Year In Review

HIGH COSTS FOR ENERGY and raw materials made 2007 a pivotal year for the chemical industry. Concern over the continued availability of traditional hydrocarbon feedstocks propelled petrochemical development deals in North Africa, the Middle East, and Asia. In the U.S. and Europe, these same concerns helped drive the hectic pace of acquisitions, joint ventures, and research devoted to alternative energy and raw materials.

Following a slow start, sales and earnings for most chemical firms rose during the year despite high prices for energy and raw materials. As the good times rolled, megamergers and acquisitions dissolved well-known corporate names such as Degussa and GE Plastics, replaced by Evonik Industries and SABIC Innovative Plastics, respectively. Other well-known names, including Huntsman Corp. and ICI, also seem to be on their way to oblivion.

CHEMICAL ECONOMY. At the beginning of the year, companies in most regions of the world cautiously predicted continued growth. Though prices for oil and natural gas were down from recent peaks, companies remained concerned over their volatility. Observers were confident that 2007, and perhaps 2008, would bring more good times for producers of ethylene, propylene, and their derivatives. Longer term, however, the industry expected a difficult period when new production capacity around the world—particularly in the Middle East—could cause a downturn in the petrochemical business cycle.

U.S. chemical firms got off to a slow start in the first quarter of 2007. Combined sales for 25 major chemical companies rose 5.6% to $46.2 billion compared with the first quarter of 2006. Earnings increased just 0.7%, however, to a total of $3.68 billion.

Oil started the year at what in retrospect looks like a bargain price—just over $50 per barrel for West Texas Intermediate, the U.S. benchmark crude. Prices rose throughout the year, hitting a high of nearly $100 in November. Oil closed recently at about $95.

U.S. natural gas prices did not experience the tremendous run-up that oil did, giving chemical industry users some competitive relief. According to the U.S. Energy Information Administration, natural gas futures started the year at around $6.50 per million Btu. They hit a high of more than $8.50 in August but settled back to about $7.15 by mid-December.

Chemical prices rose steadily throughout 2007. According to the U.S. Labor Department, the producer price index for all chemicals started out the year at 206.6 (1982 = 100). By November, the index had reached a high of 224.6.

U.S. chemical production continued along at a steady pace, according to the Federal Reserve Board. Capacity utilization reached a peak of 78.4% in the third quarter, compared with 77.8% in the first quarter.

With prices up and production continuing apace, chemical firms were able to boost profitability. By the end of the third quarter, C&EN's survey of 25 major companies showed aggregate sales of $48.0 billion, up 9.4% from the comparable three months last year. At the same time, earnings jumped 14.6% to $3.58 billion. For the first nine months of the year, earnings for the group rose 10.2% to $11.5 billion while sales increased 7.7% to $143.0 billion.

Spurred by optimism among investors and securities analysts, chemical stocks at the end of the third quarter were beating not only the major market indicators, such as the Dow Jones industrial average, Standard & Poor's 500 Index, and NASDAQ, but also pharmaceutical and biopharmaceutical stocks. C&EN's index of the aggregate stock prices of 25 chemical companies was 24.3% ahead of the year-ago quarter at 293.2 (1992 = 100.0). The index for biotech firms rose 3.4% to 586.8 and the index for eight pharmaceutical companies rose 6.0% to 417.0.

MEGABUCK DEALS. Six multi-billion-dollar deals announced this year will change the familiar face of the chemical industry. Early in the year, General Electric put its storied engineering plastics business up for sale. In May, Saudi Basic Industries Corp. signed to buy it for $11.6 billion in a deal that promised to make the Middle Eastern basic chemicals company one of the world's leading engineering plastics makers. By the end of September, it had completed the purchase and renamed the business SABIC Innovative Plastics.

In June, ICI, the last major British-owned chemical company and one-time bellwether of British industry, received an informal bid from Dutch paint and chemicals maker Akzo Nobel offering to buy it for $14.2 billion. Though at first spurned, Akzo came back in August in partnership with German detergents and adhesives maker Henkel to make a second bid that valued ICI at $15.8 billion. Shortly thereafter, the two clinched the deal with a sweetened $16.0 billion bid. The closing on the deal is expected on Jan. 2.

