbell: Currently, Praxair's air separation plants are operating at high utilization levels. The operating levels of the individual plants are set after careful consideration of customer demands, operating costs and maintenance requirements.

Dave Marek: They are running near stated capacity.

David Mudd: Air Liquide's air separation plants are not 100 percent loaded year-round; we could never operate at that level and still maintain reliability of supply to our entire customer base. However, we preferentially load our air separation plants that have argon capacity in order to maximize argon production throughout the system.

Do all of your air separation plants produce argon?
David Mudd: No. When building a new air separation plant, the supplier has a choice to invest in argon capacity or not. It's typically done only on the larger plants because it is more cost effective.

Dave Marek: Not all Praxair air separation plants capture crude argon.

How much of this current argon shortage is reflective of the lack of additional capacity?
Peter Campbell: Praxair carefully evaluates market conditions on an ongoing basis and adds argon production capacity in conjunction with investments in air separation facilities when long-term business needs warrant this investment.

If there is such a shortage of supply, why not reinvest in adding argon to those plants?
David Mudd: Air Liquide is currently adding argon capacity in several different categories. Some of those are de-bottlenecking projects, and we are looking at just about everything we can do to produce more argon at our existing plants.

Dave Marek: Doing this requires a capital investment and we have to look at all the other investment opportunities that are available to Praxair. There is a priority list.

How does the swapping of product among major gas producers work? Does it affect the market in a time of shortage?
Kim Denney: There is no impact. A swap between suppliers has to do with our trucks driving past each other to make deliveries. So a truck starts at your left hand and drives toward your right hand. The other company's truck starts at your right hand and drives toward your left hand. If we are just driving past each other, it makes sense to swap products, so that my left hand truck stays near my left and my right hand truck stays near my right. It doesn't really change the number of molecules that are out there.

Peter Campbell: Producers do purchase and sell products to each other on occasion. This helps producers supply their customers when their own production in a certain geographic area is limited. During times of shortages, if Producer A has product available in a certain area, this product can be made available to Producer B, so that Producer B can continue to supply its existing customers.

INCREASING CAPACITY
Based on past growth, is there room for some expansion as opposed to zero additional plant capacity?
Dave Marek: Yes, but Praxair does not have argon-only facilities. It's necessary to have the corresponding oxygen demand, and that is the dilemma we are in.

Will plant expansions occur?
Dave Marek: Yes, I think there will be some expansions, by all the majors, just because of demand. Is that demand sustainable? We think it is for the foreseeable future, but it's difficult to look out beyond 12 to 18 months.

David Mudd: Any new argon capacity growth in the short term is going to be a function of suppliers optimizing individual plants. In the next 12 months or so, there really isn't a major air separation plant with argon capacity being built.

Kim Denney: So growth will be incremental and relatively small. Now the good news is that argon demand increases as the economy grows. So if the economy is growing at 3-4 percent, then argon demand is probably going to be growing at 3-4 percent.

Richard Murphy: Several Air Liquide distributors have experienced double-digit argon growth, and obviously these distributors are concerned.

Kim Denney: Is this specific to the distributor, or does that imply another distributor shrinking?

Richard Murphy: Specific to the distributor. We're seeing a load shift. Some distributors are very focused in new markets, specialty gases for example, and getting away from traditional welding gases, so there has been a shift in products within their own company.

Is there anything on the horizon as a new technology for sourcing argon?
Dave Marek: Argon is a small percentage of the earth's atmosphere, less than one percent. So for every molecule going through the air separation process, less than one percent is argon. There'd have to be a huge amount of oxygen/nitrogen flowing through a membrane in order to capture any argon at all. In some respects, Mother Nature is limiting us.

Kim Denney: Cryogenic air separation is still the most cost-effective methodology to remove argon from the air.

Are there any other large applications on the horizon that could require an air separation plant, which in turn could be a method for increasing argon?
David Mudd: Alternate Energy and Gasification projects have the potential for very large oxygen volumes. One of those projects could end up providing a very large argon capacity, but the closest one is probably five to ten years away.

So how do you increase capacity to meet the demand of your customers? What do you need to generate investment in U.S. argon capacity?
David Mudd: Typically, Air Liquide looks in the category of de-bottlenecking our existing plants. We'll add refrigeration capacity—by nitrogen injection and other means—at several plants to be able to produce an extra couple of tons per day of argon. Right now, Air Liquide has about 15 ongoing projects at existing facilities, and we will have a new plant in Texas which will provide argon in 2007.

Kim Denney: There are some very promising potential projects out there for us.

Dave Marek: The downturn in oxygen demand, along with the increase in argon demand, occurred faster than Praxair could react. Most of us are just taking steps to increase production and de-bottleneck some of our plants in order to produce more argon. That takes time, and that takes investment dollars. It is not something you can turn around and do in a 30-day period.

COST MUST JUSTIFY INVESTMENT
Most GAWDA distributors' companies are privately held, driven by their customer base. How should they handle Wall Street's focus on short-term profitability?
Kim Denney: Air Liquide projects long term. We've been working on expanding argon capacity for quite some time. We started to have an inkling two years ago that argon was going to become in short supply. We saw demand increasing and we knew there were no new ASUs being built to produce more argon. We advised our distributors to put themselves in a better position so they could firmly supply their own customers. We also began to look at the projects that David Mudd described. Right now, some are fully funded and working. New capacity came online this past summer, a process that began months ago. That doesn't happen quickly. You have to justify the investment, you have to put in the capital, you have to buy the equipment, you have to install it.

Kim, what is your ROI from an air separation plant?
Kim Denney: That is not something Air Liquide shares. As in every industry, you want to get a reasonable return on your investment. So, you can speculate on the return.

