14 June 2005

Global
Equity Research

Chemicals

Research team

North America William R. Young, Ph.D.
212/538-8922 william.young@csfb.com

John McNulty, CFA
212/325-4385 john.mcnulty@csfb.com

Nancy F. Traub, CFA
212/538-3950 nancy.traub@csfb.com

Keith Siegner, CFA
Source: CSFB Research.

Wear Goggles and Rubber Gloves When Handling Chemicals

212/538-3094 keith.siegner@csfb.com

Nils-Bertil Wallin
212/538-8127 nils-bertil.wallin@csfb.com

Europe Andrew Stott
44 20 7888 0300 andrew.stott@csfb.com

Chemical Industry Primer, 2005–2006
. . . Making Chemicals Less Hazardous to Handle
THIS CHEMICAL INDUSTRY PRIMER IS A BROAD INTRODUCTION TO THE CHEMICALS SECTOR, ITS STRUCTURE, ITS PRODUCTS, AND ITS KEY DRIVERS. CSFB'S GLOBAL CHEMICAL TEAM HAS UPDATED AND EXPANDED THIS VALUABLE REFERENCE SOURCE. WE HAVE INCLUDED A SECTION DESCRIBING OUR GLOBAL INVESTMENT METHODOLOGY, EXPANDED OUR DESCRIPTION OF ETHYLENE ECONOMICS, ENLARGED OUR DISCUSSION OF GENETICALLY MODIFIED FOODS (INCLUDING CORPORATE STRATEGIES), AMPLIFIED OUR PORTRAYAL OF THE FERTILIZER SECTOR, AND REORGANIZED THE PRESENTATION TO FACILITATE EASIER ACCESS TO KEY INFORMATION.

Neil Tyler
44 20 7888 6553 neil.tyler@csfb.com

Catherine Haynes
44 20 7888 3270 catherine.haynes@csfb.com

Fraser Hill
44 20 7888 0331 fraser.hill@csfb.com

Asia Prashant Gokhale
852 2101 6944 prashant.gokhale@csfb.com

Masami Sawato
813 4550 9729 masami.sawato@csfb.com

Jim Hung
886 2 2715 6368 jim.hung@csfb.com

A-Hyung Cho
82 2 3707 3735 a-hyung.cho@csfb.com

ANALYST CERTIFICATIONS ARE IN THE DISCLOSURE APPENDIX. FOR OTHER IMPORTANT DISCLOSURES, visit www.csfb.com/ researchdisclosures or call +1 (877) 291-2683. U.S. Disclosure: CSFB does and seeks to do business with companies covered in its research
reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Customers of CSFB in the United States can receive independent, third party research on the company or companies covered in this report, at no cost to them, where such research is available. Customers can access this independent research at www.csfb.com/ir or call 1 877 291 2683 or email equity.research@csfb.com to request a copy of this research.

Chemical Industry Primer, 2005–2006

14 June 2005

CSFB GLOBAL CHEMICAL TEAM
William R. Young, Ph.D. (N. Amer. Major Chem) Nancy F. Traub, CFA (N. Amer. Major Chem) Nils-Bertil Wallin (N. Amer. Major Chem) John McNulty, CFA (N. Amer. Spec. Chem) Keith Siegner, CPA, CFA (N. Amer. Spec. Chem) Andrew Stott (Europe) Catherine Haynes (Europe) Neil Tyler (Europe) Fraser Hill (Europe) Prashant Gokhale (Asia) Masami Sawato (Japan) A-Hyung Cho (Asia) Jim Hung (Asia) Emerson Leite, CFA (Latin America) Rohan Gallagher (Australia)
1 212 538 8922 1 212 538 3950 1 212 538 8127 1 212 325 4385 1 212 538 3094 44 20 7888 0300 44 20 7888 3270 44 20 7888 6553 44 20 7888 0331 852 2101 6944 813 4550 9729 82 2 3707 3735 88 62 2715 6368 55 11 38416290 61 2 8205 4858 william.young@csfb.com nancy.traub@csfb.com nils-bertil.wallin@csfb.com john.mcnulty@csfb.com keith.siegner@csfb.com andrew.stott@csfb.com catherine.haynes@csfb.com neil.tyler@csfb.com fraser.hill@csfb.com prashant.gokhale@csfb.com masami.sawato@csfb.com a-hyung.cho@csfb.com jim.hung@csfb.com emerson.leite@csfb.com rohan.gallagher@csfb

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Chemical Industry Primer, 2005–2006

14 June 2005

Table of Contents
I. Executive Summary .......................................................................................................6 Purpose of This Report ................................................................................................. 6 The Chemicals Sector ................................................................................................... 6 Six Main Subsectors...................................................................................................... 7 II. Investment Methodology.............................................................................................11 U.S. Major Chemicals.................................................................................................. 11 U.S. Specialty Chemicals ............................................................................................ 15 European Chemicals ................................................................................................... 17 Asian Chemicals.......................................................................................................... 21 Japanese Chemicals ................................................................................................... 25 III. Commodity Chemicals ...............................................................................................26 Introduction.................................................................................................................. 26 Commodity Chemicals Industry Trends and Value Drivers ........................................ 26 IV. Inorganic Chemicals ..................................................................................................28 Chlorine, Caustic Soda, and Soda Ash: The Chlor-Alkali Industry ............................. 28 Phosphates (Nonfertilizer) ........................................................................................... 34 Titanium Dioxide.......................................................................................................... 38 V. Organic Chemicals .....................................................................................................40 “Cracking”: Production of Ethylene.............................................................................. 40 Feedstocks .................................................................................................................. 41 Ethylene and Other Olefins: Introduction .................................................................... 43 Ethylene....................................................................................................................... 48 Propylene .................................................................................................................... 51 Butadiene .................................................................................................................... 53 Benzene and Other Aromatics: Introduction ............................................................... 56 Benzene ...................................................................................................................... 57 Toluene........................................................................................................................ 58 The Xylenes................................................................................................................. 59 Acetone ....................................................................................................................... 62 Acrylates ...................................................................................................................... 64 Acrylonitrile .................................................................................................................. 67 Ethylene Glycol............................................................................................................ 69 Ethylene Oxide ............................................................................................................ 71 Methanol...................................................................................................................... 73 Phenol ......................................................................................................................... 75 Propylene Oxide .......................................................................................................... 77 Styrene Monomer ........................................................................................................ 79 Surfactants (Surface Active Agents) ........................................................................... 81 Vinyl Acetate................................................................................................................ 84 Vinyl Chloride Monomer (VCM)................................................................................... 86

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Chemical Industry Primer, 2005–2006

14 June 2005

VI. Thermoplastics and Thermoset Resins .....................................................................88 Polyethylene ................................................................................................................ 89 Polypropylene.............................................................................................................. 92 Polyvinyl Chloride (PVC) ............................................................................................. 94 Polystyrene.................................................................................................................. 96 Polyethylene Terephthalate (PET) .............................................................................. 98 Polyurethanes............................................................................................................ 100 VII. Man-Made Fibers....................................................................................................102 Polyester Fiber .......................................................................................................... 103 Acrylic Fiber............................................................................................................... 106 Nylon 6 and 66 Fibers ............................................................................................... 108 Elastane/Spandex ..................................................................................................... 110 Rayon/Lyocell ............................................................................................................ 112 VIII. Fertilizers (Plant Nutrients) ....................................................................................114 Nitrogen (N) ............................................................................................................... 116 Ammonia ................................................................................................................... 117 Urea ........................................................................................................................... 120 Phosphate (P)............................................................................................................ 122 Potash (K).................................................................................................................. 125 IX. Agricultural Chemicals (Crop Protection, GMOs)...................................................130 Introduction................................................................................................................ 130 Herbicides.................................................................................................................. 130 Fungicides ................................................................................................................. 131 Insecticides................................................................................................................ 131 Seeds and GMOs ...................................................................................................... 132 Product Development in Breeding and Ag-Biotech................................................... 134 Agrochemical Industry Trends and Value Drivers..................................................... 138 Agrochemical Near-Term Growth Prospects ............................................................ 144 X. Industrial Gases........................................................................................................145 Introduction................................................................................................................ 145 Air Separation Technology ........................................................................................ 146 Industrial Gases Industry Trends and Value Drivers................................................. 149 Industrial Gases Growth Drivers ............................................................................... 151 Industrial Gases Growth ............................................................................................ 151 XI. Atmospheric Gases .................................................................................................152 Nitrogen ..................................................................................................................... 152 Oxygen ...................................................................................................................... 156 Argon ......................................................................................................................... 162 Other Noble Gases.................................................................................................... 164 XII. Nonatmospheric Gases ..........................................................................................165 Hydrogen ................................................................................................................... 165 Helium ....................................................................................................................... 171 Carbon Dioxide.......................................................................................................... 173

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....... Pharmaceutical Hybrid Companies......................................................................................................................................210 5 ................................................................... 203 Industry Trends and Value Drivers................... 184 Water Treatment.............................................177 Background ..................................................................................... 203 Company Overviews ........................................................................................................... 182 Paints and Coatings .................... 183 Adhesives and Sealants ............................................................................................................................................................................ 194 Fine Chemicals.........................................................203 Introduction........................................................................ 201 XIV.......................................................................................... Sources ................................................................ Specialty Chemicals .....................................................................................................................................................................................................................209 Appendix 2 ..................................................................................... 2005–2006 14 June 2005 XIII........................................................................................................ 177 Specialty Product Categories ................................................. 187 Catalysts ...................................................................... 198 Colorants ............................................................................................................................................................................................................................................................................................................ 177 Specialty Chemicals Industry Trends and Value Drivers .......208 Appendix 1 .. 191 Additives ...... 185 Flavors and Fragrances ................................. 205 XV.........Chemical Industry Primer............................................................

with all of the major operators having international businesses. 2005–2006 14 June 2005 I. The huge range of products also means that the industry’s returns and financial condition in general are heavily reliant on the overall health of the economy. As a result. It is. therefore. Source: CSFB research. and we welcome your suggestions to further enhance it next year. Mining & Petroleum Refining 10% Motor Vehicles 6% Construction 5% Paper & Printing 6% Agriculture 7% Furnishing Textiles & Apparel 10% Consumer Products 21% Exhibit 2: Share of Global Chemical Output by Subsector Pharmaceutical & derivatives 19% Other Specialty Chemicals 15% Consumer Products 14% Fertilizers 4% Crop Protection 2% Man-Made Fibers 2% PetroleumDerived Organic Chemicals 14% Plastics & Polymer Related Products 15% Rubber & Plastic Products 14% Additives & solvents 2% Coatings 4% Industrial Gases 2% Inorganic Chemicals 7% Healthcare & Other Services 13% *Excluding pharmaceuticals. 6 . the sector is cyclical. the industry has undergone considerable consolidation in recent years. The Chemicals Sector The chemicals industry converts raw materials derived principally from oil and natural gas. The range of these products is so vast that it would not be exaggerating to say that the products are involved at some stage in virtually everything we do and consume on a daily basis. and as part of the continued search for scale efficiencies. Rather than being stock-specific. and air into more valuable products for use in industrial and consumer markets. In response to this globalization. Exhibit 1: Share of Global Chemical Output by Market Other Manufacturing 8% Metals. The sector is characterized by global markets. We hope it will also prove a useful source of reference for those who have worked on the sector for some time.Chemical Industry Primer. We expect M&A activity to continue. minerals. primarily aimed at those who are new to the sector. as industry participants tune their portfolios. perhaps at a reduced rate. Executive Summary Purpose of This Report CSFB’s Global Chemical team has updated and expanded this reference resource this year. Source: CSFB research. this “primer” is intended as a reference guide for information on specific areas of the industry. The goal of this report is to provide a broad introduction to and overview of the chemicals sector. with one of the key bellwethers of its fortunes being GDP trends.

and Asian producers by market cap and by revenue. Monsanto. ExxonMobil. PPG CF Industries. Agrium. Degussa. British Vita. Ciba Specialty Chemicals. • Fertilizers are substances that are added to the soil to replace essential nutrients depleted by crops. Tosoh. Nan Ya Plastics. and insecticides. Avery Dennison. Celanese. European. Zeon. copper. Johnson Matthey. Hexcel. 3M. Mitsubishi Chemical. Sealed Air. Honam Petrochemical. and. targeted variations in compositions. inorganic chemicals. Rasa Industries. Product types included within industrial commodity chemicals are organic chemicals. Although the activities of the companies often span more than one of these areas. Terra. which can be divided principally between herbicides. Linde. Ube Industries. in some cases. and manmade fibers. Air Liquide. Praxair. Rhodia. all of which are used to increase crop yields by combating weeds. UAP Holding Industrial Gases BOC. which have access to cheap raw materials. Cytec. and insects. and Pharmaceutical Hybrids. many commodity chemicals are increasingly becoming the domain of the oil companies and firms in areas such as the Middle East. Approximately 55% of the industry is currently held by oil companies.S. Compass Minerals International. Industries. and potassium) and sometimes contain secondary trace nutrients (calcium. Mosaic Westlake Chemical. Taiyo. as significant R&D costs and extensive intellectual property rights allow a small number of significant 7 . Exhibits 4 and 5 list the major U. Industrial Gases. Lanxess. respectively. we adopted this demarcation to approach the sector methodically. Huntsman. Croda. phosphorous. 2005–2006 14 June 2005 The CEFIC (European Chemical Industry Council) estimates world chemicals sales were €1. sulfur. Eastman PotashCorp. Nova Chemicals. Exhibit 3: Global Chemicals by Segments Commodity Fertilizers Crop Protection/GMO Syngenta. Valspar. Yule Catto. and zinc). They contain one or more of the primary plant nutrients (nitrogen. magnesium. Fertilizers. Nippon Sanso Specialty Pharma Hybrids BASF. Formosa Plastics. JSR. Sumitomo Chemical. Ferro. The agrochemicals industry is characterized by high barriers to entry. Lonza.. Yara. Because of their ability to integrate production with the manufacture of feedstocks. Engelhard. Hitachi Chemical. Hanwa Chemical.736 billion in 2004. Rohm & Haas. Akzo Nobel ICI. Air Products & Chemicals. Bayer. Showa Denko. PolyOne. petrochemicals. Dow Chemical. • Commodity chemicals are typically produced in large quantities and sold on the basis of price. Source: Company data. Shin-Etsu Chemical. Specialty Chemicals. Crop Protection/GMO (Genetically Modified Organisms). • The crop protection/GMO sector includes pesticides. fungicides. Mimasu Semiconductor *High-value-added mix. Georgia Gulf. Royal/Dutch Shell Group Solvay. Mitsui Chemicals. Reliance Industries. customers tend to differentiate between suppliers on the basis of price. that is. DuPont. Mitsubishi Gas Chemical. we divide the companies within the sector into six main categories: Commodity Chemicals. SABIC. Exhibit 3 provides a rough overview of where the companies covered by CSFB fall within each segment. Six Main Subsectors For analytical purposes. Chemical. Ecolab. rather than effect. Asahi Kasei. Tokuyama. Lyondell Chemical. DSM. fungal pests. plastics and other resins. iron. CSFB estimates. Givaudan. by small.Chemical Industry Primer.

Chemical Industry Primer. we examine the issues faced by these companies as a result of their presence in this industry. 8 . 2005–2006 14 June 2005 companies to dominate the industry globally. the industry tends to be less cyclical than many other areas of the chemicals sector. the discovery and commercialization of genetically modified organisms (GMOs) by Monsanto and others brought an entirely new paradigm to the agrochemical industry. As scale becomes ever more important in the pharmaceutical sector. rather than for their chemical composition. are those chemicals that are sold on the basis of their performance (and. gas producers now provide an array of specialty gases for a wide variety of uses. hybrids sold their pharma operations—that have significant pharmaceutical businesses in addition to chemicals operations. including both industry and function-specific chemicals. In addition. In addition. • The industrial gases industry separates air into its components and sells these components to third parties. The variety of end products is vast. • Pharmaceutical hybrids. in contrast to commodities.S. • Specialty chemicals. often. as the U. Because of the high reliance on long-term contracts. The final section of the report becomes more company- specific as it examines those hybrid companies—which are European-based. technical service).

Chemical Industry Primer. CSFB estimates.000 40. US$ in millions Rasa Industries Sinopec Yizheng Chemical Mimasu Semiconductor Polyone Corp Yule Catto Compass Mineral UAP Holding Ferro Corp Croda Delta and Pine Land Rhodia LG Petrochemical Hanwha Chemical Georgia Gulf British Vita Honam Petrochemical Sumitomo Bakelite Hexcel Westlake Chemicals Lanxess Sinopec Beijing Yanhua Cytec Corp Ube Industries Tokuyama Zeon Taiyo Nippon Sanso FMC Mitsubishi Gas Chemical Tosoh Sinopec Shanghai Agrium Valspar LG Chemical Showa Denko Nova Chemicals Lonza Clariant Orica Engelhard Corp Hitachi Chemical Givaudan Ciba Johnson Matthey Huntsman Mitsui Chemical Eastman Chemical Yara Sealed Air Corp JSR Avery Dennison Corp ICI Lyondell Chemical Mitsubishi Chemical DSM Asahi Kasei Sumitomo Chemical Degussa Ecolab Linde Solvay Formosa Plastics BOC Nan Ya Plastics Potash Rohm and Haas Syngenta PPG Industries Akzo Nobel Air Products and Chemicals Praxair Shin-Etsu Chemical Monsanto Reliance Industries Air Liquide Bayer BASF Dow Chemical Du Pont 3M 60.000 20.000 50. 2005 9 Source: Company data. 2005–2006 14 June 2005 Exhibit 4: Global Chemical Producers by Market Capitalization/Share Prices as of June 10.000 30.000 10.000 0 .

US$ in millions Rasa Industries Mimasu Semiconductor Delta and Pine Land Sinopec Yizheng Chemical Compass Minerals Int'l Croda Yule Catto LG Petrochemical Sumitomo Bakelite Cytec Honam Petrochemical Sinopec Beijing Yanhua Ferro Lonza British Vita Westlake Chemical Zeon Tokuyama FMC Polyone Georgia Gulf Givaudan Johnson Matthey Valspar UAP Holding Hanwha Chemical JSR Agrium Potash Corp. of Mitsubishi Gas Chemical Sealed Air Orica Sinopec Shanghai Engelhard Ecolab Tosoh Ube Industries Hitachi Chemical LG Chemical Celanese Nova Chemicals Avery Dennison Monsanto Ciba Specialty Chemicals Lyondell Chemical Syngenta Eastman Chemical Praxair Yara Rhodia Showa Denko Clariant Rohm and Haas BOC Air Products and Shin-Etsu Chemical Lanxess PPG Industries Mitsui Chemical Solvay DSM Formosa Plastics ICI Sumitomo Chemical Huntsman Asahi Kasei Linde Air Liquide Nan Ya Plastics Degussa Akzo Nobel Mitsubishi Chemical 3M Reliance Industries Du Pont Bayer Dow Chemical BASF 60. CSFB estimates.000 0 . 2005–2006 14 June 2005 Exhibit 5: Global Chemical Producers by Revenues.000 40. 2004 10 Source: Company data.000 30.000 50.000 20.000 10.Chemical Industry Primer.

one should simply examine goodwill impairments taken in 2002 to get a handle on this. in that they fail to return the cost of capital. Major Chemicals When is the right time to buy chemical stocks as an investment—i. most major U. beyond a one. returns on acquisitions have been below par. Federated Department Stores. Also. Citigroup. which can often be prolonged. according to S&P—includes such “industrial” giants as Intel.. large firms that are not primarily transportation or utility companies.or two-month move? Said differently. Too frequently. Moreover.S.” Now that a good case has been presented for not owning equities of major chemical companies on a long-term basis. etc.7%.S. That is. The commodity end of the industry is capital intensive.Chemical Industry Primer. we have learned that. in view of prices paid relative to earnings generated—even when including synergistic cost reductions. As shown in Exhibit 6.-based chemical stocks are bought to be sold. and significant mistakes have been (and will continue to be) made. is that basic U. Since 1970.S. Investment Methodology U.. we would generally not categorize the chemical companies as “growth vehicles. that is. (Note: The old S&P 400 Industrials Index—a so-called non-“GIC” measure. Pfizer. which become underperformers as a result of overcapacity. obvious cycles are apparent. while that of the S&P 400 Industrials has been 8% (CAGR). This may involve building plants that cost $100 million or more. chemical companies do not create shareholder value. if an investor hopes to outperform the market.) 11 . McDonald’s. over the long term. 2005–2006 14 June 2005 II.e. the share price appreciation of the S&P Chemicals has been 7. we believe investors can outperform the market if they play the chemical cycles correctly. comparing EPS for the S&P Chemicals versus the S&P 400 Industrials. Furthermore. why bother? Timing is the key to developing a winning formula. the high returns generated at the peak are too fleeting to compensate for the low returns produced in less robust times. whereas unit growth in the chemical industry overall still exceeds GDP on a global basis. how do the supply/demand cycles affect chemical stock performance? The first point to emphasize.

4 0.7 0. This is borne out in Exhibit 7 and Exhibit 8. 2005–2006 Exhibit 6: Relative EPS: S&P Chemicals versus S&P Industrials 14 June 2005 RELATIVE EPS S&P CHEMICALS vs S&P Industrials 0.8 0.2 0.8 0.7 0. Since it is unlikely that all “industrials” will march to the same supply/demand cycle.6 0. 12 .2 0. it is clear there are three distinct periods during which chemical company earnings outperformed industrial firms as a whole over a multiyear period: 1971-1975.6 0. CSFB estimates. How do these periods relate to the secular chemical cycle? As in all commodity products.0 0. high capacity utilization should correlate with margins and earnings performance.Chemical Industry Primer.1 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 0. it stands to reason that earnings for major chemical companies should outperform results for their nonchemical peers when capacity operating rates are high. That is.4 0. 1986-1990.5 Source: Company data.3 0.5 0. supply/demand determines the profitability. and conversely. and 1994-1997.1 0.3 0. Between 1970 and the present.

Ethylene Operating Rates 110% 14 June 2005 100% 90% 80% 70% 60% 50% Source: Company data. 2005–2006 Exhibit 7: U.S.S. Chlorine Operating Rates 110% 100% 90% 80% 70% 60% 50% 19 99 19 95 19 97 20 03 20 01 Source: Company data.S. CSFB estimates.Chemical Industry Primer. since they are big. Without these key intermediates. 13 20 05 E 19 89 19 81 19 83 19 79 19 77 19 85 19 87 19 93 19 91 20 05 E 19 89 19 77 19 83 19 85 19 91 19 79 19 81 19 87 19 93 19 97 19 95 19 99 20 01 20 03 .-based chemical companies (including their ex-U. CSFB estimates. our estimates of overall capacity utilization for major U. components) correlate quite well with the relative earnings performance for major chemicals companies. building-block commodities that are upgraded into other chemical products.S. basic. Also. We have utilized ethylene and chlorine as proxies for the commodity end of the chemical industry. A corollary that follows is that derivative supply/demand trends should mirror those of ethylene and chlorine. as shown in Exhibit 9. Exhibit 8: U. a huge range of high-volume derivatives could not be manufactured. nondifferentiated.

CSFB estimates.6 1. 14 20 05 E 19 91 19 83 19 85 19 87 19 79 19 77 19 73 19 75 19 81 19 89 19 97 19 93 19 95 19 99 20 03 20 01 .0 0.7 Source: Company data.1 1. chemical stocks peak (relatively speaking) two or three quarters ahead of relative earnings.0 1. CSFB estimates. further examination indicates that the relative movement in chemical stocks mirrors operating rates and relative earnings from a timing perspective.8 0.2 1. While it certainly doesn’t look much like the other exhibits.9 1.8 1.2 1.7 1.9 0. 2005–2006 Exhibit 9: U.9 1.0 0.5 1.7 1.5 1. Also. although the magnitudes vary substantially.3 1.8 0.1 1. in most (but not all) cases.4 1.0 1.3 1. Chemical Industry Shipment Rates (Shipments/Capacity) 100% 14 June 2005 90% 80% 70% 60% Source: Company data. This is no big surprise given that the stock market is a mechanism for discounting future trends.Chemical Industry Primer.9 0.4 1.8 1. Exhibit 10: Relative Stock Price: S&P Chemicals versus S&P Industrials RELATIVE STOCK PRICE S&P CHEMICALS vs S&P Industrials 2.6 1.S.7 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2. How about the stocks? Exhibit 10 portrays the relative share price performance (logarithmic scale) for S&P Chemicals versus S&P 400 Industrials.

This makes sense.S. 15 . As a result. (2) in many cases the products produced by specialty chemical companies are essential to their end customers’ products and difficult to replace. Our conclusion: To enjoy relatively good returns when the cycle turns (i. to look at the entire group as one industry and make a generalization on how the “sector” will perform relative to the broader market leaves quite a lot of room for error. since investors tend to buy cyclical stocks ahead of an economic expansion.. • Low operating rates in the chemical industry. U. and • Healthy prospects for economic growth—at home and abroad (including. an investor should look for the following conditions before overweighting a portfolio with commodity chemical stocks: • An economy that is relatively sluggish. Or if there is a double-dip recession (such as in 1980 and 1982). in the 1984-85 period. chemical stocks could outperform initially but are likely to underperform once investors believe another GDP downturn is in the cards. specialty chemical group is an eclectic group of companies.e. Many of the specialty chemical names are viewed by the market as being defensive in nature and subsequently perform best when the economy is soft or there is economic uncertainty. making them less financially risky than many other groups (such as the commodity chemical names). • Low EBIT margins in the chemical industry.S. It is noteworthy that chemical stocks outperformed the market— for three to six months at a minimum—at the end of each slow period in the economy. the stocks tend to outperform the broader market. The group tends to perform in-line with the market when the economy is seeing normalized growth of 2. China).to six-month trend continues (as in 1985) or not (1975 or 1980.0% and tends to underperform when the economy is accelerating. That being said. especially these days.Chemical Industry Primer. expansions and recessions) factor into the equation? The shaded areas in the exhibits mark recessions and. If the initial phases of economic recovery coincide with a period of heavy capacity expansion in the chemical industry. for example) depends on other factors. 2005–2006 14 June 2005 How does economic activity (i. and 1993-1997 periods.5-3. we believe there are a number of fundamentals/characteristics that the majority of the companies possess (especially on a market-cap-weighted basis). 1985-1989. These drivers/fundamentals include: • Defensive in nature. Specialty Chemicals The U. one might expect the positive relative price trend to be short-lived.e. resulting in a price set by a value proposition instead of industry supply/demand balance or capacity utilization rates. • Relatively little capacity expansions expected to come onstream. as it was following the 1975-1976 rebound. such as in the 1970-1975. But whether this three. In those periods. a significant soft landing. Each firm is composed of one or more segments that basically make up their own niche industries where there is minimal overlap with other companies. We believe this is the case for a number of reasons: (1) the bulk of the companies generate significant levels of free cash even at the trough of the economic cycle. to maximize the upside in the stocks).

CYT.S. to make investment generalizations about the entire specialty chemical group is often difficult. names while helping the European companies. but the above three trends/fundamentals seem to occur in many of the names that we cover. However. acquisitions that may drive returns higher (ECL and FOE). These will likely be in the form of both bolt-on and larger acquisitions. which has resulted in improved capital discipline (the industrial gas companies). it is one to stay focused on because a reverse in the dollar’s weakness could negatively impact the U. dollar. This has resulted in severe margin pressure because the specialty companies that price their products on a “value proposition” often find it difficult to raise prices in conjunction with their raw materials (because the “value” of the product to their customer has not grown just because the specialty chemical company’s costs went up. • Raw material pressure.” • Financial strength may lead to acquisitions. the companies have been able to negotiate take-or-pay contracts. • Improving return profiles. Again. Many of the companies we follow have a sizable global reach and international platforms. most specialty chemical companies have relatively strong and underleveraged balance sheets. owing to (1) rising energy prices and (2) a tightening supply/demand balance on some of the commodity chemicals that they use. We believe they will be putting them to work in the form of acquisitions over the next few years. and cost-cutting/restructuring that should potentially result in higher midcycle returns (SEE. Beyond that. As a result. The specialty chemical names have been and will likely continue to see significant raw material pressures. which help them maintain profitability during periods of economic weakness (especially the industrial gas companies). and most of their customers are willing to take them (to a degree) because of the extreme nature of the cost pressure being seen. the names are in a game of “catchup. We believe a number of the specialty chemical names in our universe have started to see or will see improving midcycle returns over the next few years (not just improvements driven by an expected economic recovery). Because the specialty chemical group generates significant levels of free cash and they had been working aggressively through the recession to pay down debt. and EC—although EC has other offsetting headwinds). these companies are benefiting from the recent weakening of the U. 16 .) Most specialty chemical companies have started to put through price increases. especially relative to some of their European competitors.Chemical Industry Primer. While this trend may continue in the near term. (2) end markets served. we would look carefully at the (1) individual business models and stories. both of which should lead to solid stock performance—this has already started in some of the names.S. Such improvements may result in greater earnings power and multiple expansions. 2005–2006 14 June 2005 and (3) in some cases. Some of the catalysts behind this trend include management changes and industry consolidation. as well as energy price pass-through clauses. • Foreign currency exposure. and (3) the R&D platforms and pipelines to get a better understanding of what names will enjoy solid outperformance while others disappoint.

as with most sectors.8 1. The chemical sector is highly volatile as seen in Exhibit 11.8 0. Pharma hybrids Specialties 17 . 2005–2006 14 June 2005 European Chemicals What Are the Drivers behind the European Chemicals sector? Our first point is that this is a difficult question to answer because of the heterogeneous nature of the sector. rather than bottom-up corporate issues. CSFB estimates. and thus we are only interested in what dictates fund managers’ asset allocation decisions with regard to chemicals (whether it is from one quarter to the next or one cycle to the next). It is fair to say that.3 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 Gases 2000 Sector 2001 2002 2003 2004 2005e 2006e Commodities Source: Company data. Exhibit 11: EV/Sales by Subsector for European Chemicals 2. there is not one dominant variable.Chemical Industry Primer. but a complex interaction of external factors. For the purposes of this note we intend to talk only about the top-down factors.3 1.3 0.

2005–2006 We propose to split our driver categories into five sections: 14 June 2005 1. Clearly. 18 . where a company has a geographical mismatch between assets and sales). especially BASF. First. there is the direct and simple effect on overseas earnings. and there is evidence to support this with certain stocks. CSFB strategists believe a steepening of the yield curve at the long end.0 100. but also the expectations of the effect of that monetary policy. there is a potential competitive effect. Third. These factors themselves are in turn heavily influenced by three main variables: • interest rates • exchange rates • energy prices Interest rates and the perception of the direction of monetary policy are critical determinants of the performance of the sector relative to the market. whereby a company’s pricing strategies in international markets can be affected by exchange rates and can thus lead to market share gains or losses. there is the potential impact on margins from transaction risk (i. Macroeconomic Drivers Being a mature sector by and large. the chemicals sector is heavily influenced by perceptions of GDP and industrial production growth.0 110.0 Significant strengthening of Euro spells start of sector underperformance 120.0 80.0 Jan-00 Jul-00 Jan-01 Jul-01 $ to € Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Chemical sector relative to DJSTOXX (RHS) Source: Datastream. Exhibit 12: Euro Strengthening Correlates with Sector Relative De-Rating 140. We show below how influential significant swings in currencies can be on the sector’s performance. not the short end. it is not just a case of the sector performance being aided by the easing of monetary policy.0 130.Chemical Industry Primer. Exchange rates are important from three aspects.0 70.0 90..e. Second. is a reasonable basis for positive performance of the sector.

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14 June 2005

Energy prices are clearly critical for an industry that typically consumes significant volumes of oil and natural gas for purposes of raw materials, energy, and distribution. However, we would caution about seeing the oil price as an especially influential factor within the sector. Far more important, in our view, are expectations of inflection points in GDP, industrial production, and currencies. Exhibit 13 shows little correlation in the past between chemicals sector performance and the oil price.
Exhibit 13: Oil Price and European Chemicals Sector Relative Performance since 2000 Shows Little Correlation
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200

180

160

140

120

100

80

60 Jan-00

Jul-00

Jan-01

Jul-01

Jan-02 Oil

Jul-02

Jan-03

Jul-03

Jan-04

Jul-04

Jan-05

Chemical sector relative to DJSTOXX

Source: Datastream.

2. Lead Indicators
This ties in with the above section, in the sense that perception of economic growth can be influenced as much by lead indicators as by monetary policy. The key lead indicators that we use are the ISM and IFO surveys, as well as regional consumer confidence surveys. The new orders sections of the ISM and IFO are especially influential for most of our stocks. Stocks that are more sensitive to the perception of consumer demand trends are Croda, Givaudan, ICI, and Johnson Matthey.

3. Mergers and Acquisitions/Consolidation
Corporate developments in the industry and the level of consolidation can have significant influence on money flows in and out of the sector. In the late 1990s and the very early stages of this decade, the industry witnessed a number of major corporate deals. In particular, this period saw a proliferation of demergers, creating new companies, which stemmed from the life science industry’s efforts to focus on pharmaceuticals and other healthcare businesses. Thus, ICI (which set the ball rolling in 1993 with the demerger of Zeneca), Ciba Specialty Chemicals, Clariant, Celanese, Givaudan, Rhodia, and Syngenta all appeared in their varied forms. Following and during this phenomenon was another theme: value destruction. This was a simple phenomenon: Newly demerged companies, in an attempt to increase scale and utilize their balance sheets, acquired a number of assets and more often than not paid too high

19

Chemical Industry Primer, 2005–2006

14 June 2005

a price during this period of aggrandizement. For example, Ciba (Allied Colloids), Clariant (BTP), ICI (Unilever Specialty Chemicals), and Rhodia (Chirex and Albright and Wilson) all paid the price for expansionary moves. We expect M&A to be a greater feature of the industry’s development in the short term, compared with the relatively barren 2001-2004 period. Our view in this regard is based upon the strengthening of balance sheets in the last few years through a process of disposal programs and capital restructuring. Private equity companies are also taking an increasing interest in the sector’s fortunes and provide liquidity as both buyers and sellers of chemical assets.

4. Capital Discipline
This will always be an important theme among investors. The chemicals sector has a rotten reputation for reinvesting at the top of the cycle, only for margins to be adversely affected at the bottom of the cycle. Another important issue is, What is happening with regard to capital discipline relative to other basic materials sectors and is it sustainable? At present, it is fair to say that the industry in Europe at least is at a relatively low level of expenditure. Whether this is sustainable or not remains to be seen and, based upon recent guidance for 2005 estimates, there is every reason to view 2004 as a trough.
Exhibit 14: Capex/Depreciation Ratios for European Subsectors
250% 230% 210% 190% 170% 150% 130% 110% 90% 70% 50% 1997 1998 1999 Commodity 2000 2001 2002 Hybrid 2003 Industrial Gases 2004e 2005e 2006e Specialty Average

Source: Company data, CSFB estimates.