Also in June, Basell, controlled by Russian-born industrialist Len Blavatnik, reached an agreement to acquire Huntsman Corp. in a $9.6 billion transaction. But that deal was not meant to be. Instead, three weeks later, Huntsman accepted a $10.6 billion takeover bid from Hexion Specialty Chemicals, which is controlled by private equity firm Apollo Management. The deal marks the end of the road for Huntsman Corp., which for most of its life had been a family-owned company built through founder Jon M. Huntsman's engineering of highly leveraged deals for unwanted chemical plants.

Basell, meanwhile, was undeterred. Less than a week after losing the bid for Huntsman, it announced a $19 billion deal to acquire Lyondell Chemical. The merger, completed on Dec. 20, is one of the largest in the history of the chemical industry. It combines Basell, the biggest polypropylene producer in the world and the largest polyethylene maker in Europe, with Lyondell, North America's second largest ethylene and propylene maker and number three polyethylene producer.

In what was a very busy summer for deals, PPG Industries said it would buy Dutch coatings maker SigmaKalon Group for $3 billion from private equity firm Bain Capital. The still-pending deal prompted PPG to reach agreements for the sale of its fine chemicals operations for $65 million to ZaCh Systems and for the sale of its automotive glass business for $500 million to private equity firm Platinum Equity.

Not to be outdone, Dow Chemical, the largest U.S. chemical maker, announced its own megadeal in mid-December. To further its strategy to lighten up on commodity chemicals, Dow and the state-owned Petrochemical Industries Co. of Kuwait plan to form an $11.5 billion-per-year petrochemical joint venture. Dow will receive $9.5 billion from PIC in exchange for a 50% share in a company that owns various assets in polyethylene, ethyleneamines, ethanolamines, polypropylene, and polycarbonate.

COMPANY MOVES. To tame an unprofitable business, Nova Chemicals and Ineos expanded their existing European styrenics joint venture to include their North American styrene and solid polystyrene assets. After the joint venture received government approvals in September, it secured rights to Sterling Chemical's Texas City, Texas, styrene facility and announced a plan to shutter the 1.7 billion-lb-per-year facility. Nova Chief Executive Officer Jeffrey M. Lipton said the move would "accelerate a return to financial health for the styrenics chain." In October, the venture closed a polystyrene plant in Montreal. A little later it said it would close a polystyrene plant in Belpre, Ohio, by Jan. 31, 2008.

Lanxess also sought an exit from styrenics and agreed to sell its acrylonitrile-butadiene-styrene resins business to Ineos. The two will first form a joint venture. Then, after a two-year period, Ineos will purchase Lanxess' minority stake. Dow and Chevron Phillips Chemical are in the process of forming their own styrenics joint venture, to be called Americas Styrenics.

Companies also moved to realign assets in the tough polyethylene terephthalate market. Eastman Chemical sold its PET plant in San Roque, Spain, to Spain's La Seda de Barcelona for $65 million. The firm also sold PET plants in Latin America to Mexican conglomerate Grupo Alfa for an undisclosed sum. Most recently, Thailand's Indorama Polymers said it is talking to Eastman about buying PET plants in Rotterdam, the Netherlands, and Worthington, England, for about $95 million.

PET producer Wellman Industries put itself up for sale; it has not made a profit since 2001. Wellman could soon face significant competition from Indorama, which plans to build a big PET plant in Decatur, Ala., by the end of 2008, and Italy's Mossi & Ghisolfi Group, which is planning an even bigger plant at an as-yet-unspecified U.S. site.

In a corporate move that did not involve any assets changing hands, RAG, the German conglomerate that acquired the specialty chemicals maker Degussa last year, has rebranded itself as Evonik Industries. The RAG and Degussa names will no longer be used. The new entity is preparing for a stock market launch in the spring of 2008.

Employment. Chemical firms employed more workers in 2007 than in the year before. At the end of November, total U.S. chemical employment reached 898,000, up 16,500 from the previous November, according to the Labor Department.

Some big employers initiated job cutbacks, but not as many as in prior years. The largest cuts came from Dow Chemical, which in early December said it planned to close at least four plants and cut 1,000 jobs-about 2% of its current workforce of 45,000. Earlier in the year, Chemtura said it would cut about 10% of its workforce, or 620 people.

