July 2005 Successful Business Concluded at ChemSpec Europe For two days in Dusseldorf, over 400 exhibitors met with several thousand visitors to discuss fine and specialty chemicals business. More than 100 countries were represented at this very international show. Attendees from the pharmaceutical, agrochemical, dyes and pigments, electronics, catalysts, flavors and fragrances, and many other industries met with exhibitors offering a broad array of proprietary products and custom services. ChemSpec Europe 2006 will take place in Geneva on June 14-15.   What Are You Hearing When You Shake a Light Bulb? Actually, what you are hearing depends upon whether you are shaking a functional or a burned-out bulb. If you are shaking a newish, functioning bulb, chances are you are hearing the sound of loose tungsten particles left over in the bulb's glass envelope during its manufacturing process. These loose particles don't affect the bulb's operation or lifespan. Although the tungsten particles aren't left in the bulb deliberately, at one time manufacturers of high-wattage tungsten halogen bulbs did leave such residue as it was recommended that after use, the bulbs be shaken to allow the loose particles to clean the inside of the glass. Today if you hear something jangling around, chances are that you are shaking a burned-out bulb. In fact, this is the way most consumers determine if a bulb is dead as you can hear the particles of a broken filament. Barring the case of loose tungsten particles inside the bulb, you shouldn't hear anything when shaking a light bulb that is still capable of lighting. Famous Quote of the Month - We are what we repeatedly do. Excellence then, is not an act, but a habit. (Aristotle) - Do not let what you cannot do interfere with what you can do. (John Wooden) - There are two kinds of people, those who do the work and those who take the credit. Try to be in the first group; there is less competition there. (Indira Gandhi) - Many of life's failures are people who did not realize how close they were to success when they gave up. (Thomas Edison) - Laugh at your self first, before anybody else can. (Elsa Maxwell) DuPont and Dow Look to China By 2010, DuPont expects to obtain 25 percent of its revenue from China, with 40 percent of the $10-$12 billion (Euro 8.2-9.8 billion) generated by products made in that country. In 2004, the company achieved sales of $1.4 billion in China, and has invested $600 million in its Chinese operations. DuPont is currently considering sites for additional investment, including Tianjin, Shanghai Chemical Industry Park (SCIP), and Nanjing Chemical Industry Park (NCIP). Dow Chemical is planning a service center in Shanghai for R&D and information technology, and is also investigating a potential location for an integrated petrochemical site in China. The company recently signed a Letter of Intent for investment in the country and is conducting a feasibility study with Shenhua Group for a coal-to-olefins plant in Yulin, Shaanxi. Restructuring Details Unveiled by Lanxess In order to reduce yearly operating costs by as much as $122.8 million (Euro 100 million), Lanxess will eliminate 960 jobs in Germany through attrition, retirement, part-time working arrangements, and voluntary departures. About 200 jobs will be cut this year, and an additional 400 in each of 2006 and 2007. Fine chemicals will account for 500 positions, the styrenic resins business 300, and the remaining 160 will come from various other areas. Lanxess will reduce operations in its Dormagen, Germany Acrylonitirile butadiene styrene (ABS) plant by 66 percent, and concentrate specialty styrenics operations in Tarragona, Spain. The fine chemical unit will become a stand-alone business, and several plants will be closed. The work week for German employees will be reduced from 37.5 to 35 hours along with a reduction in pay of 6.7 percent. Octel Names New CEO Octel named acting CEO Paul Jennings as president and CEO effective immediately. Jennings was also appointed to serve as an executive director on the board. The CEO position became vacant in April when Dennis Kerrison resigned following an investigation into questionable money transfers. Jennings joined Octel in 2002 as executive vice president and CFO. He served in many finance positions with a number of chemical companies prior to joining Octel. China Follows Up on Free Trade Agreement With Asean Nations China announced that it will reduce tariffs on many petrochemicals and other industrial goods (over 7000 total) as part of the China Asean Free trade Agreement (CAFTA). The Association of Southeast Asian Nations (Asean), includes Thailand, Brunei, Indonesia, Malaysia, the Philippines, Singapore, Cambodia, Laos, Myanmar and Vietnam. A free trade zone will be formed between China and the first six nations by January 1, 2010, and with the remaining four by January 1, 2015. Some chemicals to receive tariff reductions include Naphtha, Kerosene, Acrylic acid esters, Terephthalic acid, Polypropylene (PP), Polystyrene (PS), Acrylonitrile butadiene styrene (ABS), Polyvinyl chloride (PVC), Propane, Butanes, Chloromethane. Each Asean nation has a different import list. The free trade agreement is expected to benefit both China and the Asean member states, with Asean petrochemical exports to China becoming more competitive, and Chinese producers receiving higher margins on goods sold to the trading group. France Concerned Over Job Losses The rate of job losses in the French chemical industry has risen from a typical 1 percent per year to 1.5 percent recently. Restructuring, reduced investment, and plant closures are all contributing factors. With the expected shift to production of higher value-added products, many fear the rate of job losses will increase further in the petrochemical industry. The French government is focusing on reducing the country's unemployment rate, but trade unions are rejecting changes to the Labor Code. German Chemicals Growth