US Chemical Industry Outlook

The Outlook
for the US
Chemical
Industry
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Executive Summary
Is the worst over? A cautious but growing consensus among economists and industry
analysts suggests that after more than two years of turbulence, the global economy in
general and the chemical industry, in particular, are entering calmer waters.
1
While a full recovery for chemical companies is not expected this year, certainly, the
earnings releases across the industry for the rst half of 2010 suggest that growth is
returning at a faster rate than many had expected.
2
Increased production in the domestic
auto industry is supporting new demand for US chemical products, but the construction
sector another major market for US chemicals is recovering more slowly. However,
after massive layoffs, improvements in cash management and operational belt-
tightening, the US chemical industry is expected to realize a year-over-year increase of
around 7 percent in 2010, according to the American Chemistry Council (ACC).
3
At the same time, this recovery presents its own set of challenges for US chemical
companies. The growing size and diversity of emerging markets, the increasing
inuence of chemical producers in the Middle East, Asia and Latin America, the
increased burden of environmental regulations and many other factors have created
a new global playing eld in which US companies are no longer taking
their technical, nancial and market advantages for granted.
In fact, business as usual will never be the same again as the US chemical industry
moves into a post-recession global economy. Currently, the US produces 19 percent
of the worlds chemicals, more than any single country.
4
While this position may soon
be usurped by China
5
, US chemical companies have already started to transform
themselves into science and technology companies, placing them at the forefront
of the response to emerging global mega trends such as climate change, resource
scarcity and population growth. In particular, this transformation has focused on:
The increased use of research and new technology supporting an evolution
from base chemical production to specialties
Rationalizations and other efforts to increase their competitive advantage, both
domestically and abroad
Innovations to address a growing number of environmental regulations that
include global protocols and legislative mandates in other countries
Even these current efforts, however, will not be enough for the US chemical industry
to stay ahead of strong, new competitors emerging on the horizon. Instead, US
chemical companies are redening their traditional role as chemical producers
and literally reinventing themselves as the global industrys leading science and
technology companies for the 21
st
century.

Mike Shannon
Global and US Sector Leader
Chemicals and Performance Technologies
1
American Chemistry Council (ACC): Industry Operations Have Largely
Returned to Normal, Chemical Week, June 22, 2010
2
Ibid.
3
Ibid.
4
ACC: Industry Fact Sheet, June 2010
5
KPMG: Issues Monitor: Sharing Knowledge on the Chemicals Industry,
Issue Two, April, 2010
Contents
1. Current state of the industry 2
1.1 Industry overview 2
1.2. Impact of the global downturn 3
1.3. Tariffs and protectionism 5
1.4. Forecasts for 2010 7
2. The new global context 10
2.1 US focus on emerging markets 10
2.2. Growth in Brazil 12
2.3. New opportunities in Canada 13
3. Regulatory issues and response 15
4. The evolution in science and
technology solutions 18
5. Conclusion 19
THE OUTLOOK FOR THE US CHEMICAL INDUSTRY | 1
1. Current state of
the industry
After a rough two years, US chemical companies are looking for
new ways to grow their customer base, enter new markets and
develop their product offerings.
KPMG believes that US chemical companies can help address these goals through
a re-assessment of goals and strategies in terms of global markets, environmental
regulations, and the evolution of US companies from producers of basic chemicals
to what can truly be called science and technology companies.
1.1 Industry overview
US chemical products value of manufacturers shipments (US$ millions)
Industry
Not seasonally adjusted
Monthly Year to date
April 2010* March 2010** February 2010 2010* 2009
% change
2010/2009
(US$ million)
Chemical products 62,116 64,266 54,683 234,291 212,760 10.1
Pesticides, fertilizers, and other
agricultural chemicals
5,984 5,577 3,601 17,864 12,050 48.2
Pharmaceuticals and medicines 15,271 16,207 14,269 60,234 63,276 -4.8
Paints, coatings, and adhesives 2,920 2,798 2,299 10,114 9,815 3.0
Source: US Census Bureau, accessed on June 29, 2010
* Provisional
** Revised
US chemical products sales and prots (US$ millions)
Industry
Sales Operating prots** After tax prots
Q1 2010
Q4
2009***
Q1
2009***
Q1 2010
Q4
2009***
Q1
2009***
Q1 2010
Q4
2009***
Q1
2009***
(US$ million)
Chemicals products 184,807 180,737 170,927 18,475 16,513 20,323 26,841 38,542 21,994
Basic chemicals, resins and
synthetics
56,769 52,226 47,250 3,182 1,741 535 3,027 826 -668
Pharmaceuticals and medicines 79,548 83,019 75,834 8,772 9,224 13,131 18,192 30,676 17,018
All other chemicals 48,490 45,492 47,843 6,521 5,548 6,657 5,622 7,040 5,644
Source: US Census Bureau, accessed on June 29, 2010
* Not seasonally adjusted sales and prots
** Operating prots are prots before non-operating income, expense items, and income taxes
*** Revised
2 | THE OUTLOOK FOR THE US CHEMICAL INDUSTRY
The chemical industry is a major component of the US
economy, converting raw materials such as oil, natural
gas, air, water, metals and minerals into more than 70,000
different products.
6
According to the ACC, over 96 percent of
all manufactured goods are dependent in some way on the
chemical industry.
7
The US chemical industry produces 19 percent of the
worlds chemical output, amounting to US$689 billion. The
industry directly employs over 800,000 people nationwide.
A total of nearly 5.5 million additional jobs are supported by
the purchasing activity of the chemical industry and by the
subsequent expenditure-induced activity.
8
In addition, the US chemical industry is responsible for
10 percent of US merchandise exports, totaling US$145 billion
annually, as well as 11 percent of all US patents.
9

