January 2007 Reach Approved; Industry Responds Registration, Evaluation and Authorization of Chemicals (Reach) legislation has been unanimously approved by the European Parliament, with rules taking effect in June 2007. The legislation requires the registration of approximately 30,000 chemicals produced or imported into the EU. About 3000 chemicals of 'high concern' will be authorized only if manufacturers develop substitution plans, and where substitutes cannot be found, initiate research efforts to do so. The compromise legislation also contains a 'duty of care' clause requiring that all chemical compounds should, 'under reasonable foreseeable circumstances' not adversely affect human health or the environment. The Confederation of European Businesses believes the Reach legislation should have taken a more risk-based approach and because it did not, the European chemical industry will now be at a competitive disadvantage. The requirement for substitution plans will, according to the group, reduce innovation as well. Other European trade associations including VCI and Cefic indicated they were pleased to see Reach legislation approved but dismayed about the onerous substitution requirements. These groups also believe that the ability of European chemical producers to compete in the global marketplace will be hampered by the costs and requirements of the rules. The U.S. chemical industry also continues to believe the Reach legislation is unworkable, even with the recent compromise. The program fails to address the concerns of trading partners and reduces global competitiveness, while a true risk-based system would have more appropriately aligned both region's economies and regulatory systems. The Japan Chemical Industry Association (JCIA) is concerned about procedures for data sharing, and regulations which could work against non-European companies who try to form consortiums in Europe. It also has issues with the substitution plan requirements, time periods for approvals, and other aspects of the rules. Eastern European trade groups are concerned about the impact Reach will have on their small and medium sized member companies. They expect to see products withdrawn from the market and some facilities closing as a result of the costs of Reach, which they estimate will be as much as 5-40 percent of production costs. Some noted that consumers will still be able to buy products from Asia and other non-EU countries that contain unauthorized chemicals, which defeats the original purpose of the legislation.     Famous Quotes of the Month - Inspiration and genius -- one and the same. (Victor Hugo) - Time does not change us. It just unfolds us. (Max Frisch) - Common sense and a sense of humor are the same thing, moving at different speeds. A sense of humor is just common sense, dancing. (William James) - The future depends on what we do in the present. (Mahatma Gandhi) - Every artist was first an amateur. (Ralph Waldo Emerson)         If Water Is Composed of Two Parts Hydrogen and One Part Oxygen, Why Can't Droughts Be Eliminated by Combining the Two to Produce Water? We could produce water by combining oxygen and hydrogen, but at quite a cost financially and in some cases, environmentally. Methods for creating water are impractical because you would need massive amounts of oxygen and hydrogen to produce even a small quantity of water, and amassing each would be expensive. You would also need to add the cost of labor and equipment necessary to run a water plant. Another possible alternative would be to obtain water as a byproduct of burning methane in an oxygen atmosphere. While possible, this would be a terrible waste of energy because methane is a wonderful fuel. The most likely solution to droughts is desalinization. We already have the technology to convert ocean water to drinking water but it is too expensive to be commercially viable. It would require a perspective change on our parts to view water as a valuable and constrained natural resource (like oil or gold) before we were likely to proceed with large-scale desalinization plants. In northern Africa, water for crops, animals and drinking is not taken for granted.       Celanese Reorganizes Celanese will restructure the company as three businesses - advanced engineered materials, consumer and industrial specialties, and acetyl intermediates - with the goal of increasing revenues by 25 percent by 2010 and earnings by $300 million to $350 million (Euro 225 million to Euro 263 million) between 2007 and 2010. The advanced engineering materials group will include Celanese's Ticona business. Consumer and industrial specialties will be comprised of the company's Acetate products, emulsions, and Polyvinyl alcohol products businesses, among others. The acetyl intermediate group will include Acetic acid, Vinyl acetate monomer (VAM), Acetic anhydride and other intermediates. Strategic management for the acetyls business will be moved from Texas to Shanghai as early as spring 2007. Celanese expects to achieve 30 percent of its revenue from Asia by 2010. As part of its strategy to remain a focused company, Celanese also announced that it has agreed to sell its Oxo Products and Derivatives businesses to private equity firm Advent International for $636.3 million (Euro 480). The deal includes Celanese Corporation's Oberhausen, Germany and Bay City, Texas facilities, some of its Bishop, Texas, facility, and European Oxo GmbH (EOXO), a joint venture between Celanese and Degussa with operations in Oberhausen and Marl, Germany.       