Issue Date: December 22, 2008
Year In Review
HISTORY WILL REMEMBER 2008 as the year the financial system stood still. But what began as strictly a financial crisis slowly drew in the chemical industry as the year wore on. Demand in key chemical-consuming industries such as housing and automobiles plummeted. Banks' reluctance to lend made it tough for firms to finance acquisitions. And at the worst moments of the crisis, companies were even worried about meeting payroll.
Even without the economic turmoil, 2008 still would have been an exciting year for the chemical industry, given the run-up in energy prices, dramatic twists and turns on the mergers and acquisitions front, and even a damaging hurricane.
How the chemical industry handled such a tumultuous year provides a lesson in adapting to changing circumstances. Companies cut capacity and employment in contracting markets, introduced "green" products and processes to satisfy demand for environmentally benign chemicals, and accelerated alternative energy projects.
AN ECONOMY IN CRISIS. In any year, a recession or a record spike in energy prices would have been the main event for the chemical industry. This year saw both.
The year began with economists fretting over whether a recession would occur, putting the chances of one in the U.S. at about 50%. According to a recent report from the official arbiters of such things, the National Bureau of Economic Research, the recession was already under way last December. By year's end, the number one and two questions on economists' minds were: "How deep will the recession get?" and "When might it end?"
The odds of a recession quickly worsened as the year began and the economy went south. The Federal Reserve announced large interest rate cuts to stimulate the economy and stem any downturn. T. Kevin Swift, chief economist for the chemical trade group American Chemistry Council (ACC), told C&EN that he had grown pessimistic. "What we are in for, at least in the first half of the year, is very subpar growth," he said. "The downdrafts are just so large, and the few updrafts that we do have—exports being one—can't offset the effects of the weak housing market and soft consumer spending."
In March, Dow Chemical Chief Executive Officer Andrew N. Liveris told Reuters, "We are starting to orient ourselves for a worse year economically than we had even planned as recently as three months ago."
At the time, chemical makers were grappling with escalating energy prices. Oil prices started out 2008 at already high levels—trading between $90 and $100 per barrel during the first quarter. But April saw the start of a massive spike that peaked at more than $145 in July. Prices have since plummeted, and oil was on offer for $40 earlier this month. Natural gas prices in North America followed a similar pattern.
Despite the omens, earnings began the year fairly strong for chemical makers. The combined sales of 24 major U.S. chemical companies increased some 17.7% in the first quarter versus the year-ago period. Earnings were even stronger, up 25.9%. The performance was largely due to the strong agricultural market, which buoyed results for fertilizer makers Mosaic and Terra Industries. At the time, chemical makers also enjoyed the ability to export because of the weak dollar.
But companies warned that they were starting to feel the pinch of rising energy costs. Rohm and Haas President Pierre R. Brondeau told C&EN in May that "in the last four or five months there has been such an acceleration of costs, we can't see a way to catch up." The company tried to do just that by taking the unprecedented step of imposing an energy surcharge on its products.
Later that month, Dow came out with price increases on all of its products, some by as much as 20%, and other companies followed. Overall, U.S. chemical companies raised prices 17.2% from January through August, according to Department of Labor data. However, prices slipped by 4.7% over the subsequent two months.
The chemical industry started to feel the effects of the downturn more strongly in the second quarter. Earnings for 25 companies tracked by C&EN grew by an apparently healthy 17.6%, but that was on the strength of the agricultural sector. Take out Terra and Mosaic, and chemical earnings actually decreased by 1.3% in the period. Moreover, for the remaining companies, agriculture-related markets like pesticides and seeds were among the only strong businesses.
In the third quarter, the chemical industry had to contend with bad weather on top of everything else. Hurricane Ike hit chemical plants along the Gulf Coast in September. While the impact wasn't quite like that of Hurricanes Katrina and Rita in 2005, many chemical plants temporarily shut down. DuPont wrote down a hurricane-related charge of $146 million in its third-quarter earnings.
That same month, it became evident the U.S. economy was in serious trouble. Bad debt drove the investment bank Lehman Brothers into bankruptcy. The financial system became petrified as banks refused to lend to anyone, including each other. With chemical companies fearful they wouldn't be able to access short-term loans, ACC endorsed the $700 billion rescue package Congress proposed. "Without reliable access to credit, the ability of ACC member companies to pay their bills, purchase inventory, meet payroll, and make critical investments in new technologies would be severely compromised," CEO and former congressman Cal Dooley wrote on Oct. 1.