US chemical products can be divided into four general
categories:
Basic and intermediate chemicals: The major products of
this segment include polymers, bulk petrochemicals and
intermediates, fertilizers, inorganic chemicals and other
industrial chemicals. Employing almost a third of workers in
the industry,
10
this segment is the largest of the four, providing
plastics for packaging, home construction, appliances,
polyvinyl chloride (PVC), piping, toys and games.
Specialty chemicals: These chemicals are typically high-
value-added products with many differentiations. The major
products of this segment include paints and coatings,
adhesive sealants, catalysts, dyes and pigments, industrial
gases, resins and plastic additives.
6
US Energy Information Administration: Chemical Industry Analysis Brief
7
Op. cit., ACC: Industry Fact Sheet
8
Ibid.
9
ACC: Industry Profile, January 10, 2010
10
US Bureau of Labor Statistics: Career Guide to Industries, 2010-11 Edition
Life science chemicals: These are differentiated biological
and chemical substances used to induce specic outcomes
in humans, animals, plants and other life forms. The
major products of this segment include agrochemicals,
pharmaceuticals and biotechnology products.
Science and technology chemicals: These products include
advanced materials that transform current technologies. They
enhance the characteristics of traditional specialty chemical
products, as listed above.
1.2 Impact of the global
downturn
US Chemical Industry Employment (in 1000s)
January 2008 May 2010
740
760
780
800
820
840
860
880
Apr-10 Jan-10 Oct-09 Jul-09 Apr-09 Jan-09 Oct-08 Jul-08 Apr-08 Jan-08
Source: Current Employment Statistics, Bureau of Labor Statistics, accessed on June 29, 2010
1.3 Tariffs and protectionism
In general, the nancial crisis sparked a marked increase in
the number of antidumping cases raised by US regulators.
Asian companies have been the most prominent targets.
During the frst six months of 2008, China and South Korea
were the top targets of antidumping investigations, and a
record 44 percent of the worlds antidumping investigations
during the period involved China.
12
This trend continued into
the next year. To give just one example, in August 2009, the
US Department of Commerce (DOC) imposed duties of up to
4.2 percent on importers of plastic bags from Vietnam.
13
This
followed an initial ruling that the Vietnamese government had
provided subsidies ranging from 0.2 percent to 4.24 percent
to local plastic bag players.
14
Although Asian companies are still targeted for antidumping
investigations by Western manufacturers, China has shown
a growing assertiveness in regards to antidumping issues. In
April of 2010, China imposed anti-dumping duties on imports
of Nylon 6, a synthetic-material nylon.
15
The government
announced tariffs of up to 96.5 percent on imports of this nylon
from the US, as well as from Europe, Russia and Taiwan.
16

Current economic pressures continue to encourage
protectionist measures. However, the global chemical
industry is built on free trade across national borders and
trade zones. The US chemical industry exports 20 percent of
its output, totaling US$145 billion.
17

12
All Business: Chemicals anti-dumping cases on the rise, January 20, 2009
13
All Business: Asia producers expect high levels of protectionism, September 16, 2009
14
Ibid.
15
Voanews.com: China Levies Punitive Duties on US Chemical Imports, April 22, 2010
16
Ibid.
17
Number of bankruptcy lings in the US chemical industry,
2000 2009*
0
10
20
30
40
50
60
N
u
m
b
e
r

o
f

b
a
n
k
r
u
p
t
c
y

f
i
l
i
n
g
s
12 12
11 11 11
10
4
27
45
55
2009 2008 2007 2006 2005 2004 2003 2002 2001 2000
Source: Capital IQ (accessed on March 23, 2010)
Note: *Includes both chapter 7 and chapter 11 bankruptcy lings
US chemical shipments
70
60
50
40
30
2008 2009
J
a
n
F
e
b
M
a
r
A
p
r
M
a
y
J
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A
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S
e
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t
N
o
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D
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J
a
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F
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A
p
r
M
a
y
J
u
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J
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A
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S
e
p
O
c
t
Chemical shipments
Shipments
excluding
drugs
$

B
i
l
l
i
o
n
s
Source: US Department of Commerce, cited in Chemical & Engineering News: United States:
Chemical industry prepares for a slow recovery in 2010, January 11, 2010
The global recession that began in late 2007 has had an
enormous impact on consumers disposable income.
This in turn has led to a massive decrease in spending for
automobiles and consumer products such as appliances,
furniture and personal care items major markets for the
chemical industry.
11

The commercial or business-to-business side of the economy
has been affected as much if not more. Construction
another key market for US chemicals came to a virtual
halt as business lines of credit began to disappear, limiting
new building activity and reducing the market demand for
chemistry-intensive goods.
11
ICIS Chemical Business: Impact of the downturn on chemical distributors will be significant,
June 1, 2009
The sharp drop in these markets for
the chemical industry caused severe
inventory imbalances that persisted
throughout 2008 and into 2009, thereby
lowering the demand for chemical
production. Output in the US chemical
industry (excluding pharmaceuticals) fell
by 6.7 percent in 2008 then fell again by
8.4 percent in 2009, resulting in an average
capacity utilization rate of 70.1 percent.
18