20

Chemical Industry Primer, 2005–2006

14 June 2005

Asian Chemicals
Asian companies have a relatively short history (short in terms of chemical cycles), and the markets have evolved over the last decade, with investment methodologies getting fine-tuned. There is a greater appreciation that petrochemicals are cyclical, and for cyclical companies, earnings multiples tend to be high at the trough, low at the peak. Most Asian companies are trading at EV/EBITDA multiples of 3-5 for 2005E—a point where we believe chemical margins are likely to peak. (This does not necessarily mean margins are going to collapse thereafter—we expect above-average margins.) At this point in the cycle, we look at what market expectations are in terms of future returns and use HOLT to analyze embedded return expectations. Using multiplies is more complicated given where we are in the earnings cycle. Asian companies have been the biggest beneficiaries of the current earnings upcycle in the petrochemical sector—the chart below highlights that they have generated the greatest spread in CFROIs from the median achieved between 1998 and 2003 and to 2004.
Exhibit 15: CFROI Spread from Median to 2004
25.0 20.0 15.0 10.0 5.0 RELI DSMN 11170 12990 51910 (5.0) 600002 4063C AKZO LYO GGC DOW 1326 1301 1303 9830 EMN PPG TOC ATC NPC 325 338 DD BASF 1033

2004 CFROI less -5Y Median CFROI

Source: Company data, CSFB estimates.

The chart above highlights that most companies at the left-hand side of the chart are from Asia. A combination of higher operational leverage, greater commodity exposure, and greater gearing into spot pricing (versus contract pricing) is likely to be behind this dramatic difference in the way earnings have performed in Asia, and in the rest of the world. The key question for Asia is, therefore, What happens to returns in a downcycle? We note that even the most optimistic views see a downcycle by 2008-2009—HOLT allows us to look at implied returns in that time frame. We assume that asset growth for the companies will be limited to 5% per year, in-line with global growth in volumes. This represents our estimate of what the industry can bear as a reinvestment rate, for a given outcome on returns. Too much capex would crush returns and profitability in the future.

21

Chemical Industry Primer, 2005–2006
Exhibit 16: Median Returns in the Past Have Been below Cost of Capital
25.0 20.0 15.0 10.0 5.0 0.0 -5.0 -10.0 ATC TOC NPC 325 1303 9830 RELI 338 1326 1301 600002

14 June 2005

Cost of Capital

-5Y median CFROI

2004 CFROI

Source: Company data, CSFB estimates.

Our analysis suggests that the market is implying that returns for chemical companies in Asia will fall from 2004 levels. It also indicates that the returns implied by the market in 2008 are now low enough, if one looks at history. We note that returns for Asian companies fall below the cost of capital through a downcycle—i.e., even an assumption of a reversion of WACC in the case of Asian chemical companies might be too aggressive
Exhibit 17: What Does the Market Expect in the Future?
25

20

15

10

5

0

LYO

RELI

4063C

TOC

GGC

11170

NPC

DD

600002

12990

51910

1033

1301

1326

1303

9830

338

325

PPG

DSMN

ATC

EMN

-10

2004 CFROI

-5Y median CFROI

Market Implied T+5 CFROI

Source: Company data, CSFB estimates.

22

AKZO

BASF

DOW

-5

4063C

12990

11170

51910

1033

2005–2006 14 June 2005 Finally. we look at what the market is implying in terms of CFROI in 2008 (the dot in Exhibit 17). the market expects returns to remain at current levels to 2008. the return expectations in the future look aggressive relative to where we are today—i. However.e. ATC.Chemical Industry Primer.. we note is also one of the biggest beneficiaries of the current upswing (as its 2004 CFROI is not muted for one-off reasons). At the right-hand side of the chart. CSFB estimates. Exhibit 18: Upside/Downside if T+5 Returns Equal Cost of Capital 100% 80% 60% 40% 20% 0% (20%) (40%) (60%) DOW GGC EMN DSMN AKZO BASF 1033 9830 1303 RELI 1326 4063C 11170 51910 600002 12990 1301 TOC PPG NPC LYO 338 325 DD Upside/Downside if t+5 CFROI is Equal to Cost of Capital Source: Company data. In the case of most stocks residing on the left of the chart. return expectations are still above the historical median levels achieved. As noted above. in the case of ATC and Thai Olefins. returns for many Asian companies fall below the cost of capital in a downcycle. relative to the 2004 CFROI and the median CFROI in 1998-2003. in most cases. 23 . we move toward companies where returns are expected to fall from current levels. Expectations here are high and are likely to be disappointed.

CSFB estimates.S. We would avoid the Asian chemical sector for now. Conclusions Asian companies have been the biggest beneficiaries of the current cycle—that probably explains why we are more cautious than our U. current expectations are not low enough to invest in the stocks. 24 600002 1301 ATC 325 338 DD .0% GGC DOW EMN PPG 14 June 2005 TOC LYO DSMN NPC AKZO BASF 9830 RELI 1303 1326 4063C 11170 1033 12990 51910 Upside/Downside if t+5 CFROI is Equal to -5Y median CFROI Source: Company data. and European commodities analysts. and (2) while returns are expected to fall. The bad news is: (1) Asian companies have higher earnings volatility. 2005–2006 Exhibit 19: Upside/Downside if T+5 Returns Reach Median Historical Levels 40. CFROIs are high.Chemical Industry Primer.0% 0. and hence the risk of getting earnings wrong is high both on the upside and on the downside.0% -140.0% -80.0% -20.0% -40.0% -120. That is the good news. and the market implies in general that they will fall.0% 20.0% -60.0% -100.

so such valuations were justified.4%. as domestic demand drops slightly. We expect domestic demand for petrochemical products to stay relatively strong in 2005 after a strong 2004. but once recovery starts to come through. the drop in Asian market prices has been undermining ethylene margins.5 300 11/1/95 -0.6 3/1/05 0.3 -0. we expect to see a recovery in the petrochemical stocks that have been underperforming since the start –of 2005. As a result. Share price momentum had been strong during these periods. We anticipate that 2005 ethylene production will drop 0.050 -0.2 -0. and earnings had also increased.1 1. we expect a continued increase in the export of monomers to non-Japan Asia for use as intermediate products in chemical production. (2) the IT bubble in 2000-2001. and even if there is a reduction in exports of polyethylene and some other products. we should start to see some positive surprises.300 -0. 2005–2006 14 June 2005 Japanese Chemicals Over the last ten years.57 million tonnes in 2004. and prices should improve in the autumn (August through September).1 0 800 1/1/97 3/1/98 5/1/99 7/1/00 9/1/01 11/1/02 1/1/04 Source: Datastream. we expect growth in exports overall to be roughly flat year over year. However.54 million tonnes from 7.4 550 -0. Any upward move in petrochemical stocks would probably come once demand in China recovers from its seasonal downturn.550 Ethylene margin (3 month moving average) Relative performance of 7 major chemicals (RHS) 1. Once earnings start to recover as a result of the adjustment in raw materials prices. in the form of upward earnings revisions for the second half. we expect to see an improvement in share price performance at the general chemical makers. to 7. when we expect to see general strength in the petrochemical sector. and (3) Asian demand recovery with price rises in 2003-2004.Chemical Industry Primer. 25 . Japanese major chemical stocks mainly outperformed during three periods: (1) the Asian demand increase around 1994-1995. Exhibit 20: Ethylene Margin and Relative Performance of Major Chemicals $/tons 1. From year-end 2004 through the beginning of 2005.

2005–2006 14 June 2005 III.0% for 2005 and 4.” such as ethylene glycol as antifreeze or acetic acid as a solvent. The largest customers are the general manufacturing. They form the foundations of major classes.” Instead. the most influential are cyclicality. and can thus increase cyclicality further. Organic chemicals—derived from either crude oil or natural gas—are carbon-containing entities. Commodity chemicals tend to form the building blocks of a vast array of specialty chemicals and consumer products. Some are intermediates in the synthesis of other organic materials. Volume growth and pricing flexibility are the main factors driving the top line in the commodity chemical industry. • Cyclicality. the term refers to chemicals that share a number of characteristics. As the health of the industry is heavily reliant on the health of these cyclical industries. fertilizers. Commodity Chemicals Industry Trends and Value Drivers Because of the integral role played by commodity chemicals in a vast array of manufacturing processes. operating efficiency.3% for 2006. the chemicals industry itself is cyclical. while profitability relies on capacity utilization. thus. imbalances in supply caused by capacity additions within the industry can lead to sharp price/margin swings. and raw material costs. Examples of polymers are such ubiquitous plastics as polyethylene or polystyrene. or man-made fibers such as polyester or nylon. Commodity Chemicals Introduction There is no strict definition of what constitutes a “commodity chemical. and metal oxides. known as “polymers. They are typically those products that are manufactured in large volumes and by a number of different producers. Instead.Chemical Industry Primer. and construction industries. we traditionally measure growth in terms of GDP. As a result. agricultural. CSFB global economists currently estimate global GDP growth was 4. Some organic chemicals are used “straight away. and of products such as salt.” almost like a string of paper clips. automotive. Of these. globalization/consolidation. a huge number of factors drive demand for them.” monomers are typically combined to form long-chain compounds. including titanium dioxide and iron oxide. and capital intensity. An important subclass of organic chemicals is known as “monomers. one need only consider generic pharmaceutical or crop protection products as examples. industrial phosphates. We divide the basic commodity chemicals subsector between organic and inorganic chemicals. 26 . price and location are often key determinants in choosing a supplier. product mix. But value-added products can easily become commodities over time. such as the chlor-alkali chemicals. Quality of the product is largely generic. although industrial production (IP) can also be used. Inorganic chemicals are derived principally from saltcontaining brines and various minerals such as trona (for soda ash) or phosphate rock (for fertilizers). customers rarely distinguish between manufacturers on this basis.9% for 2004 (the largest gain in 20 years) and forecast growth of 4. In addition to shifts in demand.

and/or their derivatives for both fuel and raw materials represents the largest single component of the total cost of production. with growth only marginally outpacing that of GDP. Commodity chemicals companies are huge consumers of energy. Significant scale is required to manufacture the majority of commodity chemicals efficiently. For petrochemical companies. • Energy intensity. and to benefit from lower-cost labor. These contracts typically “lock in” volumes. 27 . rapid industrialization and improving living standards are attracting large numbers of manufacturing companies to the regions. Competitive pressure and the search for growth are forcing chemicals companies to expand globally. significant raw material volatility can still have a large effect on margins within the industry. especially on a short-to-intermediate-term basis. The chemicals industry in the developed economies of Europe and the U. leading to further expense. stringent environmental regulations require extensive protection equipment for every plant.S. both through “organic” growth and via consolidation. A significant proportion of the feedstocks is often purchased under long-term contracts in an attempt to stabilize this proportion of the cost base. salt. In developing markets. is largely mature. In addition to the standard production technology. To serve these customers. and the consequent capacity also requires continual maintenance and upgrading. Even chlorine and caustic soda production requires energy (in the form of electricity) as the largest input cost—far larger than that of the other key ingredient. however. • Capital intensity.Chemical Industry Primer. Thus. 2005–2006 14 June 2005 • Consolidation/globalization. Commodity chemicals companies are characterized by their capital- intensive nature. consumption of oil. natural gas. but fixed-price contracts are difficult to engineer. many chemicals companies are building facilities nearby.

Wyoming. including Green River. It is also used as a bleaching agent in pulp and paper manufacturing. using salt and limestone. with emphasis placed instead on improving margins by reducing feedstock costs. Similar to the diaphragm cell. soda ash (sodium carbonate). The three existing methods of electrolysis all generate 1. reducing the need for evaporation. The membrane cell process is the method of choice today. or in certain areas. • Membrane cell. Chlorine and Caustic Soda Uses • Chlorine. which is used as the cathode. metals. 28 . these three chemicals have an enormously diverse range of applications. As a result. It is being phased out because of environmental risks surrounding the use of mercury. be dependent on them.0 part chlorine to 1. and labor costs though process improvements. and Soda Ash: The Chlor-Alkali Industry The chlor-alkali industry produces chlorine and the well-known alkali. energy requirements. through the electrolysis of brine (sodium chloride solution). Inorganic chemicals are largely considered high-volume commodities. These substances are used both as building-block materials and as processing aids and catalysts in the production of other chemical and industrial products. another alkaline product. 2005–2006 14 June 2005 IV. and operations are characterized by limited R&D spending. is produced either via the synthetic Solvay process. so wide that almost all consumer products will. although this application has lost position (owing to environmental issues. and glass. Caustic Soda. The major use for chlorine is in the manufacturing of PVC plastics and a variety of other chemicals. and thus. In this process. The advantage of this process is the ability to produce caustic soda in high concentration. Although this method of production can use fairly impure brine. it tends to produce less concentrated caustic soda and consumes a large amount of energy in the process. Mercury. paper. at some stage of production. the membrane tends to be more effective.13 parts caustic soda. • Mercury cell. This is the oldest and most energy-intensive method of production. Beyond chlorine/caustic soda. caustic soda (sodium hydroxide). a far more concentrated product is produced.Chemical Industry Primer. • Diaphragm cell. the electrolysis cell contains a diaphragm (usually made of asbestos fibers) to keep the newly formed chlorine and caustic soda separate. from trona or a similar mineral. Chlorine. Chlorine and Caustic Soda (Sodium Hydroxide) Chlorine and caustic soda are produced simultaneously in a fixed ratio. including fertilizers. Between them. as dioxin is a by-product) in favor of sodium chlorate. Inorganic Chemicals The majority of inorganic chemicals are derived from mineral ores or brines. the chlor-alkali industry is one of the largest chemical industries by value. although more concentrated brine is required. is highly toxic and would be extremely damaging if released into the water table.

CSFB research. 29 . 2004 14 June 2005 Other 28% Vinyls 34% Inorganics 2% Pulp & Paper 4% Chlorinated intermediates Water treatment Organics 6% 20% 6% Source: Chemical Week. A large proportion is also used as an alkali in pulp and paper manufacturing. alumina. • Caustic soda. soaps and detergents. More than 50% of caustic soda production is used in the manufacturing of other chemicals. Exhibit 22: Major Uses of Caustic Soda (Sodium Hydroxide) by End Market. Other significant markets are water treatment. detergents. 2005–2006 Exhibit 21: Major Uses of Chlorine by End Market. textiles. and textiles 12% Inorganics 17% Source: Chemical Week. 2002 Other 24% Pulp and paper 17% Water treatment 5% Organics 17% Alumina 8% Soaps. and petroleum and gas processing. CSFB research.Chemical Industry Primer.

5% 6.4% 8.095 2.105 1.32 1. Inc.4% 5.4% 10.448 2.2% 5.671 2. Bayer AG Olin Corporation Akzo Nobel AB Asahi Glass Co. decomposing into water and oxygen. more expensive than sodium chlorate..0 to 1. Because chlorine is a toxic green gas and expensive to store.218 1. Chloralkali prices are often quoted in terms of $/ECU. Caustic output.676 2. It is.13 tons of caustic soda. 2005E 2005 Average Capacity metric tons (000) 14 June 2005 % share of Global Capacity Dow Chemical Occidental Petroleum Formosa Plastics Solvay SA PPG Industries. and costs are often measured on a per ECU basis.1% 5.109 33.2% Source: CMAI. CSFB estimates Exhibit 24: Major Caustic Soda Producers.073 1. 30 . Company data. meaning caustic is often overly abundant or in short supply.836 1.2% 9.016 1.171 1. CSFB estimates Chlorine and Caustic Soda Industry Growth Trends and Value Drivers Chlorine and caustic soda are produced in a fixed ratio.696 1.. LTD TotalFinaElf 7.027 31.873 1.0% 12.4% 5. 2005E 2005 Average Capacity metric tons (000) % share of Global Capacity Dow Chemical Occidental Petroleum Formosa Plastics Solvay SA PPG Industries. LTD TotalFinaElf 6. 2005–2006 Exhibit 23: Major Chlorine Producers. Bayer AG Olin Corporation Akzo Nobel AB Asahi Glass Co. Inc. Hydrogen peroxide not only produces excellent whiteness with very little deterioration of the substance being bleached.13.7% 8.3% 5. but is also far more environmentally friendly. is tied to chlorine demand.1% Source: CMAI. which has gained a considerable market position in North America.Chemical Industry Primer.065 1.9% 8.4% 5.117 1.3% 7.2% 5. Company data.703 1.2% 5. 1. It should be noted that chlorine increasingly is being replaced as a bleaching agent in the pulp and paper industry by hydrogen peroxide and especially sodium chlorate.3% 8. however.507 1.7% 13. therefore. An electrochemical unit (ECU) is defined as 1 short ton of chlorine plus 1.115 1. chlor-alkali production is typically tied to demand for chlorine.

fences. and thus. this alkali can be in long or short supply when production of chlorine increases or decreases. 2005–2006 14 June 2005 Demand for chlorine is highly dependent on demand for PVC. siding. decks. Furthermore. but also in-house remodeling. on the health of the construction industry. As demand for chlorine is more cyclical than the need for caustic soda. and windows. But it should be kept in mind that PVC is utilized not only in new construction. 31 .Chemical Industry Primer. infrastructure is also an important application. Aggregate GDP is most heavily correlated with the use of caustic soda. for example. in large diameter sewer pipes and water mains.

70% 2.36% 4.225 2. CSFB research.32% 5. Naturally based soda ash is more “dense” than synthetic soda ash. and about half of the synthetic soda ash produced today is sold as dense soda ash. However. more soda ash is produced from trona than through the older synthetic Solvay method. Exhibit 25: Consumption of Soda Ash by End Market.098 1.45% 3.34% 2.39% 2. 2005–2006 14 June 2005 Soda Ash Soda ash is the second-largest alkali in terms of volume behind caustic soda.26% Source: CMAI.527 2. which was a major advance when it was discovered in the late 19th century.066 15.54% 2. Soda Ash Uses Glass manufacturing is the largest application for soda ash. synthetic soda ash can be processed further to increase its density.546 2.33% 2. soap and detergents.200 1. It can be produced through either refining of mined trona ore or the synthetic processing of ammonia-soda. Other uses are chemical production. it is also more environmentally friendly and cost-efficient to produce. 32 . 2004 2004 Average Capacity metric tons (000) % share of Global Capacity Solvay SA FMC Corporation Soda Alkali Industrial Corporation Sterlitamsk Combine Shandong Ocean Chemical Group General Chemical Soda Ash Partners Tangshan Jidong Chemical Plant Sun Capital Partners Ciech Oriental Chemical Industries 7. Today. 2004 Others 19% Pulp & Paper 1% Other Glass 7% Metals & Mining 4% Chemicals 10% Container Glass 23% Flat Glass 22% Soaps & Detergents 14% Source: CMAI. and flue gas desulfurization.40% 5.100 1.105 1.600 1.273 1. CSFB estimates.Chemical Industry Primer. Soda Ash Manufacturers Exhibit 26: Major Global Soda Ash Producers.

S. manufacturers (through ANSAC) have prevailed for several years. Demand for soda ash has been dented in recent years by the replacement of glass bottles in the beverages industry with PET and recycled glass bottles. began to recover in 2004 and are advancing noticeably in 2005-2006.S. The same is true in Asia and Latin America.S.S. However. producers who have large natural trona deposits at their disposal have a significant cost advantage over their non-U. The price of soda ash and caustic soda is loosely linked. Soda Ash Growth Prospects We expect growth in soda ash to fall short of GDP growth because of the continued decline in demand for glass in favor of plastic materials. law. U. as caustic soda is produced in far larger volume. competitors. soda ash is more influenced by the price of caustic soda than vice versa. and a new Colorado-based operation (now idled) was opened in the U. However. We. therefore. we do expect usage to continue to increase in emerging parts of Asia. 2005–2006 Soda Ash Industry Trends and Value Drivers 14 June 2005 The production of soda ash through the refining of trona ore is far more cost-efficient than the Solvay process. The soda ash industry has experienced widespread oversupply in recent years. allowing supply and demand to come into better balance. sanctioned under U.S. Hence. forecast no growth in European demand for production of soda ash for the next five years. as approximately 5-10% of their demand is interchangeable. 33 . ANSAC. producers have curtailed output. However. the European industry has seen extensive consolidation in recent years in the face of increasing imports of soda ash from the U. about one-third of soda ash produced in the U. is exported through a legal cartel. In fact. Price wars between Asian soda ash producers.Chemical Industry Primer. and U. As a result. Prices in the U.S. Capacity in Asia has expanded.S. especially the Chinese.S. several U.S.

Phosphorus is a nonmetallic element (atomic weight 30. Potash Corporation of Saskatchewan has been quite successful in this endeavor. Exhibit 27: Major Products and End Uses of Phosphate Products Primary End Uses Merchant-grade acid DAP/MAP SPA. feed. 2005–2006 14 June 2005 Phosphates (Nonfertilizer) The primary market for phosphate rock is the production of phosphate fertilizer products such as ammonium phosphates and super phosphates. Source: SRI. industrial detergents. and animal feed applications. including phosphorus sulfides and halides. metal treating. the ability to economically produce PPA directly from phosphate rock— the so-called “wet process”—has evolved as a major alternative route. but its process cannot be employed universally. Poly-N Dical/Nonocal/DFP Industrial acid Feedstock for other phosphate products: technical and food-grade purified acid. Phosphorus itself is the key feedstock where ultrahigh-purity phosphoric acid (thermal acid) is required in the end product or when the desired products cannot be manufactured conveniently from high-purity acid. Exhibit 28 shows consumption of elemental phosphorus by end use. Uses for Phosphorus and High-Purity Phosphoric Acid Elemental phosphorus is used as a process input to produce a wide array of phosphorus chemicals. or purified phosphoric acid) are the starting points for phosphorus-containing chemicals used in a wide range of nonfertilizer markets. CSFB research.) It is estimated that 95% of the world consumption of phosphate is in the form of fertilizers. LoMag. 34 . In recent years. personal care items. The resultant element is then oxidized and converted to highpurity phosphoric acid. consumer. and phosphoric acid. Phosphorus and High-Purity Phosphoric Acid Elemental phosphorus and high-purity “wet process” phosphoric acid (PPA. It is produced in furnaces that require large amounts of electric power. The balance is consumed for a variety of industrial. fertilizer for agriculture Solid fertilizer Liquid fertilizer. industrial products Livestock and poultry feed supplements Soft drinks. probably owing to the different characteristics of various phosphate rock types. phosphorus pentoxide. feed supplements. food products. water treatment.97) that can occur in several allotropic forms (white/yellow/red/black). Exhibit 27 shows the major derivative products of phosphate and their end uses. (We provide detailed analysis of this in the fertilizer section to follow. pharmaceuticals. Among the pesticides that require high-purity phosphoric acid are the herbicide glyphosate (including Monsanto’s Roundup brand) and a wide class of insecticides known as organophosphates.Chemical Industry Primer.

representing only 33% of the world total. As a result. 2004 14 June 2005 Plastics and Elastomer Additives 10% Lubricating Oil Additives 11% Surfactants and Sequestrants 11% Other 8% Pesticides 60% Source: SRI. Rhodia’s operation was purchased by Thermphos. CSFB research. and FMC. Phosphorus Industry Trends Historically. Elemental Phosphorus Manufacturers Exhibit 29: Major Global Elemental Phosphorus Producers. and Rhodia had rationalized to one plant each. 35 . with the vast majority of its production used to manufacture Roundup. the elemental phosphorus industry had been highly concentrated. short tons ('000) Astaris Monsanto Thermphos International Chinese Producers 0 (Exited the market) 120 170 500 Source: Chemical Week. In 1985. the firm’s brand name for the ubiquitous. Solutia (now a 50% owner of Astaris). Rhodia acquired Albright & Wilson in 2000. By 1995. dominated by a few major producers with relatively large-capacity plants sized for production of thermal phosphoric acid in addition to phosphorus derivatives. nonselective herbicide. Monsanto remains a significant player. Albright & Wilson. The newer Chinese phosphorus plants are much smaller in scale. glyphosate. Hoechst. and Rhodia (formerly Stauffer) accounted for almost half of world capacity with 10 plants. 2005–2006 Exhibit 28: Consumption of Elemental Phosphorus by End Use. although there has been a net decline in capacity over the past decade. CSFB research. Albright & Wilson and Occidental had both stopped elemental phosphorus production. Solutia. Occidental. 2005E Capacity 2005 Average Capacity. Major companies in the phosphorus industry are now shifting their production to China by way of joint ventures. FMC (now a 50% owner of Astaris). Hoechst. the number of participants has risen substantially. and Astaris was created as an FMC/Solutia joint venture in that same year. but there are over 100 producers. In 1996.Chemical Industry Primer. Hoechst then exited the business.

de C. Prayon (based in Belgium). CSFB research. 2001 Annual Capacity Short tons ('000) Rhodia Astaris (FMC & Solutia) Thermphos (Holland) Prayon (Belgium) Potash Corp. Tata Group (India). of Saskatchewan GIRSA.V. STPP is a more prevalent product outside of North America. 2005–2006 14 June 2005 Unfortunately. 2003 Phosphorus Pentasulfide Phosphorus 5% Trichloride 4% Sodium Tripolyphosphate (STPP) detergent builder 16% Speciality Acids 3% Food Salts (Largely as preservative for baked foods) 32% Technical Grade Salts 18% Phosphoric Acid (Beverages & Foods) 22% Source: FMC.A. 36 . (Germany). Exhibit 30: Major Producers of Purified Phosphoric Acid and Phosphorus Salts. Other manufacturers include FMC’s Foret unit in Europe.V. Exhibit 31: Consumption of Wet Process Phosphoric Acid by End Use.S. Innophos (a company controlled by Bain Capital. CSFB research. de C. as it has been banned for use in laundry detergents in the U. which purchased Rhodia’s U. high-purity phosphoric acid include Astaris and PotashCorp. The following chart illustrates the proportion of products derived from wet-process phosphoric acid (includes detergents/animal feed/personal care/food ingredients) in North America (2003). the output from some of these phosphorus furnaces in that country has been curtailed due to power shortages. phosphate operations in 2004). Israel Chemicals Ltd. The successful producers of wet–process. and Quimir. and Budenheim.S.Chemical Industry Primer. Thermphos (Holland). S. (BK Giulini Chemie) Europhos 1405 861 325 245 195 195 116 95 Source: Chemical Week. S.A.

Though the demand has not changed appreciably. are in short supply. Rhodia’s action to close its Rouen plant in Europe.Chemical Industry Primer. In 2005. and Chinese production constraints resulting from energy shortages. 37 . several factors have led to much tighter market conditions for key phosphorus chemicals. which tends to mirror GDP. improved in 2004 with the strengthening of economies in North America and Europe. particularly STPP. including Astaris’s actions to close several of its plants and exit commodity-grade sodium tripolyphosphate (STPP) as part of its restructuring. we anticipate growth continuing at GDP levels. 2005–2006 Phosphorus Industry Growth Prospects 14 June 2005 Demand growth for phosphorus chemicals. As a result. in both North America and Europe. purified phosphoric acid and phosphorus salts.

Chemical Industry Primer. produces a higher-quality end product. in which concentrated sulfuric acid is added to ilmenite titanium ore to produce a titanium solution. It is manufactured from mined titanium ore through one of two processes. Fifty-five percent of the demand for titanium dioxide comes from the paints and coatings industry. as it is more cost-effective. and cosmetics. Exhibit 32: Global Consumption of Titanium Dioxide by End Market. while other major users are plastics. floor coverings. to a lesser degree. and. Additional demand stems from the manufacturing of rubber. This solution is converted into titanium dioxide through hydrolysis and calcination. the sulfate or chloride process. printing inks. ceramics. paper coating and fillers. The chloride route is increasingly being adopted worldwide. CSFB research. 2005–2006 14 June 2005 Titanium Dioxide Titanium dioxide is a white pigment. and is more environmentally friendly. 38 . Titanium Dioxide Uses This white pigment is used primarily to enhance brightness and opacity. textiles. 2004 Other 6% Printing Inks 2% Paper 10% Plastics 24% Coatings 58% Source: Kerr-McGee. The sulfate treatment uses a wet-chemical process. man-made fibers.

as a result. Following a period of dismal earnings during and after the 2001 recession (as the inventory correction intensified price competition). migration to the more costeffective chloride manufacturing process. Titanium Dioxide Industry Growth Prospects. 2004 14 June 2005 Other 18% Kemira 3% ISK 4% Kronos 10% DuPont 23% Lyondell Chemical 16% Kerr-McGee 13% Huntsman 13% Source: Orr & Boss. Following a period of downstream destocking that ended in the latter half of 2003. combined with the increasing substitution of titanium dioxide for kaolin in the lamination of paper and board. and this correlation is expected to continue in the future. 2005–2006 Exhibit 33: Global Capacity for Titanium Dioxide.S. CSFB research. The industry has seen considerable consolidation in recent years and. 39 . shipments of TiO2 reverted to their moderate growth rate in the U. In Europe. Trends. Demand for architectural paints is not that cyclical. pricing and profitability are on an upswing. has fueled strong demand. and Value Drivers Reliance on the paints and coatings industry creates exposure to both consumer and industrial confidence.Chemical Industry Primer. Growth rates over the medium to long term have been largely in-line with GDP. returns have improved somewhat.

gain significant capex advantages. and SABIC and a Western partner. 40 . Elsewhere in Asia. Oil and gas companies. “Cracking”: Production of Ethylene The organic chemical industry begins with the manufacturing of base chemicals. Foremost among these are: security of feedstock. The majority of organic base chemicals are manufactured in an olefin plant or “cracker. and Royal Dutch/Shell.Chemical Industry Primer. or the ability to integrate the chemical production into a refinery. crude oil and natural gas. These form the building blocks for an enormous array of other chemicals and products. And. as evidenced by joint ventures. 2005–2006 14 June 2005 V. The former group has gained some market share. Regardless of the feedstock. ExxonMobil. stand testimony to this latest trend in which organic chemical production is becoming a forte of oil companies. aromatics and fuel components may also be manufactured. have undertaken the manufacturing of first-generation commodity organic chemicals.” The “thermal”—also known as a “steam”—cracker uses heat and steam in tubes within furnaces to break down longer-chained carbon molecules into smaller units. and butadiene may also be generated. if you can’t beat ’em. as well as chemical companies. crackers always produce the smallest olefin ethylene. and consequently. as well as creation of vertically integrated oil and chemical giants in China. and location in a deep-sea port enabling ease of transport of the end product. as it often possesses a number of cost advantages that lead to greater production efficiency. backward integration by Reliance and Formosa groups from chemicals to refining and exploration. but propylene. which include the raw material “owner. Petronas. such as Dow Chemical. butenes. Organic Chemicals Organic chemicals are derived from either of the two hydrocarbon feedstocks. Beyond these olefins. join ’em. taking advantage of stranded natural gas in their locales and exporting the derived chemical products.” such as Kuwait. Oil/gas and chemical producers located in the Middle East and other oil-rich zones are expanding their market positions fairly rapidly.

and butane). used more often in the U.Chemical Industry Primer. used more frequently in Europe and Asia/Pacific. and aromatics). 2005–2006 Exhibit 34: Inputs and Outputs in the Petrochemical Industry 14 June 2005 Source: CSFB research. a reduced proportion of butadiene. and also require less capital investment. but it also reflects the cost of the energy that the cracking process consumes in large quantities. A cheap raw material base (predominantly natural gas feed) is the key driver of capacity growth in the Middle East. and natural gas (or more specifically. Feedstocks The cost of the feedstock has a significant influence on the profitability of the participants in the olefin industry. its natural gas liquids [NGLs] components—ethane. propylene. propane.S. 41 . and the Middle East. Natural gas-fed units produce a far higher proportion of ethylene than naphtha-fed units (and thus. The principal feedstocks for an olefin plant are the derivative naphtha (a low-octane form of gasoline made by fractional distillation of crude oil). Not only is it the principal component in the manufacturing of the majority of base chemicals and polymers.

CSFB research. sometimes with a lag of three to six months. as all of the capacity is traded under long-term contracts. The price of natural gas liquids tends. Exhibit 35: Crude Oil and Natural Gas Prices on a monthly basis Crude Oil (WTI) 50 Gulf War I Natural Gas (Delivered Texas) 10 Low Natural Gas Inventories Gulf War II 9 8 40 Severe Winter 7 Natural Gas $/MM Btu Crude Oil $/bbl 6 30 5 4 20 3 10 2 1 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 0 Source: CMAI.Chemical Industry Primer. to track the price of crude oil. the terms of which are kept confidential. 42 . 2005–2006 14 June 2005 There is no European spot market for natural gas. however.

propylene. Demand is reliant on production of derivative products. Over the short term. as a significant change in raw material price passes straight to the bottom line. After supply/demand. it is not a simple matter. the prices of crude oil (or more specifically. A producer may build new capacity. CSFB research. this is because NGLs and naphtha pricing are established daily. marginally expand an existing facility. and butadiene—form the building blocks for the majority of organic chemicals and synthetic materials. 2005–2006 Exhibit 36: Oil and Naphtha Prices on a monthly basis 14 June 2005 505 470 435 400 365 US$ / tonne 330 295 260 225 190 155 120 85 50 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Brent West Europe Source: CMAI.Chemical Industry Primer. 43 . Profitability of Ethylene—The Most Important Petrochemical Intermediate What is the best way for investors to measure profitability in ethylene in particular and in the ethylene chain in general? No matter how you slice and dice. but contract olefins prices are set on a monthly basis. which are used in a wide variety of industries. of naphtha or gas oil) and natural gas are important drivers of profitability of olefin production. or may suffer a loss of capacity because of technical problems at one of its plants. Changes in production capacity determine the level of olefin supply. Naphtha West Europe Ethylene and Other Olefins: Introduction The three most important olefins (a subsector of so-called aliphatic organic chemicals)—ethylene.

6 0. since for every pound of ethane used. coproduct prices can be even more important than ethylene prices when utilizing heavy feedstocks. more carbon atoms per molecule) and higher boiling points. butenes and butadiene.4 0.37 pounds of ethylene per pound of feedstock. CSFB estimates. but also propylene and. C3) and butane (C4) provide 0. co-products include not only hydrogen and methane.0 0. 0. 0. in which heavier means higher molecular weight (i. If even heavier oil-derived liquids (known as distillate fractions that contain C5 molecules or higher) are employed. as illustrated in Exhibit 38. i.22 (even heavier vacuum-distilled gas oil).Chemical Industry Primer. the ethylene output as a proportion of input feeds drops to 0. The Impact of Heavier Feedstocks Moving to heavier NGLs. propane (3 carbons. Hence..44 and 0.2 0.8 0. with the bulk of the remainder being hydrogen and methane.0 ethane propane butane ethylene light naphtha co-products gas oil heavy gas oil Source: Company data. 44 . Exhibit 37: Olefin Cracker Output by Feedstock Olefin Cracker Output by Feedstock (Pounds of Ethylene/Pound of Feedstock) 1. and 0.5 pounds of co-products are also produced.8 pounds of ethylene are produced. in the case of butane.29 (gas oil). 2005–2006 14 June 2005 Looking at ethylene itself is complex enough! We at CSFB have typically looked at the spread between ethylene and the principal feedstock ethane (which contains 2 carbon atoms—C2).2 1.e. their values become increasingly important as one moves from ethane to the slate of heavier feedstocks. which can be recycled as fuel. one of the NGLs derived from natural gas. This means that for every pound of ethylene produced in a gas-oil-based cracker about 3..34 (naphtha). Co-Product Values Are Critical to the Profitability Equation Because more co-products are produced. In these cases. This methodology is relatively simple.e.

