2006 Year in Review

The chemical industry is completing a relatively quiet year for a change. There were no hurricanes to decimate operations on the Gulf Coast. Oil and natural gas prices were high but relatively stable. And the industry was able to maintain solid profits throughout the year.

But 2006 saw some events that will make it a unique year. Old-guard names such as Engelhard and BOC vanished due to takeovers. Other companies used a period of relative calm to fine-tune their portfolios. Firms looked to the future and added funds for R&D both in their home countries and in Asia.

Old environmental ills continued to haunt chemical makers. And they maneuvered to manage new opportunities, such as nanotechnology, before potential environmental problems could occur. In addition, government regulators, particularly in Europe, continued to keep a close eye on anticompetitive behavior.

Chemical Economy. Still hung over from Hurricanes Katrina and Rita, which hit the U.S. Gulf Coast in the second half of 2005, the chemical industry got off to a rocky start in 2006. For the first time since the third quarter of 2003, quarterly earnings declined for the 25 companies that C&EN surveys, dropping 2.7% in the first quarter to $4 billion.

Hard hit by the storms, the petrochemical industry started out the year in recovery mode. But with high operating rates in key products like ethylene and no major new capacity coming onstream, the fundamentals were in place for another strong year.

Oil prices throughout the year were extremely high, but with no wild swings. The price for West Texas intermediate crude, the U.S. benchmark, was $63.45 per barrel on Jan. 3, the first day of 2006 trading. The price hit a high of $77.03 in July and a low of $56.27 in November. By early December, prices were close to where they started the year.

Natural gas prices generally moved with oil prices. According to the U.S. Energy Information Administration, natural gas futures began the year at about $10 per million Btu. They spiked past $11 per million Btu in late July, and then steadily declined to under $8.00 per million Btu by early December.

In a reversal of last year's volatility, chemical prices held pretty steady in 2006 as well. According to the U.S. Labor Department, the producer price index for all chemicals started out the year at 203.1 (1982 = 100) and rose to a peak of 209.9 in August. By October, the index had eased to 208.1.

Production-wise, the industry successfully recovered from the hurricanes. According to the Federal Reserve Board, basic chemical production increased by 7.8% compared with the third quarter of 2005, when Hurricane Katrina hit.

Profits recovered during the year as well. Twenty-four of the chemical companies that C&EN surveyed posted an increase in earnings of 23.0% versus the hurricane-impacted third-quarter 2005. For the first nine months of the year, earnings for these companies rose 5.3% to $11.1 billion on a sales increase of 7.2% to $146.2 billion.

Company Moves. The year in chemical deal-making began with a hostile takeover drama. On Jan. 3, following failed talks, BASF made an unsolicited, $37-per-share offer to buy the Iselin, N.J.-based catalyst maker Engelhard. The offer, which valued Engelhard at $4.9 billion, was swiftly rejected by Chief Executive Officer Barry W. Perry and the company's board.

The two firms tangoed over price until, in the eleventh hour, BASF made, in the words of Chairman JÜrgen Hambrecht, its "last, best, and final offer" of $39 per share, or $5.6 billion. Engelhard agreed to the deal.

Engelhard wasn't BASF's only acquisition. The German firm purchased Degussa's construction chemicals business for more than $3.4 billion and Johnson Polymers from JohnsonDiversey for $470 million.

Huntsman Corp. rejected a buyout offer early in the year, reportedly $25 per share from Apollo Management. Huntsman then announced a plan to split itself into two companies, a $9 billion-per-year specialty chemicals company and a $6 billion commodity chemicals firm.

While it weighed this plan, Huntsman purchased Ciba Specialty Chemicals' struggling textile effects business for $270 million. It also sold its butadiene business to Texas Petrochemicals for $262 million. Then, later in the year Huntsman CEO Peter R. Huntsman said a sale of its petrochemical assets in pieces was more likely than a spin-off. The company followed up by agreeing to sell its European petrochemical business to Saudi Basic Industries Corp., known as SABIC.

In another deal that began as hostile, British industrial gas company BOC rejected a takeover bid from German peer Linde of $13.4 billion, a 30% premium for the company. Linde later upped the bid to about $15.5 billion, and BOC gave in.

Like Huntsman, other companies engaged in major overhauls. Last month, ICI agreed to sell its Quest flavors and fragrance business to Swiss rival Givaudan for $2.3 billion. Earlier in the year, ICI sold its Uniqema oleochemicals and surfactants business to the British specialties firm Croda for about $800 million.