Some market segments reported even sharper
declines in capacity utilization. Basic chemicals
were especially impacted in 2009, contracting by
21.5 percent.
19
Massive layoffs followed these cutbacks in
production. Between December 2007 and March
2010, the US chemical industry lost over 66,000 jobs,
or 7.7 percent of employees.
20
Commodity chemical
companies were most affected, driven mainly by declines
in the automotive and construction industries.
The industry also suffered from a number of bankruptcies
among small chemical producers in addition to several
larger companies. Many companies had gone through
years of merger and acquisition (M&A) activity, leveraged
buyouts (LBOs) and share buybacks. In the rst quarter of
2009, 72 percent of the North American chemical companies
covered by Moodys Investors Service were in the high-
yield (elevated leverage) category more than double the
percentage in 2001.
21
With increased nancial pressures and
the deterioration of business fundamentals, highly leveraged
companies were often unable to renance their debt, which
resulted in further nancial stress.
22
In response to these upheavals, US chemical companies
undertook rigorous measures to cut costs and align
production with demand. In addition to further layoffs, a
number of chemical manufacturers announced production
cutbacks. Numerous plants were idled and operation rates
were cut.
23
In addition, chemical companies reduced capital
spending by 20.1 percent.
24
Other cost-cutting and cash-generating measures included
aggressive working capital management, the delay of orders
until products were absolutely needed, software solutions to
drive inefciencies out of the supply chain, and the improved
management of labor costs.
25

18
Chemical Engineering Progress: The Business of Chemistry: Forecast for 2010, statement
by Kevin Swift, January 1, 2010
19
Chemical & Engineering News: United States: Chemical industry prepares for a slow
recovery in 2010, January 11, 2010
20
ICIS Chemical Business: The worst is over, March 3, 2010
21
ICIS Chemical Business: Chemical industry credit quality deteriorates while refinancing risk
rises, February 3, 2009
22
Op. cit., KPMG: Issues Monitor: Sharing Knowledge on the Chemicals Industry
23
ICIS Chemical Business: Idling and mothballing chemical plants provides respite in
downturn, April 28, 2009
24
Chemical & Engineering News: United States: Chemical industry prepares for a slow
recovery in 2010, January 11, 2010
25
ICIS Chemical Business: Focus: Chemical firms slim down supply chain to save money,
March 12, 2009
1.4 Forecasts for 2010
Dow Jones US Chemicals Index,
April 10, 2008 June 24, 2010
350
300
250
200
150
100
A
p
r
-
0
8
J
u
l
-
0
8
O
c
t
-
0
8
J
a
n
-
0
9
A
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-
0
9
J
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9
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-
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9
J
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-
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-
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0
J
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-
1
0
I
n
d
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x

V
a
l
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e
Source: Reuters 3000Xtra
JP Morgan Global Manufacturing PMI
DI, sa
60
55
55
45
40
35
30
2003 2004 2005 2006 2007 2008 2009 2010
Source: JP Morgan, 1 April 2010
US chemicals and manufacturing operating rates,
April 2008 April 2010
Year ago
70.3%
45.0%
A
p
r
M
a
y
J
u
n
J
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l
A
u
g
S
e
p
O
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t
N
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D
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J
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N
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D
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J
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F
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M
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A
p
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M
a
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J
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J
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A
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S
e
p
O
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t
78
80
76
74
72
70
68
66
64
Latest month
74.0%
71.2%
Previous month
74.5%
70.4%
Chemicals All manufacturing
2008 2010 2009
Media Source: Prots On the Rise, Chemical Week, June 11, 2010
US chemical prots
(in billion of after-tax dollars)
120
100
80
60
40
20
0
2004 2005 2006 2007 2008 2009 2010
Sources: Haver Analytics (New York), based on data from the U.S. Bureau of the Census; estimates
by The Industry Performance Monitor (Sandy Hook, CT).
[Table from Chemical Week: Forecast: What to expect in a year of recovery,January 8, 2010]
In 2010, the global economy appears to
be slowly moving out of the recession.
According to the International Monetary
Fund Forecast released in April of 2010,
world economic growth is expected
to rise by about 4.25 percent in 2010
and 2011.
26
The JPMorgan Global
Manufacturing Purchasing Managers
Index (PMI) reached a 70-month high
in March of 2010.
27
Forecasts for the US economy are also
improving. The National Association for
Business Economics (NABE) forecast
panel in May increased its expectations
for growth in 2010 to 3.2 percent for real
GDP from 3.1 percent in its February
forecast. The panel is also predicting a
3.2 percent pace of real GDP growth
for 2011.
28
The US chemical industry reects
these upward trends. The ACC stated in
its mid-2010 outlook that the industry is
moving towards self-sustaining growth,
based on rising demand, business
investment, and cost advantages.
29

The US chemical industrys leading
indicator gained 2.3 percent in May of
2010.
30
This represented an increase
of 14 percent over a low in March of
2009. US chemical industry output
also rose 6.7 percent in May. Industrial
production in the chemical-process
industries, an important part of the
index, rose 2.9 percent.
31