To complicate matters even further. there are different types of naphtha and gas oils. and different cracking conditions (known as cracking severity) that cause the range of co-products to vary. Optimizing Feedstocks When determining their choice of feedstock and cracking severity. the various internal requirements for these co-products is another variable that has to be evaluated. ethylene economics are determined not only by the cost of feedstock and the price of ethylene. 45 . 2005–2006 14 June 2005 Hence. Key ethylene co-products are shown in Exhibit 38. Exhibit 38: Ethylene Co-Products and End Uses Key Ethylene Co-products Derivatives/End uses Polypropylene Acrylonitrile Propylene Oxide Acetone Gasoline Alkylate PE Comonomer MTBE Gasoline Synthetic rubber ABS Resins Nylon Styrene Phenol Nylon Urethanes Gasoline Benzene Urethanes Gasoline PET resins Polyester Fiber PVC Plasticizers Gasoline Propylene Butenes Butadiene Benzene Toluene Xylenes Source: Company data.Chemical Industry Primer. Beyond ethane raw material. since the bulk of these manufacturers utilize cracker output “in house” for upgrading into higher value derivatives. CSFB estimates. and it becomes downright confounding by the time naphtha or gas oil is employed. Moreover. this is not a simple task. but also by the value of the entire slate of co-products. ethylene producers use sophisticated models to maximize their economics.

the domestic ethylene industry can essentially be written off because economics have turned against it. since the U.” These are oil fractions that are limited to lower boiling materials that contain C5 molecules.e. For example. This led to a situation in which propylene and the simple aromatic compounds (benzene. or “hot end. toluene. and the xylenes) were particularly valuable. Facilities based on naphtha or gas oil are usually flexible in that they can often employ NGLs as well. and C4. there are lots of facilities that are not. natural gas cost advantage has disappeared (i. generally speaking.e. While about 70% of the ethylene 46 . when the oil:gas ratio was in the neighborhood of 7:1. Light naphthas yield far fewer co-products than full-range naphthas. Since there is a constant arbitrage between fuel oil and natural gas prices. When the oil:gas ratio is 6:1 (such as $18 oil and $3 gas). In fact. with only minor changes to the cracking furnaces in the front section. How Flexible Are Ethylene Units with Regard to Feedstock Selection? Another interesting corollary relates to the feedstock mix that any given company (or ethylene cracker) can utilize. A ratio above 7:1 typically favors natural gasderived ethylene feedstocks.S. But this ratio guideline certainly does not indicate which NGL or which oil distillate fraction would be the most cost-effective.Chemical Industry Primer. oil distillate fractions had better economics through most of the first half of 2004. as gasoline values were above normal relative to crude oil. assuming foregone days of an oil:gas ratio of 9:1 or 10:1 are not returning). Moreover. Lyondell’s Equistar unit has about two-thirds of its ethylene output based on naphtha and only one-third on NGLs. but what if they were? Whereas about twothirds of the U. or “cold end” (i. as it is the simplest method by far and does not require access to linear programming models that ethylene producers employ. in recent weeks. in general. while below 5:1 generally supports the use of those raw materials derived from oil. But they cannot. enhancing the co-product separation part of the plant). and possibly some C6 as well.S. use naphtha or gas oil. even the “rule of thumb” can provide the incorrect answer if co-product values are especially high or low. the use of naphtha was preferable to NGLs. C3. since they are utilized through upgrading (in the case of propylene) or directly (aromatics) to enhance the properties of motor fuel. the cost of generating heat from either fuel source is the same. a switch from the fourth quarter of 2003 when co-product values were particularly low.. The Feedstock and Geographic Mix Is Critical to a Firm’s Profitability It is just plain wrong to state categorically that.. This was a strong contributory factor to the impressive earnings performance in 2004 for ethylene producers that crack naphtha. How Important Is the Oil:Gas Ratio? One rule of thumb that we (and others) have used is the thermal ratio between oil and gas. Units based on natural gas liquids can often use a mix of C2. we certainly do not believe NGLs are washed up as an economically viable ethylene feedstock. although some NGL-based plants are being modified on the back. For example. although in some cases only ethane (C2) can be utilized. olefin industry is based on NGLs.” to use what are called “light naphthas. 2005–2006 14 June 2005 CSFB measures ethylene spreads versus ethane.

For example.00/mcf or less. Kuwait. This approach can often yield misleading results. etc. margins for ethylene oxide/glycol and EDC/VCM were on a sharp upward trajectory. and Malaysia—the latter two of which are not majorityowned). Dow Chemical.S.70/mcf below the U. with four naphtha crackers in Europe and three low-cost operations that employ NGLs based on very inexpensive stranded natural gas (Argentina. Yet these products command world-selling prices. it is clear that profitability in the ethylene chain was at the time advancing sharply after several dismal years. The higher the free market price of oil and gas. Japan. That is.Chemical Industry Primer. Korea. However.. For example. but even a rough look at a series of compounds manufactured along the chain can be more helpful. Europe. when factoring the high value of ethylene co-products generated in naphtha or gas oil crackers. ethylene dichloride/vinyl chloride. Gulf Coast NGLs. while profitability of PE had been lagging during the first half of 2004. and ConocoPhillips. ethylene feedstocks are critical in evaluating ethylene chain economics. polyethylene or ethylene glycol production costs. since this thermoplastic typically guzzles more ethylene than any other derivative. Thus. As of the start of 2005. are considerably lower when manufactured in the Middle East.S. however. In addition. Again. which are largely determined by oil costs in the U. What about the Ethylene Chain in General? When going beyond just ethylene and examining the profitability of the ethylene chain in general. vinyl acetate. etc. 2005–2006 14 June 2005 produced by Nova Chemicals is made in Alberta and based on ethane (the remaining output is derived from a naphtha cracker in Ontario). BP. and gas prices in the U. about 40 billion pounds of this incremental capacity. including inexpensive ethane feedstock. beneficiaries include joint venture partners such as ExxonMobil. Dow Chemical has several flexible naphtha crackers in the U. and has closed two uneconomic NGL units. styrene. it should be emphasized that Alberta ethane is derived from natural gas priced about $0. Furthermore.S.S. the more profit is generated in these facilities when downstream output is factored into the equation. this is no simple matter. EO/EG. in our view. Some observers try to “shortcut” the issue by looking at polyethylene spreads. is to examine the entire array of products. what is the best approach? While some ethylene is sold into the merchant market. giving pause to some investors that use this as a proxy for trends in the ethylene cycle. Besides the owners of stranded gas.S. with PE alone constituting slightly over half. domiciled mainly in Saudi Arabia and 47 . Brazil. PE. The best way to attack the problem. the bulk is used internally to produce such products as polyethylene. less than 20% of its global ethylene feedstock mix is U. announced capacity expansions in the Middle East approximate 50 billion pounds of ethylene. Gulf Coast price. China. How Does Middle East Output Affect Profits in Various Scenarios? An interesting counterintuitive example of ethylene chain profitability concerns petrochemical complexes that are based on ethane derived from stranded natural gas (such as in the Middle East). which sells at $1. this was certainly not the full answer to the question. Royal Dutch/Shell. roughly 20% of current global capacity. and EDC/VCM account for over 80% of ethylene consumption. ethylene oxide/ethylene glycol. while polyethylene margins were relatively lackluster during the first half of 2004.

About 10% of the potential Saudi Arabian capacity seems unlikely to be built. It could take up to a year after startup for new capacity to affect the market fully. and about 20% of the Iranian capacity startup has been pushed back. and polyester fibers. Ethylene Ethylene Uses Ethylene is produced predominantly in thermal (steam) crackers and is used in the manufacturing of a huge variety of chemicals and products. making coordination more difficult. (These plastics are discussed in more detail later in this report.Chemical Industry Primer. utilities. polyvinyl chloride. unlike the situation in Saudi Arabia and most other Middle East countries. since different facets of a given project—such as raw material procurement. 2004 Alpha Olefins Vinyl Acetate 3% 1% Other 4% Ethylbenzene 7% Ethylene Dichloride 13% Polyethylene 59% Ethylene Oxide 13% *Ethylene dichloride is a precursor of PVC **Ethylene oxide is a precursor of ethylene glycol Source: CMAI. 2005–2006 14 June 2005 Iran. downstream manufacturing. CSFB research. 48 . are not slated to come onstream and be operable until after 2007. Iranian projects do not usually include partners from outside the country. the cracker itself—typically are owned by different groups. PET bottle resin. is largely driven by demand for its derivative plastics—polyethylene. Demand for ethylene.) Much of the remaining use is linked to demand for ethylene glycol. Also. and polystyrene—which combined account for approximately 75% of demand for ethylene. this should protect less cost-advantaged producers in the interim. The completion of the Iranian facilities in a timely manner is somewhat more challenging. Exhibit 39: Global Ethylene Demand by Derivative. and therefore its price. used in manufacturing antifreeze.

Growth. In addition. the limited ability of producers to pass on feedstock price changes to their customers during periods of oversupply tends to lead to a level of earnings volatility that only the largest and/or most diversified players can handle. 49 . Ethylene Manufacturers Exhibit 41: Major Global Ethylene Producers.Chemical Industry Primer. 4. Metric tons ('000) 9.490 3. The increasing need for scale in petrochemicals is leading to sizable global players and reducing the aggregate market positions of smaller companies that are reluctant to commit further capital to this business. and Value Drivers As with many commodity petrochemicals.165 3.749 4. the ability of oil and gas companies to integrate an ethylene plant into a refinery presents significant cost advantages and consequent production efficiencies that are unmatchable by those without this ability. LDPE =Low Density Polyethylene LLDPE = Linear Low Density Polyethylene HDPE = High Density Polyethylene VCM = Vinyl Chloride Monomer PVC = Polyvinyl Chloride Others Source: ECN. 5.228 6. CSFB research. 2. CSFB research.741 3.848 6. Ethylene Industry Trends. including those with secure sources of cheap feedstocks. Finally. 3.292 3.203 4. ethylene production is increasingly being consolidated among only the largest oil and chemical companies. 2004 Capacity 2004 Average Capacity.020 Dow Chemical ExxonMobil Royal Dutch/Shell Group SABIC Lyondell Chemical BP TotalFinaElf China Petrochemical Corp Formosa Plastics BASF Source: CMAI. 2005–2006 Exhibit 40: Ethylene Derivatives Low-Density Polyethylene Linear LowLinear LowDensity Density Polyethylene Polyethylene High-Density Polyethylene 14 June 2005 59% Ethylene Dichloride VCM4 PVC5 13% + chlorine Ethylene Glycol ETHYLENE 13% 7% Ethylene Oxide Ethylene Glycol Other EO Derivatives + benzene 8% Ethylbenzene Styrene Polystyrene 1.772 8.

9% 92.4% 61.6% 95.714 4. global capacity utilization is Exhibit 43: Estimated Global Supply/Demand for Ethylene 1993 World Capacity (Avg) % change Demand* %change 1994 75. Hence. 50 .2% 91% 1997 85.0% 92% 1998 89. It appears more likely that some of the projects that were scheduled to come onstream between 2005 and 2007 may be delayed.707 5.9% 89% 2002 110.Chemical Industry Primer. CSFB research.717 3.600 1.3% 111.8% 81. In support of this view.0% 93% 2008E 138.6% 69. ethylene usage is often measured in relation to GDP.999 4.563 7.4% 104.302 7.8% 94% 2001 103.298 1.7% 66.7% 87% 2003 111. to a lesser extent. 2005–2006 14 June 2005 As demand growth is closely linked to economic health.1% 74.437 6.2% 122.286 1.171 4. expected to remain in the low 90s. most of which is centered in the Middle East and.229 4. China.2% 90.300 1.500 1.1% 91% 1999 92.0% 116.4% 85% Shipment Rate Source: Credit Suisse First Boston Estimates * Projections based on the IMF's GDP forecasts Source: CSFB research.5% 89% 1996 81.2% 128.614 2.615 6.5 through 2006 to forecast future demand for ethylene and its derivatives.359 5.2% 87. a healthy environment for profitability. a phenomenon that would boost shipment rates in those three years somewhat.527 5. Demand growth is expected to approximately match capacity growth.475 4.306 6.100 1.579 3.7% 89% 1995 78.245 4.3% 93% 2006E 126.242 6.2% 78.327 5. Exhibit 42: Ethylene Prices.965 3. 1993–Present on a monthly basis 1.365 6.772 4.981 4.976 8. we cite a recent report from CMAI.5% 88% 2004E 113. Exhibit 43 presents our supply/demand forecast for ethylene.5% 94% 2000 95. We use a trendline global GDP multiplier of 1.200 1.7% 92% 2005E 119.400 1.000 900 800 700 600 500 400 300 200 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 US$ / tonne US Ethylene EU Ethylene Asian Ethylene Source: CMAI.045 5. which projects that 20% of Middle Eastern ethylene capacity scheduled for 2005-2010 will come onstream in 2005-2007.0% 93% 72.9% 92% 2007E 131.667 5.063 2.699 1.010 3. with the remaining 80% in the following three years.2% 98.707 4.

fibers. CSFB research. A small proportion of propylene is derived from the propane dehydrogenation process. used to make high octane gasoline alkylate). Exhibit 44: Propylene Derivatives Polypropylene Acrylic Fibers Acrylonitrile 61% ABS* Resins 9% Cumene Phenolic Resins 6% PROPYLENE 7% Propylene Oxide Polyurethane resins & coatings Solvents 2% Acrylates Paints. and acrylate monomers). Refinery grade propylene is often upgraded to chemical or polymer grade material. 2005–2006 14 June 2005 Propylene Like ethylene. an important intermediate product in the manufacturing of a wide range of consumer and industrial goods. as described below. chemical (used to make various chemical products such as acrylonitrile. coatings. Moreover. Superabsorbers 15% Other * ABS = Acrylonitrile Butadiene Styrene Source: ECN. but one that is helpful if no alternate sources are available. cumene. propylene can be manufactured either in an olefins plant or as part of the oil refining process. propylene oxide. and polymer (used to make polypropylene). some can be produced by olefin metathesis.) This accounts for around 60% of output. Propylene Uses Propylene itself has few direct uses. 51 . Coatings.Chemical Industry Primer. It is also used in the manufacturing of a number of derivative chemicals that are used in the manufacturing of certain textiles. a more expensive route. (See the “Polypropylene” section. Its largest chemical market is for the manufacturing of polypropylene resin. There are three different grades of propylene: refinery (the least pure. and plastics.

2004 Isopropanol 2% Oligomers 2% 14 June 2005 Butanols 4% 2-Ethyl Hexanol 4% Others 6% Cumene 6% Propylene Oxide 7% Acrylonitrile 9% Polypropylene 60% Source: CMAI. Propylene Industry Trends. as propylene is produced as a by-product of ethylene production. and Value Drivers The value of propylene is closely allied to general economic activity because propylene forms the base for a huge number of derivative products that are used in a wide variety of industrial and consumer goods. CSFB research.272 1.Chemical Industry Primer.141 3. the remainder is produced as a by-product of petroleum refining. the manufacturing base is broadly similar.924 Source: CMAI. BASF and Dow aside. In addition. The largest portion of world expansion in ethylene is coming from the Middle East. Exhibit 46: Major World Producers of Propylene.779 2. the trends toward consolidation. scale. Hence.183 3. Thus. and ethane is the predominant feedstock there.066 2.686 4. ethylene expansions notwithstanding. The reason behind this apparent dichotomy relates to the nature of the new ethylene facilities. the majority of propylene producers are petroleum-refining companies.466 3. Growth. One interesting situation that may be unfolding is tightening propylene availability through the rest of the decade. hardly any propylene will be 52 . and participation by oil and gas producers also apply.386 2. 2004 (annual capacity) 2004 Average Capacity metric tons ('000) Royal Dutch/Shell Group ExxonMobil BP TotalFinaElf Dow Chemical Lyondell Chemical China Petrochemical Corp Ente Nazionale Idrocarburi SpA BASF AG Formosa Plastics 4. CSFB research. 2005–2006 Exhibit 45: Global Propylene Consumption by Derivatives.790 2. Approximately 70% of propylene production is derived as a co-product of ethylene manufacturing.

a combination of ethylene and butylenes can be metathesized to propylene in a catalytic reaction.5-2. the BASF/Total cracker in Port Arthur. Another possibility is the increased use of the propane dehydrogenation route to propylene. This in turn is used in the manufacturing of tires and other fabricated items. 53 . CSFB research. This will put more pressure on refineries to supply incremental propylene demands (raising the price of propylene vis-à-vis ethylene over the next five years). A third source would be olefin metathesis. Texas. The remaining demand for butadiene comes from manufacturers of styrene-butadiene latex (often used as an adhesive or coating).Chemical Industry Primer. and nylon 66 fibers—by those who utilize the DuPont technology. For example. Exhibit 47: Butadiene Derivatives Styrenebutadiene Synthetic rubbers Polybutadiene 66% BUTADIENE 33% Latexes ABS resins* •* ABS = Acrylonitrile Butadiene Styrene ** DuPont Technology Nylon fibers and resins** Source: ECN. We expect growth to remain at 1. another relatively expensive proposition. ABS resins (used in engineering plastics). 2005–2006 14 June 2005 produced in these new olefin units.0 times GDP on a long-term basis. Butadiene Butadiene Uses The primary use of butadiene is as an intermediate product in the production of two principal types of synthetic rubber. Long-term demand for propylene has grown at twice the annual rate of GDP historically. utilizes this process to bolster propylene output from its facility.

2004 2004 Annual Capacity metric tons (000) % share Global Capacity Royal Dutch/Shell Group China Petrochemical Corporation Texas Petrochemicals ExxonMobil Huntsman BP Lyondell Chemical JSR Corporation SABIC EniChem Dow Chemical 975.8% 7.8% 4. Butadiene Manufacturers As the third major product of the cracking process. CSFB estimates The companies mentioned in Exhibit 49 accounted for approximately 51% of global butadiene production.0% 2.Chemical Industry Primer.7% 4.2% Nitrile rubber 3% ABS resins 11% Polybutadiene rubber 26% Polychloroprene rubber 3% SB copolymer latex 11% Source: SRI.8 8. Exhibit 49: Major World Butadiene Producers. 54 . 6 NDC 0.9 789. Ethane and propane feedstocks do not lead to commercial amounts of butadiene. butane or higher-molecular-weight raw materials (such as naphtha and gas oil) are required to provide healthy output.9% 2.7% Source: Company data.8% 2.75 520 494. 2005–2006 Exhibit 48: Global Butadiene Consumption by Market.1 302.4% 3.5 390.1% 6. CSFB research.5 333 320 313.8% 4. although the proportions of butadiene produced depend upon the feedstock used.1 762 536.5% 3. butadiene is produced by the same companies that produce ethylene and propylene. 2004 Other 5% SBR & Latex 36% 14 June 2005 Adiponitrile/HDMA 5% 2.

demand has picked up because of increased use of ABS resins as an engineering plastic. particularly in Western Europe and the U. Growth. and Value Drivers 14 June 2005 Traditional markets for butadiene derivatives tend to be largely mature (such as automotive). 55 . butadiene growth has been modest. meaningful recovery was noted in late 2003 and 2004.Chemical Industry Primer. Demand suffered in 2001-2002 because of the weak economies. 2005–2006 Butadiene Industry Trends. thus. We expect butadiene demand growth to remain broadly in-line with GDP over the next five years.S. however. However. In recent years.

Intermediate Product End Product 56 . Exhibit 50: Principal Derivatives of Aromatics Polystyrene Styrene Bisphenol-A Polycarbonate Benzene Phenol Phenolic Resins Epoxy Resins Adhesives Caprolactam Cyclohexane Crackers or Refineries Aniline Nylon 6 Adipic Acid Nylon 66 MDI Toluene Dinitrotoluene Toluene Diisocyanate (TDI) Polyurethane Polyurethane Para-Xylene Xylenes Acetic Acid Purified Terephthalic Acid (PTA) Ethylene Glycol Polyester/ PET Resin Base Chemical Source: CSFB research. the aromatics—including benzene. therefore. and the xylenes—are derived either from the cracking process or from petroleum refining. toluene. As a large proportion of aromatics are produced in the petroleum refining industry.Chemical Industry Primer. the economics of the aromatic chain are closely linked to those of crude oil and gasoline. Prices for aromatics. 2005–2006 14 June 2005 Benzene and Other Aromatics: Introduction Like the olefins. tend to be some of the most volatile of any of the base chemicals.

phenol is employed as an intermediate in the manufacturing of adhesives and epoxy resins. The companies mentioned in Exhibit 52 accounted for approximately 40% of global benzene production. Benzene Manufacturers Exhibit 52: Major World Producers of Benzene.Chemical Industry Primer.655 1.052 972 938 Source: SRI. styrene is produced in the greatest volume for use in polystyrene for packaging.276 2.100 1. CSFB research. Exhibit 51: Global Consumption of Benzene by End Market. CSFB research. In addition. 2002 2002 Annual Capacity metric tons '000 ExxonMobil Royal Dutch/Shell Group Dow Chemical TotalFinaElf BP China Petrochemical Corporation Formosa Plastics ConocoPhillips Petróleos de Venezuela Nippon Oil Corporation 3. 57 . The other large derivative of benzene.912 1. cyclohexane. 2005–2006 14 June 2005 Benzene Benzene Uses Benzene is the most widely used aromatic compound.359 2. 2004 Others 15% Cumene 18% Ethyl Benzene/ Styrene 55% Cyclohexane 12% Source: CMAI. as well as in ABS resins and styrene-butadiene rubber.264 2. is widely used in the production of nylon and as a gasoline component.056 1. Of its derivatives.

We expect benzene demand to grow more than capacity during this period.000 tons.64 million tons in 2005-2007. Exhibit 53: Global Consumption of Toluene by End Market. but it is also used to make toluene di-isocyanate (TDI).000 tons. which is used in the manufacturing of polyurethane foams.000-500. Its use in the manufacturing of solvents is declining because of stricter emissions laws. 2005–2006 Benzene Industry Trends and Value Drivers 14 June 2005 Benzene supply in Asia will likely be tight from 2005.000 tons short in 2005. Asian oversupply in 2004 was 200. 58 . due to a demand increase for derivative products. where plans scheduled would add 1. In 2008. 2003 Other Gasoline blending 10% 5% Toluene diisocynate 10% Solvents 10% Benzene 35% Xylenes 30% Source: Chemical Week. capacity additions for 2.Chemical Industry Primer. we estimate supply will be 400. However.76 million tons of derivative products are also planned. The major chemical use is in the production of the xylenes and benzene through disproportionation. we estimate supply will be short by over 800. CSFB research. Toluene Toluene Uses Toluene’s major use is as an additive to gasoline to boost the octane rating. Benzene Growth Prospects The majority of benzene capacity additions are expected to be in Asia. During the same period.

Xylene Uses Mixed xylenes are the second most important aromatic product in terms of world consumption for chemical manufacturing.964 1. The other major isomer is ortho-xylene. The top-10 producers listed above accounted for approximately 41% of global toluene production. xylene is separated into three isomers: para-xylene. CSFB research. prices are primarily driven by gasoline prices and are also. closely linked to the price of oil. and supply/demand conditions in the aromatics business in general.Chemical Industry Primer. Almost all para-xylene is converted into either terephthalic acid (TPA) or dimethyl terephthalic acid (DMT). used to produce phthalic anhydride. including benzene. 2002 14 June 2005 2002 Annual Capacity metric tons '000 ExxonMobil China Petrochemical Corporation BP Chevron Reliance Industries ConocoPhillips Royal Dutch/Shell Group Koch Industries Petróleos de Venezuela TotalFinaElf 1. which comprises the basic intermediates for polyester fibers and films and polyethylene terephthalate (PET) resins. 59 . 2005–2006 Toluene Manufacturers Exhibit 54: Major World Producers of Toluene. a specialty engineering resin. It is also used to manufacture polybutylene terephthalate (PBT). Because of its major use as a gasoline additive. We expect demand to grow for TDI and to firm for other applications.154 1. refining margins. which itself is used in the production of plasticizers. and meta-xylene. The Xylenes Mixed xylene is used primarily as a solvent and as an additive in gasoline.075 928 913 887 873 814 717 686 Source: SRI. therefore. ortho-xylene. Toluene Growth Prospects Toluene economics depends on the price of oil. and alkyd resins. Toluene Industry Trends and Value Drivers The majority of toluene production is unrecovered (as it is consumed as a constituent of various refinery systems). polyester resins. In the chemical industry.

while the chemical companies purchase the isomers for manufacturing of derivatives. CSFB research.Chemical Industry Primer. 2005–2006 Exhibit 55: Xylene Materials Flow Major Chemical Intermediates Direct use of mixed Xylene Major End-Use Derivatives Unsaturated Polyesters Surface Coatings PET Copolymers 14 June 2005 Major Aromatic Source MetaXylene Isophthalic Acid Coal Processing Steam Cracking Mixed Xylene recovery Petroleum Reforming Separation Isomerisation OrthoXylene Phtalic Acid PVC Plasticizers Surface Coatings Unsaturated Polyesters Other Aromatic Sources Disproporti onation Para-Xylene DMT/PTA Polyester Fibers PET Resins Toluene Benzene Source: SRI.5 2. 60 . oil companies recover xylenes and isolate the isomers. Exhibit 56: Leading Producers of Xylenes.5 49 ExxonMobil China Petrochemical Reliance Industries Kohap SK Group Formosa Plastics Flint Hills Sibneft Others 11 9 8 5 4 4 4 4 51 ExxonMobil BP Reliance Industries China Petrochemical Chevron Nippon Oil Kohap Formosa Plastics SK Group Flint Hills Others 13 12 7 7 4 3 3 3 3 3 43 Source: SRI.5 2.5 6 5 4 3 3 2. 2004 Mixed Xylenes World Share (%) Ortho-xylene World Share (%) Company Para-xylene World Share (%) Company Company ExxonMobil China Petrochemical Reliance Industries TotalFinaElf BP Nippon Oil Corporation China National Pet ConocoPhillips Royal Dutch/Shell Group Flint Hills Chevron Others 11 8 6. Xylene Manufacturers Generally.

are growing well above GDP and have prompted recent capacity additions. Xylene Growth Prospects Overall. principally polymers. so nearterm demand growth for xylene may be higher. 2005–2006 Xylene Industry Trends and Value Drivers 14 June 2005 As the three xylene isomers are used in a broad range of applications.Chemical Industry Primer. such as PET for use in plastic bottles. it is difficult to generalize regarding demand drivers. although some end markets. However. 61 . However. we expect demand growth of around 3-5% for all xylenes over the next five years. para-xylene demand should grow around 7-8% in 2005-2006. the majority of end markets for these applications tend to be fairly mature.

2006E Aldol chemicals 11% Other 8% ACH/MMA 30% Bisphenol A 23% Direct Solvent 28% Source: SRI. Acetone supply is driven more by phenol (its co-product) demand than by acetone (its own end markets). It is also widely used as a solvent. as shipments depend on the health of the auto and construction sectors. CSFB research. 2002 2002 Annual Capacity metric tons ('000) 899 536 536 357 295 243 217 194 183 181 Ineos Phenol Royal Dutch/Shell Group Sun Chemical Mitsui Chemical EniChem Dow Chemical TotalFinaElf General Electric Rhodia Georgia Gulf Source: SRI.Chemical Industry Primer. bisphenol A. 62 . Exhibit 58: Leading Global Producers of Acetone. 2005–2006 14 June 2005 Acetone Acetone is produced principally as a co-product of phenol in the peroxidation of cumene. Acetone is an intermediate in the production of methyl methacrylate. although some production is via the dehydrogenation of isopropyl alcohol. Acetone Industry Trends and Value Drivers Acetone derivative demand is highly affected by macroeconomic conditions. CSFB research. and aldol chemicals. Exhibit 57: Global Consumption of Acetone by End Use.

63 .Chemical Industry Primer. 2005–2006 Acetone Growth Prospects 14 June 2005 Acetone remains in oversupply and is expected to remain so for a few years. producers continue to explore economically efficient ways of producing phenol without acetone. Global phenol demand continues to outpace the growth for acetone. and with acetone thus perennially long.

Exhibit 59: Global Consumption of Crude Acrylic Acid by End Use.Chemical Industry Primer. 2005–2006 14 June 2005 Acrylates Acrylic Acid and Acrylate Esters The most common (and economically efficient) path of acrylic acid production is the oxidation of propylene to acrolein and then to acrylic acid. the acrylic acid is either converted to polyacrylic acid—a superabsorbant polymer used in disposable diapers and incontinence pads—or to acrylate esters. Consumption of Commodity Acrylate Esters by End Use. 64 . The catalyst is a critical component of the associated cost economics of acrylic acid manufacture. which are heavily employed in the manufacturing of coatings and adhesives. 2003 Other 15% Commodity Esters 39% Superabsorbents 46% Source: CSFB estimates. Typically.S. the acrylic acid undergoes esterification with an alcohol (such as butanol or ethanol) to yield acrylate esters. employing various catalysts. Exhibit 60: U. 2003 Others 27% Surface coatings 39% Fibers 2% Textiles 7% Adhesives/ Sealants 25% Source: SRI. In the latter case. Acrylic acid production accounts for about 5% of total propylene consumption in North America. CSFB estimates.

It has a wide range of uses and is the principal building block for acrylic resins. Exhibit 62: Major Producers of Commodity Acrylate Esters. 2004 Annual Capacity metric tons ('000) 859 430 396 231 198 165 1024 BASF Dow Chemical Rohm and Haas Nippon Shokubai ATOFINA Formosa Plastics Other Source: SRI. Methyl Methacrylate (MMA) MMA is a monomer—produced from acetone—that is generally polymerized into pMMA and other polymeric systems for various end markets. One growth area. In addition. In acrylic sheet form. it is often branded (such as Perspex or Plexiglas) or molded into household products. Acrylic polymers continue to be used as a substitute for materials such as glass because of their toughness and other attractive properties. 2005–2006 Acrylates Manufacturers Exhibit 61: Major Producers of Crude Acrylic Acid.Chemical Industry Primer. thus. However. which continues to make a splash in sink and countertops. however. such as diapers and incontinence pads. 2004 14 June 2005 Annual Capacity metric tons ('000) BASF Rohm and Haas Dow Chemical Nippon Shokubai ATOFINA Formosa Plastics Other 850 739 517 406 296 111 776 Source: SRI. CSFB estimates. as well as in the replacement of oil-based paints with water-based paints. Acrylates Growth Prospects We anticipate growth rates of 4-5% for acrylic acid and acrylate esters. these products are often used in surface coatings and also as fixatives in products such as hairsprays. MMA can be co-polymerized with various acrylate esters (derived from propylene) to be formulated into water-based emulsions. demand only marginally outpaces GDP. 65 . The highest growth for these products continues to be witnessed in hygiene products. CSFB estimates. is mineral-filled acrylic surface materials such as Corian (DuPont). the market is mature.

CSFB research. Exhibit 64: Major Producers of MMA. 2007E 14 June 2005 Other 26% Acrylic sheet 34% Surface Coatings 18% Moulding & Extrusion Compounds 22% Source: SRI. 2005–2006 Exhibit 63: Major End Uses for MMA. 66 . 2003 2003 Average Capacity metric tons ('000) Rohm and Haas Lucite International Mitsubishi Rayon ATOFINA Asahi Kasei Honam Petrochemical 615 365 287 180 100 100 Source: Chemical Week.Chemical Industry Primer. CSFB research.

2003 Others 12% Acrylamide 4% Adiponitrile 10% Acrylic Fibers 50% ABS 24% Source: Chemical Week. 2005–2006 14 June 2005 Acrylonitrile Acrylonitrile (AN) is produced by the ammoxidation process from propylene. CSFB estimates. Adiponitrile (ADN) is used exclusively in the production of hexamethylenediamine (HMDA).Chemical Industry Primer. hence. nitrile rubber. which accounts for nearly half of total output. The consumption of these thermoplastic resins is primarily in the manufacture of durable goods. The process replaced a higher-cost route that employed acetylene and hydrogen cyanide. business machines. appliances. Acrylonitrile-butadiene-styrene (ABS) and styrene-acrylonitrile (SAN) resins represent 30% of acrylonitrile consumption. and acrylonitrile co-polymers. and air. which is a precursor for nylon 66 resins and fibers. including automobile components. Acrylonitrile Uses The largest end use for acrylonitrile is acrylic fibers. demand is economically sensitive. Other smaller-volume end uses for acrylonitrile include acrylamide. This propylene-based route was developed by Standard Oil of Ohio in the 1950s and is referred to as the Sohio process (now owned by BP). Solutia (formerly Monsanto) is the prime practitioner of this process that converts AN to AND. and. Exhibit 65: Global Consumption of Acrylonitrile by End Use. ammonia. 67 . and pipe and fittings.

Acrylonitrile Industry Trends and Value Drivers The growth of acrylic fibers and ABS resin capacity in the Far East has been the key driver of acrylonitrile demand. 2005–2006 Acrylonitrile Manufacturers Exhibit 66: Leading Global Producers of Acrylonitrile. Acrylonitrile Growth Prospects Global acrylonitrile demand is expected to grow at a 4% CAGR through 2005. 2004 14 June 2005 2004 Annual Capacity metric tons ('000) BP Asahi Chemical Solutia China Petrochemical Sterling Chemical BASF AG Tae Kwang Petrochemicals Formosa Plastics DSM Cytec Industries 935 695 467 355 339 300 250 240 235 215 Source: CMAI. Imported acrylonitrile from North America is a critical source of feedstock for the Asian markets. Robust Asian demand growth is expected to be partially offset by much slower growth in the mature European and North American markets.Chemical Industry Primer. 68 . CSFB estimates. and that region is not expected to become self-sufficient for the next several years.

and serves to lower the freezing point of water. ***Includes capacity from JV with DuPont. Exhibit 68: Ethylene Glycol Manufacturers. Other smaller outputs include resins for surface coatings. Antifreeze is used in motor vehicles. and 4% for PET films. 2.050 948 650 442 400 400 380 370 315 69 . **Includes capacity from JVs with Japanese consortium and ExxonMobil. 2003 PET Film Other 3% Industrial 4% 5% Antifreeze 11% Polyester Fiber 52% PET Containers 25% Source: Chemical Week. Exhibit 67: Global Consumption of Ethylene Glycol by End Market. 52% for polyester fibers. 25% is used for PET containers. 2003 2003 Annual Capacity metric tons ('000) MEGlobal* SABIC** Royal Dutch/Shell Group Mitsubishi Corp Lyondell*** Honam Petrochemical ExxonMobil Mitsui Chemicals Reliance Industries Formosa Plastics *50/50 joint venture between Dow Chemical and Petrochemical Industries Company (Kuwait). pumps.158 1. CSFB estimates. and hydraulic brake and shock absorber fluids. Source: Chemical Week. and heating. CSFB estimates. 2005–2006 14 June 2005 Ethylene Glycol Ethylene Glycol Uses Ethylene glycol is an ethylene derivative and is used primarily in the manufacture of polyester (81%) and antifreeze (11%). Of the ethylene glycol consumed for polyester production.Chemical Industry Primer.

