Industrial gas demand soars with CPEC, economic recovery

KARACHI: The demand for industrial gases, which are used in various sectors of the economy, is expected to grow in the coming days as the economy starts recovering and the development work on projects of the China-Pakistan Economic Corridor (CPEC) progresses, a study by a local credit rating agency showed.

The Pakistan Credit Rating Agency (PACRA) said that the medium and long-term demand for the sector is likely to grow as these gases are essential for many industries such as steel, cement, the food industry, and other manufacturing sectors that contribute to the country's gross domestic product (GDP).

"Major demand of the industrial gases emanates from the Large-Scale Manufacturing (LSM) as well as the health care segments of the economy. Thus, any fluctuations in LSM growth is likely to have a direct impact on the sector’s revenue," the stady showed. "However, demand from health care segment can also determine the trend in sector’s performance."

The study noted that the sector faced some challenges in the fiscal year 2023, which ended on June 30, due to the economic slowdown caused by the vulnerabilities on the economic and political front.

"The import restrictions imposed by the government to curb the current account deficit and the depreciation of the rupee against the US dollar also affected the sector's profitability."

However, the study said that the situation has improved in the current fiscal year, as the rupee has appreciated by 1.5 percent against the dollar in the first four months, and the import restrictions have been eased.

The large-scale manufacturing sector, which accounts for the bulk of the demand for industrial gases, has shown signs of recovery, registering a positive growth of 0.5 percent in the first two months of the fiscal year.

The study said that the sector’s average gross margins for the period FY19-23 hovered around 21 percent. However, in FY23, the average gross margin declined to 19 percent from 23 percent in the corresponding period the previous year, the study said.

The study attributed the decline to a notable 9 percent increase in the average cost of goods sold, which outpaced the sector’s revenue growth rate (which recorded a moderate 3 percent year-over-year increase).

As a result, the average gross margin declined by 17% year-over-year compared to FY22. This decrease is primarily attributable to rising costs due to energy tariffs and a 39 percent depreciation of the rupee. The average operating margins of the sector for the last five years (FY19-23) were recorded at 13 percent. The average operating margins were lower than the previous year at 13 percent in FY23 compared to 16 percent in FY22.

The average net margins for the same period (FY19-23) hovered around 6 percent. In FY23, the net margins declined sharply to 4 percent from 10 percent in FY22. Finance costs increased by 60 percent year-over-year due to an increase in the policy rate from 17 percent to 22 percent in FY23. The retrospective imposition of a 4 percent super tax also adversely affected the sector’s profitability.

"The use of Industrial Gases in the manufacturing segment experienced slack due to import restrictions imposed during May’22-Jun’23. However, demand from this segment is expected to rebound as administrative measures have been implemented to stabilize the economy," the study said.

It, however, anticipated that the expansion plans of the major players in the sector will increase the production capacity and availability of industrial gases, especially for the health care segment.