Archives October 2008 Hurricanes Taking Toll on Petrochemical Industry Following Hurricane Gustav, many chemical plants in Louisiana remained without power for an extended period. Three Caustic soda producers temporarily declared force majeure (FM), contributing to heightened tightness in that market. Two Ethylene glycol manufacturers also declared FM in the wake of the storm, as did a Melamine producer. Fortunately, power was restored within a few days, and most manufacturers were able to return to normal operations within a week or so. Before companies in Louisiana could fully recover from Gustav, firms located in the Houston area had to prepare for the onslaught of massive Hurricane Ike. Up to 100 petrochemical facilities in Texas were affected by the storm, but none seriously. As with Gustav, the major issue has been power restoration, and it may takes several weeks for many plants to return to business. A great number of facilities were still working to restart operations more than two weeks after the storm. Chemical shipments were down dramatically, reflecting the lost production and damaged shipping infrastructure. Two drilling rigs were torn from their moorings. Practically all crude oil and about 94 percent of natural gas production in the Gulf remained shut in several days after Ike passed through the area. The port of Houston was clogged with debris and over a hundred ships lingered, waiting to unload. The Coast Guard was working to clear ship lanes, but was also struggling without power. It will take weeks to make the Houston Ship Channel fully navigational. There is concern about Ike's possible impact on the already struggling U.S. economy. In addition to potential fuel shortages and higher prices, many industries that have remained strong during the downturn could be hurt by the extended shutdowns of chemical plants in the Gulf region.     CIS Adds New Enriched Company Feature to DWCP Chemical Information Services continues to deliver essential, high quality information to the chemical and pharmaceutical industries by launching the latest addition to its flagship product, the Directory of World Chemical Producers (DWCP). The DWCP Enriched Company Listing program will enable participating companies to enhance their current listing with a multitude of documents such as ISO Certifications, REACH Authorization, White Papers, and product price lists, just to name a few. This expanded listing offers producers additional opportunities to display their valuable company information to key decision makers and stand out at the point of purchase.     Court Hands Down Decision in Hexion/Huntsman Quarrel Huntsman prevailed in the recent court battle with Hexion when the Delaware Court of Chancery determined that Hexion could not break its $10.6 billion merger deal with Huntsman. The court also found that Hexion breached a number of obligations and possibly exposed itself to liabilities for damages excedding the $325 million break-up fee it has disputed.. Hexion must take all actions necessary to bring the deal to a close. In a separate ruling by a Texas district court, Huntsman also obtained a temporary restraining order preventing Hexion's lenders from blocking financing for the deal. Huntsman is also seeking $3 billion in damages from Hexion's owner Apollo Management in another Texas lawsuit.     Evonik Unloads North American Cyanides Business Oaktree Capital Management agreed to acquire the U.S. and Canadian cyanide business of Evonik Industries for an undisclosed amount. The business is part of Evonik's CyPlus Group that is dedicated to the gold-mining industry. The deal includes a 50 percent share in Cyanco, a joint venture with Nevada Chemicals, and the involvement of subsidiaries CyPlusCanada and CyPlus Corp. Activities of CyPlus in Europe will remain part of Evonik's Hydrogen cyanide network.     Leading Chinese Firm to Make Big Investment Ningxia Refining and Chemicals Company, a subsidiary of leading Chinese company PetroChina, will invest $1.19 billion (CNY 8.2 billion) in a refinery project in Ningxia province. The complex will include a 100,000 tonne/year Polypropylene (PP) unit and other facilities not yet detailed. Construction is underway, and the company expects the plants to be operational by the end of 2010.     