Chemical Industry Primer. We anticipate growth rates of 4-5% through 2007. Ethylene Glycol Growth Prospects Monoethylene glycol’s growth is highly dependent on polyester fibers and resins. all new capacities are being developed in the Middle East due to the abundant supply of natural gas reserves in that region. Many producers in this region cannot justify capacity expansion due to low or negligible returns. 70 . Europe. As a result. 2005–2006 Ethylene Glycol Industry Trends and Value Drivers 14 June 2005 Increasingly. most producers believe manufacturing MEG in North America. and Japan is not as profitable as other petrochemicals.

and aircraft fuels).758 1. Exhibit 69: Global Consumption of Ethylene Oxide by End Market. CSFB estimates. and polyurethanes). 2004 2004 Annual Capacity metric tons ('000) Dow Chemical Royal Dutch/Shell Group BASF Formosa Plastics SABIC China Petroleum Corporation Japanese MEG BP Huntsman Lyondell Chemical 2. 2002 Ethanolamines 6% Ethoxylates 11% Polyols 2% Polyethylene Glycol 1% Higher Glycols 8% Glycol Ethers 3% Other 2% Ethylene Glycols 67% Source: SRI.040 990 988 603 583 540 505 485 Source: SRI. 71 . surface-active agents (alkylphenol ethoxylates).Chemical Industry Primer. and glycol ethers (used in surface coatings.249 1. cleaning products. 2005–2006 14 June 2005 Ethylene Oxide Ethylene oxide is produced mainly via the catalytic oxidation of ethylene and is used in the production of ethylene glycols (used for antifreeze. PET bottle resin. ethanolamines (soaps and detergents). CSFB estimates. polyester fibers. The top-10 producers accounted for approximately 55% of global ethylene oxide production in 2004. Ethylene Oxide Manufacturers Exhibit 70: Leading Global Producers of Ethylene Oxide.

Ethylene Oxide Growth Prospects Most of the capacity growth is expected in the Middle East and Asia over the next four to five years. In North America. for example.1% through 2008. Demand for ethylene oxide is expected to grow at an annual average rate of 5. where the players have economies of scale and a cost advantage.Chemical Industry Primer. only about 10% of ethylene oxide produced is sold in the merchant market. 2005–2006 Ethylene Oxide Industry Trends and Value Drivers 14 June 2005 Most ethylene oxide is used by its manufacturer. The largest producers of ethylene oxide are located in North America and the Middle East. 72 .

Over 40% of methanol is used to produce the latter two derivatives in the manufacturing of polymers for adhesives. formaldehyde and acetic acid. 73 .Chemical Industry Primer. Instead. 2004 2004 Capacity metric tons (‘000) Methanex SABIC Celanese Ferrostaal AG National Iranian Oil Japan Saudi Methanol Consortium Terra Industries Metafrax Tomsk Group of Petrochemical Enterprises PDVSA Statoil Petronas 7316 2225 1963 1575 1510 1500 963 825 825 780 738 726 Source: SRI. CSFB research. the vast majority (90%) is produced by reforming natural gas. Exhibit 71: Global Methanol Demand by End Market. In the gasoline industry. synthesis gas with steam. Methanol is also used as a solvent. or more specifically. MTBE is used as an octane booster and a blending agent. fibers. CSFB research. Methanol Uses The principal derivatives of methanol are methyl tertiary butyl ether (MTBE). but generally not as an automobile coolant. and plastics. It is also used in some types of antifreeze. 2005–2006 14 June 2005 Methanol Methanol (methyl alcohol) is one of the few organic base chemicals not produced in an olefin plant. 2004 DMT 1% Methyl methacrylate 3% Methylamines 3% Chlorinated methanes 4% Acetic Acid 10% Other 24% Formaldehyde 34% MTBE 21% Source: SRI. Methanol Manufacturers Exhibit 72: Leading Methanol Producers.

the long-term use of MTBE in the U.42 million tons will likely be halted. Because of environmental concerns (leaching into groundwater from leaking tanks at gasoline stations). 2005–2006 Methanol Industry Trends and Value Drivers 14 June 2005 Since almost all formaldehyde is manufactured using methanol.Chemical Industry Primer. we expect supply/demand to remain relatively tight until 2007. we expect the increases to methanol supply in 2005 to be limited.2 million tons in 2003. should amount to 5. since high prices for natural gas have significantly curbed methanol production. the increase in demand (assuming 1. in our view.9-1. activity in this industry is a key determinant of demand for methanol.75 million tons in 2006. we expect supply/demand to remain tight in 2005.59 million tons is slated to come onstream in 2005 and a further 2. As a result. The use of MTBE as a fuel additive was a major driver of demand for methanol during the early to mid 1990s. Formaldehyde is used to produce resins for adhesives used principally in the construction industry. which is roughly the same level as the 5.8 million tons).5% annually. However.0 million tons in 2005. demand for formaldehyde is a key growth driver. In addition. However. and we expect demand to continue expanding at a pace of 2. Methanol could well see a long-term fillip to demand growth from fuel cells if adopted as the fuel of choice.34 million ton slated increase in production capacity. has been called into question. and by a similar amount in 2006. Methanol Growth Prospects There are concerns that new methanol facilities slated to come onstream will result in oversupply.4 million tons (including that of Mitsubishi Gas Chemical) is slated to come onstream. given that small-scale facilities in China and South-East Asia will shut down once these new plants are complete. since total production capacity of 3. combined with the expected halts to production capacity. New capacity amounting to 2. Global demand rose to 31. As a result. we believe this is not likely. We forecast demand will grow by 0.S. However. In 2005-2006.22 million tons. we are unlikely to see any meaningful effect from this source for several years to come. when production capacity totaling 8. 74 .

however. 2005–2006 14 June 2005 Phenol Phenol is an aromatic intermediate produced predominantly via the peroxidation of cumene. a process that also yields acetone.Chemical Industry Primer. CSFB estimates. rather than committing its own capital. phenol-formaldehyde resins. Solutia has patented a production process that yields phenol from benzene and nitrous oxide through a one-step process without the intermediate cumene and the co-product acetone. and alkylphenols. CSFB estimates. Other processes may be used. commercialization has been put on hold owing to oversupply.530 976 535 480 400 390 350 295 275 * Bain Capital (Boston) acquired Rhodia’s Phenol business and formed Novapex. but this is the most economic route. caprolactam. Source: Chemical Week. 2003 2003 Annual Capacity metric tons ('000) Ineos Phenol Sunoco Chemicals Royal Dutch/Shell group Polimeri Europa Formosa Plastics Mitsui Chemicals Ertisa Dow Chemical Novapex* 1. and a change in Solutia’s strategy implies the company might prefer to license the technology. Exhibit 73: Global Consumption of Phenol by End Use. Phenol Manufacturers Exhibit 74: Leading Global Producers of Phenol. 75 . Key phenol derivatives are bisphenol A. 2006E Other 17% Alkylphenols 4% Caprolactam 9% Bisphenol A 43% Phenol/ formaldehyde resins 27% Source: SRI.

9% year over year due to good demand for BPA and phenol resins. phenol prices are also driven by raw material (propylene and benzene) tabs. Phenol Growth Prospects Phenol demand in 2004 grew by 4. 2005–2006 Phenol Industry Trends and Value Drivers 14 June 2005 Demand for phenol is highly sensitive to the overall economy. Phenol demand should grow by 3% in 2005. We envision long-term growth rates of 3-4%. as end uses lie predominantly in the construction and auto sectors. Phenol-formaldehyde resins are used to bind wood for construction and furniture. In addition to demand. as well as in electronics. as demand remains firm for BPA for polycarbonate and phenol resins. Caprolactam is an intermediate in the manufacture of nylon 6 fibers and resins.and constructionrelated materials.2% year over year. Bisphenol A is a precursor of polycarbonate and epoxy resins.Chemical Industry Primer. which are employed in various OEM. 76 . Asian growth was 8.

drugs. and both yield co-products. is the second-largest use for propylene oxide. and cosmetics. which are used with MDI or TDI to produce polyurethanes. PG is used as an intermediate in the production of unsaturated polyester resins. One is commercial at this point. as well as for deicing fluid or antifreeze. One process yields tertiary butyl alcohol (TBA) as the co-product. The chlorhydrin process uses large volumes of chlorine (1. Exhibit 75: Global Consumption of Propylene Oxide by End Use. 2005–2006 14 June 2005 Propylene Oxide Propylene oxide (PO) is produced via two major routes commercially: (1) the chlorohydrination of propylene and (2) the peroxidation of propylene. representing 60-70% of propylene oxide output. Japan. that utilizes a proprietary process. There are two distinct process technologies that use the peroxidation process. is polyether polyols. are in the process of building a 200. through their joint venture Nihon Oxirane Co..000-metric-ton-per-year propylene oxide facility in Chiba.. and is also employed as an additive in processed foods. Several firms are developing routes to manufacture propylene oxide through the direct oxidation of propylene. the other yields styrene monomer (SM) as the co-product. Propylene glycol (PG). These methodologies yield two to three times as much co-product (styrene or TBA) as propylene oxide. Most of the recent capacity expansions have been in the form of propylene oxide/styrene monomer (PO/SM) plants. Glycol ethers represent 5% of PO output and are largely used as solvents in a variety of market applications. Ltd. but Lyondell Chemical Company and Sumitomo Chemical Company. The advantage of these processes is that they will not yield a coproduct. CSFB research.Chemical Industry Primer.45 pounds of chlorine for each pound of propylene oxide) and is only competitive if employed by an integrated producer. 2003 Other 10% Glycol Ethers 5% Propylene Glycols 20% Polyols 65% Source: SRI. 77 . a significant disadvantage. which accounts for 20% of end demand. Propylene Oxide Uses The largest end use.

2005–2006 Exhibit 76: Leading Global Producers of Propylene Oxide. The top-10 producers accounted for 88% of global propylene oxide production in 2004.Chemical Industry Primer. Currently. is the key driver of the propylene oxide market. Dow Chemical and Lyondell Chemical. The capital intensity of the business (it costs about $500 million to build a world scale POSM plant with 500 million pounds of PO capacity) as well. A large amount of capacity started up in the past three years. limits the number of players. The industry is highly consolidated with two key players. accounting for 56% of global supply. 2004 14 June 2005 Lyondell Chemical Dow Chemical Royal Dutch/Shell Group BASF Repsol Sumitomo Chemical BP Huntsman Sunkyog Industries Bayer AG 2004 Annual Capacity metric tons ('000) 1.861 1850 551 374 215 213 200 181 165 143 Source: CMAI CSFB estimates. as the proprietary nature of the technology that is not freely licensed. which the industry has been able to absorb. as represented by polyurethanes. the supply/demand ratio is balanced globally and looks to become tight moving beyond 2005 78 . Propylene Oxide Growth Prospects Global propylene oxide demand is expected to grow at 3-4% per year in 2005. Propylene Oxide Industry Trends and Value Drivers The durable goods market.

895 1. Source: Chemical Week. Styrene Manufacturers Exhibit 78: Leading Global Producers of Styrene.920 1. CSFB estimates. 2003 2003 Annual Capacity metric tons ('000) Dow Chemical BASF* Lyondell Chemical Royal Dutch/Shell Group ATOFINA** Sadaf Nova Chemicals Chevron BP Sterling Chemicals USA Germany USA UK France Saudi Arabia Canada USA UK USA 2. CSFB estimates 79 .050 997 950 804 750 * Includes Ellba JV between BASF & Royal Dutch/shell Group. 2003 Others 12% SBR 10% Polystyrene 47% ABS/SAN 15% EPS 16% Source: CMAI. unsaturated polyester resins. 2005–2006 14 June 2005 Styrene Monomer Styrene monomer is manufactured through the oxidation of ethylbenzene. **Includes CosMar JV between ATOFINA and GE Plastics. Other key derivatives include acrylonitrile-butadiene-styrene (ABS) and styrene-acrylonitrile (SAN) resins.Chemical Industry Primer. The majority (about two-thirds) of styrene monomer is consumed in the manufacture of polystyrene resins. which is produced via the alkylation of benzene with ethylene using a catalyst.086 1. Exhibit 77: Global Consumption of Styrene Monomer by End Market.628 1. and S/B elastomers. styrene-butadiene (S/B) co-polymer latex emulsion.830 1.

POSM (propylene oxide and styrene monomer) manufacturers will have to consider market dynamics for each co-product before pursuing further expansions. lower rates are expected for developed markets.Chemical Industry Primer. 2005–2006 Styrene Industry Trends and Value Drivers 14 June 2005 We expect an improved supply/demand. 80 . that is. Styrene Growth Prospects We anticipate a global growth rate of 3-4% for styrene monomer. as the rate of capacity growth has eased and customer restocking should result in a meaningful shipment recovery for end products. a significant proportion of new styrene capacity reflects the construction of facilities designed primarily for producing propylene oxide. which is growing more rapidly than its less desirable co-product. while much higher growth is foreseen for developing regions such as Asia and South America.

but also in the personal care market. and each possesses distinct qualities. • Nonionics (uncharged) are synthesized principally from petrochemicals. They are used mainly in detergents and industrial applications. Palm Kernel Oil. Surfactants can be manufactured from two main categories of raw material. Exhibit 79: Surfactant Production •Heavy-Duty laundry liquids •Light-Duty dishwasher •Personal care •Washing Powders Benzene LAB Anionic Surfactants SYNTHETIC Paraffins Ethylene Oxide Non-Ionic Surfactants ALCOHOLS Synthetic Alcohols Amines Fatty Alcohols Cationic Surfactants •Heavy-Duty laundry liquids •Heavy-Duty laundry powders •Industrial cleaners •Disinfectants Linear Olefins •Fabric Softeners •Baby products •Shampoos •Household Cleaners OLEOCHEMICALS Coconut Oil. Tallow Fatty Acid Amphoteric Surfactants •Conditioners •Specialised toiletries •Anti-static plasticizers •Agrochemicals Glycerine Source: CSFB research.Chemical Industry Primer. • Cationics (positively charged) are milder than both anionics and cationics. 2005–2006 14 June 2005 Surfactants (Surface Active Agents) Surfactants are chemicals that allow molecules to mix with water by having a waterseeking end and a water-repelling end. their chemical properties can be further refined to create specialty chemicals for use in personal care products. Commodity surfactants are used principally as detergents. and industrial applications. there are four types of surfactants. washing powders. however. which make them suitable for different end uses. 81 . Surfactant Uses Broadly speaking. Derivatives can either be combined or used individually to produce a wide range of surfactants. The water-repelling end is attracted to oil and creates a bond between the water and the oil. naturally derived (oleochemicals) or synthetically derived (petrochemicals). • Anionics (negatively charged) are used mainly in detergents. They are used principally in fabric softeners and baby products.

2000 RoyalDutch/Shell 12% Others 17% Dow Chemical 10% Stepan 10% Sasol 10% Goldschmidt 4% Rhodia 6% BASF 7% Huntsman 8% A&W Henkel 8% 8% Source: Rhodia. Major manufacturers of the raw materials for many surfactants include. 2005–2006 14 June 2005 • Amphoterics surfactants have an active chemical entity attached to both ends of the molecule and are used in specialty applications such as hair conditioners and agrochemicals. Exhibit 81: Principal Manufacturers of Surfactants.Chemical Industry Primer. among others. Household 51% Personal Care 12% Surfactant Manufacturers The range of surfactants is extremely broad. the manufacturing base is widely diversified. and Royal Dutch/Shell. 82 . CSFB research. 2004 Other Industrials 17% Construction 3% Paper 3% Agrochemical 3% Polymers & Coatings 5% Industrials & Institutional Cleaning 6% Source: CSFB research. Henkel. Exhibit 80: Consumption of Surfactants by End Market. Huntsman. Dow Chemical. thus.

as the barriers to entry are low and the technology and feedstocks are readily available. and this has been exaggerated by the enormous purchasing power of the customers (such as washing powder manufacturers).9% annually through 2008. Surfactant Growth Prospects Growth in surfactants has traditionally been closely allied to growth in detergents. increased demand for products made from natural oils has meant that oleochemical-based surfactants have grown faster than those based on petrochemicals. and are likely to continue growing faster. 2005–2006 Surfactant Industry Trends and Value Drivers 14 June 2005 The industry has suffered from significant oversupply at the commodity end of the surfactant spectrum. However. Overall volume growth in major world areas is expected to average around 1. which tends to grow in-line with GDP.Chemical Industry Primer. rather than on product differentiation. more recently. 83 . tended to be based on price. These competitive forces led to consolidation among the larger players. Competition has. therefore.

alternative route reacts acetylene with acetic acid. This process is no longer used in North America and Japan but still accounts for much of the older Western European and Chinese VAM capacity. as well as in the production of hot-melt adhesives for bookbinding and packaging. which accounts for 44% of global VAM output. 2005–2006 14 June 2005 Vinyl Acetate Vinyl acetate (VAM) can be produced via several routes. is primarily used in latex paints for architectural coatings and adhesives for packaging and labeling applications. Ethylene vinyl acetate co-polymers represent 9% of vinyl acetate demand and are used in film applications. Exhibit 82: Global Consumption of Vinyl Acetate by End Market. 2002 Other 8% EVA Copolymers 9% Polyvinyl Acetate 44% Polyvinyl Alcohol 39% Source: CSFB estimates. 84 . In addition. The most common commercial process employs ethylene as a feedstock and reacts the gas with acetic acid and oxygen to form vinyl acetate. as well as in the production of polyvinyl butyral for the manufacture of laminated safety glass.Chemical Industry Primer. polyvinyl alcohol is used as a textile sizing. Vinyl Acetate Uses Polyvinyl acetate. Another process that is based on the reaction of acetic anhydride with acetaldehyde is no longer practiced commercially because of the relatively high cost of acetic anhydride. Polyvinyl alcohol represents 39% of VAM production and is used in the manufacture of plywood adhesives. An older. Other end uses include vinyl acetate co-polymers used in the manufacture of adhesives and caulks.

1. Overall growth of vinyl acetate consumption during 2003-2008 is expected to be 2.7% in the U.463 422 400 330 308 276 250 240 180 Source: CSFB estimates. 2004 14 June 2005 Annual Capacity metric tons ('000) Celanese Dow Chemical Lyondell Chemical E. and acetate-ethylene resins. accounts for 70% of global exports.I. Vinyl Acetate Industry Trends and Value Drivers Vinyl acetate capacity expansions have been announced for Asia and the Middle East.S. Backward integration into low-cost acetic acid production is another critical ingredient to being a competitive vinyl acetate producer. 2005–2006 Exhibit 83: Leading Global Producers of VAM. and as new capacity comes online in other regions of the world.S.. and 4. 2% in Western Europe. 85 . North American producers will be the most vulnerable.5% in China. The strongest growth areas are likely to come from end uses such as ethylene-vinyl alcohol. Vinyl Acetate Growth Prospects Most of the applications of vinyl acetate are mature. The U. polyvinyl butyral.Chemical Industry Primer. these are expected to keep the industry well supplied for the next few years.1% in Japan. Du Pont de Nemours & Company BP China Petrochemical Various China Facilities Darien Chemical Nippon Synthetic Chemical 1. The top-9 producers accounted for 71% of global VAM capacity in 2004.

Historically. pesticides. flammable gas with a sweet odor. PVC represents approximately 97% of VCM’s global consumption. and some medical applications. vinyl chloride monomer was used as a component in aerosol propellants for women’s hair spray.467 1.110 1.050 1.207 1.739 2. CSFB estimates.429 1. Vinyl Chloride Monomer Manufacturers Exhibit 85: Leading Global Producers of Vinyl Chloride Monomer. Exhibit 84: Global Consumption of VCM by End Use. 86 . and it is a key intermediate in the petrochemical industry. and packaging sectors. electrical. The top-10 producers accounted for 51% of global VCM capacity in 2003. CSFB estimates. It is now mainly used in the production of polyvinyl chloride (PVC) polymers and vinyl co-polymers used primarily in construction markets. 2007E Other 3% PVC 97% Source: SRI. and less so in the automotive.Chemical Industry Primer.930 1.009 920 820 Dow Chemical Formosa Plastics Occidental Petroleum Georgia Gulf Solvay European Vinyls Corporation (INEOS Group) Tosoh ATOFINA LG Chemical Shin-Etsu Chemical Source: SRI. 2005–2006 14 June 2005 Vinyl Chloride Monomer (VCM) Vinyl chloride monomer (VCM) is a colorless. 2003 2003 July Capacity metric tons ('000) 2.

2005–2006 Vinyl Chloride Monomer Industry Trends and Value Drivers 14 June 2005 The PVC industry has been under close scrutiny in recent years as a result of environmental concerns and because the manufacturing of VCM produces small quantities of toxic dioxins. which are believed to have a detrimental effect on human fertility and may be carcinogenic. accounting for raw material (chlorine and ethylene) tabs as well as PVC prices. Vinyl Chloride Monomer Growth Prospects Future prospects of VCM depend on the demand for PVC products. VCM prices are formula based. The close ties of PVC to the construction sector make VCM heavily cyclical. with developed regions demonstrating lower growth rates than other developing regions. 87 . which is expected to grow at an average annual rate of 3.Chemical Industry Primer.5% through 2007. Geographic patterns will vary significantly.

pressure. and a catalyst. and thermosets. The five principal methods are bulk/gas-phase. polystyrene. such as polyethylene and nylon 6. slurry. are produced using two or more monomers. and emulsion polymerization. Thermoplastics and Thermoset Resins Plastics are polymers that are combined with additives and other ingredients before being molded into a solid state using pressure and heat.Chemical Industry Primer. Polymers are created through the linking of monomers (such as ethylene) into long chains. flakes. ABS. and demand is tied closely to the construction industry and is thus highly cyclical. which can foster significant earnings volatility. and polyester (PET). suspension. as the products are geared toward the packaging and consumer markets. polypropylene (PP). lattices. The two types of plastics are thermoplastics. Also. as shown in the past 12-18 months. sheeting. A number of different polymerization processes can produce such output as pellets. The five-largest volume thermoplastics are polyethylene (PE). or film. However. while others. Demand for thermoplastics tends to be more resilient to recession than some other areas within the chemicals sector. they are subject to significant downstream inventory swings. They have accounted for approximately 90% of total plastic production in recent years. which can be heated and resoftened into their original state. which cannot be resoftened. 2005–2006 14 June 2005 VI. some polymers are made from a single monomer. liquid resins. such as styrene-butadiene latex. Thermosets are produced in far smaller volumes than thermoplastics. solution. and the economics of each also vary. typically using heat. Each polymerization process has its own merits and downsides. polyvinyl chloride (PVC). granules. powders. 88 . and nylon 66.

and containers. CSFB research. It can also be manufactured into sheets or films for packaging and bags. • Linear-low-density polyethylene (LLDPE). The three principal types of polyethylene are high-. low-. as other monomers. thus. gasoline tanks. Polyethylene Uses Exhibit 86: Global Consumption of Polyethylene by Market. The majority is used for packaging and for consumer and institutional products. • Low-density polyethylene (LDPE). such as butene or octane. It is manufactured using lower temperature and pressure than either HDPE or LDPE. 2004 Other 13% Wire & Cable 2% Extrusion coating 13% Pipe & Extrusion 6% Film & Sheet 50% Blow Molding 13% Injection Molding 13% Source: SRI. it is often used in films for heavy-duty applications. the manufacturing process is more cost-effective. Its major use is for sheets and films for packaging. • High-density polyethylene (HDPE). LDPE is made at high temperature and pressure and is more flexible than HDPE. HDPE is a rigid plastic made at low temperature and low pressure. 89 . and linear-low-density polyethylene. tubs. Its principal uses are as a resin for blow-molding bottles and containers. LLDPE is actually a co-polymer. are added to it. As it is flexible yet tougher than either HDPE or LDPE.Chemical Industry Primer. 2005–2006 14 June 2005 Polyethylene Polyethylene is the largest volume plastic. or for injection-molding items such as crates.

3% 7.4% 4.1% 3.117 8.715 1.5% 3.364 1.709 1.7% 3. 90 .550 935 725 588 530 512 414 390 20.5% Source: CMAI.1% 1.2% 4.938 2.5% 5.5% 3.589 1.178 1.293 1.7% 5.1% 14.117 1. CSFB research.292 1. • LLDPE.155 1.Chemical Industry Primer. 14 June 2005 Exhibit 87: Major Producers of HDPE.7% 3. 2004 2004 Capacity metric tons ‘000 % share of Global Capacity Dow Chemical ExxonMobil SABIC Nova Chemicals China Petroleum BP Ente Nazionale Idrocarburi SpA Lyondell Chemical Formosa Plastics Japanese MEG Consortium 3.913 1.8% 2.9% 4. • LDPE. Exhibit 88: Major Producers of LDPE.8% 3.819 1. 2004 Company 2004 Capacity metric tons '000 % share of Global Capacity ExxonMobil SABIC Dow Chemical Lyondell Chemical Formosa Plastics TotalFinaElf BP Solvay SA Chevron ConocoPhillips 2.1% 4. CSFB research. 2004 Company 2004 Capacity metric tons '000 % share of Global Capacity Dow Chemical ExxonMobil Ente Nazionale Idrocarburi China Petroleum Lyondell Chemical TotalFinaElf SABIC Royal Dutch/Shell Group BASF AG Norwegian Government 1.8% 7. 2005–2006 Polyethylene Manufacturers • HDPE.9% Source: CMAI.6% Source: CMAI.0% 2. CSFB research.551 837 801 717 694 693 588 560 503 9.9% 4.7% 3. Exhibit 89: Major Producers of LLDPE.1% 3.6% 3.1% 4.0% 2.6% 2.6% 3.7% 2.

these polymers tend to be less vulnerable to cyclicality but are subject to significant inventory swings. The Polyethylene business is characterized by high profit volatility. polyethylene demand has grown at approximately twice the rate of GDP and should essentially continue to be driven by the overall health of world economies. 2005–2006 Polyethylene Industry Trends and Value Drivers 14 June 2005 The global polyethylene business is undergoing extensive restructuring and consolidation. but these account for a minority of the end uses of polyethylene. respectively. The majority of LLDPE is manufactured in “swing” plants that are also capable of manufacturing HDPE. production scale has diminished as a significant cost advantage over recent years. and expand geographic coverage has led to rather rapid consolidation in the industry. Historically. Increased competition has forced attention toward building and maintaining a competitive cost position. 2. while LLDPE is gradually gaining market share at the expense of LDPE as a result of its wider range of applications. The need to improve profitability. We estimate global demand for HPDE. increasing demand for recycled resin has begun to hamper demand for “virgin” resin. through 2008. and 5. and LLDPE will grow at 5. however. LDPE. enhance scale. reduce costs. Finally. So while low feedstock costs are still the most important factor in decreasing costs per unit.Chemical Industry Primer.9%. Polyethylene Growth Prospects As a large proportion of the demand for polyethylene is linked to packaging and consumer markets.7%. The HDPE industry is consolidating globally. 91 . Asia is likely to record a higher growth rate.2%. with China contributing significantly to the pace. we expect globalization and consolidation of the industry to continue. as well as its more cost-effective manufacturing process. More cyclical are those products used in the construction industry. but at a very slow pace. In addition.

66 4.19 4.V.62 2.55 2.43 3. cigarettes. and automotive parts. while PP fibers are used in carpets. Reliance Industries Ltd SABIC Dow Chemical Japan Polypropylene Sunoco Chemical 4397 2180 1957 1860 1315 1100 1100 1072 1067 784 10.13 2. PP is used in thermoformed food containers. CSFB research. Polypropylene Manufacturers Exhibit 91: Major Producers of Polypropylene.54 1. which can be either blown or injection molded. and electrical capacitors. 2004 Other 8% Raffia 13% Injection Molding 38% Fiber 16% Blow molding 1% Pipe & Profile 3% Film & Sheet 21% Source: SRI. It has a wide range of applications depending on the grade.Chemical Industry Primer. Polypropylene Uses Film grade PP is used for packaging confectionary goods.62 2. 2004 2004 Capacity metric tons '000 % share of Global Capacity Basell BP ATOFINA ExxonMobil Borealis N. 92 .48 5. clothing. including packaging. fibers. Exhibit 90: Global Consumption of Polypropylene by End Market. CSFB research. and nonwoven textiles. Co-polymer PP is used primarily in car and truck bumper manufacturing but also has medical applications. 2005–2006 14 June 2005 Polypropylene Polypropylene (PP) is the second-largest volume plastic resin globally.87 Source: CMAI.

Substitution of other polymers and significant improvements in process and technology have been the significant driving force for this growth. While new applications continue to develop for polypropylene. therefore. and superior commercial positions in the hope of reducing profit volatility. it is still largely a commodity chemical subject to economic cyclicality. technology. 2005–2006 Polypropylene Industry Trends and Value Drivers 14 June 2005 As the European (naphtha) cracking process produces a comparatively low proportion of propylene (but far more than ethane crackers in North America and the Middle East yield). 93 .Chemical Industry Primer. where cost volatility plays a vital role. consolidated to secure feedstock. Polypropylene Growth Prospects Unlike other commodity thermoplastics that have slowed relative to economic growth.0 times the GDP growth even in industrialized countries. its availability is a key driver of the profitability of the PP industry. often undercutting the ability to recover pricing. Polypropylene consumption continues to grow at 1. Major players have. We expect polypropylene consumption to grow by 5-6%.5-2.

2004 Film and Sheet 5% Wire and Cable 4% Ot her 0% Compounding 4% Past e Processes 1% Coat ing 2% M olding 4% Calendering 7% Rigid Pipe and Tubing 44% Ext rusion 70% Siding. 24% PolyOne.390 1.003 1.149 848 645 *Joint venture: 76% Occidental.) Source: SRI. (Both companies produce small amounts outside of the JV. gutters. CSFB research. It is manufactured through the polymerization of vinyl chloride monomer (VCM) using a slurry-based process.041 2. PVC Manufacturers Exhibit 93: Major Producers of PVC. 2005–2006 14 June 2005 Polyvinyl Chloride (PVC) PVC is the most widely used plastic globally. 15% All Ot her Ext rusion Uses 5% Fencing and Decking 3% Ext ruded Windows and Doors 6% Source: SRI.610 2. where it is employed to manufacture pipes. Exhibit 92: Consumption of PVC Resins by End Market. CSFB research. It is also used in food packaging in film form. The top-10 producers listed above represented 47% of global PVC capacity in July 2003. PVC Uses PVC’s principal use is in the building and construction industry. and wire coating. and it has a wide variety of uses. flooring. windows molding.481 1.273 1. 94 . 2003 2003 July Capacity metric tons ('000) Shin-Etsu Chemical Formosa Plastics OxyVinyls* Solvay European Vinyls Corporation (INEOS Group) Georgia Gulf LG Group TotalFinaElf Vinnolit GmbH 3. a declining application.Chemical Industry Primer. siding. It is also cheap to produce.

95 . we expect medium-term growth of around 3. We believe replacement of traditional materials such as aluminum in the construction industry is likely to be one of the key demand drivers. streamlining operations. Companies have adopted various strategies like consolidation. and forward integration to remain competitive. PVC Growth Prospects The close ties of PVC to the construction industry mean that demand for PVC can be very cyclical. competition is fierce in the PVC business. The PVC industry has been under close scrutiny in recent years as a result of environmental concerns. It is unlikely that further capacity additions will take place in the developed economies of North America and Western Europe. The manufacturing of both chlorine and VCM produces small quantities of toxic dioxins. as the focus shifts to Asia. 2005–2006 PVC Industry Trends and Value Drivers 14 June 2005 As with many commodity resins. The market for the product is fairly mature. which are believed to have a detrimental effect on human fertility and may be carcinogenic.5% through 2007. So feedstock integration is critical to control production costs. thus.Chemical Industry Primer.

EPS is used for insulation and packaging. it is used in appliances and other demanding applications. Exhibit 94: Consumption of Polystyrene (GP/HIPS) by End Market. General purpose/crystal polystyrene is mainly used for packaging (such as jewel boxes for CDs) and household items such as domestic food service items and toys. 96 . Ignition-grade PS is used in heat-generating appliances such as TV sets. 2005E Housewares/ Furniture 8% Construction 3% Electrical/ Appliances 39% Appliances 20% Packaging/One Time Use 38% Others 21% Source: SRI. competing against engineering plastics such as ABS. high impact. CSFB research. and high heat (ignition grade). Exhibit 95: Global Consumption of Expandable Polystyrene by End Market. Polystyrene Uses High-impact polystyrene is a strong. thus. durable plastic. Expandable polystyrene (EPS) is manufactured using a different process and is even considered to be a completely separate product in its own right. 2005–2006 14 June 2005 Polystyrene Polystyrene is manufactured from styrene monomer in three main grades: general purpose/crystal. 2005E Others 8% Packaging 39% Construction 53% Source: SRI.Chemical Industry Primer. CSFB research.

this area is extremely competitive. CSFB research. Polystyrene (EPS) Manufacturers Exhibit 97: Major Producers of Polystyrene. although rising crude oil tabs drove up feedstock costs. Polystyrene Growth Prospects As a fairly mature product and market. However. 2002 2002 Capacity metric tons ('000) 540 465 160 145 135 126 105 90 90 77 BASF Nova Chemicals Taita Chemical Radnor Holdings BP EniChem Huntsman Kumho & Co. we expect polystyrene demand to grow largely in-line with GDP. and suppliers are exposed to cyclicality. Subsequent reduction in capacity provided some support for prices. its role in this industry is being eroded by the increasing use of polypropylene. However. As packaging accounts for over 50% of demand for polystyrene in Europe. Polystyrene Industry Trends and Value Drivers Industry oversupply in recent years led to consolidation and restructuring within the industry.098 1. The top-10 producers of polystyrene (EPS) accounted for 53% of global capacity in 2002. Growth for EPS is driven largely through its use as an insulator in the building trade. this area is relatively resilient against recession.Chemical Industry Primer. Mitsubishi Chemical Shinho Petrochemical Source: SRI. The top-10 producers of polystyrene (GP/HIPS) accounted for 61% of global capacity in 2002. Some high-cost capacity is being shuttered in an effort to help balance supply and demand.548 1. 2002 14 June 2005 Dow Chemical BASF TotalFinaElf Nova Chemicals Chi Mei BP EniChem Mitsubishi Chemical Idemitsu Kosan Chevron 2002 Capacity metric tons ('000) 2. 2005–2006 Polystyrene (GP/HIPS) Manufacturers Exhibit 96: Major Producers of Polystyrene. further pressuring margins. CSFB research. 97 .200 955 570 498 405 318 266 225 Source: SRI.