In a survey of corporate boardrooms and executive suites, C&EN found that women's participation in the chemical industry is still limited. Of 416 people serving on the boards of directors of 42 chemical companies surveyed, only 12% are women, up from 11% of 415 directors found in C&EN's 2006 survey.

As 2008 approaches, some prominent management changes are under way. John E. McGlade, president and chief operating officer of Air Products & Chemicals, succeeded John P. Jones III as CEO effective Oct. 1. Jones will continue as chairman until March 31, 2008. Brendan Cummins is scheduled to become Ciba Specialty Chemicals' CEO on Jan. 1, 2008, succeeding Armin Meyer, who will remain chairman. And at carbon black and specialty chemicals maker Cabot, Patrick M. Prevost, formerly head of BASF's performance chemicals business, will succeed Kennett F. Burnes as CEO, also effective Jan. 1, 2008.

RAW MATERIAL PLAYS. Petrochemical firms made a number of deals during the year to secure low-cost supplies of energy and raw materials. Dow Chemical spearheaded many of these deals. It signed a memorandum of understanding for the construction of a massive joint venture with Saudi Arabian oil company Saudi Aramco that may be the largest petrochemical project ever undertaken.

Dow and Libya's National Oil Corp. said they would form a joint venture to operate and expand National Oil's Ras Lanuf petrochemical complex. The partners will expand existing polyethylene units and a naphtha-based ethylene cracker. They will also build an ethane-based ethylene cracker and polyethylene and polypropylene plants.

Dow and Chinese mining company Shenhua launched a two-year study of a plant that would make petrochemicals from coal. A plant slated for the central Chinese province of Shaanxi would convert coal into methanol, which would in turn be used to make ethylene, propylene, and other petrochemicals. Dow Chemical also teamed up with the world's largest natural gas producer, Russia's Gazprom, to cooperate in hydrocarbon processing and petrochemicals. The arrangement could lead to a new ethylene cracker at one of Dow's German sites.

France's Total secured a contract to build a $3 billion ethane cracker and three polyethylene plants in partnership with Algeria's national oil and gas company, Sonatrach.

And going against the flight to the Middle East, Eastman said it would participate in two separate $1.6 billion industrial gasification projects on the U.S. Gulf Coast. Instead of natural gas, both projects will rely on coke, a coallike by-product from refineries, to produce syngas, a mixture of carbon monoxide and hydrogen that is then used to make methanol and ammonia.

PRODUCTION CHANGES. The growing economies of Asian countries are helping to propel numerous construction projects. In Singapore, Shell started work on a new petrochemical complex, and ExxonMobil increased ethylene capacity. In China, Lyondell moved forward on a joint venture with China's Sinopec Zenhai Refining & Chemical to build a plant making coproducts propylene oxide and styrene.

In January, Ineos initiated its first project in China with the formation of a joint venture with Zhejiang Xing Teng Chemical to produce fluorochemical raw materials. A month later, Ineos announced plans to build a phenol plant in Zhangjiagang, Jiangsu province, by the end of 2009.

In India's northwestern state of Gujarat, Arkema and India's Essar Chemicals planned a 50-50 joint venture to manufacture acrylic acid and esters in Vadinar. And Reliance Industries' board approved a $3 billion ethylene cracker complex at its refinery in Jamnagar to be completed by 2011.

High feedstock costs shut down one major Asian investment. BASF stopped producing lysine, an amino acid used in animal feed, at a fermentation facility in Gunsan, South Korea. Wild fluctuations in the price of sugar made the plant unattractive.

Chemical makers continued to invest in capacity for the high-performance material carbon fiber, which is used instead of metal to build airliners such as the Airbus 380 superjumbo jet and Boeing's 787 Dreamliner. Toray announced plans to spend $460 million to boost carbon-fiber capacity in Decatur, Ala.; Abidos, France; and Ehime, Japan. Teijin subsidiary Toho Tenax said it would build a carbon-fiber plant in Wuppertal, Germany. And Austria's Lenzing said it would invest $65 million in a carbon-fiber project with SGL Carbon.

