Issue Date: December 19, 2011
Much like the year before it, 2011 was a year of recovery for the chemical industry. But the industry’s gains were made against strong headwinds. The economic crisis in Europe raised the specter of a new recession, and in Japan a natural catastrophe nearly ground industry to a halt.
Merger and acquisition activity started strongly, with a spate of blockbuster deals unveiled during the early months of the year. But as economic worries set in, fewer big mergers were announced. One constant throughout 2011 was investment activity in the U.S. petrochemical sector, newly competitive due to cheap natural-gas-based feedstocks from shale.
Custom and fine chemicals makers continued to benefit in the recovery, but active pharmaceutical ingredient (API) makers had a tougher time as the European economy soured. In contrast, a boom in succinic acid and polysilicon capacity made the cleantech sector lively. Scientific instrument makers grew sales, and the bigger firms continued their takeover of smaller competitors.
Despite a new patent law that promised to make patent protection less litigious, the year was fraught with patent disputes as well as charges of industrial espionage.
Industry Endures Fitful Recovery
Economists had predicted that 2011 would be a year of tentative recovery, much like 2010. In its annual forecast, the American Chemistry Council, an industry trade group, predicted that U.S. production of chemicals would rise by 3.0% in 2011. Output had increased by 3.1% in 2010, according to ACC.
The European Chemical Industry Council (CEFIC) forecast that Europe’s chemical production growth would slow down to 2.5% from the brisk 10% pace seen in 2010. But observers had an eye on downside risk from austerity measures and financial instability in the southern European countries of Greece, Italy, and Spain.
Earnings were strong in the first half of 2011 for U.S. companies. As a group, the 23 U.S. chemical firms C&EN tracks posted a nearly 15% increase in sales and a 47% increase in earnings in the first quarter versus the year-ago period.
It was much the same story in the second quarter. Industry leaders Dow Chemical and DuPont both posted strong gains in sales and earnings. “Dow’s price and volume management more than offset rising feedstock and energy costs,” remarked Dow Chief Executive Officer Andrew N. Liveris. The 23 chemical firms C&EN tracks posted a combined earnings increase of 30% in the quarter on a 19% jump in sales.
But it became increasingly obvious that the enormous Greek sovereign debt burden could send Europe into a full-blown financial crisis and perhaps catalyze another global economic slowdown. By year’s end, observers even questioned whether the euro would survive as the continent’s common currency.
Indeed, by the second quarter, cracks were beginning to show in the results of European chemical firms. Earnings at BASF, the world’s largest chemical company, grew 23% versus the same period in 2010 but missed analysts’ forecasts.
BASF Chairman Kurt Bock fretted over what the rest of the year might have in store. “We continue to be concerned about the development of the euro as well as the debt situation in some European countries and the U.S.,” he told analysts.
As the year progressed, Bock’s fears materialized. In July, ACC revised its 2011 U.S. chemical output forecast upward to 4.1%. But after a month of stock market turmoil, ACC economist Martha Gilchrist Moore said she was concerned about the economy’s health, putting the odds of the U.S. slipping into another recession at one in three. Likewise, in June CEFIC upped its European growth estimate to 4.5%, but by October the group had taken it back down to 2.5%.
By the third quarter BASF had posted a slight decline in earnings. “BASF’s customers planned more cautiously, reduced inventories, and partially delayed orders in expectation of falling prices,” the firm noted. And DuPont CEO Ellen J. Kullman told analysts: “There are parts of Europe that are in or near recession, and our own results for the third quarter indicate a very mixed bag.”
Overall, third-quarter results for U.S. chemical firms were strong as business in China and other developing countries made up for weakness in developed countries. The 22 firms C&EN surveyed during the quarter posted a 39% increase in profits on a 21% increase in sales.
A completely unforeseen setback for the chemical industry this year was the March 11 earthquake and tsunami centered near Sendai, Japan. The disaster killed more than 15,000 people and caused the crisis at the Fukushima Daiichi Nuclear Power Station. It also knocked out much of the electrical power and infrastructure in the world’s third-largest economy.
The disaster shut down chemical plants. Three feet of seawater from tsunami waves inundated the chemical complex in Kashima—about 50 miles northeast of Tokyo—which was one of the biggest sites hit. There, Mitsubishi Chemical operates an ethylene cracker, and several other firms run derivatives plants.