26
International Monetary Fund: World Economic Outlook April
2010: Rebalancing Growth
27
JPMorgan and Markit Economics: Global Manufacturing
PMI rose to 70-month high, news release, April 1, 2010
28
NABE Outlook: U.S. Recovery Approaches One-Year
Anniversary in Good Shape, May 2010
29
Op. cit., ACC: Industry Operations Have Largely Returned
to Normal
30
Chemical Week: Gaining Momentum, June 4, 2010
31
Ibid.
End markets for chemical products are
showing strong growth. In July, US auto
industry sales rose 5.1 percent over
July of 2009.
32
For the second quarter
as a whole, total industrial production
increased at an annual rate of 6.6
percent.
33
Iron and steel, computers,
electronic components and appliances
are all forecast to experience double-
digit growth in 2010, although most of
these increases are measured against
signicant declines from the year before.
34
This growth has been reected in the
earnings releases of most chemical
companies for the rst half of 2010
(H1). Eastman Chemical Company,
for example, reported a 38 percent
increase in sales revenues,
35
primarily
due to improved customer demand.
Combined with the restructuring
and cost saving programs that many
chemical companies implemented
last year, output growth is driving high
earnings across the sector, to the extent
that many companies are condent of
out-performing full year forecasts.
However, the news is not all positive.
Sustained expansion in the construction
industry has yet to occur. The volume of
non-residential building remains quite
low, and little improvement is expected
in 2010.
36
In addition, it is possible
that many of the jobs lost during the
recession are not expected to be
replaced as business improves.
32
Yahoo Finance: US Auto sales rise in July, August 9, 2010
33
US Federal Reserve: Industrial production report, July 15,
2010
34
ACC: Industry Operations Have Largely Returned to
Normal
35
Eastman Chemical: Eastman Announces Record EPS in
Second Quarter 2010, press release, July 29, 2010
36
McGraw-Hill Construction: May Construction Grows 3%,
June 22, 2010
However, most indices are encouraging,
suggesting a mild but steady
improvement for the US chemical
industry. Growth will continue beyond
2010, the ACC says, with US chemical
output expected to increase 3.7 percent
in 2011 and 2.9 percent in 2012.
37
At the same time, strong elements of
uncertainty remain about this recovery,
based on factors such as the possibility
of a sovereign debt crisis in Europe. The
crisis sent the euro to a four-year low
against the US dollar on June 7, 2010,
and it has wiped out more than US$4
trillion from global stock markets.
38

Even with massive government rescue
mechanisms and tough proposals to
reduce public spending, a continued lack
of investor condence in countries such
as Greece and Spain might have grave
repercussions in Europe and throughout
the global economy. Over US$33 billion
in chemical goods are exported annually
from NAFTA to Europe,
39
and US
chemical companies are keeping close
watch over developments in Europe.
37
Op. cit., ACC: Industry Operations Have Largely Returned
to Normal
38
Bloomberg News: Investors Ignore Positive News as
Europes Debt Crisis Persists, BIS Says, June 13, 2010
39
Cefic: Facts and Figures, 2009, chart 2.2., page 16,
Extra-EU chemicals trade flows with major geographical
blocs, 2007
US chemical industry output projections (% annual change)
Industry 2008 2009 2010 2011 2012 2013 2014
All Chemicals -4.7 -4.5 6.0 4.0 3.6 3.2 2.8
Pharmaceuticals -1.9 0.4 4.7 4.5 4.8 4.8 4.3
Chemicals, excluding pharmaceuticals -6.7 -8.4 6.8 3.7 2.9 2.2 1.9
Agricultural chemicals -9.0 -8.6 7.0 0.8 2.3 2.1 1.9
Basic chemicals -8.7 -5.4 8.8 3.8 2.5 1.7 1.5
Specialty chemicals -4.6 -15.3 2.4 4.1 4.2 3.0 2.0
Consumer products 2.0 -5.1 4.1 2.6 2.9 2.4 2.0
Soucre: Bureau of the Census, Federal Reserve Board and ACC analysis, June 22, 2010
Below 1 Between 1 and 3 Between 3 and 5 Above 5 Insufficient data
2. The new global context
Average Real GDP Growth during 2010 11
Source: IMF staff estimates
Consider these facts:
By 2015, China is expected to overtake the US as the
largest chemical producer in the world.
40

By 2025, India will have over 400 million middle class
consumers, more than the present population of the US.
41
Between 1995 and 2005, over 95 percent of world chemical
growth was concentrated in developing countries.
42
In a post-recession economy, new market leaders are
emerging from outside the West. Generally speaking, the
recession hit the developed countries hardest, and recovery
in the US and Europe has not kept pace with recovery in
markets such as Asia, the Middle East and emerging markets
in Latin America. At the same time, these markets are rapidly
increasing in both size and purchasing power.
This shift in market importance will be a dening factor for
the future of the US chemical industry in 2010 and indeed
for the 21
st
century.
40
Deutsche Bank Research: World chemicals market: Asia gaining ground, July 2008
41
McKinsey Global Institute: The Bird of Gold: The Rise of Indias Consumer Market,
May 2007
42
European Commission: The state of the European Chemicals Industry a thoughtstarter for
the High Level Group on the competitiveness of the European Chemicals Industry, 2007
2.1 US focus on emerging
markets
International comparison of chemical production growth
EU NAFTA Asia Pacific* Latin America
105
95
115
125
135
145
155
165
175
1997 1998 1999 2000 2001 2002 2003 2004 2006 2005 2007
Average growth p.a. (1997-2007)
Asia Pacific* 5.7%
Latin America 3.2%
NAFTA 1.4%
EU 1.3%
P
r
o
d
u
c
t
i
o
n