GE sold its Advanced Materials unit, a maker of silicones and quartz products, to Apollo Management for $3.8 billion. The move fueled speculation that the company might divest GE Plastics.

A few companies made some moves in their nonchemical businesses. Seeking to finance the $22 billion purchase of pharmaceutical maker Schering, Bayer announced the sale of its diagnostics business to Siemens for $5.4 billion and the sale of metal and ceramic powders maker H. C. Starck to two financial buyers for $1.6 billion.

Ashland dealt its Ashland Paving & Construction subsidiary to Oldcastle Materials for $1.3 billion. Polyvinyl chloride maker Georgia Gulf agreed to buy Ontario-based building products company Royal Group for $1.6 billion. Monsanto agreed to buy cottonseed producer Delta & Pine Land for about $1.5 billion in cash. After a failed attempt to sell Lyondell-Citgo Refining to a third party, Lyondell Chemical purchased Citgo Petroleum's 41.25% stake in the venture for about $2.1 billion.

Employment. The jobs picture improved robustly in 2006. In November, U.S. chemical employment hit a seasonally adjusted 898,000 workers, according to the Labor Department, 18,500 above the same month in 2005.

The year, however, did see the initiation of a few big layoff programs. Following the sale of its textile effects business to Huntsman, Ciba announced it would reduce its head count by 2,500 workers, about 16% of its total, by 2009. Huntsman, in turn, disclosed it would shed some 650 jobs, mostly in Europe, in the textile effects business, while adding about 300 jobs, mostly in Asia.

Likewise, BASF will cut jobs as it integrates the companies it acquired. Merging Engelhard will involve about 800 layoffs. Some 200 job cuts will come from the Degussa construction materials unit over the same period. Clariant launched a program to cut 10% of its workforce, some 2,200 jobs, and reduce its product line by 25%.

DuPont said it would cut 1,500 positions—2.5% of the company's total—in its performance coatings business. Bayer CropScience said it would shed 1,500 jobs worldwide, mostly in North America, out of its total 19,000 positions through 2009.

The industry is seeing the departure of Fran Keeth, the first woman to head a U.S. chemical company. She is retiring as executive vice president of Shell Chemicals at the end of the year. In that position, Keeth will be replaced by Ben van Beurden, the company's vice president of manufacturing excellence and support. In her role as CEO of Shell Chemical LP, the U.S. arm of Shell Chemicals, she will be replaced by Stacy Methvin.

In other moves in top management, Kathleen Bader, 55, retired as CEO of NatureWorks, Cargill's lactic acid-based polymer business. She was replaced by Dennis McGrew, another former Dow Chemical executive. And H. B. Fuller CEO Al Stroucken left the company to lead packaging manufacturer IO. He was replaced by Michele Volpi, vice president of Fuller's adhesives business.

Production Changes. Chemical companies continued to emphasize building large projects in the resource-rich Middle East or in emerging Asian and Latin American markets at the expense of constructing them in North America and Europe.

The Middle East, particularly Saudi Arabia, Iran, and the Persian Gulf States, have already seen a volley of new project announcements, mostly slated to come onstream between 2010 and 2012. Unless there are significant delays, observers expect that these new plants will cause the next downturn in the global chemical industry.

Resource-rich central Asia may see its first large petrochemical project. During the year, Basell signed a memorandum of understanding to build a plant in Kazakhstan by 2010 that would include an ethylene cracker, a propane dehydrogenation plant, and polyethylene and polypropylene capacity.

In Asia, several new projects are meant to supply a region increasingly thirsty for petrochemicals. China Petrochemical Corp. began construction on a 1 million-metric-ton-per-year ethylene cracker in Tianjin, China. Dow said it was moving forward with plans to build a $1.2 billion ethylene complex in Rayong, Thailand, with Siam Cement Co. by 2010. Shell broke ground on an 800,000-metric-ton ethylene cracker complex on Bukom Island, Singapore.

In Latin America, ExxonMobil scrapped plans to build a 1 million-metric-ton ethylene and polyethylene cracker in Jose, Venezuela, with that country's state oil company, PDVSA. In April, Brazil's Braskem said it would study a similar project with PDVSA. In nearby Trinidad & Tobago, Westlake Chemical agreed with the government to develop a $1.5 billion ethylene complex fed with locally produced ethane.

Specialties. Producers of active pharmaceutical ingredients (API) have been hit by overcapacity problems for years, largely because of a paucity of new drug approvals. But API makers take some solace in the pipeline of drug development projects, which is larger than it has ever been and may someday create the demand needed to boost operating rates.

