May 2007 Muddy Waters at Dow Chemical Dow Chemical recently experienced some turbulent times. Initially, there were reports that the company would spin off its basic chemicals and plastics businesses into a separate company in which Reliance Industries would take a 59 percent stake (~ $12 billion). Then other reports appeared claiming that a consortium of Middle Eastern investors and American buyout firms led by Kohlberg Kravis Roberts was preparing a $50 billion (Euro 37.5 billion) bid for the company. Dow responded that the rumors were false and that there were no plans to break up the company and the company was not involved in any leveraged buyout discussions. Pedro Reinhard, a senior advisor and member of Dow's board of directors, and Romeo Kreinberg, head of its performance plastics and chemicals business, were then fired for their involvement in unauthorized talks with third parties about the potential acquisition of the company. Reinhard issued a statement denying his involvement and has not stepped down from the board. Members can only be removed through a vote by shareholders. Some analysts believe that a deal may yet be forthcoming despite the firings. A relationship with a Middle Eastern company like SABIC would provide Dow with access to the feedstocks it needs. Others believe that a friendly acquisition of Dow remains unlikely in the near term at least.     Why Do Fish Float Upside-Down When They Die? Fish float upside-down when they die because internal decomposition releases gases that collect in the gut cavity. The meat of the fish is on top (dorsal side) and the thin stomach wall is on the bottom (ventral side). As gases accumulate, the dense muscle mass of the top of the fish is positioned down and the gas-filled stomach up. Fish with swim bladders already have gas inside which tends to make them somewhat neutrally buoyant. Fish that lack swim bladders (like flatfish), would not float upon death. Since so much of the fish's body weight is concentrated along the bone structure of the back and skull, it is not uncommon to find dead fish floating with their heads down.       Famous Quotes of the Month - Luck is what you have left over after you give 100 percent. (Langston Coleman) - It is better to look ahead and prepare than to look back and regret. (Jackie Joyner-Kersee) - The world is round and the place which may seem like the end may also be the beginning. (Ivy Baker Priest) - As we express our gratitude, we must never forget that the highest appreciation is not to utter words, but to live by them. (John F. Kennedy) - We must learn our limits. We are all something, but none of us are everything. (Blaise Pascal)         Dow First Major Chemical Firm to Invest in Libya Dow Chemical will form a joint venture with Libya's National Oil Corporation to expand existing facilities at its Ras Lanuf petrochemical complex that will include a new Ethane cracker and associated Polyethylene (PE) and Polypropylene (PP) production capabilities as well as upgrades to a Naphtha cracker and two PE plants. Additional expansions in the future will include new natural gas based hydrocarbon, plastics and chemical facilities. The company decided to move ahead with the project now that relations between the U.S. and Libya have normalized. Dow will have less than a 50 percent share with an option to increase that amount. Private investors are also involved.     Rubber Price Fixing Fines Levied in South Korea Kumho Petrochemical and Seetec (jointly owned by Honam Petrochemical and LG Chem) were fined $6 million (won 5.6 billion) by South Korea's Fair Trade Commission (FTC) for fixing prices of Styrene butadiene rubber (SBR) and Butadiene rubber (BR) products between 2000 and 2003. These two companies supply more than 90 percent of rubber products to the domestic Korean tire market.       Fos-Lavera Strike Ended The 18 day strike at the Fos-Lavera oil and gas terminal in Marseilles ended on March 31st, 2007 when Gaz de France (GdF) agreed to employ five full-time port employees for the hooking and unhooking of Methane carriers at its new liquefied natural gas terminal. The strike caused several refineries and petrochemical pants to reduce operations, and some were considering complete shutdowns due to the blockage of the port, which is the third largest transit port for refined oil products in the world. For some time after the end of the strike, few vessels were available for shipments, resulting in very high shipping rates. The spot market in the Mediterranean all but disappeared during that period. The backlog of vessels was not fully cleared until mid-April. Petrochemical plants were forced to continue operating at reduced rates while waiting for incoming raw materials.       