The fundamentals were at hand in 2005 for a greatly improved year in the chemical industry. And, indeed, corporate earnings have been strong. But escalating feedstock prices, punctuated by two unprecedented hurricanes, made the second half of the year challenging for chemical companies, particularly in the U.S.
CHEMICAL ECONOMY. The momentum of 2004 carried over into 2005, and chemical companies posted strong results in the first quarter. The 24 companies surveyed by C&EN posted a combined 55% increase in first-quarter earnings versus the year-ago period, hitting $4 billion on sales of $39.3 billion.
But expensive oil and natural gas pushed up prices for petrochemical feedstocks throughout the year. Prices for West Texas Intermediate (WTI) crude oil rose from $42 per barrel in January to $69 per bbl on the last trading day in August, just after Hurricane Katrina hit. Meanwhile, natural gas traded in the U.S. rose from $6.00 to $11.50 per million Btu.
Since Hurricanes Katrina and Rita, WTI prices have eased, slipping to about $60 per bbl, and natural gas prices have continued to climb, to about $14 per million Btu.
Even before the hurricanes hit the U.S. Gulf Coast, high energy prices and looming shortages figured into a national discussion on potential remedies. In the spring, a debate emerged on the establishment of new coastal liquefied natural gas terminals to import the fuel.
After the hurricanes hit, the debate expanded to encompass the entire U.S. energy infrastructure. U.S. lawmakers seriously considered ways to expand offshore production of oil and natural gas and to encourage construction of new refineries in areas outside of the Gulf Coast.
Dow Chemical Chief Executive Officer Andrew N. Liveris told the Senate Energy Committee that although the disruptions caused by the hurricanes will be short-term, "a far greater threat to the chemical industry is the serious vulnerability of the nation's energy supply."
As Congress considered a bill in November to lift the moratorium on natural gas production along the outer continental shelf, American Chemistry Council (ACC) President Jack N. Gerard went before the House Resources Committee. "Paying the highest natural gas prices in the world puts America-based manufacturing at a severe competitive disadvantage, and this is a largely self-inflicted wound," he testified.
Chemical production remained relatively steady for most of the year. But the twin hurricanes pushed up basic chemicals prices by 6.8% in September and 3.8% in October, while production tanked.
By the end of the third quarter, high feedstock prices and the hurricanes were crimping profits around the industry. Earnings growth slowed to its lowest level since the third quarter of 2003. Companies, however, were still very profitable: Overall, third-quarter earnings for the 24 companies surveyed by C&EN increased 22.9% versus the same quarter in 2004, reaching $2.5 billion on sales of $40.3 billion.
THE HURRICANES. The effects on sales and earnings tell only part of the story of the impact of Hurricanes Rita and Katrina. Katrina made landfall near New Orleans on Aug. 29, shutting down offshore oil and gas production, disrupting petrochemical plant operations, and halting rail, truck, and barge transportation across Mississippi, Alabama, and Louisiana.
Two days after the storm, crude oil output in the Gulf of Mexico, which accounts for 25% of U.S. oil production, was down 92%. Natural gas production was off 83%. Refiners in the region shut down as well. Many chemical firms suffered severe flooding and power outages, including Dow in St. Charles and Plaquemine, La., and DuPont at its titanium dioxide plant in DeLisle, Miss.
Just as chemical companies donated cash and supplies to Asian tsunami victims at the end of 2004, they helped hurricane victims along the Gulf Coast. Even as they coped with their own losses, firms including Sd-Chemie, Pfizer, and DuPont sent help to hurricane victims.
Hurricane Rita made landfall in late September along the Texas border with Louisiana, packing 120-mph winds. Though Rita caused less damage than originally expected, it compromised gas and oil production, shut down petrochemical plants, and further tightened availability of energy and raw materials.
The storms were costly. Air Products said the whammy from two major hurricanes within a month of each other would reduce earnings in its fiscal fourth quarter by 5 to 7 cents per share. Others, such as Eastman Chemical and Cytec Industries, warned shareholders to expect an impact on earnings.
DuPont said it would record costs of $150 million in the third quarter for cleanup, plant restoration, lost inventory, and humanitarian assistance associated with the hurricanes. In addition, the firm expected a capital investment of about $115 million to restore or replace damaged equipment.
EMPLOYMENT. The job picture in the U.S. chemical sector is not yet robust, but it is not quite as bleak as in recent years, when chemical companies undertook massive layoff programs and chemists had trouble finding work.