SPECIALTIES. In the past few years, business for custom chemical makers has picked up. The number of drug candidates progressing through development has been on the rise. Drug companies such as Pfizer, Merck & Co., and AstraZeneca shuttered plants and are turning increasingly to outside manufacturers. To meet growing demand, fine chemicals makers are investing in high-tech process technologies such as simulated moving-bed chromatography, supercritical fluid chemistry, and microreactors.

As Western pharmaceutical makers look eastward for some of their fine chemicals supplies, private equity and venture capital firms have sensed an opportunity to turn a profit. Shanghai-based fund management firm BioVeda China, for example, invested in Cathay Industrial Biotech, a Chinese developer of a novel fermentation route to dicarboxylic acids. Other investors put their money into Asian contract research organizations and producers of pharmaceutical ingredients and generic drugs.

To meet demand for cost-competitive pharmaceutical intermediates and active ingredients, Albany Molecular Research spent $11 million to purchase two sites in India. Some Eastern firms, meanwhile, invested in facilities in the West to capture more customers. India's Dishman Pharmaceuticals & Chemicals, for instance, acquired several European fine chemicals businesses, including Solvay's fine chemicals, vitamin D, and vitamin D analogs businesses in Veenendaal, the Netherlands.

ALTERNATIVE ENERGY & RAW MATERIALS. This year, big business got behind the effort to develop renewable energy projects that could lower greenhouse gas emissions. Many firms did so through academic and government partnerships. BP linked up with University of California, Berkeley; Lawrence Berkeley National Laboratory; and the University of Illinois, Urbana-Champaign, to be its partners in the creation of the Energy Biosciences Institute, a $500 million collaboration for renewable and alternative energy research. Three universities, a government lab, and several companies joined forces to create the Colorado Center for Biorefining & Biofuels to work on the conversion of biomass into fuels and other products. Founding corporate members include Dow, Chevron, ConocoPhillips, and Shell.

BASF, Bosch, Merck KGaA, and other firms agreed to cooperate in the field of organic photovoltaics as members of a $480 million German government initiative aimed at lowering the cost of making solar cells. UOP signed an agreement with the University of Southern California's Loker Hydrocarbon Research Institute, headed by 1994 Chemistry Nobel Laureate George A. Olah, to develop technologies to make fuels such as methanol and dimethyl ether from carbon dioxide.

The U.S. Department of Energy sought to kick-start cellulose-based ethanol by providing $385 million in grants to six proposed biorefineries. Recipients included Iogen Energy, DuPont, Abengoa Bioenergy, Novozymes North America, and Shell.

Enzyme makers turned their attention to providing technology for cellulose-based fuels. Diversa and Celunol combined into a new company, Verenium, to offer an integrated technology package for producing ethanol from cellulosic raw materials. Novozymes entered a research pact with Brazil's Sugarcane Technology Center to develop ethanol from bagasse, the residue left after making sugar from sugarcane. And Genencor launched what it calls the first commercially available enzyme to produce cellulosic ethanol.

Providing further impetus to alternative energy efforts, former U.S. vice president Al Gore joined the Silicon Valley venture capital company Kleiner Perkins Caufield & Buyers to advise it in identifying and underwriting alternative energy start-ups that could help mitigate global warming. One such firm, New Zealand's LanzaTech, got $3.5 million from venture capitalist Vinod Khosla and two New Zealand-based investors. LanzaTech plans to use microbes to convert carbon monoxide into ethanol.

A number of major companies announced plans to increase availability of silicon raw materials for solar-cell production. Evonik will provide chlorosilane feedstock to Silicium de Provence in France, PV Silicon in Germany, and the Silicon Mine in the Netherlands. Wacker Chemie announced a plan to build a solar-grade granular polysilicon facility in Burghausen, Germany. And Hemlock Semiconductor, which is two-thirds owned by Dow Corning, said it would spend $1 billion over the next four years to expand polysilicon capacity for both semiconductor and solar markets.