I
n
d
e
x

(
1
9
9
7

=

1
0
0
)
1997 2007
*Asia Pacic includes Japan, China, India, Korea, Malaysia, Philippines, Singapore, Taiwan, Thailand,
Pakistan, Bangladesh and Australia.
Source: Cec Chemdata International
US chemical companies are increasingly
focused on emerging markets,
recognizing their tremendous market
potential. China is expected to add
approximately 500 million consumers
between 2005 and 2020. These
consumers will have an estimated
annual income of at least US$10,000.
43

As consumer spending increases in
China, the demand for differentiated
products is expected to follow suit,
driving the chemicals market toward
specialty chemicals.
Equally signicant market opportunities
exist in India. The country is currently
the second-biggest market in Asia with
a population of 1.12 billion. However,
by 2025 the population of India will
approach that of China due to the
Chinese governments policies restricting
births. Meanwhile, Indias population
will continue to drive increased levels of
consumption. By 2015, over 63 million
Indian households are expected to reach
a household income of over US$6,500
annually,
44
ensuring greater demand for
food and healthcare products as well
as consumer goods like automobiles,
housing, home appliances and items for
personal care.
43
ICIS Chemical Business: Specialty chemical industry
presents growth opportunities, September 21, 2009
44
Investment Commission of India: India Opportunities in
the Worlds Largest Democracy
For the moment, most US chemical
companies see Asia and Latin America
primarily in terms of market opportunities,
not competitive threats. However, that
perspective will most likely change in the
near future. The ACC expects chemical
industry output in emerging nations to
increase 6.9 percent in 2010 and
7.6 percent in 2011, surpassing expected
growth rates for the US.
45

To maintain their competitive advantage,
many US chemical companies are taking
steps now to realign or expand their global
initiatives and strategies. Recent activities
include the following:
In November of 2009, Air Products
opened a new specialty amines
plant in Nanjing, China, which
will complement its existing local
capabilities.
46
ExxonMobil Chemical has announced
that the majority of growth for its
products in the near future will
be in Asia, especially China and
India.
47
The company intends to
supply these markets from its global
network, including its Singapore
manufacturing facilities.
45
Op. cit., Forecast: What to Expect in a Year of Recovery
46
Air Products: Air Products Opens New Specialty Amines
Plant in China, press release, November 3, 2009
47
ICIS Chemical Business: China, India key for ExxonMobil
Chemical growth, February 2009
Chevron Phillips Chemical Company
(CPChem) is increasing its production
capacity in the Middle East with two
new joint ventures between affiliates
or subsidiaries of CPChem and
companies in Saudi Arabia and Qatar.
48

CPChem already owns three plants
in the region, with another one under
development.
In March of 2010, Eastman
Chemical Company announced the
acquisition of Genovique Specialties
Corporation, a global producer of
specialty chemicals. Through the
deal, Eastman will acquire operations
in the US and several countries
overseas, including a joint venture in
Wuhan, China.
49

48
ConocoPhillips: Fact Book, 2010
49
Eastman Chemical Company: Eastman Completes
Acquisition of Genovique Specialties, press release, March
3, 2010
2.2 Growth in Brazil
Brazilian chemicals industry output, 2004 09*
0
20
40
60
80
100
120
140
2004
60.3
72.3
82.6
103.5
122.2
103.3
2005 2006 2007 2008 2009
Net sales (in US$ billion)
* Estimates
Source: Abiquim (translated): The performance of the Brazilian chemical industry in 2009
Note: Chemicals industry output includes sales from pharmaceuticals.
Estimated GDP growth rates
2010 2011
Brazil 5.5% 4.1%
South America and Mexico 4.1% 4.0%
United States 3.1% 2.6%
Western Europe 1.0% 1.7%
Source: International Monetary Fund: World Economic Outlook April 2010: Rebalancing Growth
For many years, Latin Americas petrochemical players have had
to cope with political uncertainty and complex and impenetrable
rules. However, in recent years many Latin American countries
have enjoyed political and economic stability, paving the way for
industrial development in the region.
50
Brazil is the most active Latin American country in terms of the
development of petrochemicals capacity and new international
alliances.
51
New oil and gas discoveries in Brazil have put the
petrochemicals sector and the country on a path to strong
growth and development. The promise of Petrobrass pre-salt
hydrocarbons program, demand from China and the success
of tax reductions for autos and consumer appliances have
increased condence in the region.
52
By 2014, Brazil is estimated to receive investments of over
US$26 billion for the chemicals industry, according to a survey by
the Brazilian Association of Chemicals Manufacturers (Abiquim).
The investment is expected to generate 5,800 direct jobs.
53
Opportunities in Brazil have not been overlooked by US
chemical companies. In the frst quarter of 2010, Dow
Chemicals sales in Latin America increased 25.5 percent year-
over-year from US$1.13 billion to US$1.41 billion.
54
DuPont
witnessed a 21 percent increase in its Latin American sales in
the rst quarter of 2010, to US$800 million.
55
Latin American
sales contributed 9 percent of the companys global sales.
56
50
Chemicals-Technology: South Americas Chemical Growth, May 21, 2010; content includes
statistics from Business Monitor International (BMI): Brazil Petrochemical Report Q2 2010
51
Ibid.
52
Ibid.
53
Indexet.investimentosenoticias: CHEMICALS: Chemical industry plans to invest
US$26 billion, January 8, 2010
54
Dow Chemical: Q1 2010 Earnings Statement
55
ICIS Chemical Business: DuPonts Latin America sales up 21% in 1Q 2010, April 27, 2010
56
Ibid.
The growing economic importance of Brazil to the US is
reected by the complex trade relationships between the
two countries. Of particular importance to the US chemical
industry is a long running dispute between Brazil and the
US over US cotton subsidies. This dispute has led to the
possibility of cross-retaliation penalties by Brazil involving
the suspension of patent and intellectual property rights
on goods including agricultural chemicals, biotechnology
products, and pharmaceuticals.
57