The boom for the fine chemicals industry in India, and to a lesser extent China, continued in 2006. According to Italy's Chemical Pharmaceutical Generic Association, merchant sales of APIs have grown 5-7% per year globally over the past five years. Meanwhile, the Indian and Chinese markets have grown at a 17-20% clip.

Indian companies again made several big purchases of Western assets in 2006. India's Shasun Chemicals & Drugs bought Rhodia's Pharma Solutions business, which included the ChiRex unit that Rhodia purchased in 2000 for $545 million.

Mumbai-based Nicholas Piramal, which bought Avecia's facilities in the U.K. and Canada in 2005, agreed to purchase Pfizer's Morpeth, England, API plant. In May, Solutia agreed to sell its pharmaceutical services business to India's Dishman Pharmaceuticals & Chemicals for $74.5 million.

Clariant sold its pharmaceutical fine chemicals business to private equity firm TowerBrook Capital Partners for $140 million. The sale included much of the former BTP, which Clariant purchased in 2000 for $1.8 billion.

Rockwood Holdings agreed to sell its Novasep fine chemicals and chromatography subsidiary to private equity firms and Novasep management in a transaction valued at $560 million. Rockwood had bought Novasep in 2004 to round out its previous acquisition of Dynamic Synthesis from Dynamit Nobel.

While some companies were decreasing their fine chemicals holdings, Lonza invested more in them. The Swiss firm purchased peptide maker UCB-Bioproducts from UCB for $125 million in January. In April, Lonza announced plans to spend $200 million to build intermediates and API capacity in Guangzhou, China. In November, it agreed to purchase Genentech's biologics facility in Porrino, Spain, for $150 million.

Lonza's biggest move came in October, when it agreed to purchase Cambrex's biopharma and bioproducts businesses for $460 million.

For Cambrex, the sale was a reversal of 10 years of building up its biopharma and bioproducts businesses through acquisitions and organic growth. It was also the fruition of a strategic review that began in January when Cambrex abandoned plans to become a specialty therapeutics company. Now the company is focusing on the contract manufacturing of drug intermediates and APIs.

Alternative Energy. In his State of the Union address, President George W. Bush said, "America is addicted to oil, which is often imported from unstable parts of the world." He called for research into "cutting-edge methods of producing ethanol, not just from corn, but from wood chips and stalks or switch grass." Breakthroughs there and in other new technologies, he said, will help the country achieve a goal "to replace more than 75% of our oil imports from the Middle East by 2025."

Ethanol producers, enzyme developers, and the financial community are stepping up to the challenge. For example, in May, Goldman Sachs invested $27 million in Iogen, an enzymes producer that operates the world's only cellulose ethanol facility.

Other ethanol initiatives included a plan by Marathon Oil and Ohio-based grain processor Anderson's to build and operate several large ethanol plants. Shell Oil and biotechnology company Codexis announced an agreement to explore next-generation biofuels based on cellulosic materials. DuPont and ethanol producer Broin formed a joint venture to bring cellulose-derived ethanol to market by converting one of Broin's corn-to-ethanol plants in Iowa.

Companies such as Broin and Iogen hope to snag some of the $160 million that the Department of Energy plans to divide among two or three commercial biorefineries over the course of three years. The government said it will announce the winners of the funding in January.

Meanwhile, oil refiners on both sides of the Atlantic are putting money into biodiesel, an alternative fuel derived from soybean oil and other renewable feedstocks. Chevron acquired a 22% stake in Galveston Bay Biodiesel, a Houston-based company building a biodiesel plant in Galveston, Texas. In Europe, Ineos Enterprises said it intends to construct a biodiesel plant in Grangemouth, Scotland, by 2008.

Because of government incentives that encourage use of biodiesel, there is now a global glut of glycerin, a by-product made along with biodiesel. Seeing a use for the suddenly plentiful biochemical, Solvay and Dow both said they would build new epichlorohydrin facilities based on glycerin rather than propylene.

Archer Daniels Midlands and Cargill both announced plans to make propylene glycol from glycerin instead of propylene oxide. The Soap & Detergent Association and the National Biodiesel Board awarded the 2006 Glycerin Innovation Award to chemical engineers at the University of Missouri, Columbia, for developing a method for converting glycerin into propylene glycol.

Fermentation routes to chemicals also got a big boost. DuPont and sugar processor Tate & Lyle started a plant in Loudon, Tenn., capable of making 100 million lb of 1,3-propanediol from corn-derived sugar.

Solar energy conversion is becoming a big market for chemical makers. According to the Solar Energy Industries Association, the global photovoltaic market was worth $15 billion in 2005 and is growing at a 30% annual rate.

