October 2003 How Do You Like Our Newsletter? This is the 5th monthly issue of our ChemicalInformer newsletter which began in June 2003. We have received many "thank yous" and compliments from our subscribers who have told us that a monthly news summary encompassing the important news events in the worldwide chemical industry is extremely valuable. We have tried to make it entertaining as well as informative. In the July issue, we added a "Famous Quotes" category which contains a handful of motivational quotes which are dug up by our editor each month. In this issue, we are adding another entertaining category called "Imponderables." This months "Imponderable" is entitled, "Do Penguins Have Knees?" We think you'll enjoy some Imponderables planned for future months such as "Why don't you feel a mosquito bite until it itches", "Why is steam rising from the streets of NY", "Why are nonsweet wines called dry", etc. We hope that you continue to enjoy the ChemicalInformer both as a source of news as well as a source of entertainment. And as always, please let us know what you think.   Do Penguins Have Knees? Penguins do have knees but they are hidden under their feathers. Penguin legs are divided into three segments. The middle segment, equivalent to our shinbone, is quite short in penguins. Birds that appear to have long legs, like flamingos, have a knee that is turned backwards. This does not function the same way a human knee does. Penguins however, have knees that function much the way ours do. Since their element is mainly water, their legs help them swim as their feet act like rudders . So even though you can't see them, penguins do have knees. Famous Quotes of the Month - If a word is misspelled in the dictionary, how would anyone know? (Anonymous) - Adversity introduces a man to himself. (Anonymous) - A wise man's questions contain half the answer. (Gabrirol) - Advice is what we ask for when we already know the answer but wish we didn't. (Erica Jong) - Learning is discovering that something is possible. (Fritz Perls) 3M is Reorganizing its R&D Structure 3M is moving nearly half of its corporate R&D employees into the research and development groups within its seven individual business units in order to strengthen its commercialization efforts. No reductions in headcount or the company's annual $1 billion plus R&D budget will accompany the shift in personnel. According to 3M chairman and CEO W. James McNerney, the movement of technical people will enable the company to more efficiently and effectively transform pipeline projects into products that meet the needs of its customers. Akzo to Divest Three Chemical Businesses Akzo Nobel will sell its catalyst, resins and phosphorus chemicals businesses to raise nearly $1.1 billion (Euro 1 billion). The businesses had 2002 sales of Euro 375 million, Euro 414 million and Euro 200 million, respectively. The funds will be used to decrease debt and make acquisitions in the pharmaceuticals and coatings sectors. These three businesses comprise 22 percent of the company's chemical sales, and the announcement has led to speculation about Akzo Nobel's commitment to the chemicals industry. According to a company spokesperson, Akzo Nobel hopes to gain consistency in its profitability and enhanced synergies between its pharmaceuticals, coatings and chemicals businesses. Bayer Pays $477 Million to Settle Baycol Cases Bayer has settled a total of 1,342 cases out of court associated with its anti-cholesterol drug Baycol, which was recalled in August 2001 after being connected to approximately 100 deaths. In addition, a U.S. federal court denied certification of a class action suit filed against Bayer AG over Baycol. Bayer opposed the certification because it believes the nature of the individual claims is too varied. The company plans to continue its review of individual cases and attempt to agree on "fair compensation" for the parties involved. There are nearly 11,200 cases remaining to be resolved. Baycol was sold under the trade name Lipobay outside of the U.S. Eastman in Reduction Mode In order to reduce labor costs which are expected to rise 8-10 percent in 2004, Eastman Chemical is planning to reduce its workforce. These job cuts are in addition to plans that Eastman previously announced to divest, consolidate or restructure several business units that employee a total of 2400. According to chief executive Brian Ferguson, the company is "in a reduction mode" and that "hundreds of jobs will be reduced." Kerr-McGee to Make Job Reductions In order to achieve cost savings of $45 million per year, Kerr-McGee will cut 7 to 9 percent of its nonunion workforce. The 200 to 250 jobs will be eliminated by the end of 2003 and the company will take a $40 million after-tax-charge in the fourth quarter to cover severance and other costs. Norwegian Shipper to Pay Fine for Price Fixing Odfjell Seachem, part of the Norwegian shipping group Odfjell ASA pleaded guilty to a single count violation of the U.S. Sherman Antitrust Act for "allocating customers and thereby fixing prices on certain contracts of affreightment from 1998 to 2002" and accepted a $42.5 million (Euro 37 million) fine from the U.S. Department of Justice (DoJ). Bjorn Sjaastad, Odfjell ASA president and chief executive, and vice president Erik Nilsen also pleaded guilty to single count violations. Sjaastad was fined $250,000 and will serve a 4 month sentence, while Nilsen will pay $25,000 and be jailed for three months. Rhodia to Invest in Advanced Research Facility Rhodia announced that it will construct a "laboratory of the future" in Pessac, Bordeaux, France that will operate in partnership with the French National Center for Scientific Research (CNRS). Teams of experts in computer