Year In Review

A phrase on the lips of many businesspeople in 2010 was “the new normal.” It refers to slower economic growth, higher unemployment, and more constrained credit coming out of the Great Recession than in the heady years before it. The term doesn’t promise an inspiring future, but after facing their own mortality in 2008 and 2009, most chemical executives will take it over a recession and financial crisis any day.

The year’s main theme for the chemical industry was one of recovery. Sales started to come back. Earnings saw a strong rebound. And after two years of spending dormancy, companies signed takeover deals and planned for new capital investment, even in the U.S.

Fine and custom chemical makers began to experience a pickup in sales. Cleantech firms continued to attract both government and private capital as they rushed to cash in on the trend for all things green. New and legacy environmental mishaps continued to trip up industry players. And government agencies tried, with great passion and oftentimes some success, to rein in what they considered bad practices.

An economy recovers. Emerging economies, especially China, led the recovery in the global economy. In the U.S., the recovery has been more fragile, marred by an anemic housing market, stubborn unemployment figures, and timid consumers who are still sitting on the sidelines. With the exception of Germany, Europe is still in crisis mode over sovereign debt in Greece, Ireland, Portugal, and Spain.

Economists at the American Chemistry Council, a trade association, project that overall U.S. chemical production will increase 3.1% in 2010 after declines of 4.7% and 4.5%, respectively, in 2008 and 2009. According to ACC’s European counterpart, the European Chemical Industry Council, the European chemical industry will expand a robust 10.0% in 2010. Globally, ACC says, production will rise 8.8%.

Chemical company earnings were strong out of the gate in 2010. The 24 U.S. firms C&EN surveyed in the first quarter saw earnings increase a combined 167%. The group’s sales increased 26%.

Dow Chemical and DuPont both beat estimates during the first quarter. Dow earned $594 million on $13.4 billion in sales, a 191.2% increase in earnings and a 48.4% increase in sales versus the year before. “The consumer is finally returning,” Chief Executive Officer Andrew N. Liveris beamed to investors. DuPont earned $1.1 billion on $8.5 billion in sales, representing gains of 131.4% and 23.5%, respectively, versus the 2009 quarter.

Dow earned $707 million in the second quarter, but its results narrowly missed Wall Street expectations because of production problems. “We were firing on seven of eight cylinders in the quarter,” Liveris remarked to analysts. Overall, the 22 chemical companies C&EN surveyed during the quarter enjoyed an 89.6% rise in earnings on a 21.1% increase in sales.

The industry’s expansion continued in the third quarter. The same 22 firms posted a 51.2% increase in earnings versus the prior-year quarter as sales increased 12.6%.

A few firms that filed for bankruptcy got back on their feet in 2010, most notably LyondellBasell Industries. Weighed down by debt amid the credit crunch, the company was forced to declare the largest-ever chemical bankruptcy early in 2009.

LyondellBasell cleared a major hurdle in February 2010 when it settled with a group of unsecured creditors, promising them more equity than originally envisioned under the bankruptcy plan. LyondellBasell rejected an offer from India’s Reliance Industries, reportedly worth $14.5 billion, for a controlling interest in the company. Instead, it stuck with its own reorganization plan and emerged from bankruptcy at the end of April.

Chemtura ended its bankruptcy last month and began trading again on the New York Stock Exchange. The company filed for Chapter 11 protection in 2009 when it failed to repay a $374 million bond. “We needed a fresh start,” CEO Craig A. Rogerson recently told C&EN. “How we execute our plans from now on will be the key to Chemtura’s success.”

Tronox filed for bankruptcy in 2009 because of environmental liabilities it inherited from its former parent, Kerr-McGee. After a $270 million settlement with the Environmental Protection Agency, the company has set the stage to soon emerge from bankruptcy.

The return of the deal. Mergers and acquisitions were a casualty of the financial downturn. In 2009, only five chemical deals worth more than $1 billion were unveiled.

However, the acquisitions picture changed sharply in 2010. Dealmakers announced 10 agreements worth more than $1 billion in the first three quarters alone. Consulting firm PricewaterhouseCoopers counted a total of 809 chemically oriented deals announced in the first nine months of the year, up from 784 in the same period in 2009.

The year saw a spate of hostile takeover attempts. Air Products & Chemicals’ bid for industrial gas distributor Airgas went hostile after Airgas rejected a $60.00-per-share offer that would have valued it at $7.0 billion.

