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Floods in U.S. to Effect Ethanol Supply
The floods in the central United States are only
making a bad corn year worse, and they could destroy
14 percent or more of the nation's crops. Iowa
farmers have already lost $2.5 billion to $3
billion. Ethanol producers will be hardest hit, as
corn for animal feed and human consumption will be a
priority. Lawmakers may require the reduction of
Ethanol output to free up corn supplies. High corn
prices, which are already rising dramatically, will
likely force many small- and medium-sized Ethanol
producers to shut down. Analysts predict that
Ethanol capacity could decline by 2 billion to 5
billion gal/year.
Some farmers have been able to replant corn and soy,
and, in many cases, land that would have been
planted in corn has been replanted in soy, which can
be started later in the summer. Those replanting are
paying a higher cost for fertilizer due to
additional transportation charges for moving the
material through flood-ravaged areas.
On a separate note, cotton crops have also been
devastated by the flooding. As a result, prices for
this natural fiber will be higher. Asian Polyester
producers are hoping that synthetic fiber will
become an attractive alternative.
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Central/Eastern Europe
Emerging as Key Markets for Petrochemicals
Changing dynamics - higher energy and
feedstock costs and shorter supplies of key
raw materials - are reducing the
competitiveness of Asia and the Middle East,
making Central and Eastern Europe (CEE) a
more attractive investment alternative.
While most M&A activity has been initiated
by local manufacturers, many Western
European companies are beginning to look for
organic growth opportunities through
expansion into Central and Eastern European
markets. The accession of several CEE
countries to the European Union has
contributed to recent growth in these
nations. Lower labor costs, ready access to
skilled employees and an increasing
familiarity with the English language are
further advantages over the Middle East and
China.
Countries of particular interest to the
chemical industry include the Czech
Republic, Hungary, Poland and Slovakia. The
value of chemical production in the CEE
region increased 17 percent per year from
2000 to 2006, reaching $135 billion (Euro 86
billion). A growing automotive industry,
privatization of other sectors (plastics in
the Czech Republic, for example), and the
movement of manufacturing from Western
Europe to the CEE region are all
contributing to this growth. Western
companies becoming active in the region
include Rohm and Haas Company, Akzo Nobel
and BASF.
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Growing Russian
Chemical Industry Faces Hurdles
Rising oil prices are providing Russian
government and oil and gas companies with
money to invest in petrochemical complexes.
Analysts estimate the value of projects to
be pursued over the next three to four years
at about $20 billion (Euro 13 billion).
However, while many projects have been
announced, little investment has actually
occurred. Russia faces two key issues -
difficult access to raw material sources in
terms of exportability; and a domestic
market that, while growing rapidly, remains
relatively small.
Companies interested in investing in
petrochemical complexes include leading oil
and gas firm Gazprom, which controls
petrochemical company Sibur, and smaller
players such as gas trader ITERA, resin
maker Uralchimplast, energy holding company
Tatneft and oil company LUKOIL. Projects
include various polyolefins facilities, a
Polyvinylchloride plant, a Methanol facility
and mixed petrochemical complexes. Many of
these projects have been delayed, some due
to the political difficulties plaguing
Gazprom. Many firms are also having
difficulty securing funding for these
projects, while others may be delayed due to
concerns about a future oversupply situation
if all projects come to fruition. Oil
companies also point to high taxes and oil
export duties as hindrances to investment in
new facilities.
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Strikes Around the
Globe Affecting Chemical Industry
More strikes at French ports and strikes by
truckers in other parts of Europe, India and
Korea are all taking their toll on chemical
manufacturers. A series of strikes at French
ports have been occurring to protest the
privatization of port operations in the
country. A seven-day strike at Marseilles
resulted in congestion and delays.
Additional 24-hour strikes at this port and
others across the country are also planned.
In Spain, a truckers' strike to protest
rising fuel prices has affected the
transportation of chemicals in the country.
CEPSA Quimica cut back on production because
a key raw material is not being delivered. A
surfactant producer in southern Europe
stopped production due to an inability to
get Ethylene oxide. The government and
various Spanish haulage companies are in
negotiations. No timeline has been set for
the stoppage of the strike.
Italian and Indian truckers are also set to
strike during the first week in July. Indian
truckers are protesting the government tax
structure, as well as high gas and diesel
prices.
In Korea, the Transportation Industry
Nationwide Labor Union of Korea went on
strike on June 13, 2008, seeking lower
diesel prices and a higher pay structure.