And because Japanese industry is so interdependent, entire sectors ground to a halt for want of raw materials. Especially hard-hit was the electronics industry. An outage at a Mitsubishi Gas Chemical plant caused a shortage of bismaleimide triazine, an important electronics insulating material. As a result, Shin-Etsu Chemical curtailed production at a plant in Fukushima that produces 20% of the world’s silicon wafers.
But the Japanese chemical industry was resilient. Many plants came back onstream faster than observers had expected. And earnings at Japanese companies held up fairly well. Shin-Etsu, arguably the firm most affected by the earthquake, posted a relatively modest 18% earnings decline in its fiscal first half.
Despite economic and stock market uncertainty, several companies filed for initial public offerings (IPOs) during 2011. In April, Momentive Performance Materials published a prospectus for an $860 million equity issue. The maker of thermoset resins and silicones had sales of $7.4 billion in 2010.
Trinseo, the styrenic polymers business formerly known as Styron, filed for a $400 million IPO in June. The company, now owned by the private equity firm Bain Capital, had sales of $5.0 billion in 2010. PetroLogistics, which operates a new, 500,000-metric-ton-per-year propane dehydrogenation plant in Houston, filed for a $600 million IPO in June.
Financial uncertainty did cause the German chemical maker Evonik Industries to pull back on a long-anticipated IPO in September. The company had canceled an IPO in 2008 for similar reasons.
Deal-making Starts Strongly, Ends Weakly
The year began with deals being inked at a brisk pace. In January, DuPont agreed to purchase Danisco for $6.3 billion. With $2.4 billion in 2010 sales, Danisco makes sweeteners, food stabilizers, and probiotic cultures, which are new areas of business for DuPont.
But for DuPont the crown jewel among Danisco’s businesses is its Genencor enzymes subsidiary. Long interested in industrial biotechnology, DuPont had worked with Genencor on its flagship biotech effort: a fermentation route to 1,3-propanediol. DuPont’s Kullman remarked that the deal was “a perfect strategic fit with our growth opportunities.”
In February, Clariant announced the purchase of German adsorbents and catalysts maker Süd-Chemie for $2.6 billion. The deal capped a multiyear turnaround initiative by the Swiss specialty chemical company, which in recent years has laid off 20% of its workforce. Clariant is counting on the acquisition, in chemical sectors that it had little involvement in before, to help it forge a new identity as a technology-focused chemical maker.
The year’s largest chemical deal was Berkshire Hathaway’s $9.7 billion purchase of lubricant additives company Lubrizol, unveiled in March. Though not a chemical maker, the Warren Buffett-led conglomerate is no stranger to the industry. It owns building products maker Johns Manville and paint producer Benjamin Moore, as well as $3 billion in Dow preferred shares.
In April, Solvay agreed to aquire the French specialty chemical maker Rhodia for $4.8 billion. For Solvay, the deal was a way to redeploy the cash it received in 2010 after selling its pharmaceutical business to Abbott Laboratories. The purchase combines Solvay’s strong positions in engineering polymers, soda ash, chlorovinyls, and fluoropolymers with Rhodia’s nylon, rare-earths, and surfactants businesses.
In June, Ashland agreed to purchase International Specialty Products (ISP) for $3.2 billion. Over the past eight years, Ashland has been shedding nonchemical businesses such as refining and paving materials to focus on specialty chemicals. It bought Hercules in 2008 for $3.3 billion. With ISP, Ashland expanded its presence in personal care chemicals.
In July, Swiss fine chemicals producer Lonza agreed to buy antimicrobial specialist Arch Chemicals for $1.4 billion. Lonza has a modest antimicrobial business, and the producer of APIs cast the acquisition as an attempt to diversify its portfolio.
That same month, Ecolab said it would purchase water treatment specialist Nalco for $8.1 billion. For Ecolab, which specializes in maintenance products and services for the beverage, health care, and institutional sectors, the acquisition was a logical next step.
Marquee deals aside, chemical mergers became fewer and farther between as 2011 progressed. According to PricewaterhouseCoopers, the number of chemical deals valued at more than $50 million decreased from 32 in the first quarter to 28 in the second quarter and 22 in the third quarter. The consulting firm noted that chemical executives were proceeding with more caution given the rising levels of economic uncertainty.