science, electronics, nanotechnology, automatic systems, physical chemistry and chemistry will take a "radical conceptual, methodological and technological break with previous methods" and utilize novel high throughput techniques and advanced data analysis capabilities. Air Products Appoints Two New Business Leaders John McGlade, vice president of the chemicals group division, will succeed the retiring Andrew Cummins as group vice president of chemicals at Air Products. Mark Bye, president of Air Products' Asian operations, will replace Robert Gadomski, who is also retiring, as executive vice president of gases and equipment. McGlade will be responsible for global chemical operations including the performance materials and industrial chemicals divisions. Bye will manage the energy and process industries, North America gases, healthcare, equipment and manufacturing, and engineering businesses. DuPont Dow Elastomers Gets New CEO Dupont Dow Elastomers, a 50-50 joint venture between DuPont and Dow Chemical, has appointed John Lewis as president and CEO. Lewis recently held the position of vice president, Asia growth initiatives, DuPont Performance Coatings. He replaces Theo Krappels, who has retired. Lundbeck Gets New CEO Effective November 1, Claus Braestrup will replace the retiring Erik Sprunk-Jansen as chief executive of the Danish pharmaceuticals firm Lundbeck. Braestrup joined Lundbeck as executive vice president for research and development in 1998 after holding previous positions with Schering and Novo Nordisk. Other changes include the appointment of Anders Gersel Pedersen as senior vice president of development and Peter Honggaard Andersen as vice president of research. Argentina's Chemical Industry Has Successful 2003 According to Argentina's Chemical and Petrochemical Industry's Chamber of Commerce (Cipyq), the country's chemical industry will experience 10 percent growth in 2003 and is operating at full capacity. The domestic economy has improved and Argentina's petrochemical producers have been able to increase exports as well. Many chemical companies are waiting to make further investments in Argentina, though, until the country becomes more stable. A recent agreement with the International Monetary Fund (IMF) is a first step. (image source: CIA World Factbook 1999) Biorefinery Research Program Initiated by Genencor and Cargill Dow Genencor International and Cargill Dow have formed an 18 month alliance to develop a biorefinery for fuels and chemicals production. The project will use corn stalks and other agricultural materials as a source of renewable carbon for the production of Lactic acid and biologically derived plastics. Genencor will provide expertise in enzyme technology developed in a three year biomass-to-ethanol project. The Department of Energy has provided a grant for the alliance. Both companies hope to develop an economic way to convert large quantities of renewable biomass into fuels, power, chemicals and other products and reduce dependence on fossil carbon sources. Brazilian Chemical Industry Has New Source of Natgas The Petrobras discovery of natural gas off the coast of Sao Paolo in the Santos Basin will lead to the use of this feedstock for petrochemical production. Currently the Brazilian chemical industry relies on naphtha as a feedstock. The fertilizer industry is also expected to invest in more nitrogen production as natural gas is the main raw material for production of these products. Analysts expect it will be about four years before the natural gas is available to the industry. Central American Markets Might Open for U.S. Chemicals Soon Trade pact negotiations between the U.S. and Costa Rica, El Salvador, Guatemala, Honduras and Nicaragua may lead to the opening of markets in the Central American region for American chemical companies. According to the American Chemistry Council, current U.S. exports to the region total less than $1 billion annually (Euro 854 million), mainly because the economies of these countries still remain largely agriculturally based. It is believed that improved trade agreements would lead to an increase in investment in industry, and as a result eventually lead to increased exports to the region. Chemical Company Stocks Reach New 52-Week Highs Many companies saw their stocks approach or reach new 52-week highs during the summer months of 2003. Historically, most chemical company stocks have reached their lows between June and September. This increase in value has been attributed to the anticipation of an economic recovery. Analysts warn that many companies are still not experiencing a significant pickup in business yet and the rally could end fairly soon. Dow Chemical, DuPont, Rohm and Haas, Hercules, Cytec Industries, Valspar, Arch, Engelhard and Lubrizol are some of the companies that have posted increased stock prices. Chemical Exports on the Rise in Brazil Slow domestic sales and a stabilization of the real against the dollar have resulted in increased exports for Brazil. The country's trade deficit will decrease approximately 3 percent in 2003 to $6.6 billion (Euro 5.7 billion), according to Tendencias Consultoria. Exports of chemicals are predicted to rise 20 percent to $3.9 billion while imports will experience 5 percent growth to $10.5 billion. The Brazilian government has made the growth of chemical exports a priority and believes it will provide more security for the Brazilian economy. Chemical Industry Hesitant About Positive Economic Indicators in Japan Despite a recent rally in the Nikkei index and positive economic indicators, chemical companies remain hesitant about the chances for a sustained economic recovery in Japan. Declining consumer prices, weak consumer demand, an unemployment rate of 5.3 percent and massive