Commodities such as Ethylene and Propylene,
which are transported by pipeline, were not
affected. But shipments of polymers�like
Polyvinyl chloride, Polyethylene and
Polypropylene�and other key feedstocks were
halted. After one week, some producers
reduced production rates to as low as 50
percent. In Yeosu city, companies eventually
accepted the union's demand for a 13 percent
pay hike, but many truckers planned to stay
off the road until union members in all
parts of the country reached an agreement
with the authorities. LG Chem settled
separately for a 20.5 percent increase and
drivers agreed to return to work
immediately. A 19 percent raise was agreed
on at the port of Pusan. Even though
truckers returned to work, the week-long
strike still caused tremendous delays.
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Hexion/Huntsman Deal
Hits a Snag
Because of Huntsman's increased net debt and
lower-than-expected earnings, the initial
$10.6 billion (Euro 6.8 billion) offer that
Hexion Specialty Chemicals made for the
company is no longer "viable," and Hexion is
suing to end the agreement. Hexion also
claims that the current situation presents a
"material adverse effect," and that Hexion
does not need to pay Huntsman a $325 million
breakup fee.
Huntsman responded by filing a $3 billion
(Euro 1.9 million) lawsuit against Apollo
and its principle partners, Leon Black and
Joshua Harris, claiming that the group
falsely induced Huntsman to terminate a
merger agreement with Basell. That agreement
was called off when Hexion Specialty
Chemicals, an Apollo company, made a better
offer. According to the suit, Huntsman
claims that Apollo's strategy all along was
to eliminate competitors and delay the
merger to force a lower price for the deal.
Hexion, in turn, called Huntsman's suit
"baseless," and said that in filing the
lawsuit in Texas, Huntsman violated the
merger agreement, which required that all
litigation be filed in Delaware state court.
Litigation is expected to continue for a
year or more.
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FDA Makes Progress on
Dealing with Foreign Drug Manufacturers
Several announcements from the FDA suggest
that the agency may take action to increase
the inspection of APIs and drug products
produced in foreign countries. First,
President George W. Bush requested an
additional $275 million for the FDA's
budget, and the House Agriculture
Subcommittee approved a fiscal 2009 budget
of approximately $2.1 billion for the FDA
that includes the additional funds.
Lawmakers in the House also approved an
additional $150 million for the FDA for the
rest of the current fiscal year, which runs
through Sept. 30, 2008.
Second, the agency announced that it has
received diplomatic approval to set up three
inspection offices in China (Beijing,
Shanghai and Guangzhou) by the end of 2008.
Third, the FDA reported that it is working
hard to establish at least a basic presence
in India by the beginning of 2009, at the
latest. Staff would be stationed in New
Delhi and Mumbai. When funds are available,
the FDA also hopes to create offices in
Amman, Jordan, Central or South America and
Europe.
Despite these actions, the agency is still
receiving pressure from lawmakers. Senator
Sherrod Brown, D-Ohio, recently sent a
letter to the FDA, asking the agency to
investigate pharmaceutical outsourcing. In
the letter,Senator Brown claims that
pharmaceutical companies are taking
advantage of lower safety standards in India
and China to have access to cheaper
ingredients.
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Growing Demand for
Food Changing Agrochemical Manufacturing
As greater numbers of people in emerging
regions have attained a higher standard of
living, the demand for meat and grain has
surged. Although the trend is only in its
early stages, agrochemical producers are
finding it necessary to develop new
strategies for meeting the world's needs for
novel seeds, fertilizers and pesticides.
Biotech is becoming an increasingly
important component of the agchem market, as
are outsourcing of manufacturing and higher
levels of investment in R&D.
Sales of biotech crops grew 11.5 percent
from 2006 to 2007, in response to an
increasing world population and wide
acceptance of genetically modified seeds.
Even faster growth is anticipated in the
future, particularly in developing countries
where the need for the technology is
greatest. Leading players, such as Monsanto
and DuPont, are investing heavily in their
biotech businesses to position themselves in
many of these markets.
On the crop protection side of the business,
agchem firms are turning to outsourcing of
both intermediates and active ingredients as
a way to cut costs. They are reducing their
portfolios and rationalizing capacity in an
effort to maintain patent-protected sales,
while eliminating unnecessary costs. At the
same time, these companies are increasing
their R&D efforts in response to growing
demand for ever more effective herbicides
and fungicides, particularly as planting
volume and density continue to increase.