Lyondell and Subsidiaries Face Pollution Violation Suit Lyondell and subsidiaries Equistar, Millennium Petrochemicals Incorporated and Millennium Petrochemicals GP face a suit filed by the Texas attorney general alleging violation of state air pollution laws. The suit claims that operators at four plants failed on repeated occasions to prevent the release of harmful pollutants (volatile organic compounds, Nitrogen oxides and Carbon monoxide) into the atmosphere. The state is seeking civil penalties following the failure of settlement negotiation between the four companies and the Texas Commission on Environmental Quality (TCEQ). The civil penalties range between $50 and $25,000 for each day of violation. Lyondell responded that the lawsuit was an attempt by the Texas attorney general to force the company into accepting the above mentioned settlement terms. A spokesperson indicated that Lyondell has addressed emission issues identified by state and federal environmental agencies and was negotiating in good faith when the state filed the lawsuit. The company says the lawsuit unfairly represents Lyondell's actions and makes it seem as if the problem is ongoing when the issue is in fact an historical one.       Solutia Planning for Emergence form Bankruptcy Solutia is considering two options for reorganization following emergence from bankruptcy. One would involves the sale of its equity to a third party. The other would see shares granted to bondholders in the company. Solutia met in mid-December 2006 with 18 potential buyers. Analysts predict that private equity firms would likely be interested, but strategic players would not. The company would use proceeds from the sale to fund the settlement with Solutia's retirees, certain ongoing legacy liabilities, and cash distributions to Solutia's creditors. In a separate meeting with creditors, the company proposed that bondholders exchange their debt for 36.52 million primary common shares and the chance to purchase 16.23 million shares in a rights offering. For either approach, creditors and the bankruptcy judge would have to approve the reorganization plan before Solutia could emerge from bankruptcy. The company filed its original plan in February of 2006, and filed for bankruptcy protection in December 2003. Separately, Solutia announced that it has agreed to acquire from Akzo Nobel that company's 50 percent stake in their Flexys rubber chemicals joint venture and Akzo Nobel's Japanese toll manufacturing operation for Flexys. The financial terms of the deal, which is subject to approval, were not disclosed.         Henkel Prepares for New Chairman Henkel has made moves to prepare for the departure of chairman Ulrich Lehner. Lehner announced that he will retire in April 2008. His replacement, Kasper Rorsted, will take on the responsibilities of deputy chairman effective January 1, 2007.     New Head for DSM in May Retiring chairman Peter Elverding of DSM will be replaced by Feike Sijbesma effective May 1, 2007. Elverding has been chairman since 1999. Sijbesma has been with DSM since 1998.       Brazilian Chemical Trade Deficit Climbs, but So Does Production Growing domestic demand, the weakness of the U.S. dollar, and a reluctance to invest in significant additional capacity resulted in a record high chemicals trade deficit of $8.4 billion (Euro 6.3 billion) for Brazil in 2006. According to the Brazilian Chemical Producers Association (Abiquim), Brazil's chemical trade deficit grew 6 percent in 2006 despite an increase in chemical industry export revenues from $7.4 billion in 2005 to $8.7 billion in 2006. At the same time, imports rose from $15.3 billion to $17.1 billion. With an expected stabilization of the exchange rate, the association expects the deficit for 2007 to be similar to that in 2006. Abiquim also predicts that chemical production in Brazil will increase 3-4 percent in 2007. Agrochemicals and thermoplastic resins will be two key drivers for this growth.     Stable Outlook for Thai Chemical Industry After Shaky Start Following a 15 percent drop in stock values after imposition of capital control measures introduced by the central bank (done in an attempt to control the rising value of the Thai baht), the Thai government announced that it would remove the new restrictions on foreign investment in equity. Petrochemical companies impacted by the stock market decline include Aromatics, PTT Chemical, Siam Cement, Polyplex, and Thai Oil. Just two weeks after these events rocked the Thai market, coordinated bombings in the Thai capital on New Year's Eve sent stocks plummeting again. Analysts predicted that the petrochemical industry would not, however, be affected in the long term. Unsettled times may be ahead though. These two events, combined with a revision to the foreign ownership laws that could force shareholders to sell down holdings, could result in the withdrawal of foreign funds. Despite the uncertainty in the stock market, analysts predict that the chemical companies in Thailand should experience a continuation of market conditions observed in 2006. The supply/demand relationship appears to be stable until 2008. Aromatics and olefins producers are expected to continue to enjoy high returns and increased earnings. Oversupply, though, is predicted to remain in the Polyvinyl chloride (PVC) and Polyethylene terephthalate (PET) markets until demand increases in 2008.         