Ranbaxy Drugs Banned from Importation by FDA As a result of a recent investigation into manufacturing practices at Ranbaxy Laboratories, the FDA announced that it is taking "preventive action" and banning the importation of 28 generic prescription drugs from the Indian company. The agency identified manufacturing deficiencies at two Ranbaxy production facilities, but stated there was "no evidence of harm to consumers" resulting from the problems. The FDA sent two warning letters to the company about failure to comply with current good manufacturing requirements, but despite efforts to work with the company, Ranbaxy failed to correct the deficiencies. Specific problems related to "inadequate sterile processing operations" and inadequate recordkeeping. Separately, the Justice Department is investing allegations that Ranbaxy submitted falsified data to the FDA to get the approval to sell AIDS drugs to U.S. government funded organizations. Ranbaxy has hired Giuliani Partners to "advise and review" the compliance situation and said it would cooperate with the FDA.       Reorganization in the Works for Akzo Nobel Akzo Nobel is implementing a new cost reduction program to achieve annual savings of $100 million. The program includes elimination of 3,500 positions --about 5.8 percent of its workforce -- by 2011. The company will also defer a share buyback program and a $2.6 billion (Euro 1.8 billion) dept repayment plan. Akzo also established operational goals that include managing the margins of its specialty chemicals business, focusing on organic growth in its performance coatings segment and re-branding its decorative paints operations.       Repsol Expanding Portugal Operations Repsol will invest $1.4 billion (Euro 1 billion) in its Sines, Portugal, facility to expand its cracker capacity and polyolefin units, which are anticipated to be online in 2011. This announcement increases the expenditure initially reported and delays the start-up by one year.     SAFC Expands Potent Capacity SAFC will invest $30 million (Euro 20.7 million) to increase capacity for the production of highly potent APIs in Wisconsin. The new facility, located in Verona, will be built on 15 recently acquired acres and will include a 45,000ft² (4,200m²) building that houses two 4,000-litre reactors, giving the company the ability to produce large quantities of highly potent compounds. The plant should be operational by the end of 2009. SAFC recently completed a $15 million expansion of capacity for highly potent APIs at its Madison, Wisc. site.       Chemical M&A Continues with Big and Small Deals While big deals such as the acquisition of Rohm and Haas by Dow Chemical and the takeover of Hercules by Ashland, smaller and medium-sized transactions will likely be as important. In the first half of 2008, $36 billion worth of M&A deals took place, while in all of 2007 deals totaled $55 billion. The number of deals above $25 million was just 34 in 2006, however. There were 81 such high-value deals in all of 2007, reflecting the deepening credit crisis. Mergers and acquisitions will continue, though, according to analysts, because the key drivers are still in place. In many cases, the economy has led companies to identify businesses ripe for divestiture. Some also expect that the Dow/Rohm and Haas deal to serve as a catalyst for other companies considering a move of their own. More and more deals will take place in Asia, the Middle East and Latin America as those markets look to consolidate and international companies look to gain a foothold.     Feedstock Availability Curtails Growth in Latin America Limited raw material supply is making it difficult for the petrochemical industry in Latin America to attract the necessary investment required for expansion. Countries will likely have to rely on imports to meet growing demand. Without additional investment in the industry, companies will not be able to gain access to the natural resources in the region.     Thai Chemical Industry Impacted by Political Conflicts The final ouster of the Thai prime minister following weeks of protest and unrest in the country does not provide much reassurance to members of the chemical industry. The political turmoil in the country has resulted in reduced foreign investment, severely limiting access to capital. Domestic consumer demand has also declined due to the uncertainty in the country. Major government projects, such as a mass-transit railway, are also likely to be delayed. And there is no indication that the person who assumes power will be able to provide stability.     Top 100 Companies Enjoyed a Strong 2007 BASF is once again first on the annual lists of top chemical companies according to two leading chemical industry magazines. Chemical firms are ranked by annual sales in 2007. Dow Chemical, the chemical operations of ExxonMobil and Shell, LyondellBasell, INEOS, SABIC, Sinopec, Mitsubishi Chemical and DuPont round out the top ten on the ICIS Chemical Business list, while Chemical Week's top ten includes Dow Chemical, INEOS, ExxonMobil and Shell, Sinopec, DuPont, SABIC, Total and Mitsubishi Chemical. Both lists reflect the global nature of the industry. Demand growth in emerging countries in Asia, Central and Eastern Europe and Latin America led to strong growth, despite the slowdown in North America. Both volume and price increases were achieved, with fertilizer and agchem companies making the greatest gains. Acquisitions helped others advance on the list. Overall profits grew by more than 12 percent, while the operating margin for this industry increased by 6 percent.     