Dow Makes Cuts
To achieve annual savings of about $180 million, Dow Chemical will close plants and eliminate as many as 1,000 jobs. Facilities likely to be shut down include an agrochemicals intermediates plant in Lautebourg, France, Hydroxymethyl cellulose plant in Aratu, Brazil, a Styrene plant in Camaçari, Brazil and a Union Carbide Polypropylene plant in St Charles, Louisiana. R&D activities at a Union Carbide site in South Charleston, W.Va. will also be reduced significantly. In addition, the company will exit the automotive sealants business in North America, Asia Pacific and Latin America. Further decisions could be pending with other commodities businesses.

These actions will make capital available for investment in projects in Asia and the Middle East. Dow Chemical recently announced that it will invest in an $11 billion joint venture with Petrochemical Industries Co. in order to gain access to cheaper feedstocks. Dow will sell to PIC for $9.5 billion a 50 percent share in five of its global businesses that are worth about $19 billion. The JV will be headquartered in the United States, will operate as a separate company (its name has not been chosen yet) and will produce Polyethylene, Ethylenamines, Ethanolamines, Polypropylene and Polycarbonate. The two companies already have other joint ventures and have been working together for 10 years. The new joint enterprise will mean that Dow will have projects integrated from feedstocks to derivatives.

PPG has Trouble with Sale of Auto Glass Business
PPG's $500 million sale of its automotive glass businesses to investment firm Platinum Equity has run into trouble. Platinum has accused PPG of inflating the value of its businesses and filed a lawsuit seeking to abandon the deal and alleging that PPG provided false revenue projections, understated pension liabilities and obligations and deferred several million dollars of maintenance expenditures. Platinum says that if it had known this information it would have lowered its purchase price or not entered into a purchase agreement. The company is seeking from PPG the costs and expenses incurred in connection with the transaction, lost opportunity costs and punitive damages.

Reorganization at BASF

Effective Jan. 1, 2008, BASF will operate with six business segments rather than five. The segments include chemicals, plastics, functional solutions, performance products, agricultural solutions, and oil and gas. The new functional solutions unit will incorporate the catalysts, construction chemicals and coatings divisions and will largely serve the automotive and construction industries. Performance products will include the newly created care chemicals division (fine chemicals plus detergents and cleaners) plus acrylics and dispersions, which previously was the functional polymers business. The performance chemicals segment will target the oil and refinery, coatings and plastics and leather and textile industries. BASF will divest its styrenics business. According to the company, the change will enable BASF to be faster to market, closer to customers, increase efficiency and ensure greater cyclical resilience.

China Gets Tougher on Exports
After cutting export tax rebates for over 2,000 products in 2007, China may apply further pressure in 2008 on the export of light industrial products such as plastics and electrical appliances. The 2007 cuts, however, do not appear to have affected the level of exports, which grew by 20 percent in November as compared to the same month in 2006. In general producers passed on price increases that were accepted by buyers who could not find alternative sources for these materials.

The Chinese government might introduce taxes on energy-intensive and environmentally unfriendly products in addition to maintaining the rebate cuts to further reduce exports. The central government will also release regulations on emissions and safety performance for manufacturers involved in the Chlor-alkali production chain, which should create barriers to entry into this industry.

Firms Fined by South Korea for Polyethylene Price Fixing
Hanwha Chemical, LG Chem, SK Energy, Samsung General Chemicals, Seetec and Samsung Total Petrochemicals received fines totaling $58.1 million (W 54.1 million) by South Korea's Fair Trade Commission for fixing prices of low density Polyethylene (LDPE) and linear LDPE (LLDPE). The case is the second in 2007. The government previously fined companies a total of $112.7 million (W 105 million) for forming domestic high density PE (HDPE) and polypropylene (PP) cartels for the past 12 years. The agency may expand its investing to Styrene monomer as well.

New Price Fixing Fines for European Companies
Denka, DuPont, Dow Chemical, ENI and Tosoh have been fined a total of $357 million (Europe 243.2 million) by the European Commission (EC) for conspiring to fix prices of Chloroprene rubber from at least 1993 to 2002. Bayer's Euro 201 million fine was rescinded because the company was the first to come forward with information.

In a separate case, the EC increased BASF's fine for its part in a Choline chloride cartel by $79,294 (Euro 54,000). BASF, Akzo Nobel and UCB were initially fined a total of Euro 66 million in 2004 for price-fixing activities from June 1992 to April 1994. BASF and UCB appealed the decision. In response to the appeal, the court raised BASF's fine but lowered UCB's amount by 90 percent, since UCB reported the European activities of the cartel.