57
Chemical Week: U.S.-Brazil Trade Rift Threatens Patents on Agchem, Biotech Products,
March 17, 2010
2.3 New opportunities in Canada
Canadian Chemical Industry: Principal Statistics
Year Number of Companies Shipments (C$ billions) Employment Imports (C$ billions) Exports (C$ billions)
2000 2061 37.16 83 252 29.17 18.61
2001 2067 38.41 87 861 31.08 19.84
2002 2145 40.52 88 129 32.93 20.21
2003 2122 42.69 87 166 33.28 20.40
2004 3315 47.16 84 091 35.57 24.29
2005 3049 48.64 81 882 37.40 26.86
2006 2955 49.89 79 990 39.35 28.93
2007 2945 48.63 78 709 40.42 32.33
2008 2945* 50.62* 78 630* 42.10 31.39
2009 2945* 42.47* 71 400* 39.76 26.51
* Industry Canada estimates
Source: Statistics Canada at www.statcan.gc.ca
Any discussion of the global chemical
industry must include Canada, a highly
valued business and trading partner
of the US. Canada offers chemical
companies and investors a dynamic
business environment, low business
costs, highly skilled workers and
ready reserves of competitively-priced
feedstocks. Tax rates are also very
favorable. In a Total Tax Index (TTI) ranking
based on KPMGs analysis of ten major
countries, Canada has the second lowest
TTI for R&D and Manufacturing and
second lowest overall, with only Mexico
coming in with a lower TTI ranking.
58
Not surprisingly, nine of the 10 largest
chemical companies in the world have
major production facilities in Canada.
59
In
addition, a growing number of Canadian
chemical companies are expanding their
presence in global markets. (See box:
A sample of key players in the Canadian
chemical industry.)
The Canadian chemical industry is one of
the largest manufacturing sectors in the
country, employing 78,000 workers at
almost 3,000 rms.
60
Canadian chemical
output totaled US$49 billion in 2008.
61

The chemical industry is the third largest
manufacturing exporter in the country,
and Canadian chemical exports have more
than doubled over the past decade.
62
In
2008, exports reached US$31.5 billion,
with 76 percent sent to the US.
63
58
KPMG: Competitive Alternatives 2010, Special Report:
Focus on Tax
59
Invest in Canada: http://investincanada.gc.ca/eng/industry-
sectors/chemicals.aspx
60
Ibid.
61
Ibid.
62
Ibid.
63
Ibid.
Canadas chemical industry is
concentrated in Ontario (Toronto and
Sarnia), Qubec (Montreal) and Alberta
(Edmonton and the surrounding area).
Industry output centers on three
subsectors:
Synthetic resins: Shipments amounted
to US$8.7 billion in 2008, with 83 percent
exported to the US.
64
Much of this
subsectors new capacity is driven by
state-of-the-art technology. For example,
NOVA Chemicals proprietary Advanced
Sclairtech technology was developed
in Canada and now produces a new
generation of polyethylene resins.
Petrochemicals: This is one of the
largest subsectors of the Canadian
chemical industry, including
18 manufacturing plants, most of which
are owned by foreign multinational
companies.
65
Ethylene is the subsectors
key product, which is also the leading
chemical product made in Canada.
Organic chemicals: Biotechnology is
used to create organic chemicals from
biofeedstocks such as corn, soy, wheat and
biowaste. This sector enjoys ready access
to these feedstocks due to Canadas large
agricultural and forestry industries.
64
Ibid.
65
Ibid.
A sample of key players in the
Canadian chemical industry
Agrium, Inc., a major retail supplier
of agricultural products and services
in North and South America and
a leading global producer and
marketer of agricultural nutrients
and industrial products.
ERCO Worldwide, the largest
producer of sodium chlorate in North
America and the second largest
in the world. ERCO also has the
worlds largest installed base of
modern chlorine dioxide generators
and ranks as the second largest
producer of potassium products in
North America.
Methanex Corporation, the worlds
largest supplier of methanol. As a
global enterprise, Methanex has
manufacturing, marketing and supply
chain capabilities in North America,
Latin America, Europe, the Caribbean
and throughout the Asia Pacic region.
NOVA Chemicals Corp., a leading
producer of polyethylene resins,
styrenic polymers, ethylene and a
variety of energy co-products for
construction, manufacturing and
other industries.
Raymor Industries Inc., a major
developer of high technology in
Canada and a producer of advanced
materials and nanomaterials for high
value-added applications. Raymor
holds the exclusive rights to more than
20 patents throughout the world.
New regulations applied to other
industries have the potential of affecting
the business of US chemistry. For
example, governments in developed
countries, including the US, are not
looking as favorably at petroleum
producers as they have in the past.
Incentives given to oil and gas
companies might be reduced,
perhaps resulting in price increases
for petroleum feedstocks used by
US chemical companies.
US chemical companies are also
concerned with the Regulation on
Registration, Evaluation, Authorization
and Restriction of Chemicals (REACH)
implemented by the European Union
(EU). While this regulation has no effect
on US soil, US producers exporting an
additive or solvent or other substances
for use by an EU manufacturer may
fnd their product within REACH
jurisdiction.
66
The European Commission
has estimated that the direct costs of
REACH to the chemical industry will
total US$2.8 billion over the rst
11 years of the regulation.
67
In the US, mechanisms to limit carbon
and other greenhouse gas (GHG)
emissions have the greatest potential to
inuence the chemical industry. Existing
US cap-and-trade programs include:
Acid Rain Program (part of the 1990
Clean Air Act)
NOx Budget Trading Program (first
administered in 2003)
Clean Air Interstate Rule which uses
a cap-and-trade system designed to
reduce sulfur dioxide and nitrogen
oxides nationwide by 70 percent
66
Chemical News & Intelligence: Costs of EU chemical
regulations reach US businesses, February 17, 2010
67
European Commission: REACH in Brief, October 2007
Regional Greenhouse Gas Initiative, a
market-based effort by ten northeast
and mid-Atlantic states to limit GHG
emissions
Midwestern Greenhouse Gas
Reduction Accord and the Western
Climate Initiative in which US states
and jurisdictions in Canada and
Mexico are designing regional cap-
and-trade programs
The long-term economic impact of
these programs to companies is hard
to determine, although clearly the cost
of compliance will continue to rise as
additional regulations are passed. A
new cap-and-trade bill was introduced
in May of 2010 in the US Senate. The
bill included a mandate to reduce CO
2

