Economic slowdown to hit margins of industrial gases

KARACHI: Economic slowdown might impact the consumption of industrial gases and reduce its demand in large scale manufacturing (LSM).

Pakistan Credit Rating Agency (PACRA) in a study has stated that the sector’s margins have sustained a stable position in the first half of the year due to the use of industrial gases in several industries. However, it said that the margins might be “impacted by the slowdown in the economy and reduced demand in the LSM.” The country’s economic growth was currently stunted due to political unrest and devastating floods that struck during the monsoon season. The floods have affected 33 million people and halted several economic activities, due to which the projected growth rate for FY23 was 2 percent. The LSM sector grew by 10.5 percent in FY22 which in turn increased the demand for industrial gases which could be seen by the increased revenues. However, floods have completely changed the situation due to which LSM has contracted by 0.4 percent YoY in the first two months of FY23. This might, in turn impact the demand of industrial gases that majorly emanates from LSM industries.

The study said that production capacity of the major players was being enhanced by setting up new plants, which has resulted in an increase in the borrowing of the sector by 47 percent in the first half of CY22. This would further increase the borrowing cost of the sector. The sector is moderately leveraged, having a debt to equity ratio of around 50 percent, which is manageable as the sector has strong sponsor support.

Currently, all the sectors of the economy were negatively affected and this would also be the case for industrial gases. However, in the medium-term, it is expected that the industry will revive due to its demand in several significant sectors like steel, cement, food and research, the study stated.

The LSM output has increased by 3.9 percent MoM from July to August FY23 which means that the economy has started moving towards a recovery post floods; however, the recovery is at a very slow rate and it will take time for the business activity to reach the pre-flood level.

The demand of oxygen in the healthcare sector will remain constant even in an economic slowdown. In the long run, the overall profitability of the sector is expected to become strong if the economic situation becomes stable. This is because of the growth of the sectors that use industrial gases; the demand for industrial gases is hence expected to remain stable.

Industries like research and technology are growing rapidly which increase the use of gases like argon and other rare gases (neon, krypton and xenon). Gases such as nitrogen and carbon dioxide are used in packaged food to seal freshness by removing oxygen and moisture. With the rise in the consumption of packaged and tinned food, the demand for nitrogen and carbon dioxide will increase, the study said.