By KIMBERLEY GILLES, associate editor

Rick Montagne, an Airgas bulk gas specialist, describes a new bulk tank installation.

From May to October, the major producers of industrial gases announced that they would increase prices for their gases by 10 percent to 20 percent. Airgas Inc. (www.airgas.com), the largest distributor of industrial gases in the United States, started the round of price increases with its May announcement that it would boost the prices for argon, hydrogen, helium, acetylene and other fuel gases 10 percent to 20 percent. Later, Praxair Inc. (www.praxair.com) announced 10 percent to 15 percent increases for some of its gases, including argon; Air Products and Chemicals Inc. (www.airproducts.com) increased its prices by 10 percent to 20 percent; and Linde Group (www.linde.com) said in October it would raise helium prices in the United States by 10 percent.

This latest round of price increases for industrial gases comes as no surprise to those with an eye on the economy and knowledge of how industrial gases are produced.

In making these announcements, each company cited a variety of factors, most often higher prices for energy, including the cost of electricity used to operate their production plants, and to transport the gases to distributors or end-users. (See Table 1.) These price increases also are related to tighter supplies and changing supply sources. For example, the production of argon used for welding historically has been tied to the production of steel and chemicals. The decline of steel production capacity in the United States has caused a similar decline in the availability of argon. (See Table 2.)

The relationship between steel production and the supply of argon was made clear by Airgas Inc. when it announced last year that it would boost the price of argon. The company cited higher product costs from its suppliers, a tightening argon supply across the United States and its customers' continued high demand for argon.

"Most argon production is tied directly to air separation units built to produce pipeline oxygen for steel and chemical customers," said Tom Thoman, vice president, gases, for Airgas, in a press release announcing the price increase. "As demand for steel has softened, gas producers report a sharp reduction in oxygen demand from their steel customers. This has forced gas producers to either curtail argon production or operate plants for argon only, which is a high-cost operating model, and implement price increases." Thoman added that the company also incurred higher distribution costs because it must transport product greater distances to meet customer demand. In 2006, transportation costs continued to climb as the prices for diesel and gasoline continued to rise.

Where the gas comes from
The air we breathe - when it is dry - is composed of 78.1 percent nitrogen, 20.9 percent oxygen, and 0.934 percent argon. The remaining gases, including helium, neon, krypton, xenon and radon, make up 0.066 percent of the air. The oxygen, nitrogen and argon used for welding commonly are obtained by air separation, as are rare gases (xenon, krypton, neon). These are known as "air gases." Other welding gases, such as hydrogen, helium, acetylene and carbon dioxide, are known as "process gases" - they are made as byproducts or co-products of processes designed to make other chemicals or products. Process gases are present in the air, but are too costly to be used to produce welding gases. However, those costly, specific operations are used to produce highly pure quantities of these gases for use in medical and other applications.

A little chemical engineering
The process most widely used to separate gases for a variety of industrial uses is based on making air extremely cold, and separating the gases as they liquefy. This process is known as cryogenic separation.

Cryogenic separation relies on the differences in boiling points of the various gases to separate them, and produces large quantities of the desired products at acceptable levels of purity. In general, cryogenic separation begins with filtering and compressing air (to about 90 psig, or 6 bar), then proceeds to remove contaminants, such as water vapor and carbon dioxide. The air is cooled to very low temperatures (approximately -300 degrees F); and it is distilled to produce separate gases.

Cryogenic separation requires a lot of electrical energy to cool the gases to the extremely low temperatures, and the amount of energy required depends on the product mix and the purity levels that are required. A gas separation facility can be designed and adjusted to produce quantities of nitrogen, oxygen and argon, or nitrogen and oxygen only, or oxygen and argon only. Using cryogenic separation to produce gases in liquid form requires more than twice as much power as the production of the same gases in gaseous form, or non-cryogenic separation, according to Universal Industrial Gases Inc. (www.uigi.com).

Non-cryogenic gaseous separation uses near-ambient temperature processes that rely on the differences in the molecular structure and molecular weights of gases to differentiate them and to separate them mechanically. Non-cryogenic processes include pressure swing adsorption, vacuum swing adsorption and membrane separation, and tend to produce gases with high purity levels.

Carbon dioxide, a process gas
Like argon, the production of CO2 is affected by economic factors that are not directly related to the gas. Production of CO2 in the United States is concentrated in the south, midwest and west, with no production in the northeast.