Potential for Growth Abroad but Tough Times at Home for U.S. Chemical Companies in 2008
Restrictions on natural gas and rising crude oil prices will have a negative impact on the United States chemical industry in 2008. The energy bill passed by Congress in late 2007 strongly pushes for increased biofuels and will create a level of demand for natural gas greater than current supplies. Additionally, climate change legislation that is expected to be adopted in 2008 will likely force many chemical producers and utilities to switch from coal to natural gas, further heightening demand.

American chemical companies will be facing this energy and raw material crisis at a time when the country may be facing a recession. The continuing decline in the housing market will affect many segments of the chemical industry. Automobile production, while not expected to drop further, is predicted to remain at the low levels seen in 2008. Manufacturing sectors not connected to housing or automobiles are the only areas of the U.S. economy that are expected to perform well in 2008.

Given the situation at home, many commodity chemical producers in the United States are looking to exports to maintain profitability. The weak dollar is making their products much more competitive in the global chemical marketplace. Growing demand overseas is also a favorable factor, as is access to competitively priced feedstocks. Outsourcing of pharmaceutical production will continue, however.

New Deals in Contract Manufacturing
Several transactions have taken place recently in the world of contract manufacturing. Cambridge Major Laboratories acquired Chemshop, a supplier of active pharmaceutical ingredients (API) development services. Cambridge will expand reactor capacity and increase the laboratory capabilities at the European site, which has been renamed Cambridge Major Laboratories Europe. PPG Industries completed the $65 million sale of its fine chemicals business to ZaCh Systems, a subsidiary of Zambon Company. PPG sold the business as part of its strategy to focus on coatings and specialty products.

Aptuit purchased the chemical development business of Evotek for about $64.57 million (Euro 44.36 million) to expand its development services. Evotek sold the business in order to focus on its high-end research capabilities. Isochem sold its NeoMPS peptides business to PolyPeptide Laboratories Group for an undisclosed amount. Finally, ownership of Vertellus Specialties changed from Arsenal Capital Partners to Wind Point Partners. Arsenal formed Vertellus in 2006 by combining the operations of Reilly Industries and Rutherford Chemicals. Richard Preziotti, a former executive at Honeywell, will take the position of CEO at Vertellus.

Big Pharma Reductions Will Pay Off
More than 30,000 job cuts have been announced by big pharma companies in 2007. Analysts predict that these actions, while painful, will benefit these key players in the future. Novartis recently joined Eli Lilly, Pfizer, GlaxoSmithKline, Bristol-Myers Squibb and several others with announcements of significant reductions in personnel and plans for reorganizing operations. In the end, according to analysts, leaner businesses that have shifted some operations overseas will be better suited to compete with low-cost producers in emerging markets.

Spotlight on Biopharma
Major pharma companies are investing heavily in biopharma firms as they look to biotech for strong profits. Novartis AG has signed a $1 billion R&D contract with MorphoSys AG for the development of antibody-based therapies. Merck & Co. agreed to pay $170 million to Addex Pharmaceuticals to develop a treatment for Parkinson's disease and Sanofi-Aventis will invest as much as $810 million in Regeneron Pharmaceuticals for antibody-based research.

Many leading drugs on the market today are biologics, such as Herceptin (Roche Holding), Remicade (Johnson & Johnson) and Humira (Abbot Labs). Sales of biopharmaceuticals in the United States grew 20 percent in 2006 to reach $40.3 billion, according to IMS Health. Biologics are also attractive because they do not face generic competition, at least in the United States, where the FDA has yet to establish a regulatory protocol.

At the same time, many biopharma firms are anticipating decisions from the FDA that will determine their future. Approval decisions are expected in December 2007 for drugs from Neurocrine BioSciences, BioMarin and Pharmacyclics, while Biogen Idec, Cardiome, Discovery Labs, Elan, Genentech, Indevus Pharmaceuticals and Johnson & Johnson will be waiting for decisions in 2008. Other companies that have yet to formally submit drugs for approval but are expected to do so include Advanced Life Sciences, Genitope, ImClone Systems and Medarex.