It soon became obvious that the Wall Street crisis was having devastating effects on Main Street. Important sectors such as housing and car manufacturing weren't resuscitated by government intervention. According to the U.S. Commerce Department, October saw the lowest rates of housing starts in the U.S. since the government began collecting data in 1959. November figures were even worse. Market research firm Autodata's figures for car sales through November showed a 16.3% decline versus the first 11 months of 2007.
U.S. chemical firms continued their slide. The 24 companies C&EN tracked during the third quarter saw a 20.4% increase in earnings. But fertilizer makers were still holding up the tent. Without their results, the remaining chemical firms posted a collective 8.7% decrease in earnings. The two largest chemical makers, Dow and DuPont, saw declines of 31.1% and 7.1%, respectively.
Executives at European firms, who spent the first half of the year thinking they were a safe distance from a mostly American crisis, changed their tunes. BASF saw a 37.5% drop in profits in the third quarter. "The economic skid marks can no longer be ignored," remarked BASF Chairman Jürgen Hambrecht at an earnings press conference.
Japanese firms fared even worse in the quarter. Of the eight major Japanese chemical companies C&EN tracks, only Shin-Etsu Chemical showed an increase in profits, at 6.0%. Some of the declines were severe. Profits tumbled by 96.2% at Teijin and 76.2% at Sumitomo. "The bottom is falling out of demand," observed Joel Scheiman, director of research for chemicals and textiles at KBC Securities Japan.
Chemical companies started taking desperate measures. BASF shut down 80 plants representing some 25% of its global capacity. The company fingered the depression of the auto sector. "Customers in the automotive industry have cancelled orders at short notice," Hambrecht said.
Dow announced it was shuttering chlorine capacity in Texas and styrene and derivatives plants around the world. Nova Chemicals idled a large styrenic polymers plant in Monaca, Pa., because of weak demand.
Georgia Gulf, which earlier in the year closed a polyvinyl chloride (PVC) plant in Oklahoma City because of the housing slump, announced it would permanently shutter one in Ontario as well. The company had the misfortune of spending $1.6 billion to purchase building products maker Royal Group in 2006 on the eve of the housing market's collapse.
Ashland and Chemtura both announced they would cut dividends to conserve cash to carry them over through the tough time. Even China, which has been an engine for chemical industry growth for the past decade, was experiencing problems. "There is no demand from China," Tetsuya Kurokawa, PVC sales manager at Shin-Etsu, told C&EN earlier this month.
EMPLOYMENT. As the economy hit the skids, so did chemical industry employment. At the end of November, total U.S. chemical employment was 848,500, down 10,300 from the previous November, according to the Labor Department. The numbers will slip even lower by year-end because of layoffs announced since then.
Among the corporate actions contributing to the decline was a Rohm and Haas plan, announced in June, to eliminate 925 jobs and to shut down capacity, primarily in North America.
More recently, BASF decisions affected 20,000 employees as it either temporarily closed or reduced output. Solutia temporarily decreased production of nylon intermediates, fibers, and resins and permanently shut down nylon carpet fiber facilities affecting 1,600 jobs, 700 of which were lost permanently.
In December, the carnage also reached the ranks at DuPont, Dow Chemical, and LyondellBasell Industries. DuPont launched a restructuring program that includes elimination of 2,500 jobs in the U.S. and Western Europe. Dow plans to eliminate 5,000 jobs as part of its streamlining effort and also slated 6,000 contractor jobs to go. LyondellBasell said it would cut 2,500 jobs.
Executives came and went amid the stormy weather. During the year, J. Erik Fyrwald succeeded William H. Joyce as CEO of water treatment services firm Nalco Holdings, and Stephen D. Pryor succeeded Michael J. Dolan as president of ExxonMobil Chemical. In early December, Craig A. Rogerson, former Hercules CEO, succeeded Robert L. Wood as CEO of Chemtura.
Additional significant management changes are planned for 2009. Klaus Engel will take over as chairman of Evonik Industries when Werner Müller steps down at the end of this year. Ellen J. Kullman will succeed Charles O. Holliday Jr. as DuPont's CEO on Jan. 1, 2009. Shane Fleming will succeed David Lilley as CEO of Cytec Industries effective Jan. 1, 2009. Jeffrey M. Lipton will retire as CEO of Nova in May 2009, at which time Christopher D. Pappas will succeed him as CEO. James P. Rogers will succeed J. Brian Ferguson as Eastman Chemical's CEO effective May 2009.