Airgas CEO Peter McCausland called Air Products’ offer “opportunistic” and said it undervalued his company. Air Products countered that the offer represented a 38% premium over the price of Airgas’ stock before it was announced. McCausland rejected Air Products again in July when it increased its offer by $3.50 and in September when it raised the bid by another $2.00.

In addition to trying to win over Airgas shareholders with sweetened deals, Air Products launched a proxy fight. For a vote at Airgas’ September annual meeting, it nominated three friendly board directors and proposed changes to Airgas’ bylaws. One of these changes would have forced Airgas to hold its next annual meeting in January, allowing Air Products to further stack the board in its favor.

Air Products won that round. Airgas’ shareholders elected its three nominees for director, ousted McCausland from the board, and approved its bylaw proposals. Air Products raised its offer to $70.00 in December. Another takeover saga was the $40 billion bid that Australian mining giant BHP Billiton launched in August for Saskatchewan’s PotashCorp. Like Airgas, PotashCorp promptly rejected the offer. BHP solicited PotashCorp shareholders directly with a hostile bid.

Despite BHP’s pledge that a takeover would mean more development, tax revenues, and jobs for Canada, a suspicious Canadian government ruled against the purchase. A bitter BHP withdrew its bid.

The major takeover drama of 2009 saw a resolution in 2010. In January, CF Industries dropped its bid to purchase fertilizer industry rival Terra Industries. At the time, CF was fighting off a takeover bid from Agrium. When CF pulled out of contention, Norway’s Yara International put in its own $4.1 billion bid for Terra. That prompted CF to jump back into the hunt with a $4.7 billion offer. Terra accepted, and Agrium ended its attempt to acquire CF.

Two takeover controversies surrounded Makhteshim Agan, an Israeli maker of off-patent crop protection chemicals. It announced a deal in July to purchase Iowa-based glyphosate maker Albaugh for $1.3 billion. But two months later, Makhteshim called off the purchase after finding a “material deviation” in Albaugh’s books.

Later in the year, Makhteshim itself became the target of an acquisition. China National Chemical (ChemChina) announced it was in negotiations to acquire a 70% interest in Makhteshim. Terms of the deal are now being renegotiated after Makhteshim’s report of a third-quarter loss.

Another big theme for the past year was large chemical companies putting the finishing touches on portfolio transformations. The largest such deal was BASF’s $3.8 billion purchase of personal care chemical maker Cognis, completed this month. In the bidding, BASF was up against U.S. specialty chemical maker Lubrizol. “Our motto is to strengthen our strengths and eliminate our weaknesses,” BASF Chairman Jürgen Hambrecht said of his strategic rationale.

Hambrecht pledged that Cognis would be BASF’s last major transaction for a while. The acquisition capped a series of big deals for BASF, which purchased Ciba last year and three years earlier bought catalyst maker Engelhard and Degussa’s construction chemicals business.

Dow Chemical laid the groundwork for a final step in its transformation. CEO Liveris told reporters last month that he is considering splitting the firm’s polyolefins business. Under the plan, Dow would keep its linear low-density polyethylene business while divesting or putting into a joint venture its polypropylene and high-density polyethylene businesses.

The year also saw a wave of consolidation in two struggling plastics sectors: styrenics and polyethylene terephthalate (PET). Dow Chemical sold its Styron division to Bain Capital for $1.6 billion. The newly independent company makes polycarbonate, synthetic rubber and latex, and acrylonitrile-butadiene-styrene. It also owns half of a polystyrene joint venture with Chevron Phillips Chemical.

Nova Chemicals agreed to sell its 50% stake in the Ineos Nova styrenics joint venture to its partner Ineos for an undisclosed amount. Soon thereafter, Ineos announced a styrenics venture with BASF. To be called Styrolution, the new company will have $6.5 billion in annual sales of styrene, polystyrene, acrylonitrile-butadiene-styrene, and other polymers.

Marking the completion of its exit from PET, Eastman Chemical sold the remainder of its PET business—its Columbia, S.C., operations—to the DAK Americas subsidiary of Mexico’s Grupo Alfa for $600 million. Eastman had already sold off plants in Europe and Latin America, the latter to Alfa. A month later, Invista sold PET plants in the U.S. and Mexico to Thailand’s Indorama for $420 million.

The year also saw chemical companies in emerging countries unveil bold expansion initiatives. A year after purchasing Dow’s interest in their Optimal glycols venture, Malaysian national oil company Petronas announced it would buy out BP’s interest in a polyolefins joint venture. It also raised $4.1 billion in an initial public offering (IPO) of its chemicals business on the Malaysian stock market. Earlier this month, Petronas signed a memorandum of understanding with BASF to build a $1.3 billion specialty chemical complex.