Goldschmidt Acquires Part of Degussa's Industrial Chemicals Business Goldschmidt TMB, a subsidiary of Degussa, has acquired the German and Mexican industrial chemicals activities of its parent company through a management buyout. The value of the deal, which was expected to be finalized by the end of 2006, was not disclosed. Goldschmidt managing director Karsten Tiemann will head the newly acquired businesses. Degussa will sell its U.S. industrial chemicals business separately.     Rockwood Sells Novasep Rockwood announced that it has agreed to sell Groupe Novasep to a consortium comprised of Gilde Buy-Out Partners, Banexi Capital and company management. The deal, valued at approximately $560 million (Euro 425 million) is expected to be completed in early 2007. Analysts expect Rockwood to use proceeds from the sale to reduce leverage and make other acquisitions.       Asian Liquid Caustic Soda Market Looks Bright Asian liquid Caustic soda suppliers expect a strong 2007. Demand is rising and Chlorine operating rates remain low, keeping supplies on the tight side. Contract prices for the first half of 2007 are up nearly 4 percent compared to contracts for the second half of 2006. Domestic suppliers to the Chinese spot market have seen prices rise as much as 20-25 percent. Prices even remained firm during the winter season, when they usually decline. New capacity coming on-stream in China in the second half of 2007 could result in excess supply. Some believe, however, that the solid Caustic soda market will absorb the new production volumes and thus not affect the liquid market.     Demand Driving U.S. Aromatics Increases in prices for aromatics were seen in the U.S. in the second half of December in response to a shortness in supply relative to demand. The shortness in supply was attributed to production problems at selected manufacturing facilities. Continued tight supplies coupled with demand will lead to higher prices in early 2007 as well, both for contract settlements and on the spot market. Spot prices for Benzene, Toluene, and mixed Xylenes, typically rise in January. According to traders, the price hikes are due to early position taking in the market.     Short Supply and Rising Raw Material Costs Lead to Higher Asian Toluene Prices Higher crude prices and shortage of material have resulted in higher prices for Asian Toluene. The shortage was due to a delay in the restart of a key manufacturing facility that was closed in September to improve productivity. Prices for January and February shipments rose from 2.3 percent to as much as 5.7 percent.     Slower Demand Leads to Lower Spot Prices for U.S. Soda Ash Poor seasonal demand for Soda ash has resulted in declining spot prices for the commodity in the U.S. Some deals reflected a decline in price of 18 percent. Suppliers indicate that tight supply will keep global contract prices firm and also result in a return of higher spot pricing in 2007.     Uncertainty Reins for Commodity Chemicals Analysts cannot agree which way the commodity chemical cycle will turn in 2007. Some believe that the cycle will move upward, at least for some products such as Ethylene and Chlor-alkali, following a slower first quarter. Others believe that the commodity chemical cycle could swing downward at any time during 2007. A third group believes the move will be a sideways one. Looming on the horizon, though, is significant new capacity soon to be on stream in China. If the country's domestic demand does not keep pace, then additional new plants expected to be operational in the Middle East in the 2009 time frame could create competition for existing producers in the European and North American markets.     Unexpected Rise in U.S. MTBE Prices Methyl tertiary butyl ether (MTBE) prices in the U.S. rose 6.5 percent in December in response to an unexpected increase in demand. The typical seasonal slowdown has not occurred, and supplies are tightening. The rise in price is expected to continue for the near term.       Urea Prices High in Response to Strong Indian Demand According to the United Nations' Food and Agriculture Organization (FAO), strong demand in India for Urea has resulted in elevated prices of the chemical on a global basis. Other countries with high demands for Urea include Turkey, Brazil and other Latin American and Caribbean nations. Rising gas prices have also contributed to some of the price hikes.       Buyers Return and Drive Up Chinese Adipic Acid Prices Low inventories led buyers in China to return to the market, driving Adipic acid prices up as much as 10 percent or more. The price hikes came after prices fell in November in response to year-end liquidation of stocks and weak demand from downstream markets. Traders were uncertain as to whether prices would continue to rise or remain unchanged.       