emissions by 17 percent by 2020 and
by more than 80 percent by 2050.
68

For the chemical industry, compliance
would have been postponed until 2016,
and afterwards provided allowances to
emit CO
2
to offset costs. Importantly,
US industry groups argued that the
bill would impose excessive costs and
limit their competitive strength in global
markets. The ACC estimated that new
cap-and-trade legislation proposed by
the current administration would have
cost chemical businesses at least
US$7 billion in new costs in its rst year
and a total of $69 billion in costs over
10 years.
69
While the bill in its current
form failed to gain enough traction
to advance in the current sitting of
Congress, the chemical industry
remains watchful for any future
proposals which may similarly impact
its long-term competitiveness.
68
Chemical & Engineering News: Cap-And-Trade Bill
Introduced, May 17, 2010
69
Chemical & Engineering News: Industry Considers Carbon
Options, March 30, 2009
3. Regulatory issues
and response
Regulations are becoming more stringent in virtually all markets
around the world. The Obama Administration and many in Congress
are supporting a more rigorous approach to environmental and
industry regulations. Tougher regulations may have a signicant
impact on US chemical companies, affecting their operations,
cost structures, supply chains and end markets.
Importantly, any unilateral
implementation of climate change
legislation in the US (or Europe, as has
been suggested by the EU) may raise
the cost base of the local chemical
industry, reducing its competitiveness
and possibly encouraging a new round
of protectionism.
New EPA regulations also carry a
heavy price tag for compliance. On
September 22, 2009, the EPA nalized
the Mandatory Greenhouse Gases
Reporting Rule, which includes reporting
for a wide range of public and industrial
sources.
70
Many chemical companies
will be required to install some sort of
monitoring devices, some of which will
cost US$40,000 80,000 per emissions
point, according to some estimates.
71

The EPA estimates that compliance with
the new rule will cost the private sector
US$115 million in 2010, and US$72
million per year thereafter.
72
The ACC
predicts that the compliance cost for
companies will be much higher, based
on the costs of installing the monitors
and the added costs of gathering data for
reports to the EPA.
73
Other proposals in 2010 that have
prompted strong responses from
US chemical and energy industries
include the following:
Return of Superfund taxes:
The US Environmental Protection
Agency (EPA) has called for the
reinstatement of Superfund taxes.
Cal Dooley, President and CEO of
the ACC, stated that EPAs call for
the re-imposition of Superfund taxes
is a lose-lose for the environment
and the economy. We read with
particular interest EPAs comment
that parties who benefit from the
manufacture or sale of substances
commonly found in contaminated
sites contribute to the cost of
cleanup. The fact is, since the
taxes expired in 1995, responsible
parties have continued paying for
the cleanup of Superfund sites and
continue to reimburse EPA for all of
its cleanup costs.
74

70
EPA: Final Mandatory Reporting of Greenhouse Gases
Rule, EPA website accessed on December 29, 2009
71
Chemical Week: EPAs GHG Reporting Rule Raises the Bar
on Monitoring, October 19, 2009
72
Ibid.
73
Ibid.
74
ACC: Responsible parties paying for superfund site
cleanup, press release, June 21, 2010
Revisions to the 1976 Toxic
Substances Control Act (TSCA):
Revisions as described in drafts of
the Safe Chemicals Act of 2010
would require producers to prove
the safety of the chemicals they
use and to disclose processing
information, most of which is not
protected by patents. While we
cant predict what Congress will
ultimately do modification of the
TSCA should be done carefully,
deliberately and in consideration of
all consequences, said Jim Cooper,
vice president of petrochemicals of
National Petrochemical & Refiners
Association (NPRA) in a public
statement. We firmly believe that
TSCA can be modernized in a way
that both effectively addresses
chemicals risk management and
preserves American jobs and the
economy.
75
The US chemical industry will continue
to work with government agencies
and lawmakers to help develop new
regulatory structures. At the same time,
the industry can point to an impressive
record in supporting sustainability and
environmental safety. Since 1974, U.S.
chemical companies have reduced the
energy consumed per unit of output by
nearly half.
76
Since 1990, the industry
has reduced GHG emissions by 23
percent, excluding emissions from
purchased electricity.
77
The industry
has also invested US$13 billion in
environmental and safety programs.
78