Brazilian petrochemical maker Braskem completed an agreement to buy its chief local rival, the struggling Quattor, for $380 million plus $3.6 billion in Quattor’s debt. With the purchase, Braskem captured a monopoly for domestically produced ethylene, polyethylene, and polypropylene.

Braskem also pushed abroad with its purchase of Sunoco’s polypropylene business for $350 million. The purchase gives the firm about 13% of the U.S. polypropylene market.

Companies invest again. According to ACC, capital spending by the U.S. chemical industry declined 1.0% in 2010 to $25.1 billion after falling 9.2% in 2009. Global capital spending rose 7.7% in 2010, hitting $247 billion, after falling 4.1% in 2009.

Capital spending might turn around in the U.S. as well. The North American petrochemical industry is becoming increasingly competitive thanks to shale-based natural gas. Throughout 2010, it cost much less to make ethylene from natural gas liquids than from petroleum-based naphtha. Many companies are trying to take advantage of the shift. For example, Dow plans to increase its ethane-cracking capabilities by 20–30% and is seeking to form a joint venture to build a natural gas liquids ­fractionator.

The year saw companies again turning to the U.S. as a place to invest in basic chemicals, especially in the chlorovinyls chain. Japan’s Shin-Etsu Chemical announced a $1.1 billion project to build new capacity at its site in Plaquemine, La., for vinyl chloride, chlorine, and caustic soda to back-integrate its local polyvinyl chloride production.

Dow and Mitsui & Co. formed a joint venture to build a chlorine plant in Freeport, Texas, by 2013. The plan calls for Dow to supply Mitsui with ethylene dichloride, which Mitsui would export.

The Middle East has long been a focus of chemical industry investment. But in addition to traditional petrochemicals, regional firms are increasingly planning to invest in more specialized chemistries. For example, Saudi Basic Industries Corp. (SABIC) disclosed that it is considering a massive polyurethane raw materials complex in Saudi Arabia.

Also during 2010, SABIC and Celanese unveiled plans for a $400 million polyacetal engineering polymers plant in Saudi Arabia. And SABIC said it was planning to build an oleochemicals facility in Saudi Arabia, the first plant of its kind in the region.

Asia continued to see chemical investment. A flood of elastomers investments deluged Singapore this year. Among them, the Japanese firms Sumitomo Chemical and Asahi Kasei announced styrene-butadiene rubber plants. Germany’s Lanxess moved forward on a $575 million butyl rubber plant in Singapore, breaking ground on a project expected to be completed in 2013.

Firms continued to pursue chemicals from China’s ample coal deposits. Total Petrochemicals and China Power Investment began a study of a facility making coal-derived polyolefins. Celanese announced plans to build one or two coal-based ethanol plants at a cost of $350 million apiece. Dow and partner Shenhua submitted a formal application to the Chinese government for a coal-based chemical complex in Yulin.

Employment still struggling. The chemical jobs situation became less dire in 2010, but mostly because fewer companies announced major layoff plans. The U.S. chemical industry continued to lose jobs. Overall industry employment will end up averaging about 779,500 workers in 2010, down 2.9% from 2009, according to ACC. The U.S. chemical industry has lost 80,000 jobs since the recession began late in 2007.

Bayer announced a large round of layoffs in November. The company is eliminating 4,500 positions, some 1,700 of them in Germany, by the end of 2012. Meanwhile, it plans to add 2,500 positions in the developing world for a net reduction of 2,000 positions.

Clariant announced 3,200 job cuts in 2009 and continued cutting costs in 2010. The firm revealed 500 additional job cuts in February and another 100 in October.

In 2009, BASF cut 3,700 jobs after its purchase of Ciba that year. This year, the company said it would eliminate 500 positions in its pigments business, mostly in azo pigments and phthalocyanines.

The year also saw a few key management changes at chemical firms. Notably, Kurt Bock, 51, chief financial officer of BASF since 2003, was named the company’s next chairman. He will replace Jürgen Hambrecht, 64, at BASF’s annual meeting in May 2011.

Weak year for specialties. Contract manufacturers of active pharmaceutical ingredients (APIs) and intermediates at May’s Chemspec Europe exhibition in Berlin were guardedly optimistic about 2010 after a tough year in 2009. Agricultural chemical suppliers addressed plans to deal with a continued market slowdown, and specialty chemical firms spoke of renewed growth in sectors hit hard by the economic downturn.

