Linde is the largest industrial gas company in the world with operations in more than 80 countries. Companies in the industrial gas business capture air and separate it into its component parts (oxygen, nitrogen, argon, hydrogen, helium, and carbon dioxide). These gases touch virtually all industries, making revenues durable as they serve mission-critical functions in various industries such as manufacturing, food & beverage, electronics, metals & mining, chemicals, refining, clean energy, and healthcare.1 For instance, hospitals require medical oxygen for their patients, clean energy manufacturing processes require hydrogen, and semiconductor chip fabrication requires a wide array of ultra-high purity gases.
Because of typical economies of scale as well as specific physics-based dynamics in industrial gas plants (where relative energy loss declines as the size of the plant increases),2 large plants are far more efficient than small ones. Additionally, because industrial gases are cheap to produce but incredibly expensive to transport, gas plants almost always must be located close to their customers. As a result, large industry players such as Linde contract with a large customer to build a co-located plant with a 10-20 year “take-or-pay” agreement.3 These agreements generally contain both minimum purchases requirements and cost pass-through provisions,4 giving Linde a guaranteed stream of income with significant inflation protection. Then, as new large and small customers populate the area around Linde’s plants, Linde builds pipelines or sends trucks to deliver gas to these new customers. Because 1) additional industrial gas in an existing plant is cheap to produce; 2) industrial gas is expensive to transport;5 3) industrial gas is mission-critical so customers are willing to pay dense networks more for reliability; 4) industrial gas is typically a small percentage of customer costs;6 and 5) Not-In-My-Backyard often makes it cost-prohibitive to build pipelines if there are existing ones already in the ground, each player essentially owns mini-monopoly distribution networks in each of their service areas, almost like an unregulated utility, granting them pricing power and return on capital protection. When you combine these competitive supply constraints and pricing power with the high likelihood that Linde and the other major players will continue to increase volumes over time (both because of the diversity of economy activity they undergird as well as the fast growth in a number of these activities such as chip manufacturing, green energy, healthcare, and space exploration), we believe these businesses are positioned to not only maintain but significantly grow returns on capital over time.
1 See https://air-source.com/blog/the-industrial-gas-industry-is-good-for-america/#:~:text=The%20global%20industrial%20gas%20market%20was%20$87,an%20inert%20atmosphere%20for%20soldering%2C%20and%20more and https://www.grandviewresearch.com/industry-analysis/industrial-gases-market.
2 See https://www.sciencedirect.com/science/article/abs/pii/S0017931010006599#:~:text=rights%20and%20content-,Abstract,models%20to%20life%20size%20installations, https://www.construction-physics.com/p/where-do-economies-of-scale-come, https://pubs.aip.org/aip/jap/article/121/4/044907/167753/Economies-of-scale-The-physics-basis, and https://www.digitalrefining.com/article/1000327/optimal-tonnage-industrial-gas-plants#:~:text=CO%20are%20used.-,Air%20separation,for%20high%20overall%20energy%20efficiency.
3 See https://assets.linde.com/-/media/global/corporate/corporate/documents/investors/full-year-financial-reports/2024-directors-report-and-financial-statement.pdf.
4 See https://assets.linde.com/-/media/global/corporate/corporate/documents/investors/events-and-presentations/why-linde-presentation.pdf.
5 See https://www.snsinsider.com/reports/industrial-gases-market-5801#:~:text=The%20unique%20storage%20and%20transport,and%20its%20rationalized%20distribution%20network and https://www.epa.gov/greenvehicles/hydrogen-transportation#:~:text=Hydrogen%20is%20abundant%20in%20the,transport%2C%20store%2C%20and%20use.
6 Industrial gas generated an estimated $119 billion in 2025 revenues. Some sources estimate that industrial gas companies supply mission-critical products to industries representing 25% of Gross Domestic Product. If correct, given 2025 estimated global GDP of $117 trillion, industrial gases only represent about 0.4% of the industries they serve. Regardless, this math validates other sources we’ve read that claim industrial gases typically account for less than 5% of customer operating costs. See https://www.grandviewresearch.com/industry-analysis/industrial-gases-market, https://air-source.com/blog/the-industrial-gas-industry-is-good-for-america/#:~:text=The%20global%20industrial%20gas%20market%20was%20$87,an%20inert%20atmosphere%20for%20soldering%2C%20and%20more, and https://www.statista.com/statistics/268173/countries-with-the-largest-gross-domestic-product-gdp/#:~:text=Global%20gross%20domestic%20product%20amounted,margin%20going%20into%20the%202030s.
To read a more detailed description on LIN as discussed in a prior investment letter, click here.
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