Investor's Business Daily, September 7th, 2007
Car makers tout hydrogen fuel cells as a contender for the next wave in clean, green and fuel-efficient cars. But how to safely get the hydrogen into them is a key question.
Compressed hydrogen can be unstable; it can blow up if not treated properly.
A company called Air Products & Chemicals APD is working on the problem. At the New Energy Symposium and New York Hydrogen Expo in July, it showed off what it calls a mobile hydrogen fueler, filling up six vehicles.
The event was one of the first to show a way to "safely transport this hydrogen fueling technology," said the company's business manager, Bob Kelly, in a press release.
Air Products, which already has a permanent hydrogen fueling station in Albany, N.Y., is one of a group of companies that make specialty chemicals or gases.
Spiritus Consulting analyst Andrew Lowe says in the specialty chemicals business innovation often means using common chemicals, such as hydrogen and oxygen, in new ways.
"There are always new uses emerging," Lowe said. Xenon, for example, has been around a while in products such as xenon headlights. But it turns out that the gas works well as an anesthetic. So Lowe sees high potential demand for it.
Industry reports say that anesthesia machines that can deliver xenon are about to hit the European market.
It's just one development that has helped propel specialty chemicals to No. 28 among IBD's 197 industry groups.
1. Business
The specialty chemicals industry is diverse, but it's consolidating.
Case in point: specialty gases, the largest segment of the industry group. A decade ago, there were 10 large suppliers in the U.S.
Today there are only five: Air Products, Airgas ARG, Praxair PX, Air Liquide in France and private Matheson Trigas, Lowe says.
The 53 companies in IBD's Specialty Chemicals group have combined annual revenue of $78.2 billion.
A few specialty gas companies are midsize, and there are some 30 to 40 very small companies. Many of the smaller ones are located in the South, near oil exploration sites that use a variety of gases in their processes.
Praxair Chief Financial Officer James Sawyer says he's concerned about an ongoing shortage of qualified workers.
"There's a skilled labor shortage, one that most people aren't aware of. And it's limiting growth in our industry," he said.
Chemical engineers and project managers are in short supply, along with skilled crafts workers such as electricians and pipe welders, Sawyer said.
It's a global industry. Ceramics maker Ceradyne CRDN in June opened a 100,000-square-foot plant in China. Most of the big companies have sales or marketing operations there.
Name of the Game: Growth for specialty chemical and gas firms mainly comes from finding new uses for existing substances, not from creating new ones. Successful specialty chemical companies work closely with customers to develop these new uses.
2. Market
Companies in this segment deal with everything from standard gases, such as hydrogen and oxygen, to fancier materials, such epoxies used in steel and concrete to chemicals for making computer chips.
Industrial gases make up the biggest sector. These gases go into medical and energy products, food and beverage making, manufacturing, aerospace and electronics. There's almost no aspect of everyday life that they don't touch.
The outlook for specialty chemicals makers is good. The end markets that these companies serve are diverse so that even in a slowing economy, this group generally fares well.
Lowe says although most economists expect the overall economy to slow sometime during the next five years, he expects specialty chemicals and gases to keep on rolling. He sees 6% annual growth over that period.
"The specialty gas and chemicals market is such a wide range of different industries," he said. "That's why we're expecting growth even through a downturn."
3. Climate
One of the healthiest segments involves the chemicals used to make ceramic materials. Costa Mesa, Calif., ceramics maker Ceradyne has carved out a lucrative niche selling ultrahard ceramic materials to the military, solar cell makers and others.
Ceradyne's sales have roughly doubled in the last two years, from $368 million in 2005 to about $738million today.
Some of the specialty chemicals companies make products for the housing market. Companies such as privately held Valstar in Seattle, which makes coatings and paints for houses, are liable to feel the effects of the current housing market slump.
But bigger firms such as Air Liquide and Praxair have a wide customer base, so they haven't felt the sting of the housing downturn.
Industry partnerships are rare. Specialty chemicals makers work closely with their customers to develop new ways of using the gases and chemicals. They don't want to share with rivals the proprietary processes and methods they're developing.
One exception is on the purchase of bulk materials. They sometimes team up to buy materials to keep costs down.
4. Technology
The technology that companies use to extract gases from the air hasn't changed much in recent years. But the uses for the gases have multiplied.
Chemical companies use various methods to extract gases from the air.
One is using cryogenics -- that is, freezing air until it becomes liquid. At that point, it's easier to separate the various gases. This method is precise and clean.
Companies collect gases this way and sell them to medical device makers and for food preparation. For example, food makers use liquid nitrogen to freeze foods.
A less costly method, using a polymer fiber membrane to strain the materials out, yields slightly less pure gases -- something on the order of 99% pure. They sell gases collected this way to steel makers and others who don't need the highest purity.
Inventors are constantly finding new uses for the gases. One example is a new method Praxair has developed to inject oxygen into a furnace for more efficient heating.
The method of getting oxygen hasn't changed. But the way the customer uses the oxygen has.
5. Outlook
Many industry officials see a bright future for specialty chemicals.
"The outlook is strong," Ceradyne's Moskowitz said.
Moskowitz says energy is a big driver for chemicals. Whether it's diesel engines, extracting high-viscosity oil from sand or alternative fuels such as nuclear, solar or wind, the limitation companies face is often materials.
Praxair, which sells a range of gasses, is also optimistic.
"The outlook is positive" for Praxair, CFO Sawyer said, forecasting sales growth of 8% to 12% this year and earnings growth in the midteens. "What's driving that is we have a lot of new business in energy and alternative energy."
Upside: If the overall economy stays healthy, the number of uses for specialty gases and chemicals will likely keep growing. And this will fuel the strong growth the sector continues to experience.
Risks: The cost of some raw materials has increased in recent years. It's not yet to the point 20hat it's crimping profit margins for specialty chemicals firms, but it is cause for concern, officials say. That combined with an ongoing shortage of skilled labor could drive costs up to uncomfortable levels.