The atmosphere does not contain sufficient quantities of CO2 to make extraction commercially viable, so commercial quantities of crude CO2 are produced from natural wells and from such processes as fermentation and the synthesis of hydrogen and ammonia.

The largest source of crude CO2 is underground wells that hold the gas at concentrations of nearly 100 percent. Large carbon dioxide wells are in Colorado, Mississippi, New Mexico, Utah and Wyoming.

The other significant source is the fermentation of sugars and starches that produces ethanol and carbon dioxide. The United States government encourages this process by exempting agricultural-based ethanol-gasoline blends from motor fuel excise tax. That indirect government support has helped to increase the ethanol fermentation process's share of the CO2 supply market by more than 10 percent in the last decade.

Large quantities of high quality carbon dioxide gas also are produced as a by-product of the facilities that are designed to produce hydrogen and ammonia. These plants use steam to break down natural gas, liquefied petroleum gas or naphtha into their component gases - hydrogen, carbon monoxide and carbon dioxide. The carbon monoxide is removed in a catalytic process, and the hydrogen and CO2 are separated. Hydrogen and ammonia facilities use large quantities of natural gas, and recent increases in the prices for natural gas has reduced their output. This has reduced the supply of CO2 from these facilities. Also, the cost of processing waste CO2 produced at these facilities has increased because of new technologies that improve their production of H2.

Another factor that is contributing to tighter supplies of industrial gases is the high cost of building new capacity. As with argon and CO2, installing new production capacity requires a large capital investment. The demand for a high return on such an investment to satisfy shareholders and investors has been a compelling reason for industrial gas producers to curtail those capital investments in recent years.

Industry structure
The industrial gas industry in the United States has two sectors - manufacturing and distribution. These sectors can be further divided into three market segments - users who receive products via pipelines, users who have fluctuating demands or multiple locations, and users who receive gas products in cylinders.

The major producers of industrial gases are Praxair Inc., Air Liquide America (www.us.airliquide.com), Air Products and Chemicals Inc., and Linde Group. Airgas Inc. purchases the gases it distributes from these producers, and operates six air separation units with its joint venture affiliate, National Welders Supply Co. (www.nationalweldersupply.com), that produce 1,800 tons of industrial gases per day.

Acquisitions over the past few years between these producers have realigned capacities in the United States. For example, Germany-based Linde AG's recent acquisition of BOC Group plc of England resulted in Linde divesting eight air separation units and related assets in the United States. These assets now are being held in trust, and will be sold.

Market segments
In looking at market segments for industrial gases, the largest segment in terms of volumes of gases consumed turns out to be one of the weakest in terms of sales because the pricing structure is based on the extreme efficiencies of its delivery system.

This first segment includes users who receive their gas by pipeline from the gas production facility. A typical on-site, long-term contract has a gas supplier building and owning a production plant at or adjacent to a user's production facility, and has the customer agreeing to purchase a specified volume of gas. Supply contracts for these customers often include clauses to adjust gas prices for increases in energy prices, and other factors. Gases sold to customers in this group are measured in volumes of tons-per-day, and are the most cost-effective. Sales of onsite gases account for 77 percent of the total volume of industrial gases sold in the United States, but contribute only 26 percent of total sales to producers.

For example, Airgas announced in October that it would build an air separation plant at Dow Corning Corp.'s (www.dowcorning.com) chlorosilanes and silicones plant in Carrolton, Ky. The plant is designed to supply gaseous nitrogen, giving the project a key base-load pipeline customer, according to Airgas. "When completed in late 2008, the plant will have the capacity to liquefy at least 350 tons per day of nitrogen, oxygen and argon," Airgas said in a prepared statement. That means Airgas will be able to provide oxygen and argon - the air gases that are not required by its primary customer - as bulk and packaged gases in the surrounding region. Those air gases likely will be sold in cylinders. Importantly, the cryogenic plant is designed to be expanded so it could support additional customers, the company added.

When Linde AG acquired BOC, the U.S. Federal Trade Commission noted in a complaint related to the acquisition that entry into the liquid oxygen and liquid nitrogen markets "is costly, difficult, and unlikely because of, among other things, the time and cost required to construct the air separation units that produce liquid oxygen and liquid nitrogen."