Deal Between Nufarm and ChemChina Cancelled
A consortium of buyers led by ChemChina was unable to formalize a proposal for the $2.63 billion takeover of Nufarm before the deadline for expiration of the agreement. As a result, talks between the two companies have been halted. ChemChina, Blackstone and Fox Paine Management had signed an exclusivity agreement to buy Nufarm, but Nufarm is no longer obligated to the group now that the deed has expired. Nufarm indicated that it is interested in speaking with other potential bidders.

Separately, ChemChina also failed to come to an agreement with the parent company of Shandong Haihua about cooperation between the two companies.

Fertilizer Industry Facing Shortages of Key Materials
Phosphoric acid, a key raw material in the production of phosphate fertilizers, will be in tight supply through 2010, according to the International Fertilizer Industry Association. Additional capacity is being added, but it will not be on-stream until 2011. Much of the material will be used for domestic downstream applications in China and Saudi Arabia, though, and most of the capacity targeted for export is already under contract. Urea supplies are also tightening, as new production plants around the world are experiencing delays. Industry operating rates are currently at 90 percent. Even if planned projects do come on-stream on time, there will not be a surplus until 2010. Most urea is used as fertilizer, but non-fertilizer applications are expected to grow rapidly over the next few years, adding to the need for increased capacity.

Prices for many fertilizers hit record highs in 2007 as a result of an increased demand for food at a time of low grain stocks. Increased demand for crops used for biofuels production and resulting high crop prices also contributed to the rise in fertilizer prices. These conditions continue to be factors in 2008.

The shortness in the Phosphoric acid market is impacting the Indian farm sector. Domestic phosphate fertilizer producers are not able to import the necessary quantities of Phosphoric acid, resulting in idle capacity. Prices for 2008 contracts are significantly higher than 2007 levels and are expected to climb further. India is also the world's largest importer of Diammonium phosphate (DAP) and Urea.

China Market Cooling Off?
Key industry players in China predict that demand for petrochemicals in China will slow down in 2008 as government controls and high energy and raw material costs take their toll. The Chinese government has implemented both financial controls and safety regulations that are affecting the industry at a time when crude oil costs are rising rapidly. Further actions may include additional tightening of credit and removal of remaining export subsidies. Controls in downstream markets such as the construction industry are also having an impact. Contraction in demand for Ethylene and derivatives, as well as many of the major polymer markets, is expected.

Middle East Center of Chemical Activity
Ready access to low-cost feedstocks is enabling the Middle East to establish itself rapidly as a major exporter of petrochemicals. The level of building is placing significant pressure on engineering firms and resources, including skilled labor, materials and construction equipment, resulting in the delay of several projects. Rising feedstock costs and constraints on some raw materials (Ethane in particular) are also becoming growing concerns.

Despite these difficulties, analysts predict that producers in the Middle East will become true global players, reaching customers around the world and offering more than Ethane-based derivatives. Successful companies will be from global partnerships. The diversity of projects (commodity and specialty chemicals) and careful control of costs will also be critical for companies looking to take a top position in the worldwide chemicals marketplace.

Companies building facilities include Kuwait Olefins Co. (TKOC), a joint venture project between Petrochemical Industries Co. of Kuwait and Dow Chemical; Ras Tanura, a Dow Chemical and Saudi Aramco project; Jam Petrochemical Co. (JPC); Rabigh Refining & Petrochemical project, a joint venture between state-owned Saudi Aramco and Sumitomo Chemical; Eastern Petrochemical (Sharq); and Borouge, a joint venture between Borealis and ADNOC.

Most of the projects are expected to be on-stream by 2012. Many wonder about the impact this increase in capacity will have on the marketplace, as it will occur at the same time that many new Asian plants will be starting operations. Oversupply in Ethylene is of particular concern.

Questionable 2008 for Olefins
High feedstock costs are likely to plaque olefins producers around the world in 2008. High crude oil prices are squeezing margins for producer in the United States, Europe and Asia. Some producers in Asia are considering reducing exports to save costs, which could reduce spot availability. Supplies will be further tightened in the region, with a significant number of maintenance turnarounds scheduled in Japan in 2008. Growing demand could place further strain on the market. Traders are hopeful that large production capacity in the Middle East will provide access to material.

European producers are concerned about the access that Asian and Middle Eastern producers have to lower cost Ethylene. They also must hope that downstream polymer markets will accept the record high olefins prices necessary for maintaining even slim margins. In the United States, olefin producers also face tight suppliers and high crude oil costs. Strong demand for derivatives and increased imports will continue in 2008. There are also a number of planned shutdowns scheduled in the Unites States in 2008.