PET bottle resin is likely to be a material driver of growth in many developing countries.) The polymer produced. the by-product methanol is recycled. which can be converted into bottles through a two-step process utilizing injection-molding (into a “test tube” perform). require such higher-molecular-weight resins.Chemical Industry Primer. producing by-product water. the more popular and more economic route involves the direct esterification of purified terephthalic acid with ethylene glycol. The global PET business has deteriorated since mid-1996 in terms of price stability. a process known as solid-stating. In the “Man-Made Fibers” section of this report. This PET is subsequently extruded and broken into resin chips. we discuss polyester fibers. melt-phase PET can be melted and extruded through spinnerettes into man-made polyester fiber. it can be “digested” further through the application of heat to manufacture high-molecular-weight solid-state resin. (Note: Certain applications. The world market for PET solid-state resins is still oversupplied despite strong demand growth. The “digestion” step promotes further polymerization at below-melting temperatures. followed by blow molding. but growth of PET fiber remains dominant in terms of total polyester. Purified DMT is reacted with excess ethylene glycol in a catalytic reaction that facilitates ester exchange and polymerization. and industry profitability. operating margins. Currently. 2005–2006 14 June 2005 Polyethylene Terephthalate (PET) PET is a downstream product of para-xylene and ethylene (via PTA/DMT and ethylene glycol).) Demand for the solid-state resin increased greatly in recent years because of its rapidly expanding use in the bottled drinks industry. Alternatively. such as packaging. (Additives are often used in the polymerization process to alter the color of the material. 98 .

2005E 2005 Capacity metric tons ('000) Voridian (Eastman Chemical) M&G Group Invista (Koch Industries) Wellman Nan Ya Plastics Equipolymers DAK Americas DuSa 1500 1230 1100 635 610 450 310 290 Source: CSFB research. Exhibit 99: Major Manufacturers of PET Solid State Resins.Chemical Industry Primer. 2002 Others 2% 14 June 2005 Rigid Packaging 26% Film 5% Fibers 67% Source: SRI. 99 . CSFB research. 2005–2006 Exhibit 98: Global Consumption of PET by End Market.

Demand for MDI has been strong in recent years on the back of the booming construction. automotive. which account for approximately 80% of global output and are used mostly in the construction industry.Chemical Industry Primer.S. Source: SRI. Exhibit 102: Major Manufacturers of MDI. and consumer industries. • MDI. They are easily manufactured into a wide range of different physical forms. 2004 Other 19% Packaging 6% Exhibit 101: U. The two main types of polyurethane foam are MDI-based (methylene-di-para phenylene isocyanate) and TDI-based (toluene di-isocyanate). CSFB research. 2005–2006 14 June 2005 Polyurethanes Polyurethanes are types of thermoset foams that are used in a wide range of applications and markets for their cushioning and insulating properties. 100 . The main use for MDI is in the production of rigid and semi-rigid foams. Demand for MDI by End Market. CSFB estimates. CSFB estimates. 2004 Others 15% Transport 33% Carpet Cushion 4% Insulation 3% Construction 46% Bedding 10% Transport 14% Carpet Underlay 16% Packaging 5% Furniture 20% Appliances (refrigirator) 9% Source: SRI. These materials are produced by reacting an appropriate glycol or glycol ether with a di-isocyanate. Demand for TDI by End Market. 2005 2005 Capacity metric tons('000) Bayer BASF Huntsman Dow Chemical Nippon Polyurethane Yanatai Synthetic Mitsui Chemicals Borsodchem 895 805 745 705 200 130 110 60 Source: SRI.S. Exhibit 100: U.

CSFB research. It can also be used to produce coatings. as it was replaced by MDI. Source: SRI. It enjoyed a resurgence in demand in recent years following a period of decreased usage. as capacity was insufficient to meet the rebound in demand. TDI is used principally in manufacturing flexible foams for furniture and car seating. 2005 2005 Capacity metric tons ('000) Bayer* BASF Lyondell Chemical Dow Chemical Mitsui Borsodchem Organika Zachem Huntsman 420 370 260 250 240 70 65 40 *About 100KT of Bayer’s capacity is idle. 2005–2006 14 June 2005 • TDI. and cast elastomers. rigid foam adhesives. sealants.Chemical Industry Primer. 101 . Exhibit 103: Major Manufacturers of TDI. This led to a period of modestly rising prices. which has a broader range of uses.

Noncellulosic fibers are petrochemical derivatives and include polyester. During the manufacturing process. and Japan. 102 .. Except for spandex. processed further with additional chemicals and/or solvents.S. most notably in Taiwan. Man-made fiber production continues to gravitate to Asia. and in 1987. owing to more favorable properties and economics. In 1970. Over the following two decades. China. especially with companies in industrialized countries. almost 90% of the global fiber production was in the U. Thus. and the resultant polymer is then put through a spinnerette. The man-made fiber producers in countries such as the U. The former type is produced from wood pulp and includes rayon staple. which is solvent spun.S. DuPont announced it was selling its fibers and textiles business to Koch Industries for $4. We expect this consolidation trend to continue. such as Akzo Nobel.4 billion. Man-Made Fibers Man-made fibers are classified into two groups: cellulosic and noncellulosic. Western Europe. and lyocell. wood pulp is dissolved in a solvent. which resembles a showerhead (rayon is wet-spun into a sulfuric-acid bath and lyocell is dry-spun into air). These responses include attempts at differentiation through product quality and designs. nylon. sodium hydroxide. where manufacturing costs (particularly manual labor) are substantially lower than in North America and Europe. Cellulosic fibers were introduced about 100 years ago. and Sinopec Industries. Several companies have recently disappeared from the list of top producers. acrylics. alliances with other producers and in some cases exiting the business completely. Among the major producers of man-made fibers are DuPont.Chemical Industry Primer.. 2005–2006 14 June 2005 VII. fiber capacity grew rapidly in Asia. Formosa Plastics. the list of major producers has undergone a major change over recent years. and Japan responded to the influx of Asian companies in many ways. Noncellulosic fibers are much newer (introduced in the 1930s-1950s) and have exhibited faster growth rates than cellulosic types. spandex. the remaining types are formed from molten polymer that is passed through spinnerettes. Courtaulds. In November 2003. acetate filament. the three previously dominant regions accounted for a much smaller 49% of global production. and polyolefin fibers. Western Europe. and Korea. and Hoechst.

Polyester staple is most commonly blended with cotton in manufacturing sheets and men’s shirts. Polyester textile filament is employed in the production of women’s blouses and dresses. wool. and EG is an ethylene derivative. 103 . and is also used in manufacturing household furnishing such as curtains. Exhibit 104: Global Polyester (All Fibers) Consumption by End Market. Fabrics can be 100% polyester. CSFB estimates. and water insoluble. although its market share in this sector is well below that of nylon. Polyester Fiber Uses Polyester textile filament and staple fibers are woven (or knitted) into fabric used for apparel goods and home furnishings. 2005–2006 14 June 2005 Polyester Fiber The key raw materials for polyester are purified terephthalic acid (PTA) or dimethyl terephthalate (DMT) and ethylene glycol.Chemical Industry Primer. and is also used as fiberfill for upholstered furniture and bedding and spun into yarns for making carpet. PTA and DMT are derived from para-xylene (produced in naphtha crackers or refineries). fairly durable. 2004 Industrial 20% Apparel 48% Home Furnishings 32% Source: SRI. for example. or acrylics. rayon. which are wrinkleand stretch-resistant. Polyester fibers are often blended with cotton.

as the textile industry is highly labor-intensive. However.Chemical Industry Primer. Germany. favorable currency exchange and low shipping and handling costs. especially to Asia. in the form of a finite area of cultivation. USA USA. 104 . the trend in recent years favors natural fibers at the expense of noncellulosic fibers. limitations on cotton supply. Substitution (of cotton by polyester) demand has been a key demand driver for polyester in the past. Indonesia. the shipment of fibers across nations. Polyester demand is also influenced by cotton. Germany China Taiwan. based on factors such as subsidized production expenses. especially in Asia. Developing countries in Asia have an inherent advantage in the form of lower manpower costs. continues to hurt European and American producers. current depressed cotton prices mean substitution demand is limited. CSFB estimates. is expected to bring buoyancy to the market. The trend is toward globalization of the polyester fiber industry. In the long term. Indonesia. 2005–2006 Polyester Fiber Manufacturers 14 June 2005 Exhibit 105: Global Leading Producers of Polyester Fiber. 2005E (Annual Capacity) Company Location Annual Capacity Metric Tonnes (000) TF IF ST Total 1180 1131 930 905 853 820 720 710 698 587 570 567 526 500 477 Reliance Industries Ltd Nan Ya Plastics Zhejiang Rongshan Tuntex Yizheng Shaoxing Yuandong Far Eastern Jiangying Synthetic Huvis Sinopec Zhejiang Hengyi Teijin Invista (Koch Industries) Zhejiang Tongkun Hualon India & Germany Taiwan. China. China China Korea. should work in favor of polyester. Malaysia 590 625 530 455 250 520 323 159 215 570 175 35 500 423 3 67 22 60 181 - 590 506 400 450 600 300 330 710 539 350 331 310 54 Source: SRI. USA. Expiry of the Multi Fiber Arrangement. China China Excl Yizheng China Japan. Polyester Fiber Industry Trends and Value Drivers Significant low-cost capacity. Although the trend of consolidation through alliances and joint ventures is not new. A shift in the downstream textile manufacturing base from developed countries to emerging countries. Thailand China China Taiwan. Thailand. depressing their operating rates. Vietnam China Taiwan. PCI. which brings an end to the quota system. may become more economical with the recent removal of tariff restrictions on textile goods shipped between nations. Mexico. Moreover. has affected fiber demand in developed countries. which is a competing but natural fiber. Major fiber producers have begun to maximize production capabilities worldwide to optimize sales. especially in apparel end uses.

Demand is projected to increase at a faster pace (5-6%) in developing regions. webbing. Other nontire-related applications include sewing thread. and minivan tires.Chemical Industry Primer. versus levels in mature markets (2-4%). 105 .8% per year through 2007. tape. light truck. belts. Key textile exporting economies such as China and India will be the growth engines in Asia. hoses. and geosynthetic fabrics. Polyester Fiber Growth Prospects Polyester fiber demand is expected to grow at about 3. such as Asia. 2005–2006 14 June 2005 Polyester industrial filament is widely used as a tire reinforcement material in passenger car.

such as blankets.6 3. and curtains. socks. PCI. upholstery.6 8. which itself is manufactured from propylene and ammonia.7 9. 2002 Other 24% Industrial 3% Home Furnishings 19% Apparel 54% Source: SRI. such as sweaters.9 5. Exhibit 106: Global Acrylic/Modacrylic Fiber Consumption by End Market. Acrylic Fiber Manufacturers Exhibit 107: Major Producers of Acrylic/Modacrylic Fibers.2 5. Industrial applications of acrylics are minimal but include concrete reinforcement and asbestos replacement. 2004 Annual Capacity metric tons ('000) SINOPEC Group Akrilik Kimya Sanayii Montefibre Dralon PetroChina Mitsubishi Rayon Formosa Plastics 410 287 245 176 156 138 105 % of Global Capacity 13. 106 .Chemical Industry Primer. 2005–2006 14 June 2005 Acrylic Fiber Acrylic fibers are made through the polymerization of acrylonitrile.2 4. Acrylic Fiber Uses Acrylic fibers are consumed principally in apparel goods. and sportswear.5 Source: SRI. Acrylic products also include home furnishings. carpets/rugs. CSFB estimates. CSFB estimates.

Bayer Faser. nearly half of world capacity was held by the seven large companies listed in Exhibit 107. which has significantly reduced capacity. which sold its acrylic fiber business to Dralon. 107 . In 2004. However.Chemical Industry Primer. and Solutia. Acrylic Fiber Growth Prospects Recent displacement of acrylic fibers by cotton in some of the traditional apparel segments not withstanding. 2005–2006 Acrylic Fiber Industry Trends and Value Drivers 14 June 2005 Worldwide acrylic fiber capacity slightly declined over the past few years. as plant closures and capacity reductions were not offset by new capacity additions. increasing from 76% in 1999 to nearly 90% in 2004. which exited the business. we expect acrylic fiber consumption to grow at 2-3% annually through 2009. Asian countries accounted for 54% of total worldwide capacity. up form 43% in 1999. Prominent among them were Asahi Chemical Industries. the industry has seen several restructuring measures by major companies. Capacity utilization also saw an upward trend.

CSFB estimates. monofilament. such as auto-related products (e. Important nylon fiber characteristics include abrasion resistance and high-tensile strength. Exhibit 108: Global Nylon 6 and 66 Consumption by End Market. 108 . Nylon 6 is polymerized from caprolactam. such as hosiery. and industrial applications. airbags and reinforcement for tires and hoses). 2005–2006 14 June 2005 Nylon 6 and 66 Fibers Nylon 6 and 66 Fiber Uses Nylon 6 and nylon 66 fibers. which account for about 90% of global nylon volumes.Chemical Industry Primer. are produced as continuous filament yarn. and staple.. 2004 Industrial 20% Apparal 20% Home Furnishings 60% Source: SRI. Other uses include apparel goods. and nylon 66 is made from adipic acid and hexamethylenediamine.g. Nylon is used principally for the manufacturing of carpets and rugs.

Poland. Romania Taiwan USA Poland. CSFB estimates. Record high raw material prices. and growth in Asia have had a significant impact on the global nylon fiber market and put downward pressure on margins across the value chain. India Source: PCI. competition from polyester. particularly in China and Taiwan. Latvia Taiwan. this trend is expected to continue. Slovakia. Turkey. Germany. Indonesia. Germany USA. Indonesia Japan. France. China Italy. Spain. Mexico.Chemical Industry Primer. Switzerland. Mexico. 2005 Company Location 14 June 2005 Annual Capacity Metric Tonnes (000) TF IF CF ST Total 674 303 258 202 176 166 162 142 139 113 78 73 69 64 59 Invista Solutia Honeywell Radici (Includes Nylstar acquisition) FCFC Shaw Rhodia Hualon DUSA Toray Hyosung USA. where labor is cheap and end-demand growth remains strong. Taiwan. Nylon 6 and 66 Fiber Growth Prospects Nylon is still growing strongly in engineering thermoplastics but near maturity in most fiber market segments. 2005–2006 Nylon 6 and 66 Fiber Capacity Exhibit 109: Nylon 6 and 66 Fibers Capacity. Netherlands. Canada. Canada. Thailand Korea 98 9 162 112 29 142 55 50 15 2 53 18 6 4 62 78 139 30 25 1 62 57 465 60 138 26 166 5 18 72 54 2 - 58 225 105 10 2 50 10 3 - Beaulieu Group (inc Domo) Belgium. Canada. USA. Germany. Argentina. Slovakia. In an effort to increase economies of scale to compete more favorably with Asian players. Brazil. Germany. Brazil. UK. Germany Bonazzi Group China Shenma Polyamide High Performance (Acords) Italy. Brazil USA. Slovenia China USA. France. Honeywell acquired BASF’s nylon fiber business in May 2003. with Nylon 6 outpacing Nylon 66. We expect modest growth of 12%. which doubled Honeywell’s capacity. Malaysia USA. Argentina. USA. 109 . Nylon 6 and 66 Fiber Industry Trends and Value Drivers Most capacity growth in recent years has been in the Far East.

or spandex. fibers are urethane-based elastomers that are produced from polyols (either polyether or polyester) and di-isocyanates.0 4. Exhibit 110: Global Spandex Consumption by End Market.0 9. The vast majority of global elastane production involves solution spinning.6% 10. jackets. The monofilaments bind to each other and form a continuous multifilament yarn.8 4. including men’s and women’s apparel. and a small number of industrial applications. and antioxidants.Chemical Industry Primer. CSFB estimates. 2003E Annual Capacity % of Global Capacity metric tons ('000) Koch Industries Hyosung TaeKwang Bayer Asahi Huvis Others U. CSFB estimates.0 Source: SRI. 2005–2006 14 June 2005 Elastane/Spandex Elastane. they also include a variety of performance-specific additives. Korea Korea Germany Japan Korea 82 25 25 15 12 12 80 32. Elastane/Spandex Uses Spandex fibers are used in a wide array of applications. hosiery. flame retardant agents. Newer uses include providing stretch in such mainstream articles as slacks. and dresses. 2002 Other 16% Hosiery 32% Intimate Apparel 24% Active Wear 28% Source: SRI. where the solvent evaporates. although some processes involve wet spinning. home furnishings. which is treated and wound on spools. Spandex Manufacturers Exhibit 111: Major Global Spandex Manufacturers. The filaments are typically dry spun.S.8 6.8 32. leaving the elastane filaments. such as UV absorbers. Production via dry spinning involves the extrusion of a polymer solution through a spinnerette and into a heated air column. 110 .

with increasing size. As for capacity growth.” Asia is turning out be a significant market. the majority of the expansions are planned for Asia. to Koch Industries for $4.2 billion. we expect elastane consumption to grow at a rate of 6-9%. and complexity. rechristened INVISTA. with a higher figure for Asia and a lower one for developed markets. INVISTA is the largest producer of spandex fiber in the world for both branded “LYCRA” and commodity “ELASPAN.Chemical Industry Primer. scope. Elastane/Spandex Growth Prospects Globally. All major producers are reorganizing their strategies to cater to the Asian demand. 2005–2006 Elastane/Spandex Industry Trends and Value Drivers 14 June 2005 In April 2004. 111 . DuPont sold its DuPont Textile and Interior Division.

and acetate filament are cellulosic fibers (that is. lyocell. and acetate filament are used predominantly in apparel. Lyocell.6 3. newer cellulosic fiber than rayon. Because of its relatively high cost. lyocell. CSFB estimates.0 3. Formosa Plastics Accordis South Pacific Viscose Indo Bharat Rayon Thai Rayon Public Other China Austria India Taiwan Germany Indonesia Indonesia Thailand 30. while rayon has lost share to polyester staple.7 8. lyocell tends to be used in premium apparel products. owing to a broad array of waste products that must be contained.0 Source: SRI. 2002 Industrial 17% Nonw ovens 16% Home Furnishings 16% Apparel 51% Source: SRI.2 26. 112 . 2004 Capacity March 2004 % of Global Capacity metric tons (‘000) 750 240 221 161 160 125 90 80 644 Chinese producers Lenzing Grasim Industries Ltd. 2005–2006 14 June 2005 Rayon/Lyocell Rayon staple. Acetate filament has largely been displaced by polyester textile filament. wood pulp is the chief raw material).4 5.Chemical Industry Primer. a more expensive.5 6. CSFB estimates. Rayon production is relatively costly.3 9. Rayon/Lyocell Uses Rayon staple. Rayon Manufacturers Exhibit 113: Major Global Producers of Rayon (All Types).9 6. Exhibit 112: Global Rayon (All Types)/Lyocell Fibers by End Market. was launched in the 1990s and is produced by a more environmentally friendly process using a recyclable solvent.

Chemical Industry Primer. CSFB estimates. production continues to shift to Asia for the sake of lower production costs. Rayon/Lyocell Industry Trends and Value Drivers Acetate filament has largely been displaced by polyester textile filament (PTF).5 Source: SRI. just as for noncellulosic fibers. while rayon has lost share to polyester staple. owing to lower prices for these competing fibers and lower cotton prices. 2004 Capacity 2004 metric tons (‘000) 14 June 2005 % of Global Capacity Accordis Lenzing AG UK Austria 87 40 68. 113 . Rayon/Lyocell Growth Prospects We expect global production of rayon fibers over the next five years to increase annually by about 2. Asia’s share of global production of rayon fibers has moved up to 70% from a mere 29%. 2005–2006 Lyocell Manufacturers Exhibit 114: Major Global Producers of Lyocell. the double-digit growth in rayon fiber production in the Far East has been offset by a double-digit decline in Eastern Europe. Also. However.5 31.5%. In the last decade.

farmers have wished to improve soil quality and crop yield. In 1943 the world’s largest potash deposits were discovered in Saskatchewan. phosphorus.S. Canada. the German chemist. Fertilizers (Plant Nutrients) A Short History of Fertilizers Since the beginning of agriculture. which contains nitrogen. He also articulated the “Law of the Minimum”—that is. in 1928. Factory production of sodium nitrate began in the U. P. took an active interest in systematic farming techniques. such as ammonium sulfate. Justus von Liebig. the Greeks noted that legumes (such as beans) also replaced nitrogen in the soil. and manuring. and potassium (N. other scientists began to experiment with chemical fertilizers. 2005–2006 14 June 2005 VIII. Current breadth and range of product offerings indicate a substantial advance from some of the first commercial fertilizers. And the first potash factory was built in Germany in 1857. and K)—though not always in the most efficient or rigorous manner. another nitrogen product. This figure does not take into account the various combination fertilizers. including waste collection and soil evaluation. The Chinese were some of the earliest farmers to use manure to improve crop quality and yield. 114 . While the white salt potassium chloride was well known. and urea. was mined from deposits in Chile in the early 1800s. they have employed such techniques as crop rotation. early farmers were able to increase the three basic soil nutrients —nitrogen. The Romans. whose society was based heavily on agriculture. was identified in 1773. Modern production and application exhibit significant sophistication compared with fertilizer usage even 100 years ago. a deficient nutrient impairs plant growth even if all other nutrients are present in adequate quantities. farmers have access to advanced methods to increase soil and crop efficiency. from fertilizers that contain a specific quantity of the three essential nutrients to algorithms that quantify volume of fertilizer application for a desired crop yield on any given small plot. and frequently recommended them as general-purpose crops. As agriculturalists began to understand the growth and development of plants. Later. there are at least 12 different fertilizer products that provide the three basic nutrients. Furthermore. known as NPK for the three nutrients.Chemical Industry Primer. and phosphorous-containing materials. such as Peruvian guano and Chilean sodium nitrate sold commercially in the 1830s. Ammonia was first produced in 1774. Through trial and error. Sodium nitrate. the Greeks were known to have added varieties of waste products to the soil of their olive groves to enhance its nitrogen profile and olive production. which are formed by mixing the basic fertilizers. the first commercial nitrogen product. liming. since there was insufficient knowledge of the underlying chemistry. was the first to establish that plant growth was linked to the amount of nutrients contained in the fertilizer applied. To this end. it was not until the Age of Enlightenment in the 17th and 18th centuries that other chemicals soon to be used as commercial fertilizers were discovered. Phosphate mining began in 1867 in South Carolina. Today. Today.

2.Chemical Industry Primer. phosphorus (P). the health of livestock and humans who consume grains and vegetables for sustenance. P2O5 tonnes are the unit of measurement of phosphoruscontaining fertilizers. and ammonium nitrate (NH4NO3). The decline in fertilizer consumption over the 1989-1994 time frame followed the collapse of communism in Eastern Europe and the Soviet Union and the reduction in nutrient use in that region of the world. Nitrogen-containing fertilizers are measured in units of N.29. add to the overall health of the plant. 2005–2006 There are standards units for measuring the three key nutrients. As N2. and potassium (K): 14 June 2005 1. while in Latin America/South Asia/Soviet Asia. 115 . nitrogen solutions. This phenomenon is already taking place. UAN solutions vary in nitrogen content from 28% to 32%. urea [CO(NH2)2]. Yet. as the world develops. Nitrogen is an element in the periodic table with the symbol N. multiply by 0. nitrogen (N). and 34% for ammonium nitrate. As the world population grows. typically DAP is 46% P2O5 and MAP is 52% P2O5. 46% for urea. World Fertilizer Drivers It is clear that fertilizers increase crop yield. K2O tonnes are the measurement of the nutrient value of potassium-containing fertilizers. Potassium is typically measured in units of potassium oxide (K2O). Potash (KCl) is a term typically used to denote potassium-based fertilizer. it is a gas that makes up four-fifths of the earth’s atmosphere. and fewer people will desire to work the land as rural areas give way to cities and opportunities for social advancement and greater utility become available. also called muriate of potash. Some of the most common nitrogen-containing fertilizers include. To convert P into P2O5. To convert KCl product tonnes to K2O tonnes.6% rate. greater demands will be placed on a secure and plentiful food supply. multiply by 2. For example. Phosphorus is measured in units of phosphoric pentoxide (P2O5). or UAN. Nitrogen represents 82% of the content of anhydrous ammonia. less and less land will be available for planting. improve soil quality. which vary in concentration from product to product.61. Clearly. 3. ammonia (NH3). Most potash fertilizer is potassium chloride. and ultimately. one solution will be to increase and customize fertilizer applications to ensure maximum crop yield and nutrient quality. World consumption of fertilizers has grown at an annual rate of 2% since 1970. it has grown at a 6.

prior crops harvested. These fertilizers are anhydrous ammonia (NH3). Nitrogen (N) Nitrogen reigns as the most important nutrient for plant growth and. plant growth and crop yield will suffer. even when sufficient amounts of other soil nutrients are present. ammonium nitrate (NH4NO3). Certain crops require greater amounts of nitrogen in the soil than others. (2) an essential component of all the proteins and enzymes. may require up to eight times as much nitrogen fertilizer as soybeans. CSFB estimates. That is. economic efficiency bears consideration. ammonium sulfate [(NH4)2SO4]. which drives photosynthesis. 2005–2006 Exhibit 115: World Consumption of Fertilizers 14 June 2005 World Consumption of Fertilizers 160 140 120 Millions of Tonnes of NPK World 100 Latin America and South/Socialist Asia 80 Rest of World 60 40 20 FSU and Central Europe 0 1970/71 1971/72 1972/73 1973/74 1974/75 1975/76 1976/77 1977/78 1978/79 1979/80 1980/81 1981/82 1982/83 1983/84 1984/85 1985/86 1986/87 1987/88 1988/89 1989/90 1990/91 1991/92 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01 2001/02 2002/03 Source: IFA.0 times as much as for cotton. it tends to limit the usefulness of other nutrients. urea [CO(NH2)2]. Nitrogen plays its most important role as (1) the key element in cell division. or are by-products of ammonia. desired crop yield. Moreover.6 or 2. which is in turn produced primarily from natural gas and nitrogen in the air. but only 1. Corn. for example. and the crop to be grown. and (3) a requisite element of the chlorophyll molecule. if not supplied in sufficient amounts. The amount of nitrogen farmers apply depends on soil quality. The main commercial fertilizers that provide nitrogen either contain. both in an absolute sense and relative to the concentration of other nutrients. if nitrogen levels are deficient.Chemical Industry Primer. and different types of ammonium phosphate. Farmers must analyze the marginal 116 . such as DAP and MAP.

CSFB estimates. Furthermore. direct application of anhydrous ammonia requires fairly sophisticated equipment to inject the liquid into the soil. of natural gas yields one ton of nitrogen. for it quickly becomes a hazardous gas under normal conditions. Although only accounting for 4% of world consumption of nitrogen fertilizer. accounting for only 9% and 6% of world nitrogen fertilizer consumption. such an analysis must also include other variables. ammonia is the basic building block for all of the nitrogen fertilizers. which cannot always be controlled—land price. About 34. as a source of energy and hydrogen. Urea accounts for 48% of the world consumption of nitrogen fertilizer. While greater nitrogen application does result in higher crop yields. Ammonium nitrate and urea ammonium nitrate (UAN) solutions follow but are significantly behind.S. fixes nitrogen from the air with hydrogen to create ammonia (NH3). it makes up 22% of consumption in the U. anhydrous ammonia comprises 22% of U.S.Chemical Industry Primer. the marginal returns. CSFB estimates. Natural gas. Source: Fertecon. Hence.7 Million Tonnes N Oceania 2% Middle East 2% Eastern Europe 2% Africa 3% FSU 3% Latin America 7% Asia 53% Urea 48% Ammonium Nitrate 9% MAP 2% DAP 5% Western Europe 13% UAN 6% Ammonium Bicarbonate 7% Other 11% North America 15% Source: Fertecon.400 cubic feet. While direct application of ammonia accounts for only 4% of world nitrogen consumption. Of course. Ammonia Produced by combining hydrogen and atmospheric nitrogen. Only developed nations can afford such capital intensity. or 33. Exhibit 116: Nitrogen Fertilizer Consumption by Product Global Nitrogen Fertilizer by Product Direct Application 4% Calcium Ammonium Nitrate 4% Ammonium Sulfate 4% Exhibit 117: Nitrogen Fertilizer Consumption Global Nitrogen Consumption Total 87. consumption. ammonia must be shipped in refrigerated or pressurized ocean-going vessels. 117 . 2005–2006 14 June 2005 increase in crop yield provided by additional fertilizer application. or railroad tank cars. in terms of pricing. weather. diminish prior to maximum yield. Anhydrous ammonia—ammonia free of water—contains around 82% nitrogen. consumption compared with the rest of the world.5 MMbtu. ammonia is a gas. but it can be stored as a liquid under pressure or under refrigeration. river barges. thus accounting for the relatively higher U. In ambient conditions. Nitrogen fertilizer comes in many forms. for example. and government subsidies.S.

On balance. which are nontoxic.02. The last peak in the cycle occurred when operating rates were in the mid-80s. growing at a CAGR of 0. 2005–2006 14 June 2005 Once injected into the soil. particularly in the off-season. an operating rate above 80% is good. Exhibit 118: Global Ammonia Supply/Demand 200 Capacity 86% Millions of Tonnes 160 83% 120 Production Operating Rate 80% 80 77% 40 74% 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004E 2005E 2006E 2007E 2008E 2009E 2010E Source: Fertecon. but the soil reverts to normal fertility within a few weeks and. The operating rate may be understated. the ammonium bicarbonate-based ammonia plants that are located in China typically only run for short times during the season owing to a lack of warehousing capacity. dissolves in the soil water to form ammonium salts. CSFB estimates. The global operating rate is projected to remain in the low-80s through 2010. provided the farmer did not inject the ammonia too close to the seeds. While such a rate may seem low.4% year over year as new plants come online. it is likely that the ammonia market will be a relatively healthy market for at least the next two years.S. In 2005.. crop damage will not occur. Thereafter. and Europe are unlikely to run again. we expect production capability to grow 3. Soil sterilization may occur from the injection. capacity growth should ease to an annual rate of 2. Moreover. although some short-term pricing and margin volatility is possible at any time. the current operating rate is in the low80s and the market is snug. the Former Soviet Union (FSU). as several ammonia plants that have been temporarily idled in the U.Chemical Industry Primer. 118 .5% through 2008. Outlook Global ammonia capacity has been relatively stable since 2000. In the view of some industry experts. which is in fact toxic to plants.5%. ammonia.

It is estimated that as long as gas remains above $4.Chemical Industry Primer. Some U. Natural gas accounts for over 80% of the cash cost for ammonia production in North America when gas prices are $4 MMbtu or more.-based facilities are being used to upgrade low-cost imported ammonia into products such as DAP. 119 .S.S. 2004 ( 165.8 Million Tonnes) Asia 45% 14 June 2005 Oceania 1% Africa 3% Eastern Europe 3% Middle East 5% FSU 13% Latin America 7% Western Europe 11% North America 12% Source: Fertecon. PEMEX m os tly idle Ind ian F arm ers F ertiliser C oop S audi A rabia F ertilizer C o. PotashCorp converts ammonia imported from its facility in Trinidad into other products. Consequently. at its Geismar facility. CSFB estimates. the delivered cost of imported ammonia will be cheaper. producers’ ammonia cash margins into negative territory in 2001 and 2003. CF Indus tries Source: Fertecon. CSFB estimates. 2005–2006 Exhibit 119: Global Ammonia Capacity. costs have a domino effect for other nitrogen and phosphorous fertilizers. high natural gas costs pushed U. rather than produce the ammonia onsite. This compares unfavorably with the 50% gas prices account for in the cash costs of production in the Middle East. Exhibit 120: Global Ammonia Capacity. including nitric acid. Alternatively. 2004 L arg es t G lo b al A m m o n ia P ro d u c e rs b y C a p ac ity 6000 5000 Thousands of Tonnes 4000 3000 2000 1000 0 Y ara A grium T erra K oc h TOA Z P otas h C orp. but only 70% when gas prices are at their historical average of $2. As ammonia is a key input for urea and various ammonium phosphates.

The carbon monoxide that results from the breakdown of natural gas is converted into carbon dioxide. Gulf Coast natural gas.S. accounting for 48% of global nitrogen consumption. In this case. Granular is coarser with uniformly sized pellets and it degrades less than prilled. Yet the process to form granular urea requires more labor and additional chemicals to help it maintain its consistency. forms less dust. urea is the next step in the production process. However.S. and Qatar. more high-cost U. merely substituting a higher quality form of nitrogen for another. As a result. Other units.S. farms with greater access to equipment and financing as well as greater acreage are more likely to use granular urea over prilled. urea. The process requires relatively high temperatures and pressure. marginal suppliers of urea tend to provide a floor for prices. producers may be forced to close additional capacity. producing a solution. Moreover. Some of that capacity comprises Chinese ammonium bicarbonate plants that are being converted to produce urea. are being built in the Middle East (Saudi Arabia. Trinidad. Australia. capital-intensive requirements for storage and delivery. PotashCorp. In late December. Europe. Gulf Coast. which is then combined with ammonia to create urea. Terra. More North American production could be shuttered in the coming years if natural gas prices remain above $5 for an extended period. Oman. which are based on low-cost natural gas. and should gain share from highercost suppliers.5 million tonnes capacity over the 2004-2008 time frame. including Agrium. including ammonia. granular stores better. Industry consolidation continues. Urea usually comes in two forms: prilled or granular. The firm’s core business is nitrogen-based fertilizers. Regions that favor granular are in North America. Urea As opposed to ammonia with its specific. became a public company in March 2004. Consequently. have a portion of their ammonia production based on high-cost U. relatively easy to store and handle. the net nitrogen capacity is not expanding significantly. and Thailand. Iran. Once ammonia has been produced. the company formed by the demerger of the fertilizer and related operations from Norsk Hydro. Egypt). On balance. as well as two plants on the U. as new low-cost capacity comes online. and CF Industries. Outlook Several grassroots urea plants targeting the export market are scheduled to come online with 10. Yara International. hence. Terra completed its acquisition of Mississippi Chemical’s major nitrogen assets (in a bankruptcy liquidation). which include a 50% stake in Point Lisas Nitrogen Ltd. And investing in the equipment used to distribute granular adds further costs to the farmer. if natural gas prices continue to rise. urea is the nitrogen fertilizer of choice. 2005–2006 14 June 2005 Several of the largest ammonia producers. as in the 120 . Countries with low labor costs and smaller farms tend to utilize prilled urea more often. Yara has cost-advantaged nitrogen production in the Middle East and in Trinidad. which is then evaporated to form solid urea. and nitrates. and can be expelled further by farm equipment designed to distribute fertilizers. The firm sells third-party sourced phosphate and potash fertilizers to offer customers a balanced mix of fertilizers. in Trinidad with access to lowcost natural gas. Koch. Prilled is finer and can easily be distributed by hand to cover the soil evenly.Chemical Industry Primer. urea is a solid and. As with ammonia. and Venezuela.