Furthermore, many chemical companies
were able to increase efciencies, cut
costs and tap new product markets
during the global downturn all
while reducing their carbon footprint.
This was achieved through process
improvements, recycling, investing in
renewable energy and creating energy-
saving products such as insulation
and lightweight components for
vehicles.
79
These proactive directions
in sustainability continue in 2010,
supported in large part through the
industrys continued emphasis on
science and technology.
75
ICIS Chemical Business: Proposed US law could cost jobs,
competitiveness, June 15, 2010
76
ICCA: Innovations for Greenhouse Gas Reductions: A life
cycle quantification of carbon abatement solutions enabled
by the chemical industry, July, 2009
77
Ibid.
78
Op. cit., ACC: Industry Profile
79
ICIS Chemical Business: Chemical firms lower energy use
with new technologies, August 12, 2009
To an extent, the US industry is sheltered
from these dynamics by its feedstock
advantage. Natural gas, which in 2010
enjoys a cost advantage of 20 to 1
over crude oil provides the basis for
approximately 70 per cent of US ethylene,
while in Europe, for example, 70 per cent
is derived from oil-based products.
80

If the US chemical industry becomes
more proactive at identifying and
rationalizing un-economic plants than its
European competitors, it may be better
placed to face these new challenges.
81

Undoubtedly, however, global
overcapacity and emerging market
competition will continue to change the
market dynamics of the US chemical
industry.
At the same time, the US chemical
industry is being presented with huge
areas of opportunity by the emergence
of a number of global mega trends
including:
Climate change, resulting in the need
to improve the efficiency of energy
and resource use and to diversify the
feedstock base away from fossil fuels
80
Chemical Week: The Gift of Gas, March 22, 2010
81
KPMG: The Future of the European Chemical Industry,
2010
Sustainability and the importance
of the chemical industry as an
enabler for downstream industries
providing the innovation to deliver
the more sustainable, higher
performance products increasingly
demanded by the end consumer
Population growth driving the need
to provide innovative solutions to the
problems of food and water shortage
The US chemical industry has not
remained idle in the face of these
challenges, and many companies
have already started to adapt through
rigorous portfolio rationalization and a
drive to advanced specialty chemicals,
which focus on providing the solutions
for the needs of a changing world.
Science and technology have been key
elements in this process, reecting an
industry-wide focus on research and
development (R&D).
The ACC reports that the US chemical
industry is responsible for 10 percent
of all US patents.
82
The industry also
invests almost US$50 billion in R&D
every year.
83
Major areas of research
by US chemical companies include
biotechnology in chemical production,
nanomaterials, water-based coatings,
sustainable chemistry and new bers
based on bio-materials such as corn.
82
83
Ibid.
Work in these research areas is resulting
in a wide range of new products and in
some cases even new markets. PPG
Industries, Inc. specializes in coatings,
glass products and specialty chemicals.
Over the past several years, the
company has developed:
Passenger windows for the new
Boeing 787 Dreamliner that can be
darkened or lightened with push-
button controls
Coated-glass auto windshields
that also serve as a multi-purpose
antenna
Glass-fiber reinforcement fabrics
used in blades for wind turbines
Gas barrier coatings for plastic
bottles to keep the carbonation and
freshness in beverages
84

In many cases, an emphasis on
R&D has always been a part of the
US industrys core mission. Chevron
Phillips Chemical has carried on a
tradition of research that includes
the invention of a modern-day plastic
in the 1950s.
85
The company now
holds more than 2,000 patents and
patent applications.
86
Their proprietary
loop-slurry process for polyethylene
production is one of the most widely
licensed processes in the world.
87

84
PPG Industries: all examples from www.ppg.com
85
Chevron Philips Chemical: http://www.cpchem.com/en-us/
rnt/Pages/ResearchTechnology.aspx
86
Ibid.
87
Ibid.
4. The evolution
in science and
technology solutions
Although the US chemical industry is clearly recovering from the
global recession, production facilities in China and the Middle East
are being built at a rapid pace. (See KPMG International, The Future
of the European Chemical Industry.) Global overcapacity, particularly
at the commodity end of the industry, is therefore a strong possibility,
even with increased demand from emerging markets.
5. Conclusion
The actions taken by US chemical companies during the
downturn may have given them a head-start over their European
counterparts in terms of realigning their business models to
t the needs of their long-term strategic goals. To remain
competitive, US chemical companies must continue and even
increase their drive to develop and productize world class
scientic research and technology.
Contacts
Global and US Sector Leader
Mike Shannon
KPMG in the US
Tel: +1 973 912 6312
e-mail: mshannon@kpmg.com
In Asia
Norbert Meyring
KPMG in China
Tel: +86 (21) 6288 2298
e-mail: norbert.meyring@kpmg.com.cn
In Europe
Chris Stirling
KPMG in the UK
Tel: +44 (0)20 7311 8512
e-mail: chris.stirling@kpmg.co.uk
Global Executive
Paul Harnick
KPMG in the UK
Tel: +44 (0)15 1473 5226
e-mail: paul.harnick@kpmg.co.uk
Global and US Tax Lead
Frank Mattei
KPMG in the US
Tel: +1 267 256 1910
e-mail: fmattei@kpmg.com
www.kpmg.com
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without appropriate professional advice after a thorough examination of the particular situation.
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Publication name: The Outlook for the US Chemical Industry
Publication number: 100938
Publication date: October 2010

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