A couple of chemical deals did trickle in during the waning months of the year. One was Tronox’ acquisition of the mineral sands business of South Africa’s Exxaro Resources. The $1.3 billion deal gives the white pigment producer greater access to raw materials. And BASF agreed to sell its fertilizer business to Russia’s EuroChem for $950 million.
Shale Spells Boom In Capital Spending
In 2011, the U.S. came roaring back as a location for chemical firms to invest in new plants. The advent of natural gas from shale has meant a massive increase in the amount of cheap ethane feedstock available for petrochemical plants.
Four companies disclosed intentions to build ethylene crackers. Chevron Phillips Chemical was the first out of the gate. In late March it announced that it was considering construction of a cracker and derivatives units on the U.S. Gulf Coast.
In April, Dow Chemical unveiled plans for big increases in ethylene and propylene capacity on the U.S. Gulf Coast by the end of 2017. Much of it is to come from a new ethylene cracker and two propane dehydrogenation plants.
Speculation had been growing since the beginning of the year regarding a new cracker in western Pennsylvania or West Virginia, atop the massive Marcellus Shale deposit. Shell Chemical ended the speculation in June when it announced plans for a cracker somewhere in Appalachia.
In November, Sasol said it was conducting a study for what could be the fourth new U.S. cracker complex, at its Lake Charles, La., site. The project would potentially cost $4.5 billion.
The shale boom also prompted plans for new ethylene derivatives capacity. Nova Chemicals plans to build polyethylene plants in Ontario and Alberta. Ineos is mulling an ethylene oxide plant for the U.S.
The U.S. also got projects that weren’t related to ethylene. Mossi & Ghisolfi announced world-scale plants for polyethylene terephthalate (PET) and the PET raw material purified terephthalic acid in Corpus Christi, Texas. Occidental Chemical wants to build a chlorine plant adjacent to DuPont’s titanium dioxide plant in New Johnsonville, Tenn., at a cost of $290 million.
Titanium dioxide, which has been in short supply, was the subject of vigorous investment activity in 2011. In May, the world’s leading producer, DuPont announced a program to boost its global capacity by some 350,000 metric tons. The plans include building a $500 million plant in Altamira, Mexico. In June, paint maker AkzoNobel disclosed a joint venture to build a TiO2 plant in China.
Asia and the Middle East, the focus of big-ticket investment over the past decade, were no strangers to grandiose plans in 2011. In July, Dow and Saudi Aramco unveiled a joint venture for Al Jubail, Saudi Arabia, that will cost an estimated $20 billion. Billed as the largest petrochemical project ever undertaken, the venture will produce ethylene, propylene, and aromatics, as well as downstream chemicals such as polyurethane raw materials, elastomers, and polyethylene.
Malaysian state oil company Petronas disclosed in May that it would build a $20 billion refinery and petrochemical complex in the state of Johor.
Specialty Chemicals Perform Well
With a few exceptions, fine and specialty chemical makers had a good year.
When fine and custom chemicals executives met at the annual Informex conference in February, they were largely optimistic about the year ahead. However, persistent overcapacity across the sector made forecasting the future difficult.
By June, some sectors were indeed looking up. Attendees at the annual Chemspec Europe exhibition in Geneva celebrated an upturn in agricultural chemicals after a dismal 2010. With a pickup in most industrial markets as well, executives claimed that fine chemicals were generally rebounding.
Makers of APIs were the exception, acknowledging at Chemspec that they did not expect a return to the double-digit growth the sector enjoyed prior to 2008. By October, at the CPhI conference in Frankfurt, the mood among API makers was positively sour because of the uncertainty brought on by Europe’s crisis.
Cosmetic ingredients markets, in contrast, were resilient in 2011. Many suppliers, including Arch Chemicals and Croda, adopted cell-culture techniques to produce, in sterile fermentation reactors, ingredients that otherwise would have to be harvested and extracted from plants.
The year was also good for suppliers of proppants, which are grainy materials that increase the flow of natural gas and oil by propping up fissures in rock. Demand for these materials and the resins that coat them—made by such firms as Momentive and Georgia-Pacific Chemicals—has soared, prompting suppliers to expand capacity.
Cleantech Sector Gathers Momentum
Throughout the year, cleantech projects advanced both with and without government aid. In some cases, such as in polysilicon for solar cells, excessive investment has led to overcapacity.