Mergers and Acquisition Activity Remains Strong A total of $41.9 billion in chemical industry M&A deals occurred in 2006, a new record, according to Young & Partners. In 2007, the peak of the cycle could be reached. M&A activity in the chemical industry remains strong, but may be shifting to the Middle East and Asia. Private equity remains interested in the chemical market, some mega-deals are under discussion, and large conglomerates may look to break apart their disparate businesses. The Dow rumors have created a stir. BASF has even been mentioned as a breakup target. More likely is consolidation in the plastics sector, with GE placing its business for sale. Medium-sized European specialty chemical companies such as ICI and Rhodia may also be vulnerable. In the U.S., foreign buyers are looking to acquire companies that will give them an established position in this important geographic market. Companies such as Saudi Arabia's SABIC, India's Reliance Industries, and China's Sinopec are eager to make a deal. Both SABIC and Reliance are looking at GE Plastics. Lyondell Chemical has agreed to sell its Titanium dioxide business to National Titanium Dioxide Company of Saudia Arabia for $1.2 billion. With higher oil prices, there is a lot of capital in the Middle East, and more companies are expected to try to enter the Western chemical market in the near term. In Asia, Indian companies seem to be more interested in fine chemicals, while Chinese players are looking across the board. Smaller companies are even looking to make acquisitions to gain access to production facilities and human talent. Japanese companies, too, are expected to begin entering the M&A market. All companies from this region of the world will need to learn the culture of M&A deals in the U.S., which typically take place very quickly.         Asian Generics Market New Problem for Big Pharma Generics have been important in Western markets, but until recently they have not made much inroad in the Asian sector. That situation has begun to change. Japan is working hard to convince its population to accept generics over branded drugs and dispel general concerns over the safety of generic drugs. Thailand's government has recently forced Abbott Laboratories to lower the price of an AIDS drug to prevent it from violating the company's patent. More Asian governments might employ similar tactics to lower their healthcare costs. Companies such as India's generics producers Ranbaxy Laboratories and Cipla are expected to benefit, while major pharma manufacturers will lose potential markets for selling branded drug products.     Increasing Competition in Generic Drug Sector Margins for generic drug producers have been declining slowly over the past few years. With nearly twice as many players in the field as compared to just five years ago, competition is very stiff and could result in pricing wars in the near future. The new entrants in the market are mostly low cost producers from Asia. Growth opportunities do still exist for generics, especially for branded products in developing regions such as Asia, Central Europe and Latin America. Niche therapeutic areas such as oncology also show promise. Biogenerics, which have yet to be introduced, will be very profitable for the few companies that launch the first products.       Air Liquide Acquires Lurgi Air Liquide (AL) agreed to purchase Lurgi from Global Engineering Alliance for $743.2 million (Euro 550 million) with the goal of expanding its engineering capabilities. The deal, which will nearly double the size of AL's engineering business, will increase the company's position in various hydrogen markets, and provide AL with access to the coal-to-liquid (CTL) and coal-to-chemicals (CTC) sectors as well as the biofuels industry.     Improvements for Cosmetic Chemicals The cosmetic chemicals market is experiencing increased demand as the growth of global cosmetics and toiletries sales rises. According to Euromonitor, this market segment in 2006 experienced its highest growth rate in five years, with developing regions such as Eastern Europe, Latin America and key markets in Asia-Pacific growing the strongest. Brazil and China, with sales growth of 13 percent and 11 percent, respectively, both have large populations, rising disposable income, increased consumer awareness, and improving distribution networks, suggesting the trend will continue. The market research firm estimates the global cosmetics and toiletries market to be approximately $270 billion dollars and growing a 5.4 percent per year overall.       Decline in Acetic Acid Pricing Expected in Asia With Celanese's new 600,000 tonne/y Acetic acid plant coming on stream in China's Nanjing Industrial Park at the end of May, more material will be available on the spot market and prices for this commodity chemical are expected to decline. However, the decrease is anticipated to be gradual rather than sudden, according to key players in the market. The new plant will captively consume about half of its Acetic acid production for downstream products (Vinyl acetate monomer and Acetic anhydride). Production of these chemicals is expected to begin in late 2007. Spot prices have been high in recent weeks due to planned maintenance outages at several facilities, including Samsung BP Chemicals, Formosa BP Chemicals and China Petrochemical Development Corp. Shanghai Wujing will shutdown its plant during May, and Jiangu Sopo's two acetic acid lines will not be operating in late June and early July. As a result, the additional capacity from the new Celanese plant will not have much of an immediate impact.       