Turbulence in Financial Markets Affects Chemical Industry Limited availability of credit and higher financing costs could negatively impact chemical industry projects. The higher cost for construction materials and equipment are already driving up overall project costs. Some projects in the Middle East are now uncertain, but those in Europe and the United States are most strongly affected. The $700 billion bailout passed by the U.S. Congress should help chemical companies maintain revenue streams and continue to borrow. It may also lead to increased merger and acquisitions activity. However, many are concerned that the reduced availability of credit will lead to a drop in demand for downstream products.       BASF on Acquisition Trail Again: Snapping Up Ciba BASF has made a $5.5 billion (Euro 3.9 billion) offer for Ciba Specialty Chemicals, and Ciba's board has recommended that shareholders accept it. The acquisition will strengthen BASF's position in specialty materials with the addition of Ciba's operations in plastics additives, coating effects and water & paper treatment chemicals, which BASF will merge with its performance products segment. Ciba gains access to BASF's global research, production and marketing capabilities and its integrated position in raw materials and intermediates. BASF will establish a global operating division at Ciba's headquarters in Basel, Switzerland, and retain its R&D site there. BASF expects the deal to be finalized some time the first quarter of 2009.     Paraffin Wax Cartel Members Fined The European Commission (EC) fined nine Paraffin wax producers $952 million (Euro 676 million) for operating a pricing cartel between 1992 and 1995. Companies in the cartel include ENI, ExxonMobil, Hansen & Rosenthal, Tudapetrol, MOL, Repsol, Sasol, RWE and Total. Although a member of the cartel, Shell was not fined because it cooperated with the EC. Sasol was fined the largest amount as the leader of the group, and ENI's fine was higher than the others, because they have been accused of participating in similar cartels in the past.       Consolidation Expected in Chinese Pharma Sector According to Frost & Sullivan, the $22 billion Chinese pharma market (2007) will grow to be one of the top five in the world by 2010. Between now and then, they predict increased consolidation of the 30,000 plus companies as well as growing investments in R&D. The government aims ultimately to have 20 to 30 large players that produce high quality products. Currently, generics for domestic consumption and advanced pharmaceutical ingredients (APIs) for export account for most Chinese pharma sales. The recent heparin tragedy and other incidents have highlighted, however, quality issues in the country's pharma sectors. To remain successful, companies will need to improve quality and service and perform at international standard levels -- rather than focusing solely on offering a lower cost.     FDA Expands Workforce by 1,300, Upgrades IT The FDA has expanded its personnel by about 10 percent, adding about 1,200 new employees. The Center for Drug Evaluation and Research (CDER) will get 663 of the new employees. About 75 percent have started working, an additional 11 percent will start by the end of September, and another 11 percent are undergoing background checks. Of those already working, 85 percent are professionals, such as chemists, biologists, pharmacologists, statisticians, medical officers, microbiologists and field inspectors. Overseas offices will be established in China, India, Europe, Latin America and the Middle East, and some country directors, technical experts and inspectors have been hired already. These jobs are going to existing FDA personnel to ensure that people with experience fill the positions. The agency also announced that it will invest $2.5 billion over the next 10 years to upgrade its IT systems. Ten different contractors will work to implement two new data management systems for data tracking.       