MERGERS CONTINUE. With banks reluctant to make loans, the odds seemed against deal-making in the chemical industry. That wasn't entirely the case, although some buyers, such as the private equity firms that were influential earlier in the decade, were conspicuously absent.
According to Peter Young, president of the investment banking firm Young & Partners, the number of completed acquisitions worth more than $25 million in the first half of 2008 was 34. Annualized, this figure falls short of the 81 finished in 2007. Private equity firms were responsible for only 18% of the chemical deals in the first half of 2008, compared with 28% during the same period the year before.
The pace picked up in the third quarter of 2008. According to a PricewaterhouseCoopers report, some $32 billion in deals were announced in the period, double what was disclosed during the first half of the year.
The increase was due to a few large deals unveiled during the period. The largest was Dow's planned purchase of Rohm and Haas for $18.8 billion, a high price that was seen as an attempt to win the backing of the Haas family trust, which owns a third of the company.
Some observers wondered whether in this economic climate Dow could complete an important prelude to the Rohm and Haas acquisition: the sale of half its commodity chemicals and plastics business to Petrochemical Industries Co. (PIC) of Kuwait. In December, Dow put the concerns to rest by inking a definitive agreement with PIC for $7.5 billion, instead of the $9.5 billion it originally expected to reap.
Another blockbuster deal, announced in September, was BASF's $5.5 billion takeover of Swiss specialty chemical giant Ciba. The premium BASF offered for the shares, 64.0% over the average share price during the preceding two months, wasn't enough for some shareholders. Bestinver, a Spanish asset management firm with a 13.2% stake in Ciba, balked. However, BASF had amassed more than 90% of the shares by year's end.
Ashland purchased Hercules in a deal valued at $3.3 billion, an attractive sum, according to analysts. Ashland had been seeking specialty chemical acquisitions since it sold its stake in Marathon Ashland Petroleum in 2005 and its paving and construction unit in 2006.
In a large deal announced during the fourth quarter, Japan's Mitsubishi Rayon agreed to purchase the methyl methacrylate maker Lucite for $1.6 billion. The deal values Lucite at more than Mitsubishi Rayon's own market value of $1.3 billion when it was announced in November.
Private equity firms weren't completely locked out of making chemical acquisitions. In June, for example, CVC Capital Partners purchased a 25.01% stake in Evonik, parent of the former Degussa, for $3.7 billion. The investment firm said the purchase is a step toward an eventual initial public offering of Evonik.
One of the biggest merger and acquisition stories of 2008 was actually a deal that was signed in 2007 but now won't be completed: Hexion Specialty Chemicals' takeover of Huntsman Corp. At the beginning of the year, the merger seemed to be proceeding smoothly, with the companies even announcing who would fill top management positions. The only hurdle still to go was antitrust approval.
But in June, Hexion filed a lawsuit in the Delaware Court of Chancery seeking to get out of the deal. The firm said performance at Huntsman was deteriorating, the combined company would be insolvent, and it couldn't secure the funding needed to close the deal. In September, the court ruled in Huntsman's favor, finding that Hexion had knowingly breached its merger agreement. The judge ordered Hexion to use it best efforts to complete the deal or face heavy liabilities. Last week, the firms called the deal off at a cost to Hexion of $1 billion (see page 7).
The planned sale of Chemtura also didn't come to pass in 2008. In December 2007, the company said it had hired Merrill Lynch to help explore strategic options, including a sale. Although Chemtura ended the process in June, saying it wasn't likely to reap the price it was looking for, the company did sell its oleochemicals and fluorochemicals businesses during the year.
In January, Solutia delayed its emergence from bankruptcy because the credit crunch made it difficult to secure financing. Instead, it sued Goldman Sachs, Citigroup, and Deutsche Bank to get the $2 billion it was promised. The banks relented and offered up the financing, enabling Solutia to emerge in February from its five-year-long bankruptcy. Solutia then hooked up with HSBC Securities to explore a sale of its nylon business to focus on specialty chemicals.
PRODUCTION CHANGES. Despite the bad economy, some chemical companies still planned significant capital investments, even in the U.S.
DuPont picked its Cooper River, S.C., site for a $500 million plant to make its Kevlar p-aramid fiber.