Energy projects attracted government backing as the year took off. KiOR gained a loan guarantee from the Department of Energy for a $1 billion project consisting of four cellulose-based biorefineries—two in Mississippi and one each in Georgia and Texas. Biomass-to-biofuel firms Coskata, Enerkem, and Ineos received loan guarantees from the Department of Agriculture.
Photovoltaic projects advanced as well. In fact polysilicon makers have added so much capacity that prices have dropped and some capacity has been taken off-line.
In April, Germany’s Wacker Chemie broke ground in Cleveland, Tenn., on a 15,000-metric-ton-per-year polysilicon plant. Later that month, South Korea’s OCI said it would spend nearly $1.7 billion to build a 24,000-metric-ton-per-year facility.
Not long after, Tokuyama said it would boost the size of the polysilicon plant it is building in Sarawak, Malaysia, with an additional investment of $1.2 billion. Racing to get into the business, LG Chem said in late May that it would build a plant in Yeosu, South Korea, at a cost of $450 million.
The Asian buildup continued in October when China-based LDK Solar broke ground on a huge polysilicon plant in Hohhot, the capital of China’s Inner Mongolia Autonomous Region. The reality of all the polysilicon in the market finally hit home in November when solar energy firm Renewable Energy Corp. said it would cut output of silicon wafers by 60% at its facility in Herøya, Norway.
Similarly, producers planned copious capacity for biobased succinic acid, a fermentation-derived four-carbon acid that has potential applications in bioplastics, polyurethanes, plasticizers, and solvents.
In January, Myriant Technologies said it would build a succinic acid plant at Louisiana’s Port of Lake Providence. In May, DSM and Roquette announced they would build a facility at Roquette’s Cassano Spinola, Italy, site by the second half of 2012. Just three months later, BASF and Purac upped the ante with plans to form a joint venture to make succinic acid by 2013 at Purac’s fermentation facility near Barcelona. And in September, BioAmber and partner Mitsui & Co. said they would build a succinic acid plant in Sarnia, Ontario, by 2013.
As they advanced commercialization plans, a number of biobased chemical firms filed for stock IPOs. In August, Genomatica and Gevo filed for IPOs worth up to $100 million and $150 million, respectively. In September, Mascoma and Elevance Renewable Sciences filed for offerings worth up to $100 million apiece. And in November, BioAmber filed documents to raise up to $150 million.
Algae-growing cleantech firms enjoyed a burst of attention, triggered by Solazyme’s successful IPO in May. But it’s not fuel that drove the IPO. Instead, investors and analysts were sold on skin cream and other products made from “tailored” algal oils.
Traditional chemical companies also became more heavily involved in cleantech projects throughout the year. Seeking to participate in the developing market for batteries to power electric vehicles, Albemarle launched technology that it said can recover lithium from brine. The company planned to produce commercial quantities of lithium carbonate in Magnolia, Ark., by 2013.
Thailand’s PTT Chemical invested $150 million in biobased polylactic acid maker NatureWorks, giving it a 50% stake in the Cargill subsidiary. In addition, PTT made a $60 million investment in Myriant.
Instrument Makers Consolidate
The largest scientific instrument makers kept getting larger in 2011. Sales of instruments also grew as the economy slowly recovered.
At the Pittsburgh Conference on Analytical Chemistry & Applied Spectroscopy in Atlanta in March, executives said the economic recovery has revived buyer interest. Business conditions, they said, are much stronger than they were a year ago.
Consolidation among the big instrument players continued to change the face of the industry. With its $1.5 billion purchase of Varian in 2010, Agilent Technologies moved from third to first place in C&EN’s annual ranking of major instrumentation companies.Life Technologies, formed in late 2008 from the merger of Applied Biosystems and Invitrogen, slipped to second. Thermo Fisher Scientific moved from second to third, just a hairbreadth above quickly rising Danaher.
The consolidation activity this year will change the rankings in next year’s survey. Among the major acquisitions was Danaher’s February deal for biomedical and lab automation equipment maker Beckman Coulter for $6.8 billion in cash and debt.
