Praxair, Inc. (NYSE: PX) is the largest industrial gases company in North and South America by sales, and among the biggest worldwide. Its primary products are atmospheric gases (gases that can be extracted directly from the air, such as oxygen, nitrogen, and argon) and process gases (gases that must undergo special processes to be manufactured, such as hydrogen, helium, and carbon dioxide). The company's gases are used in many industrial processes, such as the production of steel, semiconductors, medical devices and oil.
The industrial gas business is regional in nature because transporting industrial gases over long distances (more than 250 miles) is cost-prohibitive due to the high expense of liquefying gas for long periods of time. Because industrial gases are commodities that are fairly cheap to produce, customers are often unwilling to pay high shipping costs. A majority of Praxair's operating income comes from long term (usually 10-20 years) contracts, in which the company builds plants for the customer, at the customer's site. This is capital intensive but has the benefit of allowing PX to deliver gas more cheaply by cutting out transportation costs altogether. The long length of the contracts also ensure steady sales.
As the foremost industrial gas provider in the emerging markets of Mexico, Brazil, China, and India, by sales, Praxair is poised to benefit from rapidly expanding usage of gases in these countries. These countries have very low per capita but rapidly rising consumption of gases compared to the U.S. and thus represent large potential markets for Praxair.
Praxair is one of the few companies that benefits from rising oil prices. Hydrogen is one of the company's staple gases and plays an important part in the process of extracting crude oil. As world demand for energy grows, so too will demand for hydrogen gas as more non-conventional oil is used. Although energy costs are the company's largest expense, that nature of its long term contracts allows it to pass along some of its energy costs to its clients.
Praxair does business in over 40 countries, but focuses on eleven core geographies where the company has large amounts of capital on the ground, which lets the company deliver its products to the customer at the lowest cost. 59% of the company's sales come from overseas.
Almost all of Praxair’s sales are generated from the sale of industrial gases in four regional segments: North America, Europe, South America, and Asia.
Gas sales and distribution methods were broken down as follows:
6% of total sales were generated by the Surface technologies segment, which supplies high-performance coatings to protect metal from wear, corrosion, and high temperatures. Surface technologies sales came mostly from the United States and Europe, with smaller operations in Asia and Brazil.
Praxair is the leading industrial gas provider in several emerging markets, such as Mexico, China, India, and especially Brazil, where is has a 65% market share. Because per capita gas consumption in these countries is as low as 1% of that of the United States, demand in these markets will continue to grow for some time. Praxair’s solid position in China is demonstrated by its contract that provided drinking water to the Beijing Olympic Games. China’s huge coal-gasification projects also provides a substantial upside to Praxair's business in that country.
A worldwide helium shortage began towards the end of 2007, due to increasing demand and diminishing world helium reserves. Helium is important to many sectors, including the manufacturing and healthcare industries, both of which are major end markets for Praxair (see above). Praxair stands to gain from a similar opportunity with hydrogen. Hydrogen is a key component in the production of heavy and non-conventional crude oil, such as tar sands or shale oil. Because such production is growing rapidly , hydrogen consumption will increase correspondingly.
As discussed above, hydrogen is an area of increasing growth for Praxair. Hydrogen processing plants, however, have been identified as a source of carbon dioxide emissions under California law. On the other hand, environmental legislation and regulation of other industries provides Praxair with a business opportunity, as it continues to develop application technologies that reduce customers’ energy consumption and lower emissions.
Energy is the single largest cost item in the production and distribution of industrial gases, in the form of electricity needed to power separation plants and oil for delivery trucks. As such, increasing energy costs have the potential to damage Praxair’s margins if it cannot pass through increased energy costs to customers. The company notes, however, that the supply of energy has not been a significant issue in the geographic areas where the company conducts business.This is in part due to the fact that Praxair's long term contracts often include clauses that allow it to pass along some or all of its energy related costs. Note, however, that increasing energy demand is also causing use of heavy and non-conventional oil (oil extracted from tar sands, shale oil, or other non-traditional sources) to rise. See above section on hydrogen for how this affects Praxair.
Many major car companies, including Honda Motor Company (HMC) and Bayerische Motoren Werke AG (BMW), have released cars that use liquid hydrogen as a fuel source. While these vehicles are not yet ready for mass consumption, hydrogen-powered vehicles do have the potential for commercialization in the future. However, in addition to further development of hydrogen-powered technology, new infrastructure, such as hydrogen refueling stations, would need to be built and hydrogen-powered vehicles would have to meet stringent safety requirements. Furthermore, a challenge to hydrogen-powered cars has appeared in the form of electric cars that can simply be plugged in to charge, such as the Tesla Roadster or GM's Chevy Volt. This being said, if hydrogen-powered cars do become commercialized in the future, it would greatly stimulate demand for liquid hydrogen and could thus positively impact Praxair's business.
Since the late 1990s, the industrial gas industry has seen a wave of consolidation that led to the current oligopoly; Praxair, along with the above three major competitors, form the global industrial gases oligopoly.