Slows While production of chemicals expanded by 5 percent in the first quarter of 2005 as compared to the same period a year ago, growth compared to the previous quarter was a minimal 0.5 percent. According to German industry trade group VCI, the chemical industry in Germany continues to experience growth, but at a much slower rate than in 2004. Some question whether or not growth can be maintained through all of 2005. A number of factors, including high oil prices, the strong euro, a weaker German economy, and a reduced level of exports, have been identified as impacting the industry. Growth for Chemicals Slowing in Europe The slowing European and global economy are impacting the European chemical industry, which is expected to experience a growth rate in 2005 that is two-thirds of what it was in 2004. High energy prices, the high value of the Euro, and rising unemployment are all affecting the growth rate, according to the European Chemical Industry Council (Cefic). Fine and specialty chemicals will be hit hardest, according to the trade group. The pharmaceutical sector is the one area that will experience an increase in output. Recent depreciation of the Euro will not affect the industry this year, but may result in improvements in 2006 after enough time has passed to allow for an impact of the currency changes. An inquiry by the European Commission into the lack of competition in the European Union's gas and electricity markets may also help chemical companies in the future. Japanese Chemical Firms Report Strong Results Leading Japanese chemical companies achieved record sales and net profits for the latest fiscal year (ending March 31). Prices increases offset hikes in raw material costs, and growing exports to China boosted volumes. Mitsubishi achieved sales of $18.4 billion and growth in operating profits in all divisions except healthcare. Net profits at Asahi increased by more than two-fold, while sales were up 10 percent. All of Sumitomo's businesses experienced earnings gains. The company reported strong operating profits in comparison to a loss in the previous year. Sales increased 13 percent and net profits more than doubled for Mitsui. Tosoh reported a greater than four-fold increase in group net profits and an increase in sales of 21 percent. Mergers & Acquisitions on the Rise According to investment banking firm Young & Partners, the value of mergers & acquisitions that occurred in the first quarter of 2005 was up 42% over the same period last year. About 40 percent of the 20 deals were made in Europe and another 40% occurred in Asia and the rest of the world. The U.S. accounted for the remaining 20%. Eleven of the transactions were in basic chemicals. Investment companies were less active, participating in 20 percent of the deals as compared to 29 percent in the same period one year ago. The largest deal during the first quarter of 2005 was Cytec Industries' $1.8 billion acquisition of UCB's Surface Specialties Business. Several businesses are still up for sale. Kerr McGee's TiO2 business, Columbian Chemicals, Flexsys, Nexen's sodium chlorate business, Degussa's food ingredients and water treatment units, Lanxess's paper chemicals business, and a number of Akzo Nobel businesses are all on the block. Private equity firm Industri Kapital is expected to put the Perstorp businesses up for sale, and Charterhouse is likely to place Lucite on the market as well. Specialty Chemicals Attracting Investor Interest Specialty chemical companies are receiving interest from Wall Street as the potential for higher margins increases. While commodity chemicals are experiencing a slowdown, pricing power for specialty chemicals remains strong. Decreasing commodity chemical raw material costs and steady or growing demand for many products will enable specialty chemical companies to achieve good margins. Companies such as DuPont, Albemarle, Rohm and Haas, Cytec Industries, and Ferro will benefit from the current conditions. BASF to Acquire Orgamol BASF announced that it plans to acquire Orgamol for an undisclosed amount. The company has received approval from both private and employee shareowners. BASF expects to close the transaction by the end of the third quarter of 2005, assuming regulatory approvals are received. Orgamol had 2004 sales of $135 million (Euro 100 million) based on a proprietary product line and cGMP custom manufacturing capabilities. The purchase is part of BASF's recently announced plan to expand its fine chemicals business through targeted acquisitions and new product development. BASF also agreed to jointly develop and market systems for film coating of tablets for the pharmaceutical industry with Air Liquide's pharmaceutical coatings business Seppic. The first offering will combine BASF's Kollicoat instant-release polymer technology with Seppic's Sepifilm product line, enabling combined colored compositions. Separately, BASF announced that it will acquire the 50 percent stake that Akzo Nobel owns in BASF Akzo Nobel (BAN) for an undisclosed amount. The Australian joint venture sells OEM coatings to the automotive market. BASF plans to merge the BAN business with its refinish coatings business BASF Coatings (Sydney). Biocides Experiencing Strong Growth in China The Chinese market for specialty biocides is growing at twice the rate of the U.S., Western Europe and Japan, and growth rates are in the double-digits for many products. About 50% of specialty biocides in China are used for industrial preservation, which includes biocides for all types of paints and coatings, adhesives and sealants, plastics and polymers, metalworking fluids, and mineral slurries. Water treatment applications account for 35 percent, and miscellaneous applications make up the remaining 10 percent. Organosulfur preservatives are the leading category of specialty biocides in China based on revenue, but only account for a small percentage of the volume. However, these products are expected to experience the