June 2008 China Quake and the Chemical Industry The 8.0 magnitude earthquake that hit southwestern China completely destroyed or damaged several chemical plants and affected the ability to transport goods. Aftershocks continued to cause concern several days after the main quake. More than 51,000 people died. Damage has been estimated at $20 billion. Both Chinese and international chemical companies have provided monetary support and supplies to aid recovery operations. Sinopec subsidiary Jingmen Petrochemical, PetroChina, Dow Chemical, Formosa, Bayer, PPG Industries and Rohm and Haas are just some of the companies helping with the supplies of fuel, water and money for affected residents. According to the China National Chemical Information Center, 460 chemicals plants are located in Sichuan, the most affected region of the country. Several fertilizer, Melamine, Chlor-alkali and Methanol producers shut down their plants following the disaster. Both domestic and multinational producers have been affected, closing their facilities for safety reasons, even though these plants experienced no direct damage. Some were back on line within two weeks of the quake. The two largest chemical companies in China - Sinopec and Petrochina - have incurred damages worth over $715 million, according to industry analysts. ChemChina has indicated that it may have to spend as much as $329 million to rebuild its facilities. Polymer shortages have been exacerbated due to the difficulty in delivering material. The transport of other chemical products has also been hampered, affecting production in other parts of the country. Distribution experts predict that chemical trade will be disrupted through the end of 2008. Restarting production activity has been a challenge due continued aftershocks and the loss of many workers. Most companies are focusing on providing aid to victims at this point. The Chinese government has offered tax breaks to both companies and individuals in Sichuan to support earthquake relief. It is also making $10.1 billion available for reconstruction efforts. Chinese banks are also easing loan terms for those affected by the quake. Markets in Europe and the United States likely will be impacted by the shutdown of plants in the Sichuan region. The market for Melamine in both regions in particular will experience tightness without material coming from China. Spot prices for Chinese Melamine are expected to rise dramatically. In China, shortages of a number of chemicals are resulting in price hikes. Demand for Polyester fiber, used to manufacture tents for the homeless, has skyrocketed. Consumption of Polyvinyl chloride is also expected to rise dramatically in China as reconstruction work begins. Separately, Chinese manufacturers that had plans to build in Sichuan are now reconsidering. Stricter regulations for the construction of chemical plants in this earthquake-prone region are also expected.     Chemtura May Be Acquisition Target Blackstone Group and Apollo Management are in discussions regarding the joint purchase of Chemtura. No details have been released because the discussions are still in the early stages and Chemtura provided no comment. In 2007, the company formed a committee to consider strategic alternatives, one of which was its acquisition.     Lily Bets Big on Biotech Eli Lily and Company announced the completion of its $1 billion biotech facility. The building has 33 laboratories and will serve as a central research and development area for biopharmaceuticals. Based on sales, Lily is currently the fifth-largest biotech company in the world, and the company hopes to improve on that position through greater productivity at this new R&D center and by quadrupling its biotech pipeline. Locating all groups in the same facility will increase sharing of information and significantly reduce the time that is wasted during transfer of projects.     Pfizer Plans Job Cuts in France Pfizer Inc. will reduce its workforce in France by approximately 500 positions between now and 2011. Most will be sales positions. The cuts are part of a global reduction plan that was announced in January 2007 and involves elimination of 10,000 jobs. A restructuring plan is expected to be announced in June 2008.       Chemical Industry Survives Port Strikes in Greece and France On Thursday, May 8, 2008, the Pan-Hellenic Crew Union of Towage and Salvage called a two-day strike for port workers across Greece in response to a proposed method for calculating new employee salaries. A port authority spokesman noted that the real issue, however, may be the union's opposition to port privatization. It is illegal to call a strike for this reason, so the salary issue may be a ruse. Strikes have also been set for May 14 and for later in the month. Chemical manufacturers were prepared and little affected by the strikes. According to one industry player, they have faced regular disruptions since the beginning of 2008 and have established procedures for maintaining operations. In France, a 24-hour strike at several ports to protest privatization regulations interrupted some chemical shipments on May 21. The strikes have been occurring frequently and will continue through the end of May, according to a port spokesperson. As in Greece, producers have been forced to adapt to the uncertain climate at the country's ports.       