And housing woes haven't stopped Westlake Chemical from setting into motion plans to spend $300 million to build a new chlor-alkali plant in Geismar, La. The company is also expanding chlorine and PVC plants in Calvert City, Ky. Shintech, a U.S. affiliate of Shin-Etsu, started up the first phase of a massive chlor-alkali and PVC complex in Plaquemine, La.
But far more of the large investments that companies announced during 2008 were in regions that have garnered most of the new capital spending in recent years: Asia and the Middle East.
Saudi Basic Industries and Sinopec signed an agreement to build a $2.5 billion complex for making polyethylene, ethylene glycol, and polycarbonate in Tianjin, China. Qatar Petroleum, Shell, and PetroChina signed a letter of intent to build a refinery and petrochemical complex in China. BASF and Sinopec announced that they would spend $900 million expanding their joint chemical complex in Nanjing, China.
Vietnam has also been targeted for large chemical projects. A consortium involving Mitsui Chemicals, Idemitsu Kosan, Kuwait Petroleum, and PetroVietnam started planning a $6 billion refinery and petrochemical project there. And Thailand's Siam Cement and PetroVietnam advanced plans to build a $4 billion complex to make ethylene, chlorine, polyolefins, and polyvinyl chloride.
The Middle East continued to be a prime region for large petrochemical investments. In the most ambitious announcement of 2008, Austrian polyolefins maker Borealis and its Abu Dhabi, United Arab Emirates-based majority owner International Petroleum Investment said they were planning a "chemical industrial city" in Abu Dhabi. The partners said the ethylene-based complex would be the largest of its kind in the world. Borouge, a joint venture between Abu Dhabi National Oil and Borealis, announced plans to expand polyolefins output at its Ruwais, United Arab Emirates complex by 2014. The expansion would nearly double capacity there.
SPECIALTIES. Despite recent problems with Chinese pharmaceuticals, including contaminated heparin linked to the deaths of dozens of people in the U.S., China continued to play an essential role as a global supplier of fine chemicals and pharmaceutical chemicals.
To strengthen their access to low-cost active pharmaceutical ingredients (APIs), Portugese firm Hovione purchased 75% of Hisyn Pharmaceutical, a Shanghai-based API producer, and Evonik bought out the 49% share of its Degussa Lynchem pharmaceutical chemicals joint venture held by Chinese shareholders.
A number of new API makers also took advantage of low-cost manufacturing operations in China. Headed by Chinese chemists trained in the U.S., firms such as Asymchem Laboratories, Pharmaron, and ChemPacific feature sales arms in the U.S. paired with research and manufacturing operations in China.
India, too, was a focus of much new pharmaceutical chemical investment in 2008. For instance, India's Hikal signed a long-term agreement to supply APIs to Pfizer. And Switzerland's Nycomed signed a deal with India's Zydus Cadila under which it will transfer all API production from its facilities in Germany and Austria to Cadila plants by 2011.
Although 2008 was a year of recovery for pharmaceutical chemical companies, the spreading U.S. financial crisis raised concerns that cash-hungry biotech firms would become less likely to use their services. Likewise, API makers also worried that frugal big pharma firms would be less likely to hand out new business contracts in the face of stalled discovery engines and the loss of patent protection on key drugs.
ALTERNATIVE ENERGY. Energy concerns remained paramount in 2008 as oil prices hit new peaks throughout the year before coming down to earth as the year ended. High prices for raw material corn hurt ethanol makers, leading at least one, VeraSun Energy, to file for bankruptcy. Several ventures announced new transportation fuel projects centered on agricultural feedstocks that do not compete with food production.
Süd-Chemie and Linde teamed up to develop second-generation biofuels based on nonfood crops. DuPont and Danisco's Genencor enzymes subsidiary formed a joint venture that will develop ethanol from nonfood, cellulosic feedstock. Meanwhile, BP and Verenium formed a partnership to accelerate the development of ethanol made from the enzymatic conversion of cellulosic raw materials.
Many chemical suppliers leapt onto the solar energy bandwagon. South Korea's DC Chemical said it will spend almost $1.1 billion to build new facilities that will produce polysilicon for the solar industry. Wacker Chemie said it will build a nearly $1 billion plant in Germany to make hyperpure polycrystalline silicon. Wacker is so confident in solar energy over the long term that it plans to have polysilicon capacity of 35,500 metric tons by the end of 2011, up from 10,000 metric tons today.
Even the giants of silicon-based computer chips have set their sights on solar power. IBM teamed up with Japanese photolithography materials producer Tokyo Ohka Kogyo to develop copper-indium-gallium-selenide solar cell technology. Intel spun out SpectraWatt, which will make conventional crystalline silicon-based cells.
Wind turbine energy got some respect from chemical product suppliers, too. BASF and Leuna-Harze joined forces to supply European wind turbine manufacturers with epoxy resin systems for wind turbine blades. And Dow introduced a family of epoxy products called Airstone, which fabricates stronger, lighter, and easier to manufacture wind blades.
ENVIRONMENT. Companies old and new increasingly endorsed the concept of environmentally friendly products and processes. As the year got under way, venture capitalists predicted that green start-ups would constitute their highest growth sector in 2008, underscoring the notion that green for the environment and green for the bank are not mutually exclusive. Chemical companies such as BASF, DSM, and DuPont invested in green start-ups through clean technology-focused venture capital firms such as NGEN Partners.
BASF conducted a full carbon analysis of its global operation and was able to show that even older products and product lines have a green benefit. The firm said the analysis proved that its products save three times more greenhouse gas emissions than are created during their manufacture and disposal.
Industry efforts to develop products and processes perceived as more environmentally benign continued apace. Agribusiness giant Cargill and enzymes specialist Novozymes signed a joint agreement to pursue production of acrylic acid from fermentation-derived 3-hydroxypropionic acid. French starch processor Roquette joined forces with DSM to commercialize biobased succinic acid as an alternative to butane-based succinic acid.
And Cargill teamed up with Materia, an olefin metathesis specialist, to form Elevance Renewable Sciences, which aims to make specialty chemicals out of renewable oils. The firm was launched with $40 million in funding from the private equity firm TPG.
Environmental concerns even came to the fore in China. The country's State Environmental Protection Administration began its first national survey of pollution sources. Some citizens made it clear that a survey alone wouldn't allay their fears concerning the country's rapidly developing chemical industry. In March, violent protests against a p-xylene unit took place in Fujian province. In May, demonstrators took to the streets of Chengdu, the capital of Sichuan province, to oppose a refinery and petrochemical project that PetroChina has long been planning to build in their city.
Then, in October, protestors mounted a cyberspace campaign against a planned petrochemical complex in Taizhou, an industrial city south of Shanghai. The city is already home to numerous chemical plants and suffers from heavy pollution.
TRADE ISSUES. The European Union continued to take the lead in weeding out anticompetitive practices in the chemical industry. European Commission investigators raided the European offices of laundry and dishwasher detergent producers to investigate price-fixing charges. The EC imposed combined fines of nearly $7.5 million on four producers of aluminum fluoride, used to lower the smelting temperature of aluminum, for fixing prices between July and December 2000. And the commission sent a Statement of Objections to a number of companies that it says participated in a cartel covering calcium carbide and magnesium powder, products used in the steel and industrial gases industries.
The Europeans weren't the only ones to cry foul over alleged bad trade practices. The World Bank said four European suppliers of pyrethroid insecticides to a malaria control project in India colluded to fix prices. As a result, the bank said Aventis CropScience, Bayer, BASF, and Syngenta could be blocked from doing business with the bank if found guilty.
After an internal investigation at specialty chemical maker Lubrizol, U.S. federal authorities charged former company employee Kyung J. Kim, a one-time senior R&D associate, with theft of trade secrets and conspiracy. The charges, filed in U.S. District Court for the Northern District of Ohio, allege Kim downloaded trade secrets about thermoplastic polyurethanes and other technologies and provided the information to a Lubrizol competitor, South Korea's SK Chemicals.
Trade secrets were also at the heart of a series of disputes between DuPont, its former Invista textile fibers subsidiary, and French chemical maker Rhodia.
In May, Invista, now owned by Koch Industries, sued DuPont to get access to three researchers with information Invista said it needed to argue a dispute with Rhodia over patents covering the nylon 6,6 intermediate adiponitrile. In August, Invista sued Rhodia and DuPont, charging that the two conspired to steal trade secrets for manufacturing adiponitrile so they could build a plant in Asia. The judge hearing the conspiracy case dismissed the suit because the court lacked jurisdiction over the largely overseas case, but Invista quickly refiled it, naming only DuPont as the defendant in the case, which is still pending.
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