PVC Market Has Rosy Glow in 2007 Polyvinyl chloride (PVC) producers in the U.S., Europe, Asia and the Mideast all have optimistic outlooks for 2007. This optimism in part is due to the fact that no major capacity expansions are planned to begin operation during the year. Demand remains strong, particularly in emerging regions. However, lower energy costs and falling feedstock prices are placing pressure on PVC manufacturers to lower their prices. In Europe, demand from countries in the Eastern and Central parts of the region is contributing to positive expectations. Demand from Asia will keep exports from that region at a minimum, allowing European suppliers to profit from the increased volume of sales. Prices for Asian PVC are on the rise, and demand in the region is predicted to increase at a moderate rate in 2007. Producers are hopeful for improved margins, which will depend partially on the availability and pricing of Ethylene feedstock. In the Middle East, strong demand and limited supply have PVC manufacturers looking forward to a profitable 2007. The expected closure of Shintech's large Texas PVC plant some time in the first quarter could further reduce availability, as Asian material would possibly be sent to the U.S. rather than the Mideast. Demand for PVC is expected to be strong in 2007 in this region, with the construction and telecommunications sectors driving growth. One potential hitch in this positive scenario is the possibility that China will shift some exports from Turkey, where there are anti-dumping restrictions, to the Mideast. If that occurs, however, Middle East producers may then turn around and export material to Turkey themselves. U.S. producers expect growth in the PVC market despite a slowdown in the housing industry. Prices are expected to increase in the first quarter, following a decline to the lowest levels in four years in November and December 2006.         Lower Raw Materials Costs Drive Down Polybutadiene Prices in China Lower Butadiene feedstock costs have resulted in the decline of the price of Polybutadiene rubber sold to the domestic Chinese market. Overall prices have fallen nearly 5 percent.       China Faces Another Textile Anti-Dumping Investigation by EU The European Union will investigate over 1000 Chinese businesses that export chemical fabric products to Europe. The total value of these goods sold into the EU is estimated to be greater than $487 million. The investigation will seek to determine whether Chinese textile manufacturers have reduced export prices. Previously in 2006, the EU imposed a five-year anti-dumping duty (14 to 56 percent) on certain finished Polyester filament fabrics from close to 1000 businesses in China. Depending on the results of the new investigation, these tariffs could be as much as doubled for these products.     DHS Issues Proposed Chemical Plant Site Security Rules The U.S. Department of Homeland Security issued its proposed regulations on chemical plant site security. Entitled "Chemical Facility Anti-Terrorism Standards," the proposed rules would require chemical facilities to submit to an analysis to determine whether or not they pose a high risk. Those identified as being high risk would then be required to conduct a Vulnerability Assessment, submit a security plan to DHS, and implement any measures necessary to address identified shortcomings in existing programs and practices. DHS can issue penalties, up to and including the closure of facilities, for those sites that do not comply. The department is seeking comment on a number of aspects of the proposed rule. Comments must be submitted by February 7, 2006. Industry has responded favorably to the proposed rules. Individual facilities will have the flexibility to select the specific measures they wish to use, existing assessment methodologies and programs will be evaluated and potentially accepted by DHS, and vulnerability assessments and site security plans will be protected from unwarranted public disclosure. Federal pre-emption of state regulations is also addressed. Congress is likely to consider new legislation covering chemical plant site security in 2007. Many members do not agree with the federal pre-emption provisions included in the proposed rules issued by DHS. Others believe the proposed rules are too weak because they do not require facilities to implement inherently safer technologies. The law passed in 2006 contains a three-year sunset provision and will expire in 2009 unless Congress renews the statute. Renewal is not a guarantee with the Democratic majority. The chemical industry must also deal with new DHS regulations on the security of the transportation of hazardous substances via rail. The department issued draft regulations in late December 2006 and is expected to finalize them in early 2007. New federal standards for tank car design and construction are also expected in 2007. Congress may also consider legislation to prevent the transport of hazardous substances via rail through routes close to populated areas.       U.S. Congress Eyes Own Reach Legislation With the passage of the European Union's registration, evaluation and authorisation of chemicals (Reach) program, leaders of the democratically controlled U.S. Congress are actively planning the introduction of their own version of Europe's Reach legislation. New Jersey Senator Frank Lautenberg is expected to bring forth a bill soon after the New Year. Most likely, efforts will focus around attempts to revise the Toxic Substances Control Act (TSCA) to be more like Reach. Two key differences must be addressed: TSCA grandfathered in most chemicals in production when the law passed in 1976, while Reach covers all chemicals; and TSCA takes a risk-based approach while Reach is based on the precautionary principle. U.S. trade associations have anticipated that Congress would at some point try to implement legislation similar to Reach, but most do not believe Reach-type regulations will receive widespread support.