Economic Downturn May Miss China Plastics Despite concerns in the rest of the world over food and fuel prices, producers at the recent ChinaPlas exhibition are optimistic that these global issues and recent government actions such as the reduction in export tax rebates will not have a long lasting impact on the plastics sector. Demand growth within China is expected to remain strong. Several companies are moving forward with new polymer production facilities. Others note that the growth rates for some sectors of the Polypropylene market, for example, are experiencing double digit growth rates. Both value-added products and commodities are expected to continue to do well. Other Asian countries seen as good growth opportunities for the plastics market include Vietnam and India.     Higher Energy Costs Drive Price Increases Major chemical producers such as Ciba, ISP, Dow Chemical and Huntsman have all announced substantial price increases of as much as 25 percent. Rohm & Haas has added a surcharge for products tied to crude oil, natural gas and raw material prices. The hikes are an attempt to cover soaring energy and feedstock costs. Dow indicated that in the first quarter of 2008, feedstock and energy costs were 42 percent higher compared to the same period in 2007. The situation is severely straining the entire value chain and forcing companies to raise prices.     Olympic Games Could Benefit Indian Chemical Producers With Chinese chemical manufacturers required to reduce or halt production in advance of the Beijing Olympic Games, Indian chemical producers are hoping to see higher prices and increased demand from Chinese buyers. The Chinese government has regulated the production of 257 chemicals in the Beijing area to reduce pollution. Reduced production will lead to short supplies and price increases of around 10 percent, making it profitable for Indian companies to sell into the Chinese market despite import duties that run as high as 6.5 percent. Chemicals covered by the regulation include Caustic soda, Polystyrene, Ethylene and Acrylonitrile-butadiene-styrene.     Petrochemical Industry Faces Challenges A very competitive period is coming in the next three to five years, and only the lowest cost producers in all parts of the world will survive it. The weak economy in the Untied States and new capacities coming on stream in the Middle East and Asia are occurring at a time when energy and raw material costs are soaring. Global growth is also predicted to be much lower than the 3.5 percent experienced over the past several years. It is anticipated that a significant amount of older capacity will be shut down at least temporarily, and some on a permanent basis. The downturn could be the worst ever experienced by the chemical industry.     Petrochemical Industry Makes Moves in Iran Iran's National Petrochemical Co. (NPC) plans to invest $30 billion from 2005-2015 and will increase its activities on the international market over the coming years. About 50 percent of the volume (8.8 million metric tons) of exported products in 2007 was sent to Asia and one quarter to the Middle East. In value ($5.5 billion) terms, East Asia and the Middle East both received approximately one third of total exports. In 2008 exports will be 12 million metric tons valued at $7 billion. Typical products include Ammonia, Naphtha, Ethylene, Methanol, Benzene, Ethylene glycol and polymers, and newer exports include Epoxy resins and Toluene diisocyanate. Many of NPC's subsidiaries are being privatized, and this change is expected to make these companies more efficient. The process is expected to be completed by 2014. In the meantime, the company is building 10 petrochemical complexes along Iran's West Ethylene Pipeline, which is currently under construction.       Strong 2007 for Japanese Chemical Firms After taking measures to reduce costs, narrow product offerings and more carefully targeted investments, Japanese chemical producers were well positioned to take advantage of an improving domestic economy and strong global demand for chemicals in 2007. Growing exports to other parts of Asia was an important contributor to the profit increases seen that year. Analysts predict that 2008 will be tougher, but growth will continue at a slower pace. Companies are taking further action to increase their competitiveness, such as integrating petrochemical complexes with refineries, expanding sourcing options, further restructuring their businesses to increase efficiency and productivity and shifting to the production of higher value-added products.       