Meanwhile, Asian API makers were turning the slowdown to their advantage. Until recently, Indian drugmakers competed on the basis of lower salaries and the low cost of building drug manufacturing facilities in India. But lack of access to capital often prevented these firms from putting into motion ambitious expansion plans. In 2010, easier access to funds through foreign banks and initial public offerings helped Indian API makers position themselves to become even stronger competitors to Western companies.

In Western countries, private equity and venture capital firms became active in buying fine chemicals divisions from larger European chemical companies. Facing strong Indian and Chinese competitors, some of the buyers broadened the mandate of their new businesses beyond pharmaceutical ingredients to encompass agricultural chemicals, electronic materials, and other products.

By October at CPhI Worldwide, the annual pharmaceutical ingredients conference, attendees said tough economic times had caused many customers to cancel or postpone early-stage drug development projects. Orders, they lamented, were only slowly starting to return.

Cleantech rises. A number of chemical and materials companies received tax credits as part of the American Recovery & Reinvestment Act of 2009 to spur manufacturing in the clean-energy sector. Among them was Hemlock Semiconductor, a joint venture of Dow Corning, Shin-Etsu Handotai, and Mitsubishi Materials, which received $142 million to expand a polysilicon plant in Hemlock, Mich. Wacker Chemie, Hemlock’s German rival, received a credit of $129 million for a polysilicon plant in Charleston, Tenn. Both plants will supply raw material for photovoltaic solar cells.

Some of the government money went to develop algae as a fuel source. In one instance, the Department of Energy agreed to fund half of the cost of an $18 million project involving DuPont and biochemicals specialist Bio Architecture Lab to use seaweed to produce isobutyl alcohol. Honeywell subsidiary UOP prepared to demonstrate a project to capture carbon dioxide from exhaust stacks and deliver it to an algae cultivation system.

In the first half of 2010, investment in clean technology start-ups was a bright spot. Worldwide venture capital spending on cleantech reached $4.06 billion in the first six months of the year, a slight advance over the previous high in the first half of 2008, according to market research firm Cleantech Group. However, spending sank 30% in the third quarter. The quarter-to-quarter drop was likely due to investor concerns about the slow economic recovery, according to Cleantech Group.

The stock market recovery offered green technology firms another opportunity to raise cash. Amyris Biotechnologies, an Emeryville, Calif.-based firm that is devising biomass-fed routes to chemicals and fuels, raised about $85 million in an initial public offering of stock. Biofuels and chemicals maker Gevo filed for an IPO of shares worth up to $150 million. In addition, algae-to-fuels maker PetroAlgae filed for an IPO of up to $200 million, and biomass-to-fuels developer Codexis raised $78 million in an IPO.

All was not bright in the western solar energy module market, however. BP shut its last U.S. solar-cell plant, in Frederick, Md., spurred by a 50% plunge in prices for solar modules since the onset of the financial crisis. The firm shifted production to facilities in China and India with lower labor costs. According to market research firm iSuppli, China led the world in solar-cell and finished-module manufacturing in 2010 with six Chinese firms on the top 10 list.

Demand for solar energy at the right price got a boost from Walmart. The retail giant said it would work with project developer SolarCity to install solar power systems on the rooftops of some of its Western U.S. stores.

Energy storage technologies also got a boost during the year. Lithium-ion battery maker EnerDel, for instance, committed to invest $237 million in a new plant near its Indianapolis headquarters, paid for largely with public dollars. To employ 1,400 people, the plant will have capacity to produce batteries for 60,000 all-electric vehicles. And Dow Kokam, a Dow Chemical joint venture, broke ground on a $600 million lithium battery facility in Midland, Mich. The federal government is providing $161 million for the project.

At the World Congress on Industrial Biotechnology & Bioprocessing in June, companies reported that the formula for biobased success includes high-volume chemicals. Although the focus had been on biofuels, many biotechnology executives decided their chemical platforms will bring in healthier profits. Firms including Myriant Technologies and DNP Green Technology targeted succinic acid. Elevance announced plans to build a big facility in Indonesia to make C₁₈ dicarboxylic acid and esters from renewable oils through olefin metathesis.

Traditional chemical firms also planned to develop renewable feedstocks. Lanxess invested $10 million in Gevo as part of a plan to develop a renewable source of isobutene, a raw material for synthetic rubber. And Arkema advanced plans to make acrylic acid from glycerin, a by-product of biodiesel manufacture. The firm set up an acrylic pilot unit in Carling, France, and has committed $14 million to fund research with academic partners over the next three years.