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Colorado residents who claimed that
contamination from a Rocky Flats nuclear
weapons facility resulted in a decline in
their property values will be receiving
compensation from Dow Chemical and Rockwell
International. Dow was ordered to pay $653
million (Euro 418 million) and Rockwell was
ordered to pay $508 million (Euro 325
million). Dow indicated that it would appeal
the order.
Following on the heels of a 20 percent
across-the-board price increase in June, Dow
Chemical announced an additional increases
of up to 25 percent on its products for July
in order to reestablish margins. In North
America, a freight surcharge will also be
included for shipments by truck or rail.
Other regions can expect these surcharges to
be implemented later in the year. The
company has already or will reduce
production or temporarily halt operations at
several facilities in North America and
Europe, including plants that manufacture
emulsion polymers, Ethylene oxide, Acrylic
acid, Styrene and Polystyrene.
Rohm and Haas will make several changes in
an attempt to restore profitability to its
North American business, which has been
suffering as a result of the slowdown in the
housing and construction sector. The company
will eliminate 925 jobs, or 6 percent of the
workforce, and reduce installed emulsions
capacity by 30 percent. Overhead costs in
the specialty materials group will also be
reduced, and infrastructure in its
electronic materials business will be
shifted to Asia. Rohm and Haas also
introduced a surcharge at the end of April
2008 to offset rising fuel, raw material and
freight costs. About 20 percent of company
sales are generated in North America. The
remaining 80 percent of the business is
growing rapidly due to the expansion of
developing economies.
Despite demonstrations by the People's
Alliance for Democracy (PAD) against Prime
Minister Samak Sundaravej's ruling
coalition, chemical manufacturers still have
faith that the economy in Thailand will
withstand the current higher crude oil
prices -- as long as the military does not
take over the government. Natural gas
reserves, integrated production complexes
and a sizable domestic market are positive
factors, while logistics and infrastructure
issues pose some challenges. The Petroleum
Institute of Thailand is predicting that
Thailand's petrochemical industry will have
grown by 2010 to 16 times its size in 1990.
Last month, we incorrectly stated that Croda
was selling its entire oleochemicals
business. According to Martine ten Napel,
commercial manager for Croda Industrial
Specialties Europe, Croda International Plc
only sold its oleochemical plant in Chicago.
The sale is part of the company's global
restructuring program to reposition its
oleochemical operations. Croda continues to
market a wide range of high-quality
oleochemicals manufactured by its
oleochemical plants in Europe, and the
company remains committed to the
oleochemical industry.
The European Fine Chemicals Group (EFCG) and
its Agrochemicals Intermediates
Manufacturers in Europe (AIME) subgroup
highlighted their new voluntary audit
program for suppliers of non-GMP products at
Chemspec Europe in Munich. AIME is
developing and testing an audit system that
will, when finalized, be made available to
EFCG members and any other interested
chemical companies. Five particular areas
are addressed in the program: policies,
processes and procedures; safety and risk
assessment; qualification and training;
development and production; and
infrastructure and transport. The EFCG is
discussing the program with other trade
associations in the United States, Japan and
China.
The International Pharmaceutical Excipients
Council of Europe (IPEC Europe) and the
European Fine Chemicals Group (EFCG) have
signed a memorandum of understanding
regarding the development of a certification
program for manufacturers and distributors
of pharmaceutical excipients. The program
will include good manufacturing practices (GMP)
and good distribution practices (GDP). There
are currently no government regulations
requiring either GMP or GDP for excipients,
thus creating a critical need for the
industry to develop such a program to
demonstrate its commitment to producing
high-quality, safe ingredients for
formulation into drugs. The two groups will
also work with other trade associations
around the world to develop the program.
As part of an anti-dumping and subsidy
investigation of biodiesel imports from the
United States, the European Commission (EC)
will examine tax credits and grants awarded
by the U.S. government to biodiesel
producers. The investigation was prompted by
complaints from the European Biodiesel
Board. About 60 percent of biodiesel
manufactured in the United States is sold
overseas.
Rising Naphtha prices and a stronger U.S.
dollar have driven variable European
contract cracker margins negative for the
first time since 2005. They are expected to
decline further and could fall to the lowest
level in the last 10 years. Operations are
not sustainable under this scenario for any
length of time. Most producers have been
adjusting operating rates and feedstock
composition but, with crude and Naphtha
prices above $1000/tonne, are now
considering rate cutbacks. All agree that
third-quarter contract negotiations will be
critical. Spot prices, on the other hand,
improved as a result of unplanned cracker
outages and margins became positive again
after being negative since the middle of May
2008.