Croda Exits Oleochemicals HIG Capital has agreed to purchase the oleochemicals business of Croda International for $93.4 million (GBP 46.7 million, Euro 60.7 million). The sale is part of the company's strategy to reposition the oleochemicals business following its acquisition of Uniqema in 2006. Proceeds will be used to pay down debt. The deal is subject to approval by antitrust authorities.     Personal Care Goes Organic National Starch Personal Care and Evonik are certifying their ingredients as being organic and natural. New Naviance biopolymers from National Starch are derived from corn and tapioca and are certified organic by Ecocert, Lacon and Quality Assurance International. Evonik expects to expand its current line of 33 certified organic products with several new additions in the near future. Over 80 percent of the company's raw materials for cosmetics are plant based or produced via bio-based reactions.       BMS Sells ConvaTec to Private Equity Avista Capital Partners and Nordic Capital have agreed to acquire the ConvaTec wound therapy and surgical care unit of Bristol-Myers Squibb Co. for $4.1 billion. The sale will allow BMS to focus on its biopharmaceuticals activities. The company previously sold its medical imaging unit and plans to sell 10 to 20 percent of its Mead Johnson Nutritional unit. In December 2007 BMS also announced that it would lay off 10 percent of its workforce and close more than half of its manufacturing plants to save $1.5 billion per year by 2010.     Emerging Regions Become Focus of Western Pharma Companies Pharma majors in the United States and Europe are looking to emerging markets such as China, India and Eastern Europe for growth opportunities. With blockbuster drugs becoming a thing of the past, companies like GlaxoSmithKline and Pfizer are revising their drug portfolios and pricing strategies with the hope of competing against local drug producers in these regions. Pharma sales in emerging markets are predicted to total $400 billion by 2020 according to IMS Health, and these regions account for about 25 percent of the growth in drug sales.     FDA Hoping for Three New Offices in China The FDA is waiting to receive approval from China's Ministry of Foreign Affairs to open three new offices in the country. Human Health and Services Secretary Michael Leavitt is optimistic that permission will be granted soon. He is also interested in opening an office in India.     Pharma Industry Looks Forward to API2008 Around 55,000 visitors are expected to attend API2008 from July 2 to July 4 in Tokyo, according to organizer Reed Exhibition Japan Ltd. The international trade show specializes in pharmaceuticals, cosmetic ingredients and APIs, and offers access to the growing Japanese and Asian ingredients market. API2008 will be held concurrently with trade shows Interphex Japan and the International Bio Forum & Bio Expo Japan. Each show includes a wide array of exhibitors and technical presentations made by top executives on topics of interest to the pharma industry. API Special Session presentations will focus on the key technologies underlying pharmaceutical development, while Interphex presentations will examine future prospects of the Japanese pharma industry and suggest tips for further development. Academic researchers will discuss the results of their latest biotech investigations, and bio ventures inside and outside of Japan will discuss the unique technologies they have available for licensing.       Ag Companies Engineering Crops for Climate Change Leading ag firms are developing biotech crops designed to grow in adverse environments. BASF SE, Bayer CropScience, Monsanto Co. and Syngenta AG have all filed patents for biotech crops that can withstand droughts, flooding, saltwater incursions, high temperatures and greater levels of UV radiation that could result from global warming. In 2012, BASF and Monsanto will launch a new drought-tolerant corn trait developed by their 50/50 partnership that will increase crop yields by 6 to 10 percent.       2007 Peak Year for Biotech M&A Global purchasing and licensing deals in the biotech sector totaled $27 billion in 2007. Pharma companies led the way, making large acquisitions to expand their product pipelines and portfolios. In the United States alone, private equity invested $5.5 billion, an amount greater than the record set in 2000.     Big Names Get into the Cellulosic Ethanol Game DuPont Danisco Cellulosic Ethanol, a 50-50 joint venture between DuPont and Danisco division Genencor, will invest $140 million over three years to commercialize cellulosic Ethanol technology. A pilot plant will be constructed in the United States with start-up planned for late 2009. Commercial capability is expected by 2012. DuPont will contribute its pretreatment and ethanologen technologies, while Genencor will provide its enzyme technology. The company hopes to license the technology to Ethanol producers. Cellulosic Ethanol is attractive because it relies on non-edible vegetation parts and other biomass, rather than food products.       