May was a busy month for Thermo. After a five-month delay, the firm completed the $2.1 billion purchase of Dionex, a manufacturer of liquid and ion chromatography scientific instruments. Less than a week later, Thermo acquired Sterilin, a Wales-based provider of single-use products for life sciences customers, from private equity firm Nova Capital Management. It finished the month by agreeing to pay $3.5 billion to buy Phadia, a Swedish maker of allergy and autoimmunity diagnostic tests, from the European private equity firm Cinven.
In September, PerkinElmer agreed to acquire Caliper Life Sciences, a molecular and tissue imaging expert, for $600 million. And in November, Affymetrix signed an agreement to buy eBioscience, a maker of flow cytometry and immunoassay reagents, for $330 million.
Intellectual Property Rules Come Into Play
A new patent law in 2011 promised to change some of the rules for patent holders in the years ahead, but there were still many disputes to settle under the old set of rules.
In September, President Barack Obama signed into law the America Invents Act, the most significant overhaul of the U.S. patent system in almost six decades. The legislation transitions the U.S. from the first-to-invent system of awarding patents to the first-inventor-to-file approach used throughout Europe and Asia. Advocates said the switch will simplify procedures and reduce litigation.
Meanwhile during the year, several patent disputes arose and various courts decided cases of intellectual property theft.
DuPont sued German specialty materials maker Heraeus for infringing a patent on metallization pastes used to make crystalline silicon and thin-film solar cells.
Butamax Advanced Biofuels, a joint venture between DuPont and BP, sued Gevo for infringing patents related to production of isobutyl alcohol via fermentation. Gevo challenged the suit and also has challenged the validity of a key Butamax patent.
A jury in Richmond, Va., awarded DuPont $920 million in its aramid trade-secret suit against South Korean fiber maker Kolon Industries. Kolon said the verdict was part of a multiyear campaign by DuPont to force it out of the market for aramid fibers used to make bulletproof and flame-resistant clothing.
Invista resolved a lawsuit charging Ming Wan and his firm, Frontech, with stealing its 1,4-butanediol technology and licensing it to two Chinese firms. Under the agreement, Frontech obtained a license from Invista limited to the two Chinese projects.
Intellectual property theft attracted attention at the highest levels of the U.S. government. Early in the year, President Obama issued an executive order establishing advisory committees to improve the federal government’s intellectual property enforcement efforts and combat intellectual property theft in the U.S. and abroad.
A number of individuals were charged or convicted of stealing intellectual property from chemical companies. A federal jury in Baton Rouge, La., convicted former Dow researcher David W. Liou of stealing chlorinated polyethylene trade secrets and selling them to Chinese firms.
Former Dow AgroSciences scientist Kexue Huang agreed to plead guilty to two counts of stealing trade secrets from Dow and Cargill. He was first arrested by the Federal Bureau of Investigation in July 2010 on charges that he stole information related to the biosynthesis of Dow’s Spinosad-brand spinosyn insecticide.
And an organic chemist who worked for privately held Frontier Scientific until Nov. 1 was charged with stealing the chemical “recipes” for 2,2'-dipyrromethane and other Frontier compounds. A complaint filed by the U.S. attorney for the District of Utah, where Frontier is based, accused Prabhu Mohapatra of e-mailing the recipe to his brother-in-law, who was setting up a competing firm in India.
Environmental Issues Needle Industry
New and old environmental issues continued to make life difficult for many chemical firms.
In the U.S., companies faced increasing emissions regulations as the Environmental Protection Agency gave states the responsibility and authority to begin controlling carbon dioxide and other greenhouse gas emissions under the permit provisions of the Clean Air Act.
Concerns about the use of phthalates as plasticizers for polyvinyl chloride persisted. The perception that some phthalates could have reproductive toxicity in humans led to reduced use in the U.S. and Europe. The planned European phaseout of three phthalates could be the death knell for these products.
In August, EPA ordered DuPont to halt sales of Imprelis herbicide one week after the firm announced a voluntary recall. Both actions followed widespread reports that the lawn weed killer also damaged or killed trees near treated areas.
Even long-obsolete manufacturing practices continued to haunt chemical firms. Residents in Pompton Lakes, N.J., continued to press for cleanup of a former DuPont munitions site and affected homes nearby. In May, a Pennsylvania state court judge dismissed the first of 32 suits brought against Dow subsidiary Rohm and Haas involving charges that chemicals dumped near a former plant in McCullom Lake, Ill., caused residents to develop brain tumors.
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