The good news for chemistry is that, according to an American Chemical Society survey conducted in 2005, unemployment rates for chemists looking for work declined to 3.1% from the record rate of 3.6% in 2004. The bad news is that the percentage of chemists employed full-time declined slightly to 90.8% while part-time employment increased from 3.6% to 4.1%.
Overall, chemical employment, once again, trended downward in the U.S over the past year. For November, the Labor Department reported total chemical employment of 878,500, a decline of 3,900 versus November 2004. Employment of plant workers in November was 513,400, a decline of 6,000 versus the same month a year ago.
And companies in the U.S. and abroad still looked to cut jobs in 2005 as a way to save money. For example, Chemtura, formed through Crompton Corp.'s purchase of Great Lakes Chemical, announced that it would cut 600 jobs over the next year, about 8% of its workforce.
After being spun off from Bayer, Lanxess launched a restructuring program in styrenics and fine chemicals to generate $130 million in annual savings. The company is set to cut 960 jobs by 2007. Later in the year, it announced that it would cut a further 450 jobs in other chemical businesses to save another $75 million annually. BASF announced that it would cut 400 jobs in the U.S. to save $150 million annually. And Arkema announced that it would eliminate about 550 jobs in a reorganization of its European chlorochemicals business.
As in most years, the chemical industry saw its share of major management changes in 2005.
Gerard, former head of the National Mining Association, was named head of ACC. He replaced Thomas E. Reilly Jr., the Reilly Industries CEO who temporarily took ACC's reins following the ouster of Gregori Lebedev in 2004.
Raymond W. LeBoeuf, 58, PPG Industries' chairman and CEO, retired on July 1. The firm's president and chief operating officer, Charles E. Bunch, 55, replaced him.
And Hector B. Ortino, 63, chairman and CEO of Ferro Corp., died of natural causes in late November. He was quickly replaced as CEO by the company's chief operating officer, James F. Kirsch.
COMPANY MOVES. The year was another big one for mergers and acquisitions-particularly big-ticket purchases by industrial and financial players-and initial public offerings (IPOs).
Ineos, which was nearly unheard of several years ago, is set to become the sixth-largest chemical company in the world with its pending purchase of Innovene, the former BP olefins and derivatives unit. The $9 billion deal, announced in October, will combine Innovene's $18 billion in annual sales with Ineos' roughly $8 billion.
In another blockbuster deal, Access Industries brought Basell for $5.4 billion. Basell was the polyolefins joint venture between Shell Chemicals and BASF and is the world's largest polypropylene maker, with $8.3 billion in 2004 sales. Access completed the largest leveraged buyout in the chemical industry's history in August.
Crompton purchased Great Lakes for $1.8 billion, creating Chemtura, which has some $4.1 billion in annual sales. This year Crompton also sold its refined products group to Sun Capital Partners for $80 million.
Apollo Management formed Hexion Specialty Chemicals by merging Resolution Performance Products, Resolution Specialty Materials, Borden Chemical, and Bakelite. With about $4.1 billion in annual sales, the company, specializing in thermoset resins for coatings and other applications, is one of the five largest specialty chemical companies in the U.S.
Cytec purchased UCB Group's surface specialties unit, which makes resins for coatings, for $1.8 billion. Cytec then sold an amino resins business that it acquired with the UCB purchase to Ineos for $78 million to satisfy a regulatory requirement.
Ending a partnership dating back to 1988, Honeywell purchased Dow's stake in the UOP petrochemical and refining technology joint venture for $845 million.
In other ends to prominent joint ventures, Cargill purchased Dow's 50% interest in their Cargill Dow polylactic acid joint venture and renamed it NatureWorks. And Danisco bought out Eastman Chemical's 42% interest in Genencor International for $419 million.
In Europe, Finland's Kemira spent about $640 million on its acquisitions of pulp and paper chemicals maker Finnish Chemicals and the Dutch company Verdugt. DSM purchased Avecia's NeoResins coatings resins business for $670 million.
In smaller, yet far-reaching, chemical deals in the U.S., Arsenal Capital Partners, which purchased Rutherford Chemicals from Cambrex in 2003, bought longtime privately held specialty chemical firms Velsicol Chemical and Reilly Industries. And JP Morgan Partners purchased privately held PQ Corp.
As in 2004, companies saw a strong stock market for chemicals as an opportunity to launch IPOs of shares, but the moves delivered mixed results. Blackstone Group, which purchased Celanese in 2004, initially priced Celanese's IPO at a range of $19 to $21 per share. Investors balked, however, and the company had to lower the offer to $16 per share.