0 0 1 2 3 1 4 5 6 7 8 9 2 3 4 5 6 7 199 199 199 199 199 199 199 199 199 200 200 200 200 200 200 200 200 200 8 8 9 . CSFB estimates.0 % 8 3 .0 % 7 5 .0 4 0 .0 3 5 . would result in higher-than-anticipated operating rates.6 Million Tonnes Western Europe 5% Central Europe 3% Former Soviet Union 8% China 32% North America 8% Latin America 5% Africa 2% Middle East 8% Asia (ex China) 29% Source: Fertecon.0 7 5 . The global operating rate is expected to remain in the low.0 % 8 1 .0 6 0 . 2005–2006 14 June 2005 case of ammonia. CSFB estimates. including the U.0 5 5 . One should also keep in mind that capacity expansions in the Middle East and similarly cost-advantaged regions are designed for the export market and will run at full rates. as capacity expansions offset demand growth.Chemical Industry Primer. Exhibit 122: Global Urea Capacity and Operating Rate 8 0 .0 % 7 7 .0 Millions of Tonnes N 7 0 . and Europe.to mid-80s for the foreseeable future.0 6 5 .0 % 8 7 .0 5 0 .0 3 0 .0 % C a pa c ity O p e ra tin g R a te Operating Rate 8 5 . urea producers in high-cost regions are unlikely to earn the cost of capital over the long term owing to overcapacity. 121 . Exhibit 121: 2004 Global Urea Capacity 2004 Global Urea Capacity Total: 141. Growth in demand at a greater rate than 2% or additional permanent shutdowns in high-cost regions.0 % P ro d u c tio n 7 9 .0 4 5 .S.0 % Source: Fertecon.

Idaho.S. China. but this advantage is largely offset by higher extraction costs. and Israel. and resistance to disease. North Africa has over 50%. phosphorous ranks second as a crop nutrient and component of fertilizers. it is dissolved in a mixture of sulfuric acid and phosphoric acid. Currently..S.. and especially Morocco all have significant deposits. soil erosion and crop removal do contribute to phosphorous deficiency. Tunisia. MAP. has 8% of the economically viable world reserves of phosphate rock. has about a $30 advantage on sulfur costs per tonne of phosphoric acid versus Morocco. There are a number of fertilizer products used to replenish or maintain phosphorous in the soil. and especially for Morocco. Mexico. Morocco’s phosphate rock quality is modestly higher.S. The recent rise in ocean freight rates has elevated the price of imported sulfur. 2005–2006 14 June 2005 Phosphate (P) After nitrogen. Fertecon. helping to account for the high level of phosphate exports—typically in the form of DAP.S. energy utilization. When the concentrated phosphoric acid has reached commercial grade. South Africa. Russia. Algeria. All of these are derived from phosphate rock. In the U. the remaining 15-20% is found in Jordan. the differences in costs from location to location are relatively small and it is mitigated to some degree by shipping costs. uniform plant maturity. this ore is found primarily in Florida. this yellow element is required to make phosphate. as the phosphate rock needs to be treated with sulfuric acid to generate H3PO4. a calcium phosphate ore. creating wet-process phosphoric acid. The U. resulting in monoammonium phosphate (MAP) or diammonium phosphate 122 . CSFB estimates. However.S.. Morocco and the U. it can either be combined with ammonia. with its refinery-sourced sulfur. the U. Compared with the U. North Carolina. Outside of the U. triple superphosphate. The dilute phosphoric acid produced may be evaporated into a more concentrated form. Exhibit 123: Economically Viable Phosphate Rock Reserves 8 7 Billions of Tonnes 6 5 4 3 2 1 0 N orth A m erica Latin A m erica E urope A frica M iddle E ast A sia O ceania Source: USGS. Once the phosphate rock has been mined. While the soil loses little phosphorous from leaching. essential for cell division.S. and Wyoming. nitrogen fixing.Chemical Industry Primer. seed production. have excellent high-quality rock reserves.

phosphorous plays a key role in helping animals grow and resist disease. In the U. Examples of nonagricultural applications include detergents. upgraded phosphate products are also used in livestock feed. and some producers. and food ingredients. 2005–2006 14 June 2005 (DAP). unlike nitrogen. especially PotashCorp.Chemical Industry Primer. a major importer of phosphate fertilizer. Over the long term. whose DAP export levels have already fallen 45% from 9. producers.S.9 million tonnes in 1999 to an estimated 5.S.5 million tonnes in 2004. plants tend to absorb at most 20% of the phosphorous latent in the soil. phosphoric acid derived from North Carolina is low cost. As with plants. leaving sufficient amounts for the next growing season once cropping is complete. First.. carbonated beverages. With a large variety of phosphate fertilizers. could boost output moderately in four years. In addition to fertilizer use. followed by swine and cattle. Morocco’s increasing production should bolster competition to the Indian market. the phosphorous content is generally quoted in terms of phosphorous pentoxide (P2O5). and its growing capacity is likely to reduce imports even more. Saudi Arabia—with good phosphate rock reserves and low-cost sulfur and especially natural gas—is expected to become a major DAP player. Gypsum (CaSO4) is a key by-product in the production of phosphoric acid. the differences in costs from location to location are relatively small and it is mitigated by shipping costs. Outlook Exhibit 124 shows that phosphoric acid may continue to be in excess global supply for the next several years. Poultry consumes the most phosphate. Higher phosphate fertilizer output is anticipated to emanate from Morocco and especially China over the next three years. China’s imports of DAP and MAP have dropped significantly since 1998. This should put additional pressure on U. Farmers may elect to not apply phosphorous fertilizers every year for two reasons. Second. However. with obvious transportation cost advantages. India. implying that higher-cost players may not earn the cost of capital. Phosphoric acid also has several nonagricultural applications. there is less risk of losing phosphate in the soil through leaching. Given its relative proximity to India and favorable freight costs versus more distant suppliers. These three products are the principal phosphate fertilizers. are focusing on these markets as more profitable outlets for their ores. dentifrice. or be combined with additional phosphate rock to convert it into triple superphosphate (TSP). 123 .

1981–2009E 14 June 2005 Global Phosphoric Acid Capacity. Exhibit 125: Global Phosphoric Acid Capacity. the U. responsible for over 40% of all exports. CSFB estimates.S. consumes almost 35% of all phosphoric acid. The U. and Capacity Utilization Rate 60.0 20. Demand. accounting for about 35% of total production. is the world’s largest producer of phosphoric acid.0 40.0 Demand 65% 55% 45% 35% 25% 10. SRI.0 Utilization Rate 85% 75% Capacity Millions of Tonnes P 2O5 50.Chemical Industry Primer.S. 2005–2006 Exhibit 124: Global Phosphoric Acid.0 Source: Fertecon.0 30. The largest exporter is Morocco. On the other hand. CSFB estimates.0 0. and thus exports only 4% of global supply. 124 19 81 19 83 19 85 19 87 19 89 19 91 19 93 19 95 19 97 19 99 20 01 20 03 20 05 E 20 07 E 20 09 E Global Phosphoric Acid Capacity . 2004 14000 12000 Thousands of Tonnes 10000 8000 6000 4000 2000 0 North America Africa Asia FSU Middle East Latin America West Europe Central Europe Oceania Source: Fertecon.

potash needs relatively limited treatment to make it suitable for soil application. which then goes through a process of beneficiation to reach a desired level of purity.616 2. The word potash comes from early soap-making techniques in which wood ash was leached in large iron pots.889 Source: Fertecon. extraction becomes unsuitable or too costly for conventional mining using boring machines. PotashCorp .356 17.. Most of the economically recoverable potassium is found in sedimentary deposits that were the result of ancient seawater evaporation and is extracted through mining. pumping the solution to the surface. operating rates have slowly increased as capacity has remained relatively stable. KCl) comes from mineral reserves.100 4. 2005–2006 Exhibit 126: Leading Global Producers of Phosphoric Acid. The other method of isolating potassium chloride is to segregate salt (sodium chloride) via crystallization through partial evaporation of natural brine deposits found in “dry” lakes— e. Crops deficient in potassium exhibit weak stalks and wilted leaves. help determine the relatively profitability of the ore bed. Such deficiency also occurs when the ratio of nitrogen to potassium is too high. clay. and efficient uptake of nutrients. following the collapse of communism in Eastern Europe and the Soviet Union and the decline in nutrient use in that region of the world. disease resistance.200 meters.356 1. protein formation. the remaining brine is again evaporated to recover the potassium chloride. However. Unlike phosphate or the varieties of nitrogen fertilizers. potash (mostly in the form of potassium chloride. or magnesium. NR Canada. and production has grown at a CAGR of 2.Chemical Industry Primer. fruit formation. Once the salt has been removed.751 33. Solution mining was developed to overcome these obstacles. and respiration. The process involves dissolving salts in deep deposits. but this process may be more costly than conventional mining owing to the high cost of natural gas to heat the brine that is pumped underground. Brine-recovered potassium accounts for about 10% of commercial potash. The purity of the ore and extent of the presence of other materials such as salt.711 1. the Great Salt Lake in Utah and the Dead Sea in Israel. when mine depths exceed 1. Potassium is found predominantly in the earth’s crust and bodies of water.2002 Potash (K) The third-largest fertilizer in terms of consumption. Outlook The world operating rate for potash fell to a nadir of 56% in 1993. enzyme activation. Since that time. and then separating the salts through crystallization. 125 .4% over the past ten years.g. This resulted in a huge influx of material into the global market. winter hardiness. Potassium aids photosynthesis rates. 2004 14 June 2005 2004 Annual Capacity P205 tons ('000) The Mosaic Company OCP Group (Morocco) PotashCorp PhosAgro (Russia) Groupe Chimique Tunisien Other Total 6.

We also assumed that Agrium and Mosaic will debottleneck their Canadian capacity by an additional 10%. or 650. We have factored into our projections the startup of one greenfield project with 1. and these operations are not expected to come online until after 2008.000 tonnes.5-2. PotashCorp.4 million tonnes of K2O in 2003. Hypothetically. In our forecasts. This will bring PotashCorp. it could be more than this. They include a 1. PotashCorp. which would take about 12-18 months to put in place.000 tonnes of capacity at its Saskatchewan mine in early 2006. and over our time horizon. This capacity is in addition to the 1. according to several of our industry contacts. and the exact location or locations will be decided when its studies are complete. announced that it had approved engineering design work for several alternative Saskatchewan projects. if additional planned greenfield expansions come online or more debottlenecking efforts get under way. the firm already has engineering work under way at its Piccadilly potash site in New Brunswick. In addition.000 tonnes of incremental capacity in Russia/Belarus. As potash profitability is improving. but there continues to be interest in developing a greenfield unit in that region. Rather than grassroots expansions.. we expect companies to look for opportunities for incremental expansions. adding work shifts. Agrium and Mosaic also have low-cost expansion projects under review. the effective supply/demand balance for potash is much better than the 75% figure would imply.Chemical Industry Primer.6 million tonnes of KCl versus its nameplate capacity of 12. the world’s largest potash producer. Because PotashCorp.0 million tonnes of capacity in 2009 (probably in Thailand). global capacity would jump at least 10%. will have 1 million tonnes of additional KCl capacity (0. However. the biggest threat to improving capacity utilization rates is incremental expansion.0 million tonne facility in Argentina and two units in Thailand. There are only a few proposed greenfield units.1 million tonnes. particularly in Russia/Belarus. which is expecting to boost output. in 2007-2008. which is a much less costly process. we forecast 600. We believe production will increase at a faster rate than capacity.0 million tonnes of K2O) that the firm is bringing online over the 2004-2005 time frame by reducing vacation periods and adding work shifts at the Allan and Lanigan mines in 2004 and incremental debottlenecking at the Rocanville mine in the first quarter of 2005.’s effective capacity to 9. Our projections include several capacity expansions that have not yet been officially approved. However. Recently. plans to bring incremental capacity online to meet demand. has kept significant amounts of its capacity off-line. Where ore deposits are developed. several industry officials believe these new units will be delayed or may never come online. Thailand has been an area where the development of the potash industry has been pursued unsuccessfully for many years..5 million tonnes in 2010. it may be possible to increase output by improving the mine efficiency utilizing tools such as debottlenecking equipment.6 million tonnes of KCl (1. each with 1. We expect Agrium to add 260. which we have assumed it will reach 40. We have included one greenfield plant in our projections for startup in 2009.0 million tonnes of capacity. Exhibit 127 shows global capacity of 36. 2005–2006 14 June 2005 We estimate the global operating rate as a percent of nameplate capacity was 75% in 2003. in the unlikely event that all these projects materialize. we estimate PotashCorp. as some producers (particularly the Russians) currently are running their units 126 . and reducing vacation periods.6 million tonnes of K2O) in 2006.

followed by Brazil and China. 2003 Asia 33% Oceania 1% Middle East 2% Africa 1% North America 21% Europe 23% Latin America 19% Source: Fertecon.0 70% 2 0 . and 80% in 2007 before reaching 81% in 2010. While the North American market is mature. 80% in 2006.0 N a m e p la te O p e ra tin g C a p a c ity Millions of Tonnes K 2O 4 0 . Exhibit 127: Global Potash Nameplate Capacity and Operating Rate. Exhibit 128: Global Potash Consumption.0 80% 90% 3 0 . CSFB estimates. major deposits exist in only 17 countries. The next largest supply of proven reserves is located in the Former Soviet Union. We estimate the global nameplate operating rate for potash was 75% in 2003. Smaller 127 . Together these countries account for about half of global potash fertilizer consumption. increased to 80% in 2004.Chemical Industry Primer. Russia. Company Data. and Belarus account for 84% of the reserve base. consumes the largest amount of potash. and will be 81% in 2005. The largest known potash reserves are located in Saskatchewan.S. Canada. Currently. 1990–2010E G lo b a l P o ta s h S u p p ly /D e m a n d T r e n d s 5 0 . use of potash in Latin America and Asia should grow as both the acres planted and the application rates increase. That ore body as measured in nutrient terms is also rich (K2O of 25-30%) relative to other regions of the world. 2005–2006 14 June 2005 at below full rates.0 20 06 E 20 09 E 20 03 20 04 E 20 07 E 20 08 E 20 05 E 20 10 E 19 92 19 95 19 96 19 97 19 99 19 98 20 00 19 90 19 91 19 93 19 94 20 01 20 02 40% Source: SRI. Despite potash’s substantial reserve base. CSFB estimates.0 Dem and 60% 1 0 . The ore found in the FSU is of lower grade. the U. specifically in Russia and Belarus. with 1015% K2O.0 50% 0 .

Chile. 2005–2006 14 June 2005 developed reserves are located in countries that include Germany. It is estimated that there are 8 billion tonnes of proven reserves.000 6. Exhibit 130: Leading Producers of Potash. 128 U ni te d . 2004 2004 Annual Capacity KCI tonnes (000) 10. the U. NR Canada.300 2. Israel..500 PotashCorp Mosaic Belaruskali Kali & Salz Dead Sea Works (Israel Chemicals Ltd. potash production is dominated by North America (primarily Canada).750 1.100 1.100 6. Spain.2002 As shown in Exhibit 131. and the Former Soviet Union (Russia and Belarus)—the areas that have the largest developed reserves..250 9.) Uralkali Silvinit Arab Potash Agrium China Other Total Source: Fertecon.S. Exhibit 129: Global Potash Reserves 4500 4000 3500 Millions of Tonnes K2O 3000 2500 2000 1500 1000 500 0 az il la ru s hi na ad a te s ia n y Is ra el G er m an Jo rd a St a an C O th e us s Br r C Be R Source: USGS.300 2.Chemical Industry Primer.100 8. CSFB estimates.500 4. and China.500 5.K. PotashCorp .800 57. the U. Jordan.

The Russian producer. While the global potash operating rate is expected to remain relatively unchanged over the next two to three years. we project potash output (including primarily incremental volume from Canada and Russia) will increase at a 3.0% demand growth. Some industry participants believe the Russian facilities in their current states are not capable of raising output meaningfully without significant additional capital investment.0% CAGR. 2003 14 June 2005 2003 Global Potash Capacity 16 14 12 Millions of Tonnes K2O 10 8 6 4 2 0 North America* Russia EU Belarus Middle East Latin America China * Primarily Canada Production Idle Capacity Source: Fertecon. This factor could put a lid on potash prices and margins. although the product should still deliver healthy profits. Uralkali. since operating rates in the Russian facilities currently are well below nameplate capacity (70-80%) and output from the units has been increasing steadily in recent years. and Belarus dominate the export market. from 5. which is faster than projected 2. other industry observers are more optimistic that the facilities could increase output significantly by improving operating efficiencies and incremental debottlenecking projects. 2005–2006 Exhibit 131: Global Potash Capacity. Russia. 129 .0 million tonnes. However. announced plans to increase output by 2.Chemical Industry Primer. CSFB estimates Canada.0 million tonnes by 2008.0 million to 7.

glyphosate. Europe remains a sticking point from the viewpoint of consumers and governments. dollar terms by around 14%.0% per annum. but also corn. which has been facing competition since 2001. prevent or inhibit weed growth. and we expect selective herbicides to remain relatively flat from 2005.5 billion. worth around $30. The leading herbicide. but not exclusively. Thus. accounted for US$2. In the years before 2004. as a result of the success of Monsanto’s seed technology franchise. The industry can be narrowed into three main types of pesticides: herbicides. was worth about US$5 billion in 2003. by far the most important market.S. and Canada. or 22% of the total market. 2003. but thanks mainly to a very successful season in 2004 when the industry grew in nominal U. Agricultural Chemicals (Crop Protection. we estimate. largely. the most popular nonselective. as these nonselective products took market share from the selective herbicide class. Indeed growth in 2003 was only very marginal (less than 1%) as compared with 2002. but. fungicides. In addition.4 billion in 2003 by Phillips McDougalll. hurt by a weak farm economy and a secular shift to nonselective herbicide products such as Roundup. Herbicides By category we do not have the data as yet for 2004 and so concentrate on the last available annual data.Chemical Industry Primer. and we expect nonselective herbicides to show a flat revenue environment in 2004-2007. That said. Herbicides. However. especially in soybeans and cotton. by an average of around 7. the market contracted. known generically as glyphosate. and thus replace or reduce the need for manual and mechanical weeding. the higher level of sales of seeds with engineered resistance to certain nonselective herbicides directly fed through to higher growth of products such as Monsanto’s Roundup brand. The overall industry has grown in the last five years at a compound annual average rate of 2. • Nonselective herbicides: Nonselective herbicides act on all vegetation with which they come into contact. due to the increased level of biotechnology-based acreage. The overall market. at the moment. The market grew at a swift rate in 1997-2001 (around 10% per year). the growing biotechnology segment has increased to $4. • Selective herbicides: Selective herbicides act on specific targeted plant species only. • Future growth for nonselective herbicides will depend on the acceptance of biotechnology outside of the U. The global market was estimated at US$13.S. according to the consultants Phillips McDougall.9 billion in sales that year. we estimate. we estimate. growth drivers for nonselective chemicals remain: (1) Brazil should see higher GM acreage in 130 . 2005–2006 14 June 2005 IX. We estimate that this sector was worth around US$9. growth recently has been impacted heavily by the loss of Monsanto’s patent on glyphosate. GMOs) Introduction The traditional agrochemical industry was.3 billion in 2004 (excluding GMO).8% per year. and insecticides.9 billion in 2003.

7 billion in 2003 by Phillips McDougall. Bioengineered cotton and corn seeds that provide insect control using Bt genes have gained share at the expense of conventional insecticides.7 billion in 2003 by Phillips McDougall and has shrunk at about 3% a year over the last five years. which should have resulted in a high level of growth for the overall fungicides segment. 3.S. Europe’s heat wave in 2003 led to significantly reduced demand for that season. following a dry season in 2003.S. and the firm expects insecticides to grow by 0. but the spread of Asian rust. experienced low disease rates over that period. Beyond 2004.6% per annum in the medium term. especially in the context of the potential for Asian rust to positively affect demand in the U. having declined 2% per annum over the past five years. 2. Weak demand in East Asia (especially in 1998-1999). projections of 3.6% growth out to 2008 by Phillips McDougall can be justified..Chemical Industry Primer. and (3) an increasing emphasis of conservation tillage. as a precautionary measure by farmers in the U.S. (2) Monsanto’s stacked-trait technology could mean growth in biotech acreage in corn in the U. In addition. The market was estimated at about US$5. At the very least. where climactic conditions usually dictate higher-than-average demand for fungicides. That said. which. 2005–2006 14 June 2005 2005. a prolific virus that can devastate soybeans. 131 . if at all. The insecticide market was estimated at about US$6. a reversal of fortune is under way. Insecticides Insecticides are used to control chewing pests (such as caterpillars) and sucking pests (such as aphids). The main crop markets are cereals and fruits and vegetables in Europe and rice in Asia. reduce crop yields and quality. due to currency devaluations at the end of the 1990s. in which a nonselective herbicide can be used as a preplant weed burndown agent. has led to a booming market in Latin America in 2004.S. Europe saw a significant recovery in demand in 2004. market—the extent to which benefits will be seen will depend on the extent to which the disease spreads in 2005. though. Data has not come in for 2004 as yet. in common with diseases. This area has been the worst performing in the industry during that period because of three main factors: 1. The U. we expect some sales in 2005. Fungicides Fungicides prevent and cure fungal plant diseases that affect crop yields and quality. and we foresee a noticeable improvement in the next five years. Further penetration of such genetically modified organisms is anticipated.

these will enhance the properties of the crop. However. Within agbiotech. the company’s technologies are the most widely used today. as described below. would rank #2 in its focus on ag-biotech and molecular breeding. This industry is the subject of widespread publicity. one way or another. The businesses supply seeds. a number of agrochemical companies have significant seeds operations. and. Monsanto is the undisputed leader in glyphosate-resistant (Roundup Ready) and insect-resistant (Bt) crops. as a result.Chemical Industry Primer. But whether the various firms are likely to pay such amounts remains to be seen. There is a scarcity of acquisition opportunities in the seeds industry. The firm is using seeds as a way to leverage its technology and germ plasm in the marketplace. in our view. in fact. Seeds and GMOs In addition to pesticide operations. 2004 US$ in millions. It is also developing output 132 . and its success in this endeavor is apparent. whose genetic structure has been altered to enhance the properties of the crop. More recently. with emphasis on input traits—those traits that bolster grower economics. perhaps leading to premium prices for available properties. Beyond expanding its input trait technologies (including stacked multiple traits in one seed). especially if the purported targets don’t have substantial growth prospects. Seminis and Emergent Genetics. CSFB estimates. tubers. DuPont. Monsanto has been the dominant participant in recent M&A activity with its upcoming acquisitions of two seed companies. The firm is well behind Monsanto in commercializing input traits (and. unless otherwise stated 2004 Sales Global Market Bayer Syngenta BASF Dow Chemical Monsanto DuPont 7000 6309 4166 3143 2864 2210 23% 21% 14% 11% 10% 8% Source: Phillips McDougall. genomics and biotechnology have led to the production of GMOs. Monsanto is moving into output trait development. it is climbing up the learning curve. It appears that Monsanto is the one agrochemicals firm that is still putting huge emphasis on ag-biotech. Traditionally. at this stage it is difficult to gauge its prospects in detail. We estimate that the seed industry was worth US$17 billion worldwide in 2003. and management believes it can grow EPS at a minimum of 10% per year and upwards of 15-20%. must license certain traits from its arch opponent to keep its corn and soybean seeds competitive). However. such as enhanced oil or amino-acid content. or early-growth-stage plants to commercial and professional growers. 2005–2006 14 June 2005 Agrochemical Manufacturers Exhibit 132: Global Market Shares for Crop Protection Only (Excluding Seeds). improving seed characteristics have been achieved through cross-pollination or through selective breeding. Monsanto is no longer developing new crop protection chemicals. Moreover. we believe GMOs will play a major role in the fortunes of the major agrochemical producers over the long term.

the conventional breeding process is noticeably accelerated. can actually improve the yield. Well-publicized issues of consumer resistance are being displayed toward these technologies in certain parts of the world. Crops that are genetically modified have genes from other organisms (such as algae or bacteria) added to their genomes. but also cotton. and canola). and value-added nature of particular crops. An alternative methodology that results in crops with better commercial properties is molecular breeding. DuPont isn’t putting all of its eggs in one basket. herbicide. some of which are similar to those being “cultivated” by Monsanto. Traditional approaches appear able to only postpone the trends that are leading to a critical point in world food supplies. 2005–2006 14 June 2005 traits. therefore. which are discussed below). New Productive Techniques Required in the Long Term Longer-term growth in the agrochemical industry is more likely to come from the increased adoption of new biotechnologies (such as GMOs. only a proportion of this untapped yield can be realized. as products tend to lose efficacy over time as resistances grow.Chemical Industry Primer. would appear to be a significant untapped source for new “traditional” crop protection agrochemicals products. Despite this. we believe the need for this new technology will lead to a gradual acceptance. However. The remaining 40%. Technological Issues Development of Traditional Technology Research suggests that full and appropriate use of current agrochemical technology could increase crop yield to around 60% of the theoretical maximum (compared with a 30% yield without any agrochemicals). and the managements believe any meaningful payoff in this business is years away. While this view is unlikely to change in the short term. beyond lowering the cost of growing crops. The prospects for achieving EU approval to plant GM crops are dismal. which transfer genes from Bt bacteria into crops so that they are naturally toxic to caterpillars (such as Bt corn and Bt cotton). the most successful GMOs are Roundup Ready crops (especially soybeans. Input traits— those that control properties such as insect. That is. notably in Europe and in such highly populated countries as Japan. and disease resistance—were 133 . In reality. corn. Genetics of the crops are improved— without adding genes from other types of organisms—by breeding into the species beneficial genes that are present in other plants of the same species. altering the crop’s properties in various ways. with enhanced knowledge of plant genomes and the use of molecular markers to spot the location of specialized genes. The most recent major technology is Bt corn for corn rootworm (launched by Monsanto in 2003). as it continues to discover new crop protection chemicals and moves downstream into commercializing new soybean-based food ingredients. Syngenta is a bit more sanguine than Bayer and BASF but continues to focus on crop protection. GM technologies. and Bt crops. intermediate-term growth in the agrochemical marketplace is most likely to be driven by increased usage of traditional crop protection agrochemicals. At this stage. quality. however. Bayer and BASF seem disenchanted with the outlook for ag-biotech.

The third-generation oil product will add low-saturated-fat content. admitted that it looked at this property as well but felt the expected transaction price would be too high to justify. particularly in Europe. texture. thereby reducing production of undesirable trans-fatty acids. However. this variety is targeted for 2010-2011. and drought-tolerant crops by the start of the next decade. since we don’t believe this unit is expanding as quickly as the firm’s Seed & Trait business. which is expected to be commercial in 2008-2009. The first product to be introduced is Vistive low linolenic soybeans. quality. This change was encouraged by (1) the establishment of EU rules governing the labeling of GM foods. management expects the property to bolster its gross profit growth. Product Development in Breeding and Ag-Biotech Monsanto Monsanto continues to emphasize some new soybean oil traits that it is developing with molecular breeding (non-GMO). thereby mirroring the traits of olive oil.Chemical Industry Primer. the commercialization of biotech-related output traits could help lift the cloud surrounding the ag-biotech industry. Syngenta. after a five-year hiatus. color. and (2) pressure from the WTO. The second-generation product is mid-oleic acid plus low-linolenic soybeans. Monsanto has converted all of its Roundup Ready corn technology from the GA21 event to NK603. food flavor. initially corn but there are many other crops behind it. With regard to Monsanto’s acquisition of the fruit/vegetable seed company Seminis. As of 2005. soybeans that produce their own omega-fatty oils in 2009 or 2010. 2005–2006 14 June 2005 the first to be widely marketed. Output traits—those that affect end users directly. 134 .S. from 16 million acres (2004) to 20 million (2005) and ultimately to 50 million acres (out of 80 million acres that are typically planted in the U. which has the #2 position in fruit/vegetable seeds. Ratification was certainly a politically charged issue in the EU due to the complicated pathway that relied heavily on most or all of the member states to agree on approval. its joint venture with Cargill). The firm also stressed that the cost of goods sold for crops with double. However. the EU has finally begun to approve importation of new GM crops. low-linolenic oil requires far less hydrogenation. and nutritional enhancement—are still early in their development cycle.or triple-stacked traits is virtually the same as it is for crops with a single trait. Other products the firm continues to develop are high lysine GM corn (to be sold for animal feed by Renessen. annually). which threatened economic sanctions since the refusal to approve new GM foods was viewed as a restraint of trade. because there was no scientific basis for refusing to approve them. It expects RR corn acreage to grow in the U. higher concentrations of oleic acid improve the taste of soy oil-based products such as soymilk. such as yield.S. technology fees are collected for each of the traits. which is being launched in 2005. bolstering revenues with little or no increase in production cost. We still believe Seminis could slow the firm’s overall growth rate. In our view.

a private cottonseed enterprise owned by an affiliate of Hicks-Muse. DuPont In contrast to Monsanto. In early 2005. This purchase provides Monsanto—the sole current GM trait supplier to Delta and Pine Land—control of a major DLP competitor. with other blends two to four years away for corn. how will this sales target be achieved? Clearly. and management believes it has $500 million in sales potential.8% Rest of World 3.8 million acres (+11. Our challenge: Since caterpillars are controlled fairly well in cotton and corn with Bt crops (genetically modified). and Solae food ingredients.5% Total = 173. DuPont is using a three-pronged approach to its ag and nutrition business: crop protection.2% USA 68. 2005–2006 Exhibit 133: Major Biotech Markets (in Green. As a follow-on to its success in indoxicarb insecticide (known as Steward in some formulations). The firm has an array of new crop protection products in its pipeline. It ensures the rapid deployment of Monsanto’s new GM technologies and grants Emergent direct access to Monsanto’s cotton germ plasm that has been developed in house through Monsanto’s Cotton States unit. low-dose chemical for caterpillar control. Monsanto announced its purchase of Emergent Genetics.8% over 2002) Source: Phillips McDougall.Chemical Industry Primer. seeds with enhanced germ plasm and GM traits. with Percentage of Global Market per Region) 14 June 2005 Agricultural Biotechnology Market 2003 Canada 7. Building on its success in sulfonylurea herbicides. The product is on track for a 2008 launch.5% Latin America 20. there are countries that don’t allow Bt crops and other 135 . the company has 18 new SU blends in pre-launch stage for cereals and soybeans. The two operations within Emergent are Stoneville and NexGen. DuPont is developing E2Y—a low-toxicity.

the competing SILK brand of soymilk (from Dean Foods) has about 80% market share. Herculex Corn rootworm trait—developed jointly by Dow Chemical and DuPont—could be launched as early as 2006. biotech market—not Europe (Bayer and Syngenta). In late 2004. beyond the health benefits of soybean isoflavones. According to CSFB’s food industry analysts. over the past several years— not necessarily every year—Dupont’s Pioneer Hi-Bred corn seed has lost market share when measured on a domestic acreage basis. with more on the way. Triple-stacked corn—three traits licensed from Monsanto (Bt corn borer. Solae’s focus is on helping food companies develop better-tasting and more-digestible foods with. European Companies It is becoming clearer that some agrochemical companies are choosing not to focus on ag-biotech (BASF) or have decided to concentrate their efforts on the U. an enhanced. while 8th Continent—sold by General Mills—has about 10% share but is growing. its 72%-owned joint venture with Bunge. Still. to say the least. the firm is developing a variety of new crops utilizing molecular breeding and GM technologies. Syngenta has received EU approval to offer its GM sweet corn for planting in that region.S. and Bt corn rootworm—is in the pre-launch stage. With regard to output traits. enhanced texture. the company hopes to have its own proprietary glyphosate-tolerant trait—known as GAT (glyphosate N-acetyltransferase) and developed with Maxygen—commercialized in corn.Chemical Industry Primer. Drought-tolerant proprietary GM corn is thought to be 4-5 years away. But are these markets sufficient to allow $500 million in revenues? In the seeds . but there were so many hurdles that had to be overcome before a product could receive such approval in the EU. its first generation of high-energy corn for livestock feed (via germ plasm breeding) is going commercial. According to one contact. Like its competitor Monsanto. Herculex stacked with a new generation of Roundup Ready gene (from Monsanto) could come one to two years after. and perhaps in soybeans and canola as well. that these firms believe it is not worth the expense. but its commercial prospects are uncertain. Commercialization of such a product is not likely until 2009 or 2010. DuPont is also working on a glyphosate-tolerant trait for cotton through Verdia—a 50/50 joint venture with Delta and Pine Land. if required. For example. second-generation GM variety is in Phase 2. roughly in-line with Monsanto’s schedule. Soy protein-based Slim-Fast and 8th Continent Soymilk are just two examples. Also. That is. By 2009. Customers of Solae already have 54 branded food varieties on store shelves. suggesting a launch late in the decade. there was a meeting between German regulators and such companies as BASF and Bayer. This is a testament to its high-quality corn and soybean germ plasm that generates a superior price. In addition to proprietary processing. the authorities are very willing to approve GM crop planting in Germany. 136 . DuPont makes the point that its global revenue share in corn and soybeans continues to increase. Roundup Ready. The third prong in DuPont’s ag growth fork is Solae. high-yielding and shortmaturity corn varieties have been quite successful. 2005–2006 14 June 2005 insect-sensitive crops such as potatoes and vegetables (a critical target market for E2Y). Solae uses soybean varieties that have been bred to help achieve the desired results.

Other areas of ag-biotech interest for Syngenta include the production of biopharmaceuticals. but a recent court ruling said Syngenta had an IP (intellectual property) position associated with GA21. It is a single-starch potato that is suitable for the paper industry. a key raw material in the production of glyphosate. regulators for approval of its corn rootworm product. it is likely there won’t be any substantial sales of VipCot cotton—a potential competitor of Monsanto’s Bollgard II insect protection technology— until 2008. the firm has developed “imi-resistant corn. Among the other products Syngenta has under development is glyphosate-tolerant corn.S.Chemical Industry Primer. Furthermore. BASF BASF only has one ag-biotech product far enough in development to discuss with investors. Corn using this event had previously only been commercialized by Monsanto. China: Generic Glyphosate China accounts for about 20% of the world’s glyphosate capacity. Syngenta is also developing a product using the Bt 11 event for control of the European corn borer in corn. To protect corn from damage. and Invigoro canola with resistance to the firm’s nonselective Basta herbicide.” The firm believes this new herbicide controls some weeds better than Roundup (glyphosate). and Golden Harvest—which together account for 15% of North American market share in corn. with the GA21 event obtained from Bayer. 137 . The firm has introduced three products: Fibermax cotton (which has 25% market share in North America). Hence. no technology-sharing agreement has been reached between Monsanto and Syngenta. Garst. the firm feels this is the more efficient route to therapeutics (versus the enzymatic route) and hopes to be able to offer a product to a drug company by 2008-2010. Thus far. the firm has applied to U. which would likely follow on the heels of the traits from Monsanto (commercialized) and DuPont (to be launched in 2006-2007). The firm has an imidazolinone (imi) herbicide in the pipeline that is three to four years away from commercialization in the Corn Belt. Once the IP standoff is resolved. The court also ruled that Monsanto had an IP associated with GA21. Monsanto introduced Roundup Ready Cotton in 1997. Bayer Bayer believes that ag-biotech is not going to be important to its bottom line for the next four to five years. it will probably be 2009 before Syngenta can offer a glyphosate-resistance technology that can be stacked with VipCot for cotton. Chinese glyphosate manufacturing plants are running at reduced rates. it is conceivable that Syngenta could license GA21 to others for use in other crops such as cotton and soybeans. As a result. Arise hybrid rice that has been introduced in India. a shortage of power in that country has limited the production of elemental phosphorus. In 2004. Additionally. Syngenta initially plans to market the glyphosatetolerant corn only through its own seed companies—Northrup King. 2005–2006 Syngenta 14 June 2005 Syngenta’s VipCot GM technology for insect protection in cotton is not expected to be commercial until 2007. However. and Monsanto is litigating the issue with Syngenta to extract value for its IP. Delta and Pine Land signed an agreement with Syngenta to license the VipCot technology.