The high demand for solar power has led to a shortage of the polysilicon used in photovoltaic cells. According to stock brokerage Piper Jaffray, the solar industry will consume more polysilicon than the integrated circuit industry for the first time in 2008: 30,000 metric tons for solar versus 27,000 for integrated circuits.

Chemical companies have been addressing the need. Wacker—which hadn't even completed doubling capacity for solar-grade polysilicon to 10,000 metric tons per year at its Burghausen, Germany, site—decided to invest an additional $375 million to increase capacity there by another 4,500 metric tons. Joint Solar Silicon GmbH, a joint venture between Degussa and SolarWorld, unveiled plans to build an 850-metric-ton plant in Rheinfelden, Germany.

In July, California-based SunPower inked a deal to buy $250 million worth of polysilicon ingots from South Korea's DC Chemical. In turn, DC moved forward with plans to build a 3,000-metric-ton polysilicon plant in South Korea, its first for the product.

Hemlock Semiconductor, a joint venture between Dow Corning, Shin-Etsu Chemical, and Mitsubishi Materials, has been looking for a location to build a new polysilicon site. Hemlock is also spending $500 million to install new capacity at its Hemlock, Mich., plant.

Meanwhile, DuPont said it would invest $100 million in materials for photovoltaics, including $50 million to expand capacity for its Tedlar polyvinyl fluoride film in Fayetteville, N.C.

Intellectual Property. Early in the year, the Industrial Research Institute predicted in its annual R&D Trends Forecast that firms conducting R&D in the U.S. would increase research spending in 2006.

C&EN's own survey of 18 chemical firms' R&D spending plans for 2006 found that, on average, they had budgeted a 4.7% increase in spending above 2005 levels. The predicted rise closely paralleled the 4.8% increase the group had planned the year before. The group, which included firms such as Dow Chemical, DuPont, Eastman Chemical, and Rohm and Haas, planned to spend $8.7 billion on research.

To boost their innovation potential, a number of chemical firms made investments in research in Asia. Dow Chemical, DuPont, Honeywell, Degussa, and Toray Industries all have built or are building R&D facilities in the Shanghai region, contributing to a strain on the availability of qualified scientists in and around the city.

But running counter to that trend, Hercules closed satellite labs and consolidated its global R&D efforts near its Wilmington, Del., headquarters. CEO Craig A. Rogerson said the quality of the firm's innovation would improve if scientists and upper management work in close proximity.

Companies were involved in some notable scraps over intellectual property in 2006. Monsanto agreed to pay the University of California $100 million to settle a dispute over patents the university claimed it owned. The patents covered recombinant bovine somatotropin, a genetically engineered hormone that increases a cow's milk production. Monsanto claimed it had licensed the technology from Genentech and had developed its own BST, which it introduced to farmers in 1994.

In another case involving patents, Dutch firm DSM filed a lawsuit against the Chinese company Hangzhou Pivot International for infringing patents to produce high-performance polyethylene fiber used in bulletproof garments. DSM gathered its evidence at the Milipol 2005 exhibition on state security in Paris, where Hangzhou had a display.

Not all patents are as valuable to their owners as they could be to others. To provide a new venue to transfer patents to new owners, Chicago-based Ocean Tomo arranged the first live public auctions of intellectual property. Eastman and Dow tested the waters and put patents up for sale at the firm's second auction, held in New York City in October. Though a few of the patents attracted bids, none were sold.

Safety and Security. Early in the year, Congress' investigative arm, the Government Accountability Office, suggested that Congress consider legislation giving the Department of Homeland Security authority to require industry to address security at its facilities. Not long after, DHS Secretary Michael Chertoff called for legislation giving his agency authority "to create a sensible regulatory structure for the nation's chemical infrastructure."

Speaking to reporters at the American Chemistry Council's annual conference on Responsible Care in May, ACC leaders said there was no need for legislation that mandates inherently safer manufacturing technology. The industry's health, safety, and environmental management initiative had already established and implemented clear safety and security goals for the industry, they said.

However, a National Research Council report in May on vulnerabilities in the chemical supply chain recommended that DHS support research to beef up chemical storage and monitoring and promote the use of inherently safer chemicals and processes.

At least one firm decided to get an independent view on the debate. In July, Dow set up an independent advisory panel on chemical security chaired by former congressman and 9/11 Commission Vice Chairman Lee H. Hamilton. Dow said the panel would offer an outside perspective on the chemical industry's approach to security and evaluate its security initiatives against best practices.