Huntsman priced its IPO at $23 per share, and shares climbed by 6.5% on their first day of trading. The successful offering raised about $1.45 billion for the company.
Kerr-McGee spun off its TiO2 business, which it named Tronox, and launched it in an IPO in November. But the debut was disappointing: the $14-per-share offering was well below the $18.50-to-$20.50 range the company originally set.
Rockwood Holdings, the specialty chemical company cobbled together through acquisitions by private equity firm Kohlberg Kravis Roberts & Co., fetched about $400 million in an IPO. Fertilizer cooperative CF Industries launched an IPO valued at $750 million in August.
The two largest unions of chemical workers in North America combined in 2005. The Paper, Allied Industrial, Chemical & Energy Workers International Union merged with the United Steel Workers of America to form a new union.
PRODUCTION CHANGES. Like most years in the chemical industry, 2005 has seen its fair share of capital projects. And the trend of spending mostly in Asia and the Middle East continued this year.
China dominated capital expansion, both in terms of the number of projects being undertaken there and as the primary destination for products made by new petrochemical plants in the Middle East.
The year marked the completion of several major petrochemical projects in the country. BP and China Petroleum & Chemical Corp. (Sinopec) started up their $2.7 billion Secco ethylene cracker joint venture in Shanghai. BASF-YPC, a $2.9 billion joint venture between BASF and Sinopec in Nanjing, started its own ethylene cracker. A $4.3 billion joint venture between Shell Chemicals and China National Offshore Oil Corp. in Daya Bay, China, is scheduled for completion by the end of the year.
And major investments in Asia have by no means been relegated to petrochemical projects. DuPont is planning a TiO2 facility in Dongying, China, that is to open in 2010 and eventually cost $1 billion. Wacker-Chemie and Dow Corning announced that they would build a silicones joint venture in Shanghai that would cost several hundred million dollars.
Over the next decade, ethylene capacity in the Middle East is projected to double to 30 million metric tons per year, and propylene capacity will triple to 7 million tons. The year saw no shortage of projects destined to be part of this buildup.
Borealis and Abu Dhabi National Oil Co. are planning a $2.5 billion project in Ruwais, Abu Dhabi, to be completed in 2010. Innovene and Saudi development firm Delta International signed a memorandum of understanding to build a $2 billion petrochemical complex in Al-Jubail, Saudi Arabia, set for completion in 2008. And Saudi Basic Industries Corp. is planning an ethylene cracker for Al-Jubail by 2012.
In North America, there were few major capital investments and a fair share of plant closures, largely because high raw material costs put local industry at a disadvantage.
The only major ethylene capacity that came on-line in 2005 was an Innovene expansion in Chocolate Bayou, Texas. Nova Chemicals is spending about $210 million to expand its ethylene plant in Corunna, Ontario, in a project soon to be completed.
In North America, there were several prominent plant closures. Ending its production of methanol in North America, Methanex announced it would close its Kitima, British Columbia, facility early next year. Innovene is closing an -olefins plant in Pasadena, Texas. Sterling Chemicals closed its Texas City, Texas, acrylonitrile plant.
Investments in Europe have also been modest, although one big project in the region is under consideration. In June, Ineos undertook a study of a $1.25 billion ethylene and vinyls complex in Wilhelmshaven, Germany.
BASF is working on a couple of big investments in Antwerp, Belgium, such as a $250 million expansion of its ethylene cracker. It also announced that the site would house the first BASF/Dow propylene oxide plant using a hydrogen peroxide-based route that produces no coproduct styrene.
SPECIALTIES. Fine chemicals companies started 2005 still hung over from several years of high expectations from the pharmaceutical industry's pipeline. And given the persistence of unfavorable business conditions, pressure to consolidate lingered.
Rhodia wrote off $125 million in value from its Pharma Solutions business during the year and said it was exploring alternatives for the unit, including divestiture.
Lanxess carved out its money-losing fine chemicals business as a stand-alone entity and renamed it Saltigo. And as part of a program by its private equity owners to liquidate the firm, Avecia sold a fine chemicals business to Finland's KemFine and custom synthesis assets to India's Nicholas Piramal.
Bucking the trend of large chemical companies exiting the sector, BASF says it views pharmaceutical custom manufacturing as a growth sector. To this end, it purchased Orgamol, a Swiss specialist in phosgene and sodium azide chemistry.
Other companies acquired their way into bigger custom manufacturing businesses.
