Industrial gases: a resilient industry that deserves a deeper look.

In the article below we will try to argue why Industrial gases is a more interesting subsector of the Materials sector and take a look at some of the large players.

 

Industrial Gases: A big business with global reach 

The global market for industrial gases exceeds 100 billion dollars in revenues. It is an oligopolistic market dominated by five major players – Air Liquide, Linde, Air Products, Messer (unlisted), and Taiyo Nippon Sanso – with operations spanning multiple geographies. However, the industry's biggest competitor is often the customer, who faces a critical decision: to build their own gas production facilities or to outsource and buy the gases they need.

 

Not all gas players are alike

French company Air Liquide and American-German company Linde are relatively close peers. The main distinction between the two lies in their margins, with Linde achieving superior profitability, particularly in Europe and emerging markets. Their approaches to capital allocation and business operations also differ. Linde's management is heavily aligned with shareholders through stock-based compensation, whereas Air Liquide’s management owns relatively few shares. However, this does not imply that Air Liquide is not a solid operator. Air Products, on the other hand, is no longer directly comparable to Air Liquide and Linde. The company has moved further down the chemicals value chain, does not offer packaged gases, and has significant exposure to the helium market - a low-margin commodity business.

 

There are 2 types of industrial gases …

Industrial gases are delivered to customers through three primary channels: pipelines (for on-site customers), trucks (merchant supply), or packaged cylinders (distributed from filling plants).

 

There are two main types of industrial gases: atmospheric gases and process gases. Atmospheric gases — such as nitrogen, oxygen, argon, and rare gases like krypton, neon, and xenon — are produced through the purification, compression, cooling, distillation, and condensation of air. Process gases, including hydrogen, carbon monoxide, carbon dioxide, acetylene, helium, and propane, are either produced directly or recovered from natural gas or as by-products of chemical production.

 

… for 2 types of end markets

End markets for industrial gases can be broadly divided into consumer and industrial segments. Consumer markets include healthcare — for example, oxygen supply to hospital patients - food and beverages, where CO₂ is used in carbonated soft drinks, and electronics. Industrial customers are typically found in sectors such as chemicals and energy, manufacturing, and metals and mining - for example, gases used in welding processes.

 

Moats …

Although industrial gases are a commodity, industrial gas companies benefit from a significant moat. Their customers prioritize two key factors: reliability and safety, and the total cost of ownership. Ensuring a constant flow of gas is critical for customers, as the cost of production disruptions far outweighs any potential savings from switching to a cheaper supplier. While switching suppliers is theoretically possible, it is often challenging in practice, especially when gas supplier installations are embedded on the customer’s site. Long-term contracts and high switching costs further discourage customers from seeking alternatives. Additionally, the market is highly concentrated, with only a few dominant global players, leaving customers with limited options if they wish to switch providers.

 

… and Resilience …

Shares of industrial gas companies tend to be resilient due to several factors. One key reason is their exposure to healthcare, food and beverages, and electronics clients — industries that are less sensitive to economic cycles. In addition, industrial gas companies often operate under long-term supply agreements that include fixed elements and 'take-or-pay' clauses, ensuring a stable revenue stream. They also receive consistent rental payments for the use of tanks, cylinders, and other equipment. Their broad geographical footprint further reduces cyclicality by diversifying revenue sources across regions. While the broader European industrial sector faces challenges from increased global competition — driven by higher energy costs and wages that disadvantage European manufacturers — demand for industrial gases in Europe is expected to remain relatively stable. The assets of industrial gas companies are likely to be among the last to be affected, given their critical role in production processes.

 

… come at a price

As a result of their strong profitability, limited cyclicality, and expectations for continued growth, shares of industrial gas companies trade at high valuation multiples.

 

 

Over the past decade, the performance of Western industrial gas companies' shares has diverged significantly. Linde outperformed the broader U.S. market (S&P 500) by a comfortable margin, while Air Products delivered relatively weaker returns. Air Liquide’s performance lagged behind both Linde and Air Products but was still meaningfully better than the broader European stock market (Euro Stoxx 600).

 

Graph: 10-Year performance of Western industrial gas companies versus Euro Stoxx 600

Source: Econopolis, LSEG Datastream

 

Strong market positions, limited cyclicality, high profit margins and room for further (profit) growth are all trumps that make industrial gas stocks mouth-watering bets for investors. The biggest questions for investors are how much one should pay for such companies and which stock one should pick within the industry.