greatest growth as they replace older biocide technologies. Inorganic specialty biocides are the second largest category of biocides based on value, and they account for about one-third of the total market volume. Unlike in Europe and the U.S., there is no government regulation of biocides in China, although regulations that apply to the end-use applications do play a significant role in determining which preservative technologies will be successful. Finnish Paper Strike Settled The Finnish Forest Industries Federation (FFIF) reached settlements with both the Union of Salaried Employees, which represents supervisors and office employees working at Finnish pulp and paper mills and Pappersfoerbundet, the Finnish paper workers' union. Salaried employees will receive a 6 percent pay hike over three years. Pappersfoerbundet also signed a three year deal that includes work during midsummer and Christmas holidays in exchange for fewer working hours. Paper mills implemented a lock-out on May 18, and most were shut down for nearly six weeks. They were expected to begin operating immediately. Most Finnish plants supplying paper processing chemicals have had to significantly reduce or halt operations as a result. Chemical plants should be able to return to full capacity within a week. Oleochemicals as the Natural Alternative Interest in vegetable and tallow-derived oleochemicals as alternatives to petrochemical-based products is peaking as the price of crude oil continues to climb. Oleochemicals and their derivatives can provide price, value, performance, and environmental advantages. Glycerine, for example, can provide enhanced performance and has a more attractive environmental profile, according to Uniqema, a leading producer of oleochemicals and derivatives. Glycerin demand has increased 5 percent during the first half of 2005, selling at about half of the price for many petrochemical based glycols. Uniquema is investigating the potential of oleochemicals as replacements for specialty petrochemicals under regulatory pressure and mainstream products with rising prices. Potential application areas include personal care, oilfield chemicals, household, industrial and institutional cleaning, water treatment, and automotive and industrial lubricants. Strong Demand Drives Bromine Price Hikes The price of elemental Bromine has increased sharply since the beginning of 2004, rising over 300 percent. Despite additional capacity, demand for Bromine has continued to outpace supply. Prices of Bromine-based polymer additives and fine chemicals, including flame retardants, have also climbed. Albemarle plans additional capacity in the Dead Sea, which will come on stream in 2007. Dead Sea Bromine expects to start up a new 40,000 metric ton facility by the end of 2006. Great Lakes Chemical is also in the process of expanding its Bromine capacity. Smaller regional producers are also expanding production capabilities in response to the supply imbalance. Rohm and Haas and Groupe Novasep in Biologics Alliance Rohm and Haas' Advanced Biosciences Division has formed a strategic alliance with the Novasep Process network of Groupe Novasep to provide laboratory to industrial scale bio-purification solutions. Rohm and Haas brings its expertise in polymer chemistry, functional beads, and the manufacture of high performance separation media to the alliance. Novasep complements these capabilities with its expertise in process development, modeling, and implementation of global separation processes and technologies. Innovene Plans Petrochemicals Cracker in Saudi Arabia Innovene, the newly formed petrochemicals and refining subsidiary of BP, announced that it has signed a memorandum of understanding with Saudi development company Delta International that establishes a 50:50 joint venture for a second $2 billion (Euro 1.6 billion) world-scale petrochemicals cracker and associated derivatives plants at Jubail. The first cracker, due on stream in 2008, will have an annual capacity of approximately 1.2 million tonne/year, with downstream plants for high density Polyethylene (hdPE), linear low density Polyethylene (lldPE), and mixed olefins. The second cracker complex will focus on Propylene production and have associated downstream plants for Polypropylene (PP) and Acrylonitrile. Delta will provide the gas feedstock for both cracker complexes. The partners are currently looking for additional investors. Marathon Oil Gets OK for Marathon Ashland Petroleum Purchase Ashland shareholders approved the sale of Ashland's 38% interest in Marathon Ashland Petroleum (MAP), Ashland's Maleic anhydride business, and 60 oil change centers in Michigan and northwest Ohio to Marathon Oil Corporation for $3.7 billion (Euro 3 billion). Reduced Activity in Commodity Chemicals Market The petrochemical sector has quieted, with lower operating rates. Naphtha prices have risen, reflecting the price ofcrude oil, but Ethlyene spot prices have fallen due to oversupply. Propylene prices have been stable, but Butadiene prices are dropping as tightness in the market is relieved. Benzene prices have fluctuated, while Toluene prices held steady and Styrene and mixed Xylene prices have firmed. Strong demand for MTBE has kept prices steady, while Ammonia prices held despite softening demand. Slowing Growth for Commodity Chemicals, But Outlook Positive Shrinking demand and falling prices are causing leading analysts to lower earnings expectations for many commodity chemical manufacturers. However, earnings for 2005 are still expected to be higher as compared to 2004, and margins are anticipated to improve in the second half. Reduced demand in the first half resulted in higher chemical inventories, and production was scaled back. Inventory correction has taken longer than initially predicted, but most analysts expect pricing power will be regained by late summer. Asian demand should also pick up during the summer in preparation for the holiday season at the end of the year.