We believe this trend still has some distance to run.5 billion mouths. According to the U. More recently. Global Population Growth The key driver of demand for food is population growth. Census Bureau expects the global population to expand by another 50%. The formation of Syngenta at the start of 2001 from the agrochemicals businesses of Novartis and AstraZeneca marked the largest deal ever within agrochemicals. In 2001. 138 . in the next 50 years. and thus combined their agribusiness (as well as pharmaceutical) portfolios. Demographic Trends Demographics suggest that agrochemical growth should be driven most strongly in volume terms—more traditional agrochemical products should be used more widely to improve crop yields by reducing wastage. The U. While this is likely to be a major effect.25 billion in June 2002 marked the most recent step toward a more consolidated industry. new technology and product introductions will also have major impacts on the market. Bayer’s purchase of Aventis’s CropScience for €7.S. Census Bureau.S. or approximately 3 billion people. Hoechst and Rhône-Poulenc merged to form Aventis.Chemical Industry Primer. This equates to an incremental 3. having grown by 138% in the past 50 years. while BASF bought Wyeth’s Cyanamid operations in early 2000. the global population in 2000 already reached 6 billion. The top six producers now represent 77% of the industry. 2005–2006 14 June 2005 Agrochemical Industry Trends and Value Drivers Industry Consolidation The crop protection market has undergone major consolidation in recent years.

30 5.20 3. Static Land Availability According to our analysis. various natural factors can affect (and reduce) its ultimate productive capability. both in terms of yield and yield reliability. insecticides.25 4. most of the worldwide accessible.000 0. the most efficient and effective way to boost yields is to utilize plant nutrients (fertilizers). Forecasts for the next 50 years suggest that only the same rate of growth in farmed acreage is likely. in the past 50 years. the total area of worldwide arable land expanded by only 9%. Census Bureau.000 0.000 1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050 0. Broadly speaking.000 0.000 0.45 8.000 0. In other words.35 (Hectare) (m) 6.4 billion acres). to 1. Generally. FAOSTAT. plus traditional crop protection agrochemical products such as herbicides.) According to the Food and Agriculture Organization of the United Nations Statistical Database (FAOSTAT). Intrinsic crop quality needs to be improved. unless the intrinsic quality of a crop improves.10 Arable land available per person (RHS) W orld population (LHS) Source: U. per capita land available for food production should decrease significantly in coming years. or pesticides.40 7.000 0. fungal growth.000 0.38 billion hectares (3. agricultural yields must improve significantly in coming years.S. available land that is suitable for agricultural purposes has already been exploited.50 14 June 2005 9. As a crop is cultivated. (We estimate approximately 33% by 2050. 139 . yields will improve only if traditional agrochemicals are utilized more widely and effectively or if better agrochemical products are developed.000 0. CSFB estimates. These factors are varied but can include insect infestations. 2005–2006 Exhibit 134: Global Population and Arable Land Trends to 2050E 10. and competition for nutrition and sunlight from weeds.15 2.Chemical Industry Primer. Agricultural Yields Must Increase As a result of these trends. and wastage needs to be reduced.

and at the very least. texture. This trend underscores even more clearly the need for the methods previously discussed to drive crop yield growth. the mechanism driving demand for grain is clear. or cope with an unfavorable environment are more efficient. one germ plasm will be better than another if its “instructions” on how to use the available nutritional elements. selective crop breeding has been used to pursue or repel pests’ particular product traits. to the extent that crop quality and traits can be improved faster than ever before. which cuts the availability of labor to work on crop production. and purity). Economic Growth Boosts Caloric Requirements Industrialization tends to drive up per capita caloric intake. more red meat is eaten. reducing the attractions of working on a farm. As an economy moves from primary through secondary and into tertiary economic production. all other things being equal. As countries industrialize. Trend toward Urban Dwelling: Cheaper Agricultural Labor Available Global industrialization tends to reduce rural populations. or repel pests. Essentially. higher-paying jobs are offered in towns and cities. swine 3kg of cereal per 1kg of meat. Given that poultry requires 2kg of cereal to produce 1kg of meat. this loss of labor can be offset by the expansion of agrochemical use. demand food of a higher quality (taste. As the use of certain agrochemicals can reduce the labor-intensity of crop production significantly (for example. For many years. 2005–2006 Selective Crop Breeding Also Boosts Yields 14 June 2005 Advances in technology have meant that intrinsic crop quality can now be improved by changing the genetic instructions that dictate how a plant actually develops—the germ plasm. the use of herbicides reduces the need for manual weeding). typical consumers tend to increase caloric intake. More specifically. Recent advances in genetic technologies (biotechnology or genetic modification) have vastly accelerated this process.Chemical Industry Primer. but this process has historically been slow and limited by the lifecycle of the plant in question. 140 . and disposable income grows. as a society becomes richer. and cattle 7kg of cereal per 1kg of meat.

The budget available to farmers from the CAP is frozen until at least 2006. This was witnessed when there were widespread local currency devaluations in Asia in 1998-1999 and in Latin America in 2001-2002.S. was recently reformed (for a six-year period from 2003) to the extent that the overall package could rise by as much as 80% over the old legislation (1997-2002). The U. there are a number of shortterm drivers in the sector that can significantly affect the short-term growth characteristics. The EU Common Agricultural Policy (CAP) and the U. however. and thus there is little incrementally positive in Europe within the context of subsidy levels. 2005–2006 14 June 2005 Cyclical Factors Despite these relatively healthy long-term fundamentals. • Crop prices. and these two periods of weakness materially affected global growth rates in the last five years. 141 . • Technological changes. this is not an absolute number and depends on pricing levels of crops. This is inevitably linked with the section on crop pricing. However.S. Farm Bill. • Weather. • Government subsidies. These dynamics are discussed in detail later in this section. • Currencies. These are discussed later in this section. among other things. Farm Bill are the most influential in this regard.Chemical Industry Primer. and the weakening of “soft” currency emerging markets can seriously hamper farmers’ ability to pay. The industry is dollar-based.

5.0 -5.0 -8.0 -2.6 -3.0 2.0 -6.2 2.0 1990 1990 Source: Phillips McDougall El Nino Freedom to Farm GATT US glyphosate price fall Improved Crop Prices Drought Recovery in Europe LAM Economy Recovery Soybean Rust in Brazil EU ‘CAP’ Reform 4. A key driver to farm profitability is crop pricing.5 -4. -1.7 -6.1 4.0 -5. 2005–2006 Exhibit 135: The Agrochemicals “Cycle.0 0.7 2.7 -0. which itself is driven by the supply/demand balance for a given crop.0 -0.0 4.Chemical Industry Primer.0 6.3 3. 1993 1993 1994 1994 1995 1995 1996 1996 1997 1997 2003 2003 2004 2004 .” 1989–2004 % change 14 June 2005 Conventional Agrochemical Market Real Growth 1989-2004 % change 8.1 0.6 GM Crops Weak Crop Commodity Prices Reduced Support LAM / Asian Economies Weak -1.8 1998 1998 1999 1999 2000 2000 2001 2001 2002 2002 -1.0 GM Crop Expansion Improving Commodity Prices Drought in Northern Europe US glyphosate price fall 1991 1991 1992 1992 142 Commodity Price Trends Changes in farm profitability affect the profitability of the agrochemical industry by varying the type and amount of purchased seeds and crop protection products.

2005–2006 Exhibit 136: U. Different crops have different herbicide. Other Issues Technology has. short-term demand for agrochemical products is driven by factors such as crop planting mix and weather conditions. thus dragging prices up. thanks mainly to its seed and glyphosate technology. This is typified by the success of Monsanto in the late 1990s. played a significant role in growth rates within the industry. usually driven by a good harvest. since the mid 1990s. which ultimately reduces product availability and eventually tightens the supply-demand balance. which in turn may lead to farmers having less available to invest for the following planting season.S. As a result. In addition to general crop cyclicality. CSFB estimates. However. Climatic effects are completely unpredictable and generally have regional effects only. Commodity Prices cents/bushel 1200 14 June 2005 1050 900 750 Cents/bushel 600 450 300 150 0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Corn (US) Soyabean (US) W heat (US) Source: Company data. This for many soybean farmers fundamentally changed the economics of farming. and insecticide requirements. when the company managed to deliver a CAGR in sales of around 20% (in the period 19952000). so does income per acre for a farmer. 143 . Crop Cycles High crop availability. the flip side of this is that the traditional agrochemical market has lost out—a number of selective herbicide products have suffered significantly because of the success of this technology. tends to drive down crop prices. it could potentially present a risk to producers with narrow offerings. This tends to reduce the yield from the following year’s harvest. and although this may not be a significant issue for an agrochemical company that offers a broad product portfolio.Chemical Industry Primer. companies with broad geographical exposure are best positioned to resist volatility caused by weather conditions. both positive and negative. As prices decline. fungicide.

in addition to traditional crop protection chemicals. 4. which should benefit agrochemical demand. 3. 2004 data from the major producers in the industry was very healthy and comments from a number of companies so far in 2005. where hedging is more difficult and/or expensive. 144 . moreover. it would now appear that the farm cycle might be on the verge of a gentle upswing. in an industry clearly and increasingly driven by technology and related issues. the availability of patent protection is important to ensure that a good return can be made on investments. Agrochemical Near-Term Growth Prospects Sales and profitability in the agrochemical industry in recent years fell sharply in the early part of this decade. dollar.S. the industry is forced to pay closer attention to regulatory issues and to protect its intellectual property. Increasingly. in our view.7% real growth of 2004. owing to a series of strong harvests in the U. and a number of regional economic crises. The absence of any major economic/currency crisis in 2005 thus far. agrochemical product inventories in the pipelines are in general lower than in 2004. Crop prices. We point to the following positive development and potential further trends: 1. Monsanto’s rollout of stacked-trait seed technology. to defend their intellectual property. would suggest generally healthy conditions exist in the farm economy. Eastern Europe is likely to continue to see improved prospects. while early. Finally. 3. center on: 1. especially in the “soft” currency regions of Asia and Latin America. In addition. There has been a shift in industry structure to refocus on “row crops” and away from specialty crops. 2. the strength of the U. which could well impact growth in the conventional pesticide market. in particular the slow start to the planting season in Europe due to snow. China.Chemical Industry Primer. Weather patterns (as ever). companies are patenting genes. However.S. but we expect sales to grow by 1-2% in 2005.. proteins. The main risks ahead. or new plant traits. 2. Growth is unlikely to match the 4. so greater feed-through of this robust volume progression to the company sales level is possible. the Common Agricultural Policy in the EU has a deep influence on the types of crops grown. The full impact of the reduction in set-aside in the EU will improve acreages in 2005. The agribusiness marketplace is subject to strict and tightening regulation in the approved use of the various products and examination of emerging GM products. Currencies. Recovery in some selected grain prices has started in recent weeks. 2005–2006 14 June 2005 As agrochemical technology advances.

0001% Xenon 0. The main industrial gases are the principal ingredients of air (nitrogen. In addition.0005% Krypton 0. The industry supplies a variety of gases to a broad range of industrial and consumer end markets.09% Carbon Dioxide 0. The industrial gases companies also now supply a vast range of specialist gases. dominate the global industrial gases market—accounting for roughly 80% of the industry’s sales. and carbon dioxide comprise significant markets. neon. The largest end users are the steel. 145 . commercial quantities of these gases are derived primarily from other sources. All of these gases are produced using air separation units (ASUs). CSFB research. Industrial Gases Introduction Five companies. helium. 2005–2006 14 June 2005 X.03% Neon 0. and argon). and refining industries.00001% Other 0. hydrogen. and xenon. along with the noble gases. krypton. Exhibit 137: The Principal Components of Air Oxygen 20.93% Helium 0. and while these gases are to be found in the atmosphere.95% Argon 0.Chemical Industry Primer.0018% Source: BOC. chemicals. all of which have operations worldwide. oxygen.0024% Nitrogen 78. electronics.

and argon. • Temperature. 2005–2006 14 June 2005 Air Separation Technology Factors Influencing Choice of Separation Technology Five factors influence separation technology choice: • Volume. oxygen.Chemical Industry Primer. Only cryogenic systems are able to provide the liquefied gases that are essential for low-temperature applications such as food freezing.to large-scale production of the atmospheric gases nitrogen. less pure products are suitable for many applications. or as a gas for piping direct to large-volume users. Production is either in liquid form for storage and transportation. Exhibit 138: Cryogenic Air Separation Distillation column Gas Gas CO2 and water removed Heat Exchanger system AIR Compressed & Heat removed by water or refrigerant systems Air cools further as it is passed through an expansion turbine to reduce pressure Air Vapor recycled or eliminated as waste Liquid air withdrawn for distillation / separation Liquid Liquid Reboiler / condenser Source: Company data. Fluctuating demand is best satisfied from liquid storage tanks filled by road tanker (or sometimes by an onsite plant). as it usually is. • Location. Cryogenic methods are most economical for large-scale users. Some places are too remote for delivery to be economical. Additionally. Cryogenic Cryogenic system ASUs are used principally for medium. CSFB estimates. although the companies are making significant headway in this area. 146 . Noncryogenic systems tend not to be able to produce high purities economically. • Purity. • Continuity. an onsite plant would need to be backed up with liquid storage for emergency use. or may be out of reach altogether (such as an offshore oil rig or on board a ship). ASUs are complexes of compressors and heat exchangers with a tall column in which air is fractionally distilled at low temperatures. If a gas supply is an essential process requirement.

The resultant product is not of high purity. the greater the degree to which air is separated. While the vapor is recycled in the system. 147 . In general. the liquid is passed into a distillation column. Inert Gas Generation These systems work via the combustion of natural gas (or other hydrocarbon feedstock) and the oxygen in air to yield a nitrogen-rich product. In addition. Noncryogenic Noncryogenic methods separate air at ambient temperature on the basis of physical property differences other than boiling points. where trace hydrocarbons that are potentially explosive in the presence of oxygen are removed. Pressure Swing Adsorption (PSA) PSA systems use specially tailored adsorbent materials. Membranes are normally used to make only nitrogen from air. because both nitrogen and oxygen must be high-purity products so that the small amount of argon in each can be recovered. which allow more rapid diffusion of oxygen.Chemical Industry Primer. which contains perforated metal trays or structured packing. The liquid passes down through the column. and the descending liquid becomes richer in oxygen. two columns are used. which were originally designed to produce only oxygen. The air is then purified to remove contaminants such as carbon dioxide and water vapor and then introduced into a heat exchanger system. the air consists of both liquid and vapor. The rising vapor tends to become progressively richer in nitrogen. the process is energy-intensive. To obtain high-purity products. At this point. while the vapor bubbles up through the liquid. and the greater the height of the distillation column. and the popularity of this system has waned now that the majority of nitrogen is sourced from cryogenic systems. the more separation stages are required. Most ASUs are built with capacity to recover argon. 2005–2006 14 June 2005 Ambient air is compressed in progressive stages. which results in further cooling of the expanded air. separated by a reboiler/condenser. it has become common practice for pricing agreements to include a clause for energy surcharges to apply should the energy costs rise above a certain level. leaving a higher concentration of nitrogen behind. During this cycle. Membrane Separation Membrane systems rely on special polymers. the cooled and compressed air is passed through an expansion turbine to reduce pressure. This is particularly true when argon is to be recovered. While the raw material for an ASU is free. which preferentially retain either oxygen or nitrogen as the basis of their operation. The industry is constantly searching for ways of improving operating efficiency. and the heat of compression is removed by cooling with water or refrigerant systems.

particularly in areas where hydrogen and oxygen are required. which led to improvements in efficiency. but where natural gas is not available. Nitrogen-Rich Natural Gas Wells Nitrogen has long been separated and rejected from nitrogen-rich natural gas streams to achieve the purity of natural gas required for resale. Argon from Ammonia Plants It is possible to recover argon from plants that produce ammonia. increasing amounts of nitrogen will be produced at the wellhead as it has been injected into the reservoirs for EOR. Electrolytic Dissociation of Water This method used to be a significant source of oxygen. Only recently has this nitrogen begun to be recovered. primarily in some metaltreating operations. However. In future years. 148 . The vaporized ammonia is split into its component parts (nitrogen and hydrogen [1:3]). or by burning off the hydrogen. interest in the process has risen for use in hydrogen-fueled fuel cells. Argon is a component of both the natural gas burned to produce hydrogen and the air separated to make nitrogen for ammonia production. either cryogenically. power requirements tend to be costly. More recently. This process is suitable when small amounts of nitrogen that are less pure than cryogenically produced nitrogen can be utilized. 2005–2006 Ammonia Dissociation 14 June 2005 Commercially supplied pure anhydrous ammonia is vaporized and then passed over a catalyst in a retort heated by gas or electricity. Recovery is usually via small cryogenic units. as it is useful in oilfield servicing and for enhanced oil recovery (EOR).Chemical Industry Primer. This argon builds up in the purge gas stream and can be recovered.

further significant moves are unlikely. The five major players hold relatively stable market share and recently demonstrated greater focus toward profitability and returns than toward further market share gains. Source: Company data. Exhibit 140: Industrial Gases—Major Participants End Markets.Chemical Industry Primer. 149 .) As a result. similar to those encountered by Air Liquide and Air Products in their failed bid for BOC in 1999. pipeline. We believe that this current industry structure should remain largely unchanged and that its profitability should benefit as a result. The industry itself is characterized by the three different methods of distribution—onsite production. with the latest being Air Liquide’s acquisition of Messer in 2004 (and PX buying the portion AL was required to divest. CSFB estimates Industry Consolidation The industrial gases industry has seen a significant amount of M&A activity in recent years. with some products being produced purely as by-products while others are the result of capital-intensive processes. 2004 Other 16% Airgas 3% Taiyo Nippon Sanso 4% BOC 12% Praxair** 15% Linde 12% Air Liquide 25% Air Products & Chemicals 13% *Market: US$43-44 billion—Gases and Services revenues only. at this point we view the consolidation as largely complete. with the only possible merger candidates being BOC and Linde—a topic that has been in peoples’ minds for a number of years. ** Pro forma for Messer Acquisition. 2004 Healthcare Electronics Chemicals Hydrogen Food and Beverage Metal Production/Fabrication Other Air Liquide Air Products 17% 12% 11% 23% 22% 6% 20% 4% 4% 35% 10% 5% 31% BOC 6% 18% 11% 4% 9% 45% 7% Linde 9% 11% 5% 5% 45% 25% Praxair 11% 7% 10% 12% 7% 16% 37% Average 11% 15% 14% 9% 6% 30% 21% Source: Company data. With those possible exceptions. Exhibit 139: Global Industrial Gases Market*—Breakdown by Revenue. CSFB estimates. and cylinder/tanker delivery—and also by the nature of its production methods. as they would most certainly come up against antitrust obstacles. 2005–2006 14 June 2005 Industrial Gases Industry Trends and Value Drivers Five companies worldwide supply the majority of the global industrial gases market.

the contract is generally constructed on a take-or-pay agreement over the depreciable life of the asset. since the raw material is free. and smaller-scale delivery—each attracting different margins and capital requirements. gases companies have managed to protect to a large extent their operating margin against this risk. The higher variable costs of supplying much smaller volumes in this way render operating margins much lower. However. many onsite plants are “overbuilt” in terms of capacity. Pipeline “Over the Fence” Supply To improve returns. because although plants are typically depreciated over 15 years.Chemical Industry Primer. which will typically be at a higher price. The age of a company’s assets plays a part in the level of its returns. In this respect. For other gases. Onsite/Long-Term Contracts Long-term contracts typically involve a dedicated plant. high volume. pipeline “over the fence” supply. the operator will enjoy a period of high returns once the capital base has been fully depreciated. The plants are then connected to a pipeline network. Low variable costs (no distribution) mean that high operating margins are achievable. and distribution. the major costs are capital costs. and low prices. which can be hundreds of kilometers in length. Customers on this network can generally purchase their supply of gas either on a longterm contract. normally supplied by road tanker. the cost of the feedstock also must be taken into account at times. Smaller-Scale Delivery Smaller-scale users buy gas as liquid (to conserve space). This way. many longterm contracts now include clauses allowing for surcharges/rebates to reflect changing energy prices. Distribution The supply of industrial gases typically takes place via one of three broad methods— onsite/long-term contracts. The cost of power varies by region and is an important determinant of pricing. Gas is also delivered to small-scale users in cylinder form. power. or on demand. these transport costs limit the market to around 200 miles from the plant. particularly if cylinder rentals are included. in an infrastructure in a key strategic region (such as Air Products’ hydrogen network on the U. but also by ship and rail. To offset much of the risk undertaken by the gas company in building the plant. the gases industry is highly capital-intensive even in comparison with the broader chemicals sector. meaning that respectable returns are possible. but the high capex requirements mean that return on capital measures are low. they may be operational for longer.S. so that unused output can be sold to alternative customers also connected to that pipeline. In such an instance. Gulf Coast) is able to provide significant incremental returns for relatively low incremental investment. For the atmospheric gases. 2005–2006 14 June 2005 Production Irrespective of distribution method. In addition. Liquid prices are typically significantly higher than onsite prices because of the smaller volumes and addition of transport costs. 150 . prices can be up to 100 times onsite levels. A number of gas plants will typically supply a pipeline network. However.

• Environmental legislation designed to lower the sulfur content in gasoline and diesel is driving demand from refiners for gases used in its removal. • In the steel industry. driven in large part by the aforementioned drivers. in terms of improving productivity in existing processes. While some of this incremental demand is from the semiconductor industry as more layers and more complex chip designs require more gases. driven by both new technologies (such as fuel cells) and by lower gas production costs. some is from relatively new industries—most notably the LCD flat panel display industry. an increasing range of applications is being found for gases. 2005–2006 14 June 2005 Industrial Gases Growth Drivers Demand for industrial gases has shown resistance to much of the cyclicality that plagues many other areas of the chemicals sector. • In the oil industry. and consequently a relatively robust pricing environment over the past two years than had been the case in the late 1990s. volume has grown at around 1. with more mature markets such as the U. In addition. many new markets for industrial gases are being discovered. and meeting demand for new applications. and assist in refining. as crude supplies become heavier and more difficult to extract. both bulk and specialty gases. meeting more stringent emissions regulations. On average. • The electronics industry continues to demand greater volumes and greater purity levels of gases. Demographic trends. Industrial Gases Growth As a result of these trends.Chemical Industry Primer. • Home healthcare is another area of growth for the industry gas producers. 151 .0 times GDP globally. as well as a push by hospitals to move patients out and home faster. Because of its reliance on long-term contracts for the majority of its revenues. increasing amounts of industrial gases are being used in enhanced oil recovery techniques. have resulted in demand for oxygen in the home. such as hydrogen.S. the improving capital discipline within the industry has led to improving utilization. In addition. and Western Europe averaging slightly lower growth.5-2. as well as greater penetration globally—especially in emerging markets. furnace atmospheres are being enhanced with oxygen and hydrogen in place of air to speed up the smelting process. • In addition. A large proportion of the revenue stream is derived from take-or-pay contracts that provide a level of revenue security. we estimate that global industrial gases volume should grow toward the high end of its long-term historical growth rate of 5-8% over the next few years. the gases industry has always enjoyed relatively strong growth and lower cyclicality.

and elastomers. Under normal conditions. We expect demand for nitrogen in the chemicals industry to continue to grow at approximately 3% per annum over the long term. versatile. and nonpolluting agent for freezing and chilling. fats and oils. Chemicals Nitrogen is utilized in the production of chemicals and petrochemicals. Applications Exhibit 141: U. It is used primarily as an inerting agent to exclude oxygen and moisture. Atmospheric Gases Nitrogen Properties Nitrogen is the world’s most widely used industrial gas as a result of two key properties. 2005–2006 14 June 2005 XI. 2002 Exhibit 142: Western European Nitrogen Consumption by Market. 152 . In liquid form. thus. it is a highly effective. Nitrogen Consumption by Market. although blanketing and inerting applications can use noncryogenic nitrogen. it is virtually inert. CSFB research. nitrogen is chemically inactive. therefore.Chemical Industry Primer. chemical processing and manufacturing is generally served by onsite air separation plants. Source: SRI. CSFB research.S. nitrogen has a low boiling point (-195. it can be used as an inert blanket that prevents most reactions and combustion from occurring. 2002 Rubber & Plastics Other 11% 1% Glass 2% Food Industry 5% Petroleum Refining 10% Primary Metals 11% Electronics 13% Chemicals 33% Glass 3% Food Industry 8% Other 18% Chemicals 38% Oil & Gas Extraction 14% Petroleum Refining 8% Oil & Gas Extraction 10% Metals 15% Source: SRI. Second. First.8 degrees centigrade). but it is also used as a diluent to control reaction rates during processing. Because of the large quantities of nitrogen required.

which is usually supplied by onsite cryogenic plants. by carrying oxygen used to burn off deposited carbon. Oil and Gas Extraction Numerous stages of oil and gas production involve the use of nitrogen. It is also pumped into the drilling fluid to reduce its pressure during underbalanced drilling. This uses large amounts of gaseous nitrogen. and as a safety agent in preventing fires and explosions. The largest use is for advanced oil recovery (AOR). location permitting. 153 . we expect a growth rate of roughly 10-15% within this market. 2005–2006 Primary Metals and Fabrication 14 June 2005 Nitrogen is used primarily for inerting and blanketing applications in the steel industry and as an atmosphere in fabricated metal products manufacturing. such as regeneration of catalysts. nitrogen is used to replace air to reduce the risk of ”downhole” fires or explosions. via pipeline systems.Chemical Industry Primer. and other equipment during startup. In addition. Onsite membrane units are increasingly meeting this demand. and delivery nitrogen is widely used. In well drilling. and hence can be supplied with liquid nitrogen. Finally. storage. as a flotation agent for bringing foamed wax to the surface of waxy oils. shutdown. purging. processing. Petroleum refining requires significant amounts of nitrogen. it is used in a number of additional processes. to maintain reservoir pressure. Drilling and oil field stimulation and production are comparatively small consumers of nitrogen. Also. during normal petroleum production. We forecast demand from petroleum refineries will outpace GDP growth over the medium to long term. tanks. This is most commonly supplied either by onsite air-separation units or. while the largest contain onsite ASUs and cryogenic or noncryogenic nitrogen generators. Petroleum Refining The major use for nitrogen in this industry is as an inerting. in aluminum processing. We expect demand in these areas to remain relatively sedate and in-line with GDP. as an agitating decolorizing agent. because the high price of oil is resulting in oil producers looking for ways to squeeze more oil out of their assets. Demand in this field is somewhat dependent on the demand for and price of oil. and cleaning operations. and blanketing agent for reactor vessels. AOR requires large volumes of nitrogen and is usually fed by onsite cryogenic plants. Delivery methods for nitrogen in metal fabrication can take various forms depending on the location and scale of the production facility. nitrogen is bubbled through the melt to remove hydrogen. which can create voids in finished castings. pipelines. Based on our oil price forecasts. Facilities commonly use pipeline systems and merchant liquid supply.

the rapid contraction of the semiconductor industry in recent years has meant that demand for these specialist applications has also contracted. nitrogen has further uses. It is used as an inert atmosphere for the processing. producers established plants that can supply a large number of users via a pipeline. In the absence of carbon dioxide in the drink. Liquid nitrogen is generally used because of its purity. However. or carrier gas. used in the electronics industry. and to operate it at the customer site. sufficient internal sidewall pressure is created to prevent implosion or dents. storage. such as cryogenic freezing and inerting. demand for nitrogen is not directly reliant on the level of production activity. Food Industry In its liquid form. liquid carbon dioxide competes with nitrogen for all stages in the cryogenic freezing of food because of its lower cost. single crystals. we expect long-term demand for nitrogen from the electronics industry to grow approximately 6-10%. 2005–2006 Electronics 14 June 2005 Nitrogen is used primarily as a blanketing and purge gas in the manufacturing of semiconductors. while gaseous nitrogen is used as a diluent. Rather than immersing the product directly into liquid nitrogen. cryogenic freezing competes with mechanical freezing and with newly developed forms of preservative packaging. it is more effective to use a two-stage process. Its rapid freezing properties mean that the moisture content of the food is frozen rapidly into small ice crystals. and this tends to be delivered in bulk form. which tends to cause undesirable effects in food and often results in uneven freezing. 154 . the food is cooled and “crusted” (using carbon dioxide. Supply of nitrogen to the food industry generally takes place in the form of bulk tanker deliveries.5% (per year) over the next five years. integrated circuits. Liquid nitrogen is also used in cryogenic testing and to remove impurities. although some applications require gas in cylinders. and transport of foods. In some locations. for reactive gases (primarily etchants). and other devices. strict purity requirements have meant that gas suppliers tend to offer not only the gas itself. Slower freezing techniques lead to larger crystals. overall. First. but also the design and installation of the gas distribution system. however (such as Air Products in Silicon Valley). as it is cheaper). In addition. For food industry uses in general. which can rupture food cells and tissues and also lead to partial dehydration of the product. For semiconductor applications.Chemical Industry Primer. Although demand will depend largely on the weighting of a company’s activities between general electronics and semiconductor applications. then it is frozen by spraying with liquid nitrogen in a freezing tunnel. Elsewhere in the food and drink industry. For general inerting and blanketing applications. nitrogen is commonly used to cryogenically freeze some foods. and thus remains largely constant. it is also injected into the headspace of aluminum cans that contain noncarbonated drinks. Although liquid carbon dioxide freezes less quickly than nitrogen. Furthermore. we expect demand to grow approximately 2. vacuum tubes.

This process uses microwaves to break down the molecular bonding in rubber tires to form carbon black. a process used to remove imperfections. to prevent the oxidization of the bed of molten tin onto which the molten glass is poured. A similar process is used to grind down and recycle items such as tires. we expect growth to be in-line with GDP. liquid nitrogen is used in a number of other glass applications. Over the long term. Rubber and Plastics Liquid nitrogen is widely used in the cryogenic grinding of molded plastic and rubber products. It is used as a blanketing agent in float-glass production. gaseous nitrogen is used to provide an inert atmosphere for a process called reverse polymerization. It is used as a mold cooler in the container glass industry. fuel oil.Chemical Industry Primer. as well as for electrode inerting in both the container and fiberglass industries. As a result we forecast demand to grow in-line with GDP over the long term. Demand for nitrogen for rubber and plastic manufacturing is reliant on the level of manufacturing activity in these areas. 155 . In addition to gaseous nitrogen. Demand for float glass is driven by activity in the construction and automotive industries. and is thus cyclical. and steel wire for recycling. This nitrogen is usually produced in small onsite plants. In addition. 2005–2006 Glass 14 June 2005 The majority of nitrogen consumed in the glass industry is in gaseous form.

and various fluxes are combusted in a blast furnace to produce pig iron. Applications Exhibit 143: U. improving efficiency. oxygen is widely used because of its reactivity. CSFB research. which in turn accelerates the combustion of the steel. BOFs use approximately 50% more oxygen than electric arc furnaces. As coal absorbs more energy when it burns. In blast furnaces. additional oxygen is being used to redress the consequent loss of heat. Glass & concrete Products 5% Health Services 6% Fabricated Metal Products 6% Coal Gasification 8% Other 4% Primary Metals Production 49% Primary Metals Production 40% Chemicals 19% Source: SRI. The two common types of combustion furnace are the basic oxygen furnace (BOF) and the electric arc furnace. and therefore increase efficiency. oxygen is being increasingly used to enrich the air mixture to aid combustion. although changes in technology should lead to continuing increases in oxygen by the latter. Steel manufacturing is essentially a two-stage process. and thus purify to steel. In addition. Glass & concrete Products 6% Chemicals & Gasification 25% Exhibit 144: W. CSFB research. the expense and environmental concerns surrounding coke ovens led to new technologies being developed that replace coke with coal. Oxygen Consumption by Market. 2002 Health Pulp & Paper Water 2% Services Treatment 4% 1% Welding & Other Cutting 1% 6% Petroleum Refineries 6% Clay. European Oxygen Consumption by Market. Source: SRI. iron ore. 156 . In the first stage. Primary Metals Production By far the greatest consumer of oxygen is the steel industry. oxygen is introduced to oxidize the impurities in the molten pig iron. 2002 Water Pulp & Paper Treatment 3% Petroleum 4% Refineries 5% Clay. In the second stage. 2005–2006 14 June 2005 Oxygen Properties In contrast to nitrogen.S. In the combustion furnace. molten pig iron and scrap are converted into steel in a combustion furnace. This oxidization generates additional heat. It also possesses two key properties that drive its use across a number of industries: it supports combustion and it supports life. coke.Chemical Industry Primer.

Other applications in the chemical industry include the manufacturing of ozone. oxygen is being used increasingly both at facilities that recycle aluminum and at those that recover gold from sulfide ores. and injection for fermentation to increase yields. some of the largest plants produce their own oxygen. However. Much of the oxygen used in the chemical industry is delivered by pipelines. In addition. Because of the quantities used. these factors increase production capabilities and reduce pollution. injection into fluidized bed reactors. The advantages of using oxygen over air are that it generates improved reaction rates and eliminates inert nitrogen. We forecast oxygen consumption in the steel industry to grow at around twice the rate of GDP growth in the medium to long term. Exhibit 145: U.S. Bulk liquid deliveries are often used to meet fluctuations in demand over and above the pipeline capacity. 2005–2006 14 June 2005 Oxygen is also extensively used in the smelting of nonferrous metals such as copper. Combined. Steel Industry Consumption of Oxygen 350000 300000 250000 Cubic feet (m) 200000 80 150000 60 100000 50000 0 19 7 19 6 77 19 7 19 8 79 19 8 19 0 81 19 8 19 2 83 19 8 19 4 85 19 8 19 6 8 19 7 88 19 8 19 9 9 19 0 91 19 9 19 2 9 19 3 94 19 9 19 5 9 19 6 97 19 98 160 140 120 100 Tons (m) 40 20 0 Oxygen consumed (lhs) Source: SRI. The largest companies have their own onsite facilities. CSFB research. zinc. and these also tend to be the preferred source for small mills. either multior single-user pipeline. 157 . Again. Additional demand is usually met by bulk liquid deliveries. and lead.Chemical Industry Primer. although smaller quantities are used for oxychlorination processes. most of the oxygen for the primary metals industry is delivered from large onsite gaseous oxygen plants via pipelines. Steel produced (rhs) Chemicals Oxygen is used in a number of large-volume chemical production processes. principally as a catalyst in oxidation reactions. its primary use is to enrich the air to improve combustion and reduce energy consumption.

or to generate power through combustion.Chemical Industry Primer. More stringent environmental regulations and deregulation of the electricity markets make it likely that power generation holds the key to further growth in this industry. Oxyfuel gas cutting (OGC). CSFB research.S. it is used for oxidization of silicon. Given the strength of the commodity chemical recovery. The link to the growth in semiconductors means that we do not expect demand for oxygen for these applications to grow at more than 2% per year. Oxygen used in gasification is generally produced onsite because of the large quantities required.100 18. with air-based plants less capital-intensive but also less efficient than oxygen-based plants. Consumption of Oxygen for the Chemicals Industry. It can be supplied as air or elemental oxygen.800 2. In the manufacturing of semiconductors. 2001 14 June 2005 Cubic feet (millions) Acetylene Caprolactam Ethylene Oxide Propylene Oxide Titanium Dioxide Vinyl Acetate Vinyl Chloride 16.000 8. Fabricated Metal Products The principal use of oxygen is for welding and cutting.400 19. and inexpensive. Gasification This process uses oxygen to partially oxidize hydrocarbons (usually coal) to produce synthesis gas. The nitrogen that is used as a by-product is usually used as a purge gas in the gasification process. we expect growth to be in-line with GDP. is still widely used for cutting thick sections of material. but it is gradually being replaced by electric arc welding in all but some specialist applications. as it is fast. 2005–2006 Exhibit 146: U. 158 . is used to produce substitute natural gas (SNG) or other chemicals. while it is also used in the manufacturing of optical fibers and electron tubes. Over the long term.300 67. purity of oxygen is important.000 22. as impurities have a disproportionately large effect on the efficiency of the operation. This. which is a mixture of hydrogen and carbon monoxide. Oxygen fuel welding (OFW) is the oldest form of welding. however. In addition. For both applications. Nevertheless.600 Source: SRI. we would expect demand over the next few years to remain relatively robust for oxygen and run at a rate a bit better than the normalized level. but can also be used in the manufacturing of other chemicals such as ammonia. effective. we do not forecast significant growth above 3% over the long term. small quantities of oxygen are used in the electronics industry. in turn.

