Industrial gases are a fascinating and often overlooked cornerstone of the modern economy. These aren't the gases you fill party balloons with; they are gaseous materials manufactured in vast quantities for critical use across an incredible spectrum of industries. The main players in this space form a global oligopoly, including giants like Linde, Air Liquide, and Air Products and Chemicals. These companies produce essential gases like oxygen, nitrogen, argon, hydrogen, and helium. At first glance, it might seem like a boring commodity business, but nothing could be further from the truth. The magic lies in their business model. These gases are fundamental inputs for everything from steelmaking and oil refining to semiconductor fabrication and food preservation. Because they are often consumed in huge volumes and are difficult to store and transport, the relationship between a supplier and its customer is exceptionally deep and durable, creating a powerful business structure that should make any value investor's ears perk up.
The genius of the industrial gas business isn't just selling gas; it's about selling a mission-critical, integrated service that becomes deeply embedded in the customer's operations. This creates one of the widest and most durable competitive advantages, or “moats,” you can find.
For large customers, like a steel mill or a chemical plant, gas suppliers don't just deliver cylinders. Instead, they often build a dedicated production facility, such as an Air Separation Unit (ASU), directly on or next to the customer's site.
This creates incredibly high switching costs. Once that plant is built, the customer is locked in. Tearing it down and having a competitor build a new one is prohibitively expensive and disruptive. This arrangement provides the gas company with a highly predictable, recurring revenue stream that is the envy of almost any other industry.
While the major players are global, the business itself is intensely local. Transporting cryogenic liquids or high-pressure gases is expensive and inefficient over long distances. The practical delivery radius from a production plant is typically only a few hundred kilometers. This economic reality carves the world into regional markets where one or two suppliers dominate. This structure is a classic oligopoly, which grants the dominant companies significant pricing power. They aren't competing with a supplier from the other side of the country; they are competing with the one or two others who have a dense production and distribution network in that specific region.
For followers of value investing, the industrial gas sector is a textbook example of a high-quality business that consistently compounds capital over time.
The moats protecting these companies are deep and multi-faceted:
When analyzing an industrial gas company, focus on these metrics:
No investment is without risk, and even these high-quality businesses have things to watch out for.