Ethylene Market Suffering in Asia now, North America to be Hit in 2009 A threatened oversupply has driven prices for Asian Ethylene down nearly 30 percent since January, 2007. Additional supply from South Korea, Taiwan and the Middle East has entered the market. Demand for downstream Polyethylene products has remained stable as well. In the U.S., the Ethylene market should be healthy through 2008, but new capacity in China and the Middle East beginning in late 2008 will lead to global over supply. Exports of Ethylene derivatives such as Ethylene oxide, Ethylene glycol and vinyls will decline, and North America could switch to becoming an Ethylene importer. Plant closures and consolidations will be likely, as up to 20 percent of capacity will need to be eliminated.       Rise in Crude Prices Benefits Asian Aromatics June contract prices for Asian Benzene increased nearly two percent in response to rising crude prices and higher U.S spot prices, which rose around three percent. Toluene and Styrene monomer prices showed marginal increases as well. In the U.S., the price rise was attributed to higher gasoline prices.       Acrylonitrile Market at Peak in Asia As global demand and supply remain unbalanced, spot prices for Acrylonitrile (ACN) in Asia have reached a 12 year high. Prices are expected to continue rising as demand remains strong. The tightness in the market has partly been cause by unplanned outages and shut downs in Europe and the U.S.       Middle Eastern and Asian Plastics Markets Strong for Now, but Oversupply Threatens Middle Eastern prices for Polyethylene (PE) and Polypropylene (PP) rose as much as 3.5 percent in May in response to tightness in supply resulting from shutdowns, low operating rates and reduced buyer inventories. In Turkey, demand for polymers will increase by nearly a third between 2006 and 2010, according to a major distributor in Istanbul. With no new capacity for polyolefins planned, imports will likely be necessary to meet the increased consumption levels. Highest demand growth will be for PP and high density PE (HDPE). In India, Polystyrene (PS), PP and PE producers have cut domestic prices nearly 4 percent for May product in response to the appreciation of the Rupee versus the U.S. dollar. This action was taken to maintain competitiveness against imports and despite strong demand and tight supply. Domestic supply will get even tighter when the Haldia Petrochemicals Ltd. cracker and polyolefins plant in West Bengal shuts down for maintenance in mid May. Demand in India for plastics, particularly PP, PE and Polyvinyl chloride (PVC), is expected to nearly double by 2012. Demand is strong in the packaging industry, the plastic furniture market, and the infrastructure and automobile sectors. India's National Commodity and Derivatives Exchange recently launched futures contracts for linear low density PE (LLDPE), PP injection molding grade, and PVC. Imports of synthetic resins such as PE and PP into China are expected to grow in response to the fast rising gross domestic product. The growth rate may slow some, however, due to increased domestic capacity, rising crude prices, reduced tax rebates, and a growing use of recycled material. Most imported material is currently for the re-export market. There are, however, some uncertainties in the Asian PE and PP markets currently, with low inventories and high crude prices on the positive side, but lower downstream product pricing is a negative factor. The situation is expected to become more complicated in 2008, when PE and PP plants in both Asia and the Middle East come on stream. Some believe the surplus will only exist for commodity grade polymers, while others expect a broader impact on the market. Yet others suggest that delays in new projects in the Middle East will mean the surplus won't affect trading until later than many expect. The U.S. and Europe will be attractive markets for the surplus material, as there will be some shortages in supply by 2010, providing opportunities for distributors with strong logistics capabilities.       U.S. Polyethylene Exports Experience Strong Growth Exports of linear low density Polyethylene (LLDPE) and high density PE (HDPE) from the U.S. rose over 80 percent in the first two months of 2007 as compared to the same period in 2006. Strong demand from China was the main contributor to the growth. Mexico and Canada were also major importers of US PE.       In This Issue   Featured Article   Imponderables   Famous Quotes   Companies   Business/Finance   Pharma   Fine & Specialty Chemicals   Commodity Chemicals   Intermediates   Plastics     Corporate HQ: 9101 LBJ Frwy., Suite 310 Dallas, TX 75243 USA Tel: (214) 349-6200 Fax: (214) 349-6286