Chemical Industry Primer, 2005–2006
Clay, Gas, and Concrete Products

14 June 2005

Oxygen is used to enrich the atmosphere within the glass melt furnaces, as well as brick and cement kilns to enhance combustion efficiency. The result is decreased fuel consumption, increased productivity, and reduced pollutant emissions. It is the last of these reasons that has become the greatest demand driver. The majority of companies that have migrated to oxygen enrichment have also moved to onsite generation of that oxygen. Companies that provide PSA and membrane-based systems have targeted this market because of the lack of need for absolute purity and its comparatively small scale. Use in fiberglass and container glass manufacturing is becoming a significant end use, while applications in flat glass manufacturing are still emerging.
Petroleum Refineries

Oxygen has two key uses in the petrochemical industry, including regeneration of cracker catalysts, debottlenecking of sulfur recovery units, and gasification. 1. Oxygen is able to regenerate the catalysts used within catalytic crackers by oxidizing the carbon that builds up on the catalysts. As heavier crudes are used, carbon buildup increases, regeneration takes longer, and capacity falls. Oxygen is, therefore, used in increasing quantities to combat this effect. 2. Demand for this use is seasonal because of the higher demand for auto fuel during the summer months. As a result, while basic demand is met either with onsite facilities or pipelines, incremental demand is met using bulk-liquid deliveries. 3. The second major use is for the debottlenecking of Claus sulfur recovery units by enriching the atmosphere, in which the acid gas feed is combusted. Again, demand relies on a number of factors, with fluctuations matched by bulk-liquid deliveries. As many of these uses are still emerging, we expect demand to reflect this, and to grow at over twice the rate of GDP. However, demand is also heavily reliant on the overall level of industrial activity, which itself drives demand for oil.
Health Services

Oxygen has a significant number of uses within the medical industry as a result of its ability to support life. Hospitals account for 75-80% of demand, with the remainder coming from home treatment. Large medical centers and hospitals tend to have high-purity oxygen delivered in liquid form and stored on site before being revaporized for use. Oxygen in cylinders is generally used by smaller hospitals and to meet additional demand from larger hospitals. In addition, a few large hospitals produce their own oxygen in onsite oxygen concentrators (small PSA units). Growth in demand is generally driven by population growth, although in developing countries, improving medical facilities drive demand at a faster rate. We expect growth of around 6-10%.

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Chemical Industry Primer, 2005–2006
Pulp and Paper

14 June 2005

Oxygen is used at an increasing number of stages in pulp and paper manufacturing. Its use is being driven principally by environmental concerns and tougher regulations in that field. In particular, oxygen bleaching reduces the need to bleach with chlorine, which itself has a poor environmental record.
Exhibit 147: Potential Oxygen Requirements for a 1,000-Short-Ton-per-Day Fully Bleached Kraft Pulp Mill
Potential Oxygen Requirement (short tons per day) Use/Benefit

Oxygen Delignification White Liquor Oxidation Oxidative Extraction Black Liquor Oxidation Black Liquor Oxidation Polishing Lime Kiln Enrichment Wastewater Treatment Wastewater Treatment Polishing Ozone Generation Hog Fuel Boiler Enrichment

25 3-5 5-10 60 5 1-10 15-50 20 60 15

Reduced AOX formation Decreased caustic purchases Decreased chemical cost Environmental odor control Increased production Environmental compliance

Source: CEH estimates, CSFB research.

Oxygen for these processes has traditionally been delivered in bulk-liquid form. However, as it is being used in increasing quantities throughout the manufacturing process, so the investment into onsite production becomes justifiable. Overall, we forecast oxygen consumption in paper mills to grow broadly in-line with GDP.
Wastewater Treatment

Oxygen is required by bacteria to oxidize organic matter to produce carbon dioxide and water. When the reaction occurs in nature, the dissolved oxygen content in water is used. However, if the level of organic matter is such that all of this water is consumed and not replaced, the fish and plant species in the water that are dependent on oxygen are harmed. With increasing amounts of organic waste finding its way into waste systems, the demand for oxygen to combat this is increasing. Activated sludge systems and oxygen systems are the two principal methods of providing the oxygen required for this purpose. Oxygen systems are commonly chosen over air systems as they take up less space. The oxygen is traditionally supplied by either a cryogenic oxygen plant or by a PSA unit, depending on the size of the wastewater facility, while liquid oxygen is usually also stored on site as a backup. Although additional uses for oxygen exist within wastewater processing, it is essentially a mature market. As a result, we do not expect growth in excess of 2% over the long term.

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Chemical Industry Primer, 2005–2006
Ozone for Drinking Water

14 June 2005

Ozone (triatomic oxygen) is a powerful oxidizing agent that is increasingly replacing chlorine in water treatment applications. Ozone can be generated from ambient air, liquid oxygen, or oxygen generated on site. As ozone will spontaneously revert to diatomic oxygen, it is produced at the point of use. The largest volume applications for ozone are in the processing of water for drinking. Major applications within this field are disinfection, color, taste, and odor control. Industrial gas companies tend to have investment interests in ozone-generation companies, rather than undertaking the production of ozone themselves. Concerns over the use of chlorine in drinking-water preparation have led to rapid growth in the number of processors switching to ozone treatments. As a result, growth in recent years, particularly in the U.S., has been strong. We believe this transition should continue, albeit at a slower rate, and hence we forecast demand growth of around 5% over the long term.

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Chemical Industry Primer, 2005–2006

14 June 2005

Argon
Argon is the most abundant truly inert (or noble) gas. While for the majority of metallurgical applications nitrogen is sufficiently inert, argon is the optimum choice in extreme conditions. The argon business operates differently from the oxygen and nitrogen businesses, as argon can be produced economically only as a by-product of large air separation units. This means that the construction or closure of these facilities is based on the demand for oxygen and/or nitrogen, and this can result in a dislocation between supply of and demand for argon. This situation is made worse, since oxygen and nitrogen are consumed in a large number of industries, while argon is used almost exclusively in the steel industry.

Applications
Exhibit 148: U.S. Argon Consumption by Market, 2002

Other 14% Electronics 4% Electric Lighting Equipment 4% Welding 43%

Primary Metals 35%

Source: SRI, CSFB research.

Primary Metals Industries

The steel industry is the largest user of argon and usage is increasing as processes that consume argon are more widely adopted and more high quality steels, such as stainless steel are produced. Specific uses are as an atmosphere in vacuum-induction furnaces, which are used to produce special alloys; “bottom blowing,” which is the process of bubbling argon through molten steel to stir it and aid oxidation of any impurities; ladle metallurgy furnaces where it is bubbled through to cause impurities to flow to the top; and continuous casting, during which argon is used to shroud the molten steel to protect it from oxygen as it is poured into molds. In addition, the decarburizing of stainless steel involves an argon and oxygen mix, in which the argon reduces the partial pressure of the carbon monoxide reaction product of the furnace charge, thus increasing the rate of oxidation of the carbon and decreasing the rate of oxidation of chromium.

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as the labor savings should have a far greater effect on profitability. The major use for argon is as a shielding gas for electric arc welding of nonferrous and specialty metals. copper. we expect long-term growth in demand for argon to be slightly above GDP growth within these applications. try to sell their products to welding companies on the basis of improvements in efficiencies that they may provide. Gas companies. and carbon monoxide in the aluminum smelting industry to remove dirt and other imperfections from molten aluminum. but argon is the preferred gas. • Electronics. Argon is also used as a blanketing and inerting agent and in the plasma processes in semiconductors and integrated circuit manufacturing. therefore. Although krypton is more effective. • Electric lighting equipment.5% per annum over the long term. Fabricated Metal Products • Shielding for gas welding. There are two principal welding processes: tungsten inert gas (TIG) and metal inert gas (MIG). and other metals. which produced environmentally harmful by-products. The tungsten electrode is not consumed. • MIG is also used for aluminum and other specialty metals. Helium can also be used for this purpose. casting. and annealing operations. It has taken over this role from chlorine.Chemical Industry Primer. argon is used as a fill gas to protect the tungsten filament within incandescent lighting bulbs and fluorescent tubes. because it is cheaper. which require high-temperature refining and fabrication processes. chlorine. • Consumables are only a small part of the cost base of welding (less than 10%). Argon shields the molten beads of metal from the electrode as it is passed across the arc onto the weld joint. 163 . We forecast the use of argon in the steel industry to grow at approximately 3. • TIG is used for welding aluminum. and the argon protects the areas between the hot filler metal and the weld zone. Finally. Overall. 2005–2006 14 June 2005 Argon is also combined with other gases as an inert blanket for melting. This prevents wide dispersal of the beads of filler metal. rolling. argon is used along with nitrogen.

while lasers that use krypton have recently found a niche in corrective eye surgery. xenon. High-powered lights. and krypton together account for less than two thousandths of 1% of air. Bar code readers containing continuous lasers are also filled with neon. Neon is used in lighting tubes and signs. use xenon and krypton. Like argon they are truly inert and are used almost exclusively by the lighting industry.Chemical Industry Primer. such as those in lighthouses. 2005–2006 14 June 2005 Other Noble Gases Other noble gases such as neon. 164 . while fluorescent tubes use a mixture of argon and krypton.

and with limited local supplies of natural gas or merchant hydrogen. New Developments Research into hydrogen-fueled fuel cells has triggered improvements in the technology of hydrogen production. and light and heavy naphtha are also less commonly used. 2005–2006 14 June 2005 XII. propane. burn it for fuel. Hydrogen Production Hydrogen is produced in large quantities. Electrolysis This process accounts for only a small proportion of hydrogen generated in developed countries. This hydrogen often requires a certain amount of purification. Processes that produce hydrogen as a by-product include catalytic reforming in refineries. By-Product Generation In addition to intentionally produced hydrogen. The cost of manufacturing depends largely on the cost of the feedstock. The resulting mixture of hydrogen and carbon monoxide is known as syngas. Electrolyzers are best suited for producing small volumes of relatively highpurity hydrogen and oxygen for specialized applications or in countries without a welldeveloped transport system. this new technology may mold the economics of small-scale hydrogen production in the coming years. none of these gases is extracted from the atmosphere although some are present in very small quantities. sell it to a company that specializes in marketing industrial gases.Chemical Industry Primer. both as a principal product and as a byproduct. although ethane. and can be used as it is. The most common feedstock is natural gas. sell it to end users. Hydrogen producers may consume the product captively. and the manufacturing of carbon black. butane. and therefore of natural gas. large volumes of by-product hydrogen are generated from a variety of production processes. production of chlorine and sodium hydroxide. Dissociation of methanol or ammonia result in mixed gas streams (hydrogen and nitrogen) that are primarily used as atmospheres for metal treating. In addition. Nonatmospheric Gases As the name implies. or vent it into the atmosphere. 165 . or separated into its component parts. Steam Reforming of Hydrocarbons This is the primary method of intentionally manufacturing large volumes of hydrogen. Dissociation of Hydrocarbons This process is generally used to produce smaller quantities of hydrogen that are to be used captively.

rather than hydrogen. 2002 Global Hydrogen production (excluding ammonia) 270bn m3 Chemicals 3% Other 1% Chemicals 20% Refineries 46% Ammonia * 50% 10% Outsourced to gases industry (27bn m3) Other 10% Hydrogen generated internally 90% (243bn m3) Refineries 70% * 100% of production consumed within industry. It is highly combustible and is even colder than nitrogen in the liquid phase. Exhibit 151: Additional Hydrogen Applications Industry Application Delivery method Food Electronics Glass Space Food Laboratory Heat Treatment Glass Glass Starch Optical fiber Rocket fuel Hydrogenation of fats and oils Cylinders Float Glass Polishing Pipeline Bulk Liquid Bulk Liquid Bulk Liquid Bulk Liquid Cylinders Cylinders Cylinders Source: Company data. CSFB estimates. Applications Exhibit 149: Global Hydrogen Demand. CSFB estimates. Source: Company data. with a boiling point of minus-252. Chemicals Industry Ammonia production is the single-largest consumer of hydrogen in the chemicals industry.8 degrees centigrade. As the production of hydrogen from natural gas tends to be integrated into the ammonia plant. most producers consider themselves to be consumers of natural gas. no external market. In addition. CSFB estimates. is also used in the production of a wide variety of chemicals. Industry estimates of % outsourced range from 6% to 10%. 166 . a mixture of hydrogen and carbon monoxide.Chemical Industry Primer. although many other chemical products also consume hydrogen during their manufacturing. syngas. Source: Company data. 2002 Current Annual Global Hydrogen Consumption 540bn m3 Exhibit 150: Outsourcing of Hydrogen Demand. 2005–2006 14 June 2005 Properties Hydrogen is a key chemical reagent and reducing agent.

fluid catalytic cracking and thermal processes both produce significant amounts of hydrogen. The largest source of hydrogen is catalytic reforming of naphtha.S. 2005–2006 14 June 2005 Significant quantities of both merchant and captive hydrogen are consumed by the chemicals industry. where it is passed through once and then generally burned as fuel. are expected to drive demand for the gas.) In Europe. In addition. (The deadline for this legislation is 2004 for gasoline and June 2006 for diesel. Exhibit 152: U. • Production. Source: Company data.. • Consumption. respectively. Petroleum Refining Petroleum refining both produces and consumes large amounts of hydrogen. The principal use of hydrogen in refineries is in the removal of sulfur and other contaminants from various petrochemical products. Emissions Legislation Exhibit 153: EU Emissions Legislation 500 450 400 350 300 Sulphur content 250 ppm 200 150 100 50 0 30 15 350 500 350 350 300 250 Sulphur content 200 ppm 150 150 100 50 0 50 10 50 10 2001 2001 2005 2001 2006 2001 2005 2008 2001 2006 2008 Gasoline Diesel Gasoline Diesel Source: Company data. which produces a gas that is typically 85% hydrogen. the maximum will be reduced to 50 ppm by 2005 and to 10 ppm by 2008. for both gasoline and diesel. respectively. More stringent emissions regulations.S. The regulations aim to reduce the parts per million (ppm) of sulfur in gasoline and diesel. the maximum permissible sulfur content will be reduced from the current 350 ppm for gasoline and 500 ppm for diesel to 30 ppm and 15 ppm. 167 . combined with the increasingly high sulfur content of many remaining crude reserves. The gas is usually routed directly to hydrogen-consuming units of the refinery. while bulk-liquid deliveries satisfy the needs of both small-scale users and of users whose regular production fails to meet peaks in demand. which currently stand at 150 ppm and 350 ppm.Chemical Industry Primer. In the U. The merchant gas is usually delivered in either single or multi-user pipelines.

. CSFB estimates. Gasoil Hydrotreater nC4 H2 ISOMERIZATION H2 FCC FCC Gasoline ETHERIFICATION H2 ALKYLATION Diesel VACUUM 168 CRUDE OIL Heavy Atm.Chemical Industry Primer. Gasoil VGO Hydrotreater H2 HYDROCRACKING H2 HEATING OIL DA O DEASPHALTING SOLVENT EXTRACTION DEWAXIN G HYDROFINISHING H2 LUBE OIL ASPHALT AR/VR DESULFURISATION VISBREAKING H2 COKING LS FUEL OIL HS FUEL OIL PETROLEUM COKE = Hydrogen Production = Hydrogen Consumption 14 June 2005 Source: Company data. 2005–2006 Exhibit 149: Hydrogen—Production/Consumption in the Refining Industry Acid gas from conversion units CLAUS GAS SEPARATION AMINE WASH SULFUR FUEL GAS nC4 MEROX H2 H2 Isomerization LPG Light Naphtha Hydrotreating ATMOSPHERIC DISTILLATION Heavy Naphtha Hydrotreating H2 Catalytic reformer H2 H2 Gasoline JET FUEL Desalted Kerosene MEROX Light Atm.

or as gas vaporized from liquid. bulk hydrogen sold to the electronics industry is usually in liquid form. while heat treating. Hydrogenation is a process that is used to raise the melting point of oils and fats. while the rest generally purchase their hydrogen in bulk liquid form. The industry produces its captive hydrogen in a number of ways. Hydrogen consumption in the metals industry has increased significantly in recent years. Many hydrogenators have captive or onsite hydrogen units. although the majority of the demand comes from processing. The hydrogen used needs to be of a relatively high purity (99. and onsite hydrogen are all consumed by the industry. sintering.5%) to prevent damage to the nickel catalyst that is used during the hydrogenation process.Chemical Industry Primer. primarily because of the increased demand from annealing furnaces. and in wafer production. Electronics Hydrogen is widely used during integrated circuit manufacturing. tungsten carbide. Because of the high purity required in these applications. and molybdenum powder all involve the use of hydrogen. 2005–2006 Edible Fats and Oils 14 June 2005 Hydrogen is used in the hydrogenation of unsaturated fats and oils. pipeline. The majority of hydrogen consumption is within the first of these processes. and fused quartz manufacturing. Primary production of tungsten. 169 . and brazing are all secondary processes that consume the gas. Metals Hydrogen is used in both primary metals production and secondary metals processing. so that they remain solid at room temperature. including generation from natural gas and dissociation of ammonia or methanol. Bulk-liquid. optical fiber manufacturing. The hydrogen content of the atmosphere in these furnaces has increased from 6% to 100%. for polysilicon manufacturing.

although some produce their own. flat-glass producers do not generally produce their own hydrogen but prefer to purchase bulk hydrogen in liquid form. which can cause a residue to form on the glass. That said. and hence gases companies. making it hazy. and as a result. in instrumentation as a calibration gas. and in a variety of environmental applications. hydrogen. to ensure an oxygen-free environment. and quantities required are comparatively limited. Utilities Hydrogen is used by utilities companies for two main reasons: 1. The majority of such plants purchase their hydrogen in liquid form. the stationary market might be a significant growth driver.Chemical Industry Primer. because the molten tin bed is highly sensitive to oxidation. As purity and reliability of supply are vital. Fuel Cells Industrial gases companies are currently investigating the potential for hydrogen as a feedstock for fuel cell technology. (See also the “Float Glass” section within the nitrogen uses discussion. 2. However. hydrogen is often added to the cooling water of nuclear power plants with boiling water reactors to prevent corrosion and cracking.) Hydrogen acts as a scavenging agent. will play no part in this market. it can provide more efficient cooling. As it has greater thermal conductivity and generates less friction than air. In addition. If methanol or gasoline (because of its easier storage and increased safety) becomes the preferred course of development. not only does the large-scale commercial development of fuel cells still appear to be a distant reality (according to Air Liquide. 170 . but also there is no guarantee that hydrogen will become the chosen fuel over methanol or gasoline. 2005–2006 Float Glass 14 June 2005 Hydrogen typically forms around 5% of the atmosphere (the remainder being nitrogen) for float-glass manufacturing. it is at least ten years away). it is used to cool some forms of generator. again depending upon the fuel infrastructure adopted. Glass quality is also affected by oxygen. Other Hydrogen is also used in the space industry as rocket fuel.

. Natural gas companies tend to recover crude helium during their processing of natural gas. Source: SRI.S. A small number of these companies also refine the helium. Consumption of Refined Helium—Liquid. About 80% of world production is in the U. CSFB research. which requires less upfront investment and fewer personnel for operation. Applications Exhibit 150: U. Because of its high value. 171 . and Poland.Chemical Industry Primer. Only a few sources in the world contain a sufficient proportion of helium (at least 0.S. and nitrogen).S. helium is the only major industrial gas to be traded internationally. CSFB research. 2005–2006 14 June 2005 Helium Production Helium is extracted from helium-rich natural gas deposits. Russia.3% helium) to justify its separation. and has a low solubility in water. It has a small molecular size. with the majority of the remainder located in Algeria. lighter than air. It is most commonly separated using a low temperature process that removes the crude helium from the natural gas. carbon dioxide. Further purification can also be undertaken using cryogenic separation. The prime objective is to remove impurities (including helium. which reduce the value of the natural gas. is highly mobile. and the coldest of all the nonatmospheric gases in liquid form. 2000 Exhibit 151: U. Consumption of Refined Helium—Gas. Properties Helium is totally inert. 2000 Other 9% Other 1 4% Fibre Optics 3% B reathing M ixture 4% Inert A tmo sphere 5% Heat Transfer 6% Leak Detectio n 8% Chro mato graphy 8% Welding 25% Preco o l 2% Nuclear M agnetic Reso nance 6% Superco nducto r Bath 8% Lift Gas 1 8% P ressure Purging 9% M RI 75% Source: SRI. but most send it to an industrial gas company for further refining. although technology is moving toward using a pressure swing adsorption (PSA) process.

• Breathing mixtures. Because it remains gaseous under normal operating conditions. and is easily detected in minute amounts. Helium is used because it is capable of escaping through tiny gaps. The susceptibility of many metals to oxidation means that many metals cannot be joined without such a shield. • Chromatography. and has a high thermal conductivity. as it proved to be a useful diagnostic tool. helium is a useful heat-transfer medium. MRI use became popular in the late 1980s. and high thermal conductivity mean that it is a popular carrier gas during a technique used for separating mixtures of gases. • Heat transfer. • Lift gas. • Leak detection. In products that require leak-proof systems for safety or long-service life. It is used for lifting weather balloons. 172 . Helium and oxygen are combined and used as a synthetic breathing mixture for deep-sea divers working underwater for long periods. The increase in offshore exploration and production within the oil industry in the 1980s fueled demand for this application. liquids. The liquid helium is used to cool the magnets within the machine. Applications—Liquid • Magnetic resonance imaging (MRI). as well as for filling blimps and decorative balloons. Helium has been used as a nonflammable substitute for hydrogen in balloons and lighter-than-air craft. inertness. • Pressure purging.Chemical Industry Primer. 2005–2006 Applications—Gas 14 June 2005 • Welding. Purging of air and spacecraft used to be a major use of helium. where it provides an inert gas shield to protect the weld zone from the atmosphere. and is therefore used in gas-cooled nuclear reactors. or dissolved substances. Now it is also used for purging cold boxes and gas storage equipment. The largest use for gaseous helium is in welding. is chemically inert. Helium’s low solubility.

Rather than being considered an impurity and vented into the atmosphere. (See the “Hydrogen” section.) Syngas is composed mainly of hydrogen and carbon monoxide. The majority of carbon dioxide is recovered from industrial processes. carbon dioxide does not support combustion. carbon dioxide tends to be a by-product of other processes. Some countries encourage the use of ethyl alcohol as a fuel. both industrial and natural. the amount of carbon dioxide recovered from oilfields has also grown. a relatively limited number of pure carbon dioxide deposits exist naturally that can be recovered for processing and further use. As its use in oil-field applications has increased (principally for EOR). Carbon dioxide dissolves readily in most liquids. • Ethyl alcohol. 2005–2006 14 June 2005 Carbon Dioxide Production Rather than being manufactured. In addition. either as a proportion of natural gas or sometimes as pure carbon dioxide. Industrial By-Product • Hydrogen. or as dry ice in insulated trucks. • Other. Most carbon dioxide is recovered from plants that produce hydrogen or syngas through steam reforming of natural gas. which can be compressed to form blocks (dry ice). and forms a mildly acidic solution when dissolved in water. Properties Carbon dioxide is heavier than air. and when concentrated. although some is also recovered from natural deposits. ethylene oxide. A number of other chemical production processes give rise to carbon dioxide. In addition. If the liquid is exposed to atmospheric pressure. its production is likely to be a growing source for carbon dioxide. can be compressed and cooled to form a colorless odorless liquid. with a small proportion of carbon dioxide. sodium phosphate. Carbon dioxide can be transported in cylinders. carbon dioxide content in natural gas is now recovered for future use. and as a result. road or rail tankers. also creating more carbon dioxide. These plants are typically used in the production of ammonia and other chemicals for hydrogenation. it converts into a mixture of gas and solid. if more hydrogen is desired. Substitute natural gas (SNG). Carbon dioxide is produced as a by-product of the fermentation process that produces ethanol.Chemical Industry Primer. Natural Deposits Significant amounts of carbon dioxide are recovered from natural deposits. However. and calcium carbonate operations all give rise to carbon dioxide in quantities sufficient for recovery. 173 . the carbon monoxide is catalytically oxidized.

principally for carbonation. and we do not expect growth to significantly exceed the historical average of around 3. For example. to prevent oxygen coming into contact with the beer. Liquid and solid carbon dioxide is used in the preparation. In addition.Chemical Industry Primer. or dry ice. supply of carbon dioxide is at a peak in the autumn and winter months as a by-product of ammonia production. packaging. because of its ability to inhibit growth of bacteria that cause spoilage. In a number of areas. Demand. A large proportion is used to keep food cool while it is being handled. Applications The balance between supply and demand for carbon dioxide is not necessarily an even one. Not only does it generate “fizz. which is at its highest level during this period in preparation for the spring fertilizer requirements. although some is also purchased over the fence.) Solid carbon dioxide. 174 . In addition. with virtually all of the remainder used for beer.5%. while globally there is an increasing interest in capturing emissions. Applications—Solid and Liquid • Food industry. (See our discussion on nitrogen applications in the food industry. This is a mature market. and preservation of a wide variety of food products. or as a purge gas. Production of carbon dioxide is driven by demand for the primary product.” but it also inhibits the growth of mold and bacteria. The European Union has imposed a tax on carbon dioxide emissions. the beer-brewing industry consumes significant amounts of carbon dioxide. processed (such as dough mixing). We estimate that approximately 80% of the carbon dioxide used for this purpose is directed toward soft drinks. Other uses within the food industry include creating an inert atmosphere for packaging to prevent food spoilage. it competes directly with nitrogen and holds an advantage in some situations because of its lower cost. The majority of this carbon dioxide is produced captively through fermentation. carbon dioxide is now being injected into some dairy products such as milk and ice cream to prevent the growth of microorganisms. Carbon dioxide is frequently used during two processes. • Beverage carbonation. Liquid carbon dioxide is widely used as a direct refrigerant that is sprayed onto food for freezing. and hence extend the shelf life. which may not match demand for carbon dioxide itself. controlled atmosphere packaging (CAP) and modified atmosphere packaging (MAP). or transported. is highest during the summer months. Carbon dioxide’s primary use in the beverage market is for soft drinks. as its principal source is as a by-product of other processes. 2005–2006 14 June 2005 Environmental Issues The widely held belief that atmospheric carbon dioxide is responsible for global warming has led to an increased focus on reducing emissions. is widely used to lower the ambient temperature during food transportation. driven by food refrigeration and beverage carbonation on the other hand.

solvent recovery. is injected into the well to aid the release of the hydrocarbons. Carbon dioxide is used in oil and gas recovery for both fracturing and in enhanced oil recovery (EOR). To adjust the PH of drinking water (usually as a replacement to lime to soften water). which open the pores of the rock. particle formation. As a shield gas in gas metal arc welding (GMAW) and flux core arc welding (FCAW). although it is occasionally used in oil wells. Compressed liquid carbon dioxide. many of which have been banned under the Clean Air Act. This is discussed in further detail below. Exhibit 152 contains a brief summary of some of the wide variety of other uses for merchant liquid carbon dioxide. The ammonia and carbon dioxide are then reacted under high temperature and pressure to form ammonium carbamate. The majority of carbon dioxide consumed for this purpose is in gaseous form (see below). Aerosol packaging Pulp mills Dry ice Source: CSFB research. It is also used in some types of fire extinguishing equipment. chemical reactions. replacing sulfuric acid as it is less toxic. Also for brownstock washing. cleaning. • Other. 2005–2006 14 June 2005 • Oil and gas recovery. For EOR. although it is not suitable for soil fumigation. but also in pellets for blasting. Replacing chlorofluorocarbons. Also to neutralize alkaline wastewater streams. gaseous carbon dioxide is generally piped in. Extractions (such as caffeine from coffee. to shut out oxygen. and chromatographic separation. 175 . Also as a stirring gas in steel manufacturing (see nitrogen section).Chemical Industry Primer. Used mainly for polyurethane and polystyrene foams. Large quantities are produced and consumed captively in chemical manufacturing. to clean surfaces by thermal shocking. Particularly at grain stores and flourmills. Carbon dioxide is produced as a by-product of ammonia production. Urea is the primary consumer. Its principal use is in gas wells. Most urea is produced at plants that recover and recycle excess ammonia feed. although we expect demand from this source to decline as hydrocarbon-based propellants are replaced with emulsions of water and an organic solvent to reduce VOCs. flavors from spices). Use is on the increase as one by one alternatives are withdrawn for environmental and health reasons. Applications—Gas • Captive for chemical manufacturing. It does not have the insulating properties of some gases. also as a reactant to manufacture precipitated calcium carbonate. and hence demand for fertilizer is the principal driver for this source. To treat acid wastewater. During fracturing. Currently mixed with hydrocarbons for propellant use. as a blanketing and inerting atmosphere. Replaced CFC-12 during 1970s. and hence use in some applications is limited. Primarily used to keep items cold. sodium carbonate. for inerting and pressurizing and for cooling. because of the quantities required. Exhibit 152: Carbon Dioxide—Miscellaneous Uses Use Description Chemical manufacturing Metal working Inerting and pressurizing Solvent and supercritical fluid applications Water treatment Fumigation Foam blowing As a raw material. such as oil refining. liquid carbon dioxide containing proppants. and calcium carbonate. In a wide variety of applications. This is then dehydrated to form urea and water. principally in the manufacturing of synthetic urea.

it is an effective solvent for oil. and this can be recovered and reinjected. As crude reserves in oil fields become depleted EOR techniques are implemented more frequently. accounting for approximately 25% of all U. the unique characteristics of the field. picks up the lighter carbon components. and the flood cannot be easily stopped. as some of the injected carbon dioxide will break through with the recovered oil. gas (41%). the remaining carbon dioxide can in theory be recovered and used to flood another field.S. Carbon dioxide is also used in the production of sodium carbonate (soda ash). increasing the volume and reducing the viscosity of the oil. Over time. The three principal methods are thermal (59% of EOR in 1998). which may include carbon dioxide) content. the amount of oil in the field will naturally play a part. although companies that produce their own carbon dioxide will probably consider a lower oil price as their threshold. but the majority used for EOR occurs naturally in fields developed for their carbon dioxide (or methane. because at temperatures and pressures above its critical point. EOR using carbon dioxide appears to become economically viable when the oil price reaches US$20/barrel. It. EOR in 1998. and chemical (less than 1%) methods. making extracting easier. However. The gas is usually recovered as a by-product of other processes. Carbon dioxide is the most commonly used gas for EOR. such as the decomposition of limestone. the price and availability of carbon dioxide. although some plants purchase it in bulk-liquid form. Industry estimates of the extent to which recovery is enhanced range between 8% and 16%. the majority of the costs are sunk in the infrastructure. 2005–2006 14 June 2005 Carbon dioxide is commonly reacted with milk of lime to produce precipitated calcium carbonate. demand for which has increased rapidly in recent years for use in manufacturing paper. and the level of government intervention (if any). demand for purchased carbon dioxide falls. because the fixed-asset costs can then be spread over a longer period. The economics of using carbon dioxide depend on several factors: the price of oil. Some oil fields are fortunate enough to be located near ammonia plants that produce large amounts of by-product carbon dioxide. At the end of the oil field’s useful life. therefore. once the decision has been made to inject a field with gas. As EOR requires large quantities of carbon dioxide.Chemical Industry Primer. the gas can only economically be delivered by pipeline. In addition. which is used both as a chemical reagent and in glass manufacturing. 176 . • Pipelined for oil and gas recovery.

2005–2006 14 June 2005 XIII.169 4. focusing operations on specialty products and consolidating to gain scale. 2004 US$ in millions.584 1.721 1.826 9. Rhodia was 177 . however.553 2.341 4. Source: Company data. It is these broad features that distinguish specialty chemicals companies from the more commodity-oriented operations. while ICI’s reinvention as a specialty chemical company began in the same year with the purchase of Unilever’s chemical businesses.798 3. The companies within this subsector are defined more by the general characteristics of the products that they manufacture. CSFB estimates.441 1. the global chemicals sector has seen a number of major diversified players trimming their portfolios. It is possible.801 1.462 7. to bracket specialty chemicals companies into a number of broad categories based on the end use of their products. unless otherwise stated Company 2004 Sales 3M Degussa Clariant DSM Ciba Specialty Chemicals Lanxess ICI Rhodia Avery Dennison Engelhard Ecolab Sealed Air Givaudan Lonza Valspar Ferro Cytec Johnson Matthey British Vita Yule Catto Croda 20. Specialty Chemicals Industry Trends and Value Drivers Overview Over the last decade.262 698 376 * Excludes PMD division and auto catalysts.824 2.095 8.014 14.131 3. rather than by any technical function of those products.584 11. American Cyanamid spun off its specialty chemical operations into Cytec Industries in 1997.Chemical Industry Primer. and acquired the specialty chemical businesses of Hoechst in 1996 in a transaction that propelled it into the top echelons of the specialty chemical industry. Clariant was formed in 1995 from an IPO of the chemical operations of Sandoz. Specialty Chemicals Background What Are Specialty Chemicals? Specialty chemicals is a loosely defined term. Exhibit 153: Specialty Sales League*.006 9.757 5.155 6.

and Degussa (2001) have all emerged as prominent players on the specialty scene. however. including research. Historically. more recently. to name just two. so have their importance as investment vehicles within the chemicals industry. Givaudan (2000). while the latter are sold on effect. there are a number of key drivers. many of these distinctive features have become less clear. Lonza (1999). