Issue Date: December 21, 2009
Year In Review
Anyone connected to the chemical industry will be talking about 2009 for the remainder of their careers and, probably, years thereafter. Executives, workers, and scientists might have experienced previous downturns, but, unless they are pushing 100 years old, other recessions were child’s play compared with the one they just went through.
The memories won’t be good ones. The downturn spelled cost cutting, layoffs, plant closures, and lost fortunes. And perhaps the best that can be said for the year is that it is nearly over, with a recovery hoped for in 2010.
Despite the bleak economy, chemical firms and their clients invested heavily in alternative energy this year. Polycrystalline silicon and solar-cell makers commissioned new capacity and undertook projects aided with government funding. Funds from the American Recovery & Reinvestment Act (ARRA) also spurred further development of batteries for a hoped-for new generation of low-emission electric cars.
And chemical makers anticipated government action that would put limits on carbon emissions. Although uncertain of the form such action will take, many firms took steps to reduce their carbon footprints.
AN ECONOMY ON THE BRINK. At the start of 2009, the chemical industry was in the depths of the worst recession since the Great Depression. It was a year, after all, that saw the U.S. government take a controlling interest in a bankrupt General Motors. But it ended with observers optimistic that the worst had passed and a recovery is taking shape.
What has made the downturn so painful, especially for chemical makers, is that the economic slowdown was exacerbated by a financial crisis. In 2009, more than any other time in the chemical industry’s recent history, cash was king. Chemical companies, their suppliers, and their customers had one mantra at the beginning of the year: raise cash.
This scenario created a negative feedback loop that had a disastrous effect on chemical prices. Chemical companies and their customers tried to sell off inventories as quickly as possible to raise money, causing prices to decline. The declining prices, in turn, made firms want to sell off inventories even more. The effect finally started to abate during the early spring when companies had no more inventories to draw down.
The decline in chemical prices was unprecedented. For example, contract prices in North America for ethylene, one of the most essential building block chemicals, declined from 74.5 cents per lb in July 2008 to 28.5 cents per lb at the beginning of 2009, according to the market research firm Chemical Market Associates.
Andrew N. Liveris, the chief executive officer of Dow Chemical, called the fourth quarter of 2008 “one of the worst quarters we have seen in more than two decades” when he announced financial results in February. “The rapid demand destruction and unprecedented destocking throughout almost every value chain is something none of us have ever experienced,” he said. During the quarter, the 21 companies C&EN tracks reported a 60.3% decline in earnings versus the same period in 2007.
Even though chemical makers knew they were beginning 2009 with some of the worst conditions on record, the industry’s actual decline this year went beyond what experts were predicting.
A year ago, the American Chemistry Council, the U.S. industry’s main trade association, predicted that U.S. chemical demand, excluding pharmaceuticals, would fall by 3.6% in 2009. Earlier this month, ACC said the actual decline will be more like 9.4%. Similarly, the European Chemical Industry Council predicted a 1.3% decline in chemical output for 2009; last month, it said the year was shaping up to show a 12% decline.
As expected, the first quarter was painful for chemical makers. The 23 companies surveyed at the time by C&EN posted a combined 68.1% earnings decline from the year-earlier quarter, an even bigger decrease than in the fourth quarter. Sales dropped by 37.8% versus the same period in 2008.
In the second quarter, the situation started looking up—or, at least, stopped getting worse—for chemical makers. “Many of our markets showed improvement in the second quarter, with an apparent end to destocking across several supply chains,” DuPont CEO Ellen J. Kullman told analysts.
Overall, chemical company earnings again saw a precipitous drop—55.1%—from the year-earlier quarter. But the good news was that earnings at 18 of the 23 firms C&EN tracks improved versus the first quarter.
The third quarter brought even more promise. The companies tracked by C&EN saw a 2.4% increase in sales versus the second quarter, a sign that the economy may have hit bottom. “We are starting to see pockets of volume growth in certain businesses versus the prior quarter,” Dow’s Liveris said.
European firms showed a similar kind of improvement by the third quarter. BASF was happy to report that its third-quarter sales, although down 19% from the same quarter in 2008, were up by 2% versus the second quarter. “There is much to suggest that the worst is behind us,” Chairman Jürgen Hambrecht said.
Because of the downturn, bankruptcies were a fixture in 2009, the most notable one being at LyondellBasell Industries. In January, the company filed for what is by far the largest bankruptcy ever in the chemical industry.
At the time, the company had $26 billion in debt stemming mostly from its formation in late 2007 when Basell purchased Lyondell Chemical. Len Blavatnik, head of Access Industries, the combined company’s owner at the time, didn’t blame himself for shelling out too much. Basell paid “a full price but not a crazy price,” he said. “Everything that could go wrong did go wrong.”
In September, LyondellBasell filed its reorganization plan with the bankruptcy court. It called for the company’s equity to be redistributed among creditors. A public listing of its stock, so creditors can cash in, is in the offing. But in November, the Indian conglomerate Reliance Industries disclosed an offer—reportedly for as much as $12 billion—to buy the company.
LyondellBasell wasn’t alone in its bankruptcy filing. Titanium dioxide maker Tronox filed in January, fingering environmental liabilities stemming from its 2006 spin-off from oil exploration firm Kerr-McGee. In May, Tronox sued its former parent and Anadarko Petroleum, Kerr-McGee’s new owners, over the liabilities. In September, Huntsman Corp. unveiled a bid to purchase most of Tronox for $415 million.
Chemtura was the third major company to declare bankruptcy during the year. The specialty chemical maker had been suffering losses and faced a looming $375 million debt maturity. Cutting costs, eliminating its dividend, and putting businesses up for sale were not enough, and the company filed for bankruptcy in March. “We didn’t file because we have a profitability issue,” CEO Craig Rogerson told C&EN. “We filed because we have a short-term liquidity issue.”
MOSTLY QUIET ON THE DEAL FRONT. Owing to the credit crunch, merger and acquisition activity cooled in 2009. The number of deals announced during the first half of the year declined 7% versus 2008, to 349 transactions, according to the advisory firm PricewaterhouseCoopers. Deals worth more than $50 million declined from 44 in the first half of 2008 to 25 this year.
But thanks to the saga of Dow’s takeover of Rohm and Haas, there was plenty of deal news in the pages of C&EN. The year began with the Kuwaiti government canceling the formation of a petrochemical joint venture between Dow and Kuwait’s Petrochemical Industries Co.
Dow was left in the lurch. The company had been counting on $9 billion in pretax proceeds from the deal to help it finance its pending $18.8 billion acquisition of Rohm and Haas. Analysts thought that being forced to complete the acquisition without the windfall from Kuwait was a worst-case scenario and wanted Dow to walk away from it.
Dow maintained that it wanted to do the deal, but the company missed its January deadline and implored Rohm and Haas for more time. Dow was facing a downgrade of its credit ratings that, the firm argued, could trigger a default on its debt. Rohm and Haas balked and dragged Dow to court. On the March day the trial was to start, the companies hammered out a deal that was consummated in April.
Dow sharply reduced spending by cutting jobs and capital spending and even reducing its dividend for the first time in nearly 100 years. The company also divested assets such as Rohm and Haas’s salt and powder coatings businesses, stakes in a refining joint venture in the Netherlands, a petrochemical partnership in Malaysia, and its calcium chloride business.
The second biggest chemical deal completed in 2009 was BASF’s $5.1 billion purchase of Swiss specialty chemical maker Ciba in April. Although the two firms shared several markets, competition authorities forced BASF to sell off businesses with just under $125 million in annual sales.
Nova Chemicals was purchased by International Petroleum Investment Co. (IPIC), in Abu Dhabi, United Arab Emirates, the same firm that has a controlling interest in European petrochemical maker Borealis. Nova was a victim of the financial crisis. Because of imminent debt maturities, credit rating agencies lowered Nova’s bond ratings—to levels that deemed them speculative investments—and said the company needed to raise $100 million in a hurry. Shareholders panicked, and Nova’s stock plunged. IPIC swooped in with a $6.00-per-share offer that valued Nova at $2.3 billion, including debt.
Mitsubishi Rayon closed its $1.6 billion purchase of Lucite International in May. The deal was originally expected to close in January but was hung up by Chinese regulators who feared that the combination of the two methyl methacrylate makers would dominate the market. In November, a bigger fish came along: Mitsubishi Chemical Holding launched a $2.6 billion bid for the enlarged Mitsubishi Rayon.
In what is a rare move these days, Kraton Polymers—the former Shell Chemical styrene block copolymers business now owned by TPG Capital and JPMorgan Partners—filed in October for an initial public offering of stock. The company hopes to raise $230 million to help pay down debt.
CHEMICAL MAKERS CUT JOBS. Chemical producers reacted to economic conditions by laying off workers. Many large chemical firms instituted restructuring programs that resulted in hundreds, even thousands, of lost jobs. Overall, according to ACC, U.S. chemical employment averaged 812,200 in 2009, a decline of 4.4% from the year before.
Some layoffs were related to completed mergers. Dow is targeting 8,000 layoffs as part of its cost-cutting program. It says 40% of them are due to the Rohm and Haas acquisition. In July, BASF said it would cut 3,700 jobs related to its purchase of Ciba.
Layoff announcements trickle out every year, but in 2009, the trickle turned into a flood, especially in the year’s early months. Clariant alone initiated several programs that together amounted to 3,200 jobs lost. Many other firms broke the 1,000-layoff mark. LyondellBasell said it planned to eliminate 3,000 employees and 2,000 contractor positions. PPG Industries disclosed it would cut 2,500 jobs. Hexion Specialty Chemicals is cutting roughly 1,400 jobs.
In May, DuPont said it would cut 2,000 jobs by the end of 2010. The company had inaugurated a round of 2,500 job cuts in December 2008. In July, Air Products & Chemicals announced it would cut 1,150 jobs in addition to the 1,400 jobs it started cutting in December 2008. In January, Huntsman Corp. said that it would cut nearly 1,200 jobs during 2009.
In addition to layoffs, the recession forced companies to examine other ways of trimming payrolls. “Furloughs, flexible workforce arrangements, workhour cutbacks, shift reconfigurations—we’ve seen every possible iteration of that coming out of the chemical industry,” Tom Morrison, human capital principal at Deloitte Consulting, told C&EN in July. In Germany, BASF, Bayer, and Lanxess trimmed several hours off the weekly timecards of thousands of employees.
Other companies reduced salaries. Directors and executive officers at Mitsubishi Rayon faced a 20–50% salary reduction. Momentive Performance Materials instituted a 10% pay cut for top executives and an 8% pay cut for some 2,300 salaried and administrative employees. Eastman Chemical cut worker salaries by 5%. DuPont asked 75 senior executives to take three weeks off and other employees to take two.
The year saw prominent changes at the top for several chemical companies. In a surprise move, Bayer named Marijn E. Dekkers, 51, to replace Werner Wenning, 62, as CEO. Dekkers is the CEO who turned Thermo Electron into the laboratory supply powerhouse Thermo Fisher Scientific.
Following Nova’s acquisition by IPIC, Christopher D. Pappas, 53, stepped down as the Canadian company’s CEO. He was replaced by Randy G. Woelfel, 54, former CEO of bioplastic developer Cereplast and president of Basell North America.
Rohm and Haas President Pierre R. Brondeau, 51, was named president of Dow Advanced Materials, a business that includes much of the former Rohm and Haas, only to leave Dow in August. In November, he was hired as the CEO of FMC.
PRODUCTION EBBS. The year saw production cutbacks in every major chemical sector, and plant shutdown announcements appeared in C&EN almost weekly.
The bankrupt LyondellBasell, for example, closed a 500,000-metric-ton-per-year ethylene cracker complex in Chocolate Bayou, Texas. The company, however, did invest in its Corpus Christi, Texas, plant to improve feedstock flexibility so it could take advantage of low natural gas prices.
Dow closed an ethylene cracker and an ethylene oxide/ethylene glycol plant in Hahnville, La., as well as ethylene dichloride and vinyl chloride plants in Plaquemine, La.
PPT Poly Canada, a joint venture between Shell Chemical and Société Générale de Financement du Québec, closed its polytrimethylene terephthalate plant in Montreal after only five years of operation. The companies said production of the polymer, used mostly in fibers, never became profitable. Asahi Kasai and Teijin closed a Japanese joint venture making the same polymer.
In Europe, Spanish polyester producer La Seda de Barcelona shut down 500,000 metric tons per year of capacity each for polyethylene terephthalate and raw material purified terephthalic acid (PTA). The company said it needed to cut costs because of debt accumulated in an acquisition spree.
Admitting there was no hope in restoring profitability to its Japanese PTA business, Mitsubishi Chemical announced the closure of a 250,000-metric-ton-per-year PTA plant and a 100,000-metric-ton-per-year plant for the raw material p-xylene, both in Japan.
Because of the downturn, announcements of big investments were few this year. Many new plants, especially in developed countries, are now more about technical appeal than about adding big slugs of capacity to the marketplace. For example, Showa Denko said it would build a 400-metric-ton-per-year carbon nanotube plant in Oita, Japan. Similarly, Bayer MaterialScience unveiled a $30 million investment to more than triple capacity for carbon nanotubes in Germany to 200 metric tons per year.
In commodity chemicals, the Middle East continued to be the focus for new investment. Borouge, a joint venture between Abu Dhabi National Oil and Borealis, moved forward on a new complex that includes an ethylene cracker and 2.5 million metric tons per year of polyolefins capacity.
Sumitomo Chemical and Saudi Aramco said they were studying the feasibility of expanding their $8.5 billion refining and petrochemical joint venture, which opened in the spring in Rabigh, Saudi Arabia. The new complex would make methyl methacrylate, caprolactam, nylon 6, polyols, acetone, cumene, and other chemicals when completed in 2014.
Saudi Basic Industries Corp. and Saudi International Petrochemical Co. (Sipchem) agreed to collaborate on $4 billion in chemical projects in Al-Jubail, Saudi Arabia. The companies would produce acrylonitrile, methyl methacrylate, polyacrylonitrile, and carbon fiber, among other products. Sipchem also formed a joint venture with South Korea’s Hanwha Chemical to invest $1.1 billion in vinyl acetate and polyvinyl acetate plants.
A few companies unveiled big plans for the U.S. For instance, French water treatment chemicals firm SNF said it will build a $362 million polyacrylamide plant in Iberville Parish, La., by 2011. The company said the plant, which will have a capacity of 250,000 metric tons per year, is meant to meet burgeoning demand in the enhanced oil recovery sector. South Africa’s Sasol said Lake Charles, La., is the “leading candidate” for its first plant to employ a tetramerization technology to make α-olefins.
And in Mexico, Brazilian petrochemical giant Braskem inked an agreement with Mexican state oil company Pemex and the local firm Grupo Idesa to build a $2.5 billion petrochemical complex. The companies hope to finally break the logjam to building new petrochemical capacity in Mexico.
SPECIALTIES A MIXED BAG. Pharmaceutical chemicals were a bright spot during the economic maelstrom. At the Chemspec exhibition in Spain in June, executives agreed that sales of fine chemicals, including active pharmaceutical ingredients (APIs) made under contract, were holding steady. And although they said agricultural chemical markets continued to grow, the news was bad for custom chemical makers serving industrial sectors, especially automotive and construction.
By October, when the CPhI pharmaceutical ingredients conference was held in Madrid, suppliers were hopeful that the worst had passed. Many custom chemical manufacturers reported a decline in early-stage API projects. However, companies were enthusiastic about the prospect of increased business with major drug companies that were exiting API manufacturing.
Evonik Industries, for one, took advantage of Eli Lilly & Co.’s decision to purchase rather than make many late-stage chemical intermediates and APIs. The German firm agreed to acquire Lilly’s 700-employee Tippecanoe Laboratories facility in Lafayette, Ind.
East-West ties grew in contract pharmaceutical research. For instance, the Indian firms Syngene International and Jubilant Biosys added drug discovery services through partnerships with U.S. firms Sapient Discovery and BioLeap, respectively. And U.S. contract R&D firm Pharmaceutical Product Development agreed to acquire Beijing-based BioDuro, a drug discovery services supplier.
Eastern API suppliers discovered new markets on their home turf. Prior to 2009, the most advanced Chinese pharmaceutical ingredient makers exported virtually all of their output to Europe, North America, and Japan. But as demand weakened in developed countries, many export-focused companies discovered more opportunities at home.
ALTERNATIVE ENERGY FLOURISHES. Energy was a big concern this year, not so much because of energy prices—they were mostly lower than in 2008—but because of climate change. The greenhouse gases emitted during the burning of carbon-rich energy sources are increasingly being blamed for playing havoc with Earth’s temperature. Alternative energy sources gained industry attention.
Despite the recession, makers of polysilicon and solar cells commissioned new capacity and charged ahead with new projects. Hemlock Semiconductor, a joint venture majority owned by Dow Corning, started up an 8,500-metric-ton-per-year polycrystalline silicon facility in Hemlock, Mich., and started building a new silicon plant in Clarksville, Tenn. Germany’s Wacker Chemie planned a $1 billion silicon plant in Cleveland, Tenn.
But toward the end of the year, all the new silicon and photovoltaic capacity took its toll on the market. Prices for both polysilicon and solar modules were down 30%. Wacker exited the business of making silicon wafers for solar cells, and General Electric said it would close its Newark, Del., solar module facility by the end of the year.
Government funds, however, continued to support a ramp-up in solar energy capacity. The Department of Energy offered Solyndra, a Freemont, Calif.-based developer of thin-film solar cells, $535 million in construction financing authorized in the 2005 Energy Act to expand manufacturing capacity.
Government stimulus cash also went to battery developers to create jobs and jump-start a push into electric vehicles. In August, DOE selected 48 battery and electric drive projects to receive awards totaling $2.4 billion under the ARRA stimulus package. Big winners included A123 Systems, which uses nanophosphate battery technology and received $249 million. A joint venture of Dow and Kokam America received $161 million to develop lithium polymer batteries. And Compact Power, a U.S. subsidiary of South Korea’s LG Chem, was set to receive $151 million to produce lithium-ion polymer cells.
In 2009, algae started challenging their more popular cousins, corn and soy, to become the biofuel feedstock of the future. Supporters say the ubiquitous pond scum can produce a renewable fuel without taking arable land or clean water away from food production. After years of mostly sitting on the sidelines in the alternative energy game, ExxonMobil said it would invest as much as $600 million to develop algae-derived biofuels with California-based Synthetic Genomics.
Another oil major, France’s Total, invested an undisclosed amount in biofuels start-up Gevo. The U.S. firm recently started a demonstration facility in St. Joseph, Mo., showcasing its technology to make butanol and other fuels and chemicals from agricultural waste. And Royal Dutch/Shell expanded its research program with Codexis to ferment ethanol from nonfood raw materials. The program focuses on enhancing Codexis biocatalysts that break down cellulose and convert it to sugars.
Earlier this month, biofuels companies got their own injection of stimulus funds from the government: $564 million in grants for 19 projects, most of which seek the large-scale production of fuels and chemicals from cellulosic and other nonfood agricultural sources.
PROTECTING THE ENVIRONMENT. Most chemical companies agreed that, like it or not, limits on carbon emissions are coming to the U.S. What neither they nor legislators have agreed on is whether a tax, a cap-and-trade program, or some other mechanism is the most efficient way to fairly limit emissions of greenhouse gases.
While the policy debate continued, many firms advanced projects and processes to reduce emissions. For instance, Nalco formed a joint venture with Sonic Technology Solutions to expand use of fly ash from coal-fired power plants as a cement substitute. Because cement production contributes an estimated 7% of global carbon dioxide emissions, the company claims that increased use of fly ash will help reduce greenhouse gases.
The European Union underwrote a $42 million program, the Bayer-led F3 Factory initiative, to develop more sustainable chemical processes. Twelve companies and seven universities agreed to work together to develop solvent-free polymers, high-value-added building blocks, and pharmaceutical intermediates at a development center to be built in Leverkusen, Germany.
To create a comprehensive industry standard, the American Chemical Society’s Green Chemistry Institute undertook an effort to unambiguously identify greener chemicals and process technologies. The standard will set criteria by which chemical producers and users can gauge the environmental impact and sustainability of chemicals and their derivatives.
The chlor-alkali industry garnered its share of attention during the year. U.S. chlorine maker Olin said it is developing a fleet of railcars designed to carry industrial bleach, which is gaining favor over chlorine gas in some applications because it is less dangerous to ship. And citing a desire to improve security, Clorox said it will stop making its namesake bleach out of chlorine and sodium hydroxide. Instead, the big household products company will purchase high-strength bleach of up to 15% concentration and dilute it to household strength of 6%.
TRADING ISSUES. The EU continued to lead the international fight to weed out anticompetitive behavior. The European Commission imposed fines totaling $87 million on makers of calcium carbide and magnesium for colluding to fix prices between 2004 and 2007. AkzoNobel and Evonik Industries received higher penalties from the commission because they had been in previous cartels.
Responding to a complaint from the European Chemical Industry Council, the commission opened an investigation into allegations that Chinese makers of the industrial cleaning agent sodium gluconate were selling their product at below-market prices in the EU.
Stolen trade secrets were a concern for DuPont in at least two instances. The firm filed a suit in U.S. federal court against Kolon Industries, charging the South Korean firm with theft of trade secrets and confidential information related to Kevlar-brand p-aramid fiber. The fiber is used to make bulletproof clothing for police and soldiers.
DuPont also filed suit against one of its own, senior researcher Hong Meng, charging that he stole confidential information on the development of organic light-emitting diodes while working at the firm’s Wilmington, Del., research station. Federal authorities also filed a one-count criminal complaint against Meng for improperly accessing a computer belonging to DuPont.
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