As energy and petrochemical prices rose throughout the year, firms looked to renewable materials as feedstocks for traditional products. Dow Chemical and Brazilian sugar and ethanol maker Crystalsev announced plans to build a commercial-scale facility in Brazil to make biomass-based polyethylene for local markets by 2011. The facility will use ethanol derived from sugarcane to produce 300,000 tons per year of the polyethylene raw material ethylene.

Petrochemical maker Braskem said it also planned to make polyethylene from sugar in a facility scheduled to start up in 2009. Solvay plans to invest $135 million in a sugar-based ethylene project in Brazil. The ethylene, together with chlorine, will be used to make polyvinyl chloride.

INTELLECTUAL PROPERTY. The top-scoring company in a ranking of global patent activity by the Patent Board, a patent analytics firm, was DuPont. Using a normalization process to factor out industry dynamics so it can compare companies across industries, the Patent Board concluded that DuPont is ahead of Intel and Microsoft in terms of "technology strength," a measure of overall quality and size of a company's patent portfolio. Other chemical companies are much further down on the list. For example, BASF came in at 35, Rohm and Haas at 57, and Shin-Etsu Chemical at 90.

But there is trouble with some of the industry-university alliances that have led to new patents. Such partnerships have to balance the university's responsibility to educate with industry's responsibility to turn a profit. Research directors on both sides of the divide fear that the balance has been thrown off in recent years as the profit motive crosses to the university side during precontract negotiations. According to a report by the National Bureau of Economic Research, "Technology-transfer officers were envisioned as gateways to facilitate the flow of innovation but have instead become gatekeepers that in many cases constrain the flow of invention."

The patent tussle between universities and industry is moot, however, if the two are unable to obtain patents. The U.S. Supreme Court issued a ruling at the end of April that may make patenting new inventions and defending existing patents more difficult. The unanimous decision relaxed the standard used by the Patent & Trademark Office and the courts to determine whether an invention is obvious and therefore not patentable.

ENVIRONMENTAL & LEGAL MATTERS. Though industrial corporations are often viewed as impediments to environmental improvements, several large companies, including General Electric, DuPont, and BP, called on President George W. Bush and Congress to pass national legislation requiring mandatory cuts in greenhouse gas emissions. The companies joined with environmental organizations such as Environmental Defense and the Natural Resources Defense Council to form the U.S. Climate Action Partnership, which wants mandatory carbon dioxide emission caps backed by CO₂ trading among emitters.

In Europe, where limited trading on carbon emissions has already started, chemical firms began to grapple with the European Union's new program for the Registration, Evaluation & Authorization of Chemicals, known as REACH, which came into force on June 1. Manufacturers have 18 months to preregister their products and then 11 years to generate safety data. The European Chemicals Agency, set to administer REACH, opened its doors in Helsinki, Finland.

Legal battles continued to trip up former makers of lead paint. A Rhode Island Superior Court judge ruled that paint makers must clean up contamination from lead paint in more than 240,000 homes and public buildings in the state. He also denied an appeal from Sherwin-Williams, NL Industries, and Lyondell to set aside a year-old jury verdict holding them responsible for as much as $1 billion in remediation costs. The paint makers have appealed to the Rhode Island Supreme Court.

Dow fired two senior executives on April 12 after claiming that they had been involved in unauthorized discussions with third parties about the potential sale of the company. J. Pedro Reinhard, former chief financial officer and a board member, denied the allegations and filed a suit in U.S. District Court for the Southern District of New York seeking $75 million in damages. Romeo Kreinberg, executive vice president for performance plastics and chemicals, also denied the allegations and filed a $600 million lawsuit. Dow also sued the executives to recover recent compensation made to the two.

Anticompetitive behavior did not claim the headlines in 2007 that it did in prior years. Chemtura settled an old score, paying $21 million to resolve federal class-action claims against the firm for fixing prices of ethylene-propylene-diene rubber. It completed the sale of that business to Lion Capital in June.

The European Commission, however, wasn't finished with rubber producers. As the year came to a close, it imposed a total of about $355 million in fines on five producers of chloroprene rubber for fixing prices in Europe between 1993 and 2002. Italy's ENI received the largest fine, $193 million, followed by Dow Chemical, Denka, DuPont, and Tosoh. Bayer would have received the largest fine, but it was granted immunity for bringing the cartel to the attention of the commission.