Dave Marek: Praxair does not share that information, either, and I am not at liberty to even speculate.

What rate of growth does Praxair expect with argon in the near future?
Peter Campbell: The market growth rate for argon has been in the range of 2% - 5% over recent years. The use of argon has grown in the basic steel, stainless steel, electronics and metal fabrication industries.

Do you predict shortage capacities for other gases?
Peter Campbell: Predicting future supply and demand of any product is a very difficult practice. Prudent users of any product should discuss these issues with their suppliers as part of their own contingency plans.

How's nitrogen looking?
Dave Marek: Nitrogen is increasing at its historical rate, but Praxair has not seen a huge increase in nitrogen demand.

Several producers seem to be interested in the potential growth of hydrogen fuel technology and medical gases, to the point of ignoring their traditional business, other than utilizing it as a means of finance. Will this happen with your company's business plan?
Kim Denney: Not with Air Liquide. Our core business is air gases. We are very interested in and are expanding hydrogen, and a lot of our new projects are hydrogen-focused. That does not mean that we have taken our eye off the ball in air gases. It is part of our name, it's who we are, and we are proud to be in air gases.

Will industry consolidation have any impact?
Kim Denney: I don't believe it will have any effect on argon sourcing and supply. There is production capacity today. That same production capacity will be there tomorrow. It may have a different name plate, it may be painted a little differently, but that same capacity will still exist.

Dave Marek: It certainly is not going to change product availability, because the same number of plants are going to be present out there.

SHORTAGE SOLUTIONS
Kim, how did Air Liquide's Distributors respond when you advised them two years ago to prepare for an argon shortage?
Kim Denney: I think people listened, but not many distributors turned around and said, “My contract is expiring in six months, I want to make sure I have access to firm supplies, let me renew.” Fast forward to January 2006, and they really saw that argon was hard to put their hands on from all suppliers. Now, they're knocking on our door saying, “Do you have any argon? I'm looking for argon.”

Dave Marek: It becomes an issue of educating the customer to the severity of the problem. In the near term, this is the situation we are in with argon. We expect the economy to remain strong and robust this year and with that, the demand for argon to continue to remain strong.

Is there something specific GAWDA Distributors can do now to deal with shortages?
Peter Campbell: Praxair recommends that users of industrial gases exercise good business judgment in selecting a supplier. Understand that supplier's capabilities, both locally and nationally, to assess the supplier's ability to deal with production and distribution challenges. Choose a supplier with a proven track record of safety and reliability.

Richard Murphy: The best thing they can do for their business is come and talk to us now and firm up their argon agreements. Let us know what type of programs they are looking at in the future. We need information to move forward.

Dave Marek: Distributors need to remain very close to their argon suppliers. Look at the suppliers' reliability record and make decisions based on that reliability and the kind of distribution network each has. Know their capabilities and their supply history. Be sure to understand the terms and conditions of the agreement. And they need to educate their customers to help them understand the issues around argon and argon supply. This is key. Distributors need to rely on their suppliers to work with them to educate their customers.

Let's go outside the box. Transport is one your bigger costs. What if Distributors invested in their own transport system?
Dave Marek: Transport is only one element. The production piece is still the biggest and key piece of it all. This is where Distributors have to monitor the supply-demand ratio and have those conversations with their suppliers. It is so difficult for the supplier to estimate or predict demand very far out into the future. If we could do that, we would never have had this shortage.

What if 8 to 10 smaller distributors, all located in a metropolitan area, get together and build their own air separation plant and figure out how to transport. Could that happen?
Dave Marek: If the past is any indication of the future, the answer is probably no. Just because of the amount of investment dollars required. The other thing that is difficult to predict today, and we have not addressed this, is the changing energy situation. Argon costs are directly tied to power costs, and with more and more states deregulating energy, cost is becoming a much bigger issue for all of us. The power grid is one more thing to factor in. There are many more variables today for the distributor to think about than there were just five years ago.

Such as?
Dave Marek: The initial capital investment of the plant, the size, power rates, and then loading. Can they consume and sell what is produced by the plant?

What if these 8 to 10 Distributors invested in a new plant with their producer?
Dave Marek: Wow, you just stepped off into something that I really hadn't thought about.

Say those 8 to 10 Distributors just purchase an argon tank together and take that tank to any plant that would give them the best spigot price; your transport costs are eliminated, and the Distributors assume those costs. Is this a possibility?
Kim Denney: I think my distribution is going to be more efficient than the distributors' distribution. I get to touch many different customers and I have flexibility on not only where I go, but how often I go there. If those 8 to 10 Distributors from an East Coast metropolitan area say, “Let's drive to Florida and pick up a load,” what happens two weeks later when two of the guys desperately need argon and the other guys don't need it yet? So now that truck has to drive and bring back only a quarter of a load, and that is not very efficient.

How did you prepare for the 2006 hurricane season?
Peter Campbell: Praxair performed contingency planning to protect its assets, including sourcing critical spare parts, ensuring maintenance is performed on schedule, and protecting fixed assets as appropriate. These plans include prudent placing of distribution assets once the location of hurricane landfall is known.

Is your supply of argon now able to meet the demand?
Kim Denney: Air Liquide is in very good shape. We still have argon available for purchase. We are investing, and there will be more argon available. And because we have a very good infrastructure to distribute this argon across the U.S., using our fleet of rail cars and trucks, we are very, very flexible and able to serve a myriad of distributor requirements.

Dave Marek: Praxair did not run out or curtail any of our argon customers last year. With our network of plants and delivery equipment, we were able to meet our customer demands last year. For Praxair, the answer to that question is yes.