Aromatic Prices Soar Benzene prices in Europe, the United States and Asia have all risen dramatically in response to higher crude oil prices, unexpected plant outages and growing demand. In Europe, Benzene prices easily surpassed the previous record high of $1,225/tonne, reaching $1,355/tonne. Toluene in Europe rose above the record set in April to reach $1,175/tonne for June contracts, and Styrene rose to a record $1648/tonne. In the United States, Benzene spot prices hit the $1,200/tonne level for the first time since May 2007. Contract prices for June climbed to $5.00/gal, well above the previous record of $4.20/gal set in May 2007. Benzene prices in Asia passed the $1,300/tonne mark, reaching $1,335/tonne, the highest level observed in 12 years, before falling slightly. Asian Styrene prices hit a record high of $1,480/tonne in response to high crude, Benzene and Ethylene feedstock costs. Polystyrene prices hit an 18-year high of $1,550/tonne. Toluene in China sold for as much as $1,419/tonne, a new 14-year high.     Chemical Industry in Singapore Looking to Good Future According to the Singapore Chemical Industry Council, the country is well positioned to experience strong growth over the next five to seven years. The chemical sector accounts for nearly a third of Singapore's manufacturing revenue and it experienced a year-on-year growth of 21 percent in 2007. The completion of large new complexes owned by Shell and ExxonMobil will provide additional growth opportunities.     European Inventories of Caustic Soda Low; Prices Rise in North America Inventories of Caustic soda in Europe have fallen below the comfortable level of 300,000 tonnes, according to industry players. High demand and growing exports to the Americas have been attributed as the causes of the reduction. Capacity utilization remains at approximately 85 percent. Sellers were able to push through price hikes for second quarter contracts, and hikes are likely when third quarter contracts are settled. Spot prices are also expected to rise thanks to tightness in the market. Domestic prices for Caustic soda have already risen in Mexico and the United States. Reduced availability of imported material led to price increases in Mexico above 10 percent in some cases. In the United States, producers were proposing price hikes of nearly 20 percent for June contracts in response to higher energy and transportation costs and tight global supplies. One industry player, however, suggested that speculation and misinformation about production rates and inventory levels were a major reason for the price increases.       Large Petchem Investments in Africa and Vietnam More large petrochemical projects have been announced for emerging markets. In Mozambique, Rashtriya Chemicals and Fertilizers (RCF) and Industrial Development Corp announced plans to build a $1.9 billion (Euro 1.2 billion) fertilizer complex to manufacture Ammonia, Urea and complex fertilizers. Construction is slated to begin in mid-2009 and the plant should be online by early 2012. In Vietnam, Kuwait Petroleum International, Idemitsu Kosan, PetroVietnam and Mitsui Chemicals received approval to construct a $6.2 billion refinery and petchem complex. The facility is expected to be operating by 2013 and will produce Polypropylene and Xylene largely for export.     Weak Demand For U.S. Chlorine The slow housing market in the United States has dramatically reduced demand for Polyvinyl chloride, which in turn has resulted in a decline in demand for Chlorine. In April 2008, production levels for Chlorine were the lowest since December 2005. The low production rates are causing hikes in Caustic soda prices. Caustic soda is produced along with Chlorine in the same process, and demand for this commodity remains strong.       Challenging Conditions Provide Opportunities for Coatings Suppliers Coatings manufacturers are facing challenging market conditions, particularly in mature regions of the world. The global economic slowdown, rising raw material and energy prices, declining home and auto sales in the Unites States, increasingly strict regulations, industry consolidation and the demand by consumers for "greener" products are all affecting coatings producers. Throughout the supply chain, those that have a history of strong innovation and the ability to recognize opportunities where others only find daunting challenges will be successful. Innovation can come in the form of both new chemistries and product platforms, as well as new ways to serve the global market. Companies are also focusing on emerging regions of the world - China, India and other Asian countries like Vietnam, the Middle East, Africa, Eastern Europe and Russia - where demand is growing at a much faster pace and is expected to do so for many years to come.