Wacker acquired the German protein maker ProThera and renamed it Wacker Biotech. Sigma-Aldrich purchased Degussa's Proligo subsidiary, which generated $38.4 million in sales in 2004 from nucleic acid and oligonucleotide synthesis. Codexis purchased Germany's Jülich Fine Chemicals to establish a base in Europe. American Pacific diversified into pharmaceutical fine chemicals through its purchase of Aerojet Fine Chemicals from GenCorp for $119 million.
Drug services are continuing to migrate to India, where companies have been able to leverage their low costs in an industry elsewhere mired in overcapacity.
And Indian pharmaceutical services firms are growing beyond that country's borders. In what was billed as the first purchase of a U.S. pharmaceutical chemical firm by an Indian company, Malladi Drugs & Pharmaceuticals acquired Novus Fine Chemicals, a New Jersey-based pseudoephedrine maker, for $23 million. Also, India's Dr. Reddy's Laboratories is purchasing an active pharmaceutical ingredient plant from Roche in Cuernavaca, Mexico, for $59 million.
In semiconductor materials, growth has been strong, but it is falling short of the breakneck pace of 2004. The sector is projected to grow 6.1% globally this year, hitting nearly $18 billion. It grew by an estimated 18.6% in 2004.
The electronic materials sector has also seen some deal making. BASF, a relatively small player in electronic chemicals, bought Merck KGaA's high-purity electronic chemicals unit for $350 million. Merck, however, held onto its business in chemicals used in liquid-crystal displays and added to that business by buying Avecia's Covion unit, a pioneer in organic light-emitting diode (OLED) materials.
Sumitomo Chemical, which on its own had been developing light-emitting polymers, purchased Dow's Lumation OLED business for an undisclosed sum. Sumitomo then formed a joint venture with Cambridge Display Technology in OLED technology.
INTELLECTUAL PROPERTY. As the year got under way, C&EN's annual survey of chemical firms' future-oriented spending plans found that a group of 20 planned a 2% increase in R&D spending-just a bit above the projected rate of inflation.
Despite the modest increase, many companies said they would continue to count on R&D to boost sales and earnings. For instance, Thomas M. Connelly Jr., DuPont's chief technology officer, said his firm expected to get 33% of sales from new products in 2005.
DuPont also put money into new R&D ventures. It signed a research agreement with the National Chemical Laboratory in Pune, India, in an effort to further globalize R&D. And it put another $25 million into its research alliance with Massachusetts Institute of Technology, bringing its total commitment to $60 million over 10 years and adding nanocomposites, nanoelectronic materials, alternative energy technology, and safety and protection materials to the alliance's focus.
Others planned to investigate new areas, too. General Electric CEO Jeffrey R. Immelt declared that his firm would place emphasis on products with advanced environmental technologies and pledged to double GE's current $700 million R&D effort in clean technologies by 2010.
In January, Dow said it would further globalize its R&D operations by setting up a center in China that would employ 600 people by 2007. It will join companies such as General Electric, Honeywell, Degussa, Hitachi Chemical, Toray Industries, and Unilever that already have R&D in China.
Regional policy initiatives also set the tone for R&D spending. The European Technology Platform for Sustainable Chemistry-supported in part by the European Commission-unveiled a research agenda for the European chemical sector in three areas: health care, energy-efficient housing, and industrial bioprocesses.
Late in the year, management consulting firm Booz Allen Hamilton released a study showing no direct relationship between R&D spending and common measures of corporate success such as growth, profitability, and shareholder returns. Superior results, the consulting firm concluded, are a function of the quality of an organization's innovation process rather than of absolute spending.
SAFETY AND SECURITY. Safety and security were at the top of the national agenda throughout last year. Early in January, a Norfolk Southern train derailed in Graniteville, S.C., resulting in a chlorine leak that killed nine people and forced the evacuation of 5,400 people. "Whether it's an accident or an al Qaeda attack, we need to make the shipments of deadly chemicals more secure," said Rep. Edward J. Markey (D-Mass.), a senior member of the House Homeland Security Committee.
While the Department of Homeland Security called for a mandatory chemical plant security bill, the House and Senate differed on the need for such a law. Emphasizing the necessity for such legislation, Sal DePasquale, a security consultant with the engineering firm CH2M Hill told C&EN, "As it is now, an adversary with a six-shooter can defeat the security of most chemical facilities."