Building a commercially viable air separation unit represents an investment of $30 million to $40 million, and the Federal Trade Commission noted that it is not economically justifiable to build such a unit unless a sufficient amount of its production capacity is pre-sold before construction begins. "Such pre-sale opportunities occur infrequently and unpredictably," the commission said in its complaint. The Federal Trade Commission's complaint underlined the difficulty of entering into this market segment for gas production, and forced Linde to agree to sell the eight air separation units that are being held in trust as a way to maintain a degree of diversity in the production of industrial gases in the United States.

The next major market segment includes the customers who have fluctuating demand or who operate multiple facilities in scattered locations. They often buy industrial gases under short-term contracts of less than five years in duration. Gas suppliers deliver gases to these customers in bulk volumes, typically in liquid states, in cryogenic tank trucks or in cryogenic railcars. These industrial gases are shipped and stored in liquid form because of volume constraints. For example, liquid oxygen requires less than 1 percent of the space required to contain the same amount of oxygen in a gaseous state. These bulk sales of industrial gases account for 21 percent of gas volume, and provide 35 percent of sales value to gas producers.

The final segment of the industrial gases market is the long list of customers who purchase gases in cylinders. Cylinder gas, which is typically called packaged gas, is more expensive than the industrial gases that are delivered either in pipelines or in bulk for several reasons. The foremost expense in packaged gas is the handling of the gas and cylinders: A typical tanker truck carries the equivalent of 1,600 large cylinders, while ten train cars carry the equivalent of 57,000 cylinders. Moreover, gases in cylinders have additional costs because of the gas residuals that are left in cylinders and that must be purged before the cylinders are recharged, and because of the time needed to change cylinders. The sales of packaged gases is the most expensive way to take delivery of industrial gases: While gases sold in cylinders account for 2 percent of volume, they contribute 39 percent of sales value to industrial gas producers.

The distributors
The packaged gases industry in the United States developed as small, local businesses spread across the country because packaged gases are costly to transport over great distances. Over the last decade this segment of the industrial gases industry has contracted because of consolidations, and continues to narrow as consolidation continues. Airgas has more than 900 locations and accounts for more than 20 percent of the $9 billion gases and welding supplies distribution market, and it continues to acquire distributors. Airgas has acquired more than 320 distributor businesses in its 24-year history. "With more than half the packaged gas industry still made up of independents (approximately 57 percent), we should have plenty of opportunities to add to our national footprint," said Peter McCausland, chairman and chief executive officer of Airgas in announcing his company's acquisition of 14 locations from Union Industrial Gas Group in 2003. So, Airgas continued to make acquisitions over the past three years, including the purchase of additional operations of Union Industrial Gas Group that it announced November 1. That announcement marked the fifth acquisition for Airgas in its current fiscal year, which ends in March.

Airgas is not alone in its moves to consolidate the industrial gases distribution business. Matheson Tri-Gas Inc. (www.matheson-trigas.com), one of its primary competitors in the distribution market and a gas producer, acquired Linweld in July. Matheson Tri-Gas is, in turn, owned by Taiyo Nippon Sanso Corp. (www.tn-sanso.co.jp/en).

Table 1: Industrial gas manufacturers' costs for fuel and electric energy for heat and power
	2004	2003
Cost of purchased fuels and electric energy (x $1,000)	1,002,989	972,900
Electric energy purchased: Quantity (x 1,000 kWh) Cost (x $1,000)	22,026,212 888,693	21,250,856 874,218

Source: U.S. Census Bureau

Table 2: Production, imports and apparent consumption of industrial gases by type for 2003 and 2004
Apparent	Production		Imports		Consumption
	2003	2004	2003	2004	2003	2004
Acetylene (million cubic feet)	1.468	1.591	N/A	N/A	N/A	N/A
Carbon dioxide, gas liquid, and solid (tons)	14,928,042	12,307,663	32,128	45,388	14,833,679	12,2390,819
Argon (million cubic feet)	23,802	21,471	848	848	18,858	17,056
Hydrogen (million cubic feet)	624,611	507,684	4,767	5,509	615,429	498,678
Nitrogen (million cubic feet)	940,783	926,057	2,260	2,084	939,158	925,386
Oxygen (million cubic feet)	724,233	672,744	459	1,165	721,973	670,908
Note: The U.S. Census Bureau has discontinued the MQ325C quarterly, industrial reports, which cover industrial gases. Source: U.S. Census Bureau

Image courtesy of Air Liquide