Protecting the environment. A federal carbon dioxide cap-and-trade bill that looked like a certainty in 2009 died in July this year. After passing in the U.S. House of Representatives, the cap-and-trade bill went out with a whimper in the U.S. Senate after Senate Majority Leader Harry M. Reid (D-Nev.) said it would garner too few votes to pass.

Nevertheless, EPA continued along its own track to regulate CO₂. Early in the year, the agency took two steps toward using the Clean Air Act to reduce CO₂ and other greenhouse gases. It finalized a decision to regulate emissions from stationary sources such as chemical and electric power plants. It also finalized regulations requiring automakers to cut vehicular CO₂ and other greenhouse gas emissions beginning with the 2012 model year.

But many are unhappy with EPA’s approach. Some 24 states, as well as environmental groups, trade associations, and conservative organizations, sued EPA in August, challenging its plan to regulate CO₂ and other greenhouse gases.

A more immediate environmental calamity broke out in April when BP’s Deepwater Horizon oil exploration platform sank after an explosion that killed 11 workers. The runaway well spewed millions of gallons of oil into the Gulf of Mexico, making it the worst oil spill in U.S. history.

Crews used the Nalco dispersant Corexit as part of the cleanup effort. Concern grew over the potential toxicity of the dispersant, and EPA ultimately directed BP to find less toxic and more effective products.

Legacy environmental issues also came to the fore during the year. In June, a district court in Bhopal, India, convicted seven former officials of Union Carbide India of negligence in the chemical leak that killed thousands in December 1984. Activists representing victims of the tragedy said the former Carbide officials should have been accused of the more serious charge of “culpable homicide amounting to murder.”

Bhopal also figured into Dow’s decision in September to cancel a $100 million R&D center in Pune, India. Dow ran into protests from members of the Varkari sect who contended that the project would pollute the area. Protesters in Pune were encouraged by activists from Bhopal who demanded that Dow, which acquired Union Carbide in 2001, pay additional compensation for the 1984 accident.

In Europe, chemical companies successfully met the first deadline for regulation under the Registration, Evaluation, Authorization & Restriction of Chemical substances (REACH) protocol. Chemical company representatives and employees of the European Chemicals Agency worked in the final hours of Nov. 30 to input data for substances that meet the 1,000-metric-ton annual volume requirement or are considered of high concern. The next phase, focused on substances produced at 100 metric tons or more, promises to be more difficult to implement because it involves many small companies.

Trade issues. In January, the European Commission asked several pharmaceutical companies to submit the details of patent settlements with generic drug companies to determine whether payments made to generic firms delay the introduction of low-priced alternatives to brand-name drugs. The monitoring program in Europe follows action in the U.S. to address similar deals between brand-name and generic drug companies.

A long-running investigation of a specialty chemical firm linked to ethical and trade violations came to an end during 2010. In March, Innospec pleaded guilty to bribery and trade violation charges in U.S. and British courts and agreed to pay more than $40 million in fines. The company admitted to paying kickbacks to the Iraqi government in the early 2000s, violating the Cuba embargo, and bribing Indonesian officials.

In September, the Central Administrative Court of Thailand cleared 74 of 76 projects that had been suspended for a year at the Map Ta Phut industrial estate, one of Asia’s largest chemical industry zones. Environmental activists had convinced the court to halt construction of plants that the government had previously approved. With the situation largely resolved, Bayer, for instance, said it would get permits allowing it to run its expanded polycarbonate and bisphenol A plants. Asahi Kasei said it would resume production at methyl methacrylate and acrylonitrile facilities.

Social welfare disputes led to a loss of $760 million in French chemical sales, according to the French chemical industry association UIC, after a pension-related strike halted work throughout the country. The industrial actions paralyzed Marseille, a key port for materials entering and leaving the country.

Intellectual property. Protecting intellectual property continued to be a major concern for chemical firms. In July, the Federal Bureau of Investigation arrested Kexue Huang, a former Dow AgroSciences employee, on charges that include theft of trade secrets regarding the biosynthesis of Dow’s spinosyn insecticide. Huang was charged with disclosure of confidential Dow information in a review article for which he was a lead author.

The Dow case recalled a similar one involving a DuPont researcher who was charged last year with stealing trade secrets from his employer. This year, the researcher, conductive polymer expert Hong Meng, pleaded guilty to one count of trade secret theft, according to the U.S. attorney for the District of Delaware. In late October, a Delaware federal court sentenced Meng to 14 months in jail.