Meanwhile, some state officials worked on plans to require chemical facilities to adopt security measures to reduce the chances of a terrorist attack. By the end of the year, New Jersey's governor had signed a measure putting state-mandated security requirements into effect.
ENVIRONMENT. Marking 20 years after the accident that killed thousands living near a Union Carbide pesticide plant site in Bhopal, India, the chairman of the U.S. Chemical Safety & Hazard Investigation Board wondered whether the process safety lessons learned by the industry since then are fading. "It is eerie how many investigations we do where we find the same conditions that led to the accident at Bhopal," said Carolyn W. Merritt, board chairman.
Ironically, a few months after Merritt's remarks in June, the state of Madhya Pradesh began a cleanup of the chemical accident site in Bhopal without following even the most basic safety precautions such as requiring protective equipment.
As it industrialized at breakneck pace, China's environment suffered and major chemical disasters were still a fact of life. Residents of Zhejiang province, south of Shanghai, and residents of Huaxi, near the city of Dongyang, rioted over pollution.
A nitrobenzene plant operated by PetroChina subsidiary Jilin Petrochemical exploded in Jilin on Nov. 13. The explosion killed at least five people and injured more than 70. The resulting chemical spill into the Songhua River shut down water in the city of Harbin for four days. As the spill headed downriver, it threatened drinking water supplies farther downstream.
In the U.S., DuPont settled a perfluorooctanoic acid lawsuit with residents of Parkersburg, W.Va., for $108 million. The deal included $85 million to local utilities to remove PFOA-a by-product of fluorochemical manufacturing-from drinking water and to conduct a study on the connection between exposure and disease in humans. The company also paid $23 million in plaintiffs' legal fees and expenses.
Other environmental mishaps encountered the U.S. legal system as well. A federal grand jury in Montana issued a criminal indictment against W.R. Grace and seven current and former Grace executives for knowingly exposing residents of Libby, Mont., to asbestos and concealing the danger. And New Jersey environmental regulators filed a lawsuit against Grace for falsely claiming that the firm had completed a cleanup of asbestos contamination at a former plant in Hamilton Township.
Legislation to cap asbestos liability by setting up a $140 billion fund to compensate asbestosis victims went nowhere. The Association of Trial Lawyers of America and the Environmental Working Group, among others, opposed the legislation, calling it underfunded, unfair, and unworkable. More than 74 companies, including Grace and Owens Corning, have declared bankruptcy because of asbestos liability.
Chemical industry concern persisted over the final form of the European Union's draft legislation on the registration, evaluation, and authorization of chemicals (REACH). Nevertheless, the legislation moved closer to enactment as the European Parliament approved the regulations in a Nov. 17 vote.
Environmental concerns continued to affect the public's image of the chemical industry as ACC began to roll out a long-awaited multi-million-dollar communication campaign intended to turn the tide of public opinion. Television advertisements began the week of Sept. 22.
TRADE ISSUES. Price-fixing charges continued to dog the chemical industry in 2005. They contributed to the unraveling of DuPont Dow Elastomers, a joint venture between Dow Chemical and DuPont. Before it dissolved, DuPont paid $84 million to settle criminal charges stemming from a polychloroprene price-fixing investigation.
Rubber-related price-fixing claims led Chemtura to agree to settle class-action lawsuits in rubber chemicals and ethylene-propylene rubber for a total of $92 million. Because too many claimants opted out, however, the firm withdrew its settlement offer and started separate settlement talks with the largest claimants. A $5 million class-action settlement with nitrile rubber purchasers remained in effect.
Wellman agreed to pay $8 million to settle remaining civil claims against the firm for fixing polyester fiber prices between 1999 and 2001. It earlier paid $24 million to settle with another group of fiber buyers.
Monsanto got into trouble for making a $50,000 cash payment to a senior Indonesian official in 2002 in an attempt to get the official to waive environmental regulations for approval of genetically modified crops. The firm agreed to pay a $1.5 million fine to U.S. regulators.
European firms were not immune to run-ins with regulators. Rhodia faced a criminal investigation by authorities as it was accused of fiscal improprieties. In July, police searched the firm's headquarters to further the probe.
In February, the European Commission brought charges against 18 chemical firms for conspiring to fix prices of hydrogen peroxide and derivatives. Firms charged include Kemira, Akzo Nobel, Solvay, Degussa, and Arkema. In August, the EC undertook a probe of acrylic plastics makers, alleging that ICI, Lucite International, BASF, Degussa, and Arkema all conspired to fix prices for the monomer methyl methacrylate between 1995 and 2003.