national debt are all problems that must be addressed. Japanese chemical companies are responding to the current economic situation by participating in informal alliances involving agreements to close plants or produce only certain grades of different products. The network of alliances is impacting the structure of the industry while allowing companies to continue to operate individually and maintain their corporate image. In the past, Japanese chemical companies often forged single product mergers with one another in order to reduce overcapacity and replace aging plants with world-class facilities. These agreements often resulted in difficulties because the companies were rivals in other product areas. Corporate Profitability Up According to a report by JP Morgan, U.S. corporate profitability has returned to high levels despite a minimal economic recovery. The study indicates that aggressive cost cutting moves and the rapid adoption of productivity-enhancing technologies contributed to the rise in profitability. The majority of the profits were driven by domestic sales. JP Morgan suggests that this return to corporate profitability is a positive indicator for an economic recovery in 2004. Europe Looking for Recovery in 2004 Several positive signs are pointing to an economic recovery in Europe in 2004, according to many key executives in the chemical industry. Improvements in the U.S. economy, including increasing consumer confidence, a rising gross domestic product (GDP) and a better performing stock market all bode well for other economies around the world. Many companies are expecting to see improved results in the fourth quarter of this year with growth continuing into 2004. Cefic, the European chemical industry association, expects that growth for the chemical industry in the European Union will nearly triple from its 0.7 percent level in 2003 to 3.6 percent in 2004. European Transport Regulations Will Impact Chemical Industry The European Union Working Time Directive, which will cut working hours for drivers and crew of vehicles in operations subject to EU drivers' hours rules, will be effective in March 2005. Hours will be reduced to an average of 48 per week over a four-month period, with a 60-hour maximum in any one week. The UK chemical industry will be hardest hit, where transportation represents 10 percent of the manufacturing cost for specialties and 30-40 percent for commodities, and drivers' wages account for 25 percent of all transport costs. The regulation is expected to result in the need for more drivers in an industry that is already suffering from a shortage of experienced personnel. Free Trade Agreements Will Hurt Brazilian Chemical Industry Economists from Campinas State University report that a free trade agreement with Europe or the U.S. would hurt the Brazilian petrochemicals and plastics industries, with exports remaining flat and imports increasing. The study, conducted at the request of Brazil's Ministry of Development, Industry and Foreign Trade (MDIC), found that a system of progressive tariff reductions for these areas would be best until the industries can be strengthened and prepared for free trade. Many Asian Companies Improved Their Performance in 2002 A recovery in some petrochemical markets and strong cost cutting measures enabled several Asian companies to improve profits and sales in 2002. Companies that did very well in 2002 include Mitsubishi, Nan Ya Plastics, Formosa Chemicals & Fiber Corp., Formosa Plastics Corp. and LG Chem. Nine out of the top ten chemical companies in Asia are Japanese, with Sinopec of China being the only non-Japanese firm at the top. Despite SARS and the Iraq war, many analysts are predicting that 2003 will be an even better year. OPEC Production Cuts Cause for Concern OPEC unexpectedly announced that it will cut oil output by 900,000 bbl per day beginning in November in order to address overstocking in the first quarter of 2004. The expected shortness in supply will arrive just as demand is increasing for the winter season and could negatively impact chances for an economic recovery in the U.S. and Europe. U.S. Chemical Industry Disappointed with WTO U.S. Chemical companies were hoping the World Trade Organization would consider a broad reduction of industrial tariffs at its biennial ministerial meeting in Cancun, Mexico so that the chemical industry could work to establish specific tariff measures that benefit chemical trade. U.S. companies were looking to gain greater access to developing nations, which continue to maintain higher tariffs on chemical imports but have the greatest potential for market growth. The collapse of the WTO talks, however, will likely lead to further bilateral trade agreements that will make it difficult for the global chemical industry to conduct business. The U.S. will now pursue individual trade agreements and take steps to support U.S. manufacturers in the global marketplace. Western European Chemical Companies Struggle with Uncertainty in Market High feedstock prices, high raw material costs, concerns associated with the war in Iraq and reduced sales due to the SARS outbreak in Asia all contributed to a volatile petrochemicals market in Western Europe in 2003. Crude prices fluctuated tremendously in the first half of the year, making it difficult to establish contract pricing for petrochemicals, and the situation is not expected to stabilize until 2004. Prices, while strong in January, softened in the second quarter, making it difficult for manufacturers to maintain margins as raw material prices rose. Analysts predict the difficult market will remain until next year, but are only "cautiously optimistic" because unforeseen events could easily have a negative impact on a recovery.