In September, the U.S. Congress finally gave DHS authority to develop chemical plant antiterrorism protections using "risk-based performance standards." The measure, part of a budget authorization bill, is in effect for the next three years. The bill is silent on inherently safer technology requirements, and it is unclear if state chemical plant security laws, such as one implemented by New Jersey, will be preempted by DHS oversight.

Environment and Regulation. More than 21 years after the disaster, nobody in India can agree on how to clean up the old Union Carbide site in Bhopal. Other environmental transgressions from the past also haunted chemical makers.

A judge in Rhode Island ruled that three companies that manufactured lead paint won't face punitive damages because the paint was legal at the time they made it. Sherwin Williams, NL Industries, and Lyondell Chemical's Millennium unit were earlier found guilty of creating a public nuisance for selling the paint. In California, a state appeals court reinstated a lead paint suit brought by the state's counties and cities to require lead pigment makers to underwrite the removal of lead paint from low-income housing.

DuPont reached a settlement with Parkersburg, W.Va., residents last year over the presence of perfluorooctanoic acid in drinking water wells. PFOA is used as a processing aid in the manufacture of fluoropolymers and is suspected of causing health problems, including cancer. But PFOA issues continued to dog the firm. In a January agreement with EPA, DuPont voluntarily consented to eliminate emissions of perfluorooctanoic acid from its products and facilities by 2015. Arkema, Asahi Glass, Ciba, Clariant, Daikin, 3M/Dyneon, and Solvay Solexis also agreed to the same terms.

Attempts to settle the long-standing asbestos liabilities of chemical and other firms met no success in 2006. Early in the year, the Senate debated a bill that would have removed asbestos lawsuits from the courts and created a $140 billion trust fund financed by defendant companies to compensate asbestos victims. Even with backing from the National Association of Manufacturers, the legislation failed to advance.

Efforts were made to forestall nanomaterials from becoming a potential future liability. Many observers agree that nanotechnology may create advances in the energy, medical, and environmental fields. But they also agree that nanoparticles present a large exposure risk.

Consumer and environmental organizations petitioned the Food & Drug Administration to address the human health and environmental risks of untested and unlabeled nanomaterials in consumer products. DuPont and the advocacy group Environmental Defense said in April that they are cooperating to develop a framework to evaluate key factors for the responsible development, production, use, and disposal of nanomaterials.

Basic and downstream chemical users prepared to cope with REACH, which stands for Registration, Evaluation & Authorization of Chemicals, expected to go into effect in the European Union soon. Helsinki, Finland, prepared to become the new home of the European Chemicals Agency, the main body responsible for administering REACH.

In February, negotiators at a United Nations-sponsored conference in Dubai, United Arab Emirates, completed a set of voluntary international guidelines for making, transporting, using, and disposing of chemicals in ways that protect people's health and the environment. The Strategic Approach to International Chemicals Management was designed to help nations implement a comprehensive approach for managing chemicals by 2020. Critics view the guidelines as a tool for the European Union to spread REACH to other parts of the world.

Trade Issues. Anticompetitive behavior continued to attract regulators' attention this year. In the U.S., the Department of Justice confirmed that it is "investigating the possibility of anticompetitive practices in the polyurethane industry." BASF, Bayer, Huntsman Corp., Lyondell, and Dow all acknowledge receiving subpoenas requesting information.

However, the European Commission—the executive body of the EU—appeared to be more active than U.S. authorities in going after price-fixers. Early in the year, the EC imposed $90 million in fines on Bayer, Chemtura, and General Quìmica for fixing the price of rubber chemicals between 1996 and 2001. Flexsys, a joint venture of Akzo Nobel and Solutia, received immunity as the first firm to cooperate with the EC probe.

In May, the EC hit Solvay, Kemira, Akzo Nobel, FMC Foret, Arkema, and Snia with a total of $490 million in fines related to a cartel that operated in the peroxygen chemicals sector in the late 1990s. Later in the month, the commission fined Arkema, ICI, Degussa, Lucite, and Quinn Barlo a total of $443 million for participating in a cartel that fixed prices in the European methacrylates market between 1997 and 2002. In November, the EC fined five firms, including Italy's ENI, Dow, and Shell, a total of $680 million for fixing synthetic rubber prices between 1996 and 2002.

The penalties the commission imposes on anticompetitive activity are thought to be a deterrent against future bad behavior, but now the EC said it is considering making it easier for victims of price-fixing conspiracies to recover damages in European courts. Although victims can sue for damages in U.S. courts, European Commissioner for Competition Neelie Kroes said the right to compensation in European courts "is too often theoretical because of obstacles to exercising this right in practice."