Pharma Hopes Rest on Biologics Buys Facing numerous patent expirations, growing generics competition, rising discovery and development costs and a lengthening approval process, pharma companies are turning to life science firms with biologics technology to increase their pipeline offerings. Whether through mergers and acquisitions or licensing deals, big pharma is betting on collaborations to identify potential new drugs that will positively impact the bottom line. Nearly one-third of the pipelines of the top 10 pharma companies are in-licensed products, according to PAREXEL. Even leading biotech companies are in-licensing technology to expand their pipelines.     Pharma Turns to Academic Investments Major pharma companies like AstraZeneca (AZ), Pfizer and GlaxoSmithKline (GSK) are investing in partnerships with academic institutions to expand their research capabilities. AZ is collaborating with Columbia University, GSK is linking up with Harvard, and Pfizer is working with four different institutions. In these new relationships, industry and university scientists are working toward the acceleration of the drug-discovery process after patent and publication rights are established. The increased activity between big pharma and universities has attracted the attention of Congress. Senator Charles Grassley (R-Iowa) wants the National Institutes of Health (NIH) to revoke grants awarded to universities that do not disclose financial ties to drug manufacturers. The agency spent greater than $23 billion on educational research projects. Institutions like Harvard and Stanford Universities are in response considering how to handle funding from pharma companies.       Sanofi-Aventis Makes Move in Eastern Europe Sanofi-Aventis announced that it will acquire Czech generic drug producer Zentiva for $2.6 billion. The deal is 9.5 percent higher than Sanofi's original offer. With the move, the company gains a foothold in the rapidly growing emerging markets in Eastern and Central Europe. Current Zentiva CEO Jiri Michal will remain as head of the business. The deal still requires the approval of shareholders and relevant authorities.     Shionogi Acquires Sciele Pharma Japanese firm Shionogi & Co. has agreed to acquire U.S.-based Sciele Pharma for $1.4 billion. The purchase provides Shionogi with an extensive sales force in the United States that will help introduce its growing pipeline to this key market. Three drugs are expected to receive FDA approvals in 2012.       Green Light for Growth in Ag Chem Sector Both sales and profits have been up for leading agrochemical firms in 2007 and the first half of 2008, and more growth is expected. Companies are investing in R&D to develop new technologies that improve crop productivity, from protection products to hybrid seeds and biotech-based plant varieties. Much of the growth has been driven by higher prices for both agricultural commodities and chemicals, which are beginning to decline. However, the increasing biofuels sector, larger planted areas and other factors will continue to support further growth for the sector.       Big Investments in Refining for Chinese Company China National Offshore Oil Corp. (CNOOC) announced plans to invest about $6.6 billion to expand its refining and Ethylene production capacity. Refining capacity will grow from 12 million to 22 million tonnes/year. Construction is slated to begin in 2009, with the facility becoming operational in 2011.     Ethanol Production in Brazil to Get Investment Boost Ethanol producers in Brazil recently announced investments totaling about $4 billion in its sugar cane-to-Ethanol operations. Bunge and Itochu will spend $800 million on two plants, while ETH Bioenergia will spend $3.3 billion on 10 new facilities by 2013.     Petchem Prices Declining in Asia The falling price of crude in the end of August and first half of September had a dramatic impact on prices of commodity chemicals in Asia, which have declined considerably. Even the recent spike in crude oil values is not likely to have an impact. Many expect downstream demand, which is already weak, to slow down further, as buyers wait to see if prices will go still lower. Styrenic compounds have seen spot prices drop as much as 8 percent, while Benzene and Toluene fell to a seven-month low. Declining raw materials costs are expected to lead to some of the lowest prices seen in Asia for solvents in some time. Polyolefin prices experienced the biggest drop in prices in the last 10 years. Traditionally, downstream consumption rises in the third quarter, but restrictions on the production and transport of chemicals surrounding the Olympic Games in China dramatically affected the market. Prices could drop even further with the upcoming Chinese National Day holiday in early October. The subprime crisis, growing global economic slowdown and recent crises in Western financial markets, combined with increased capacity in the Middle East, will further exacerbate the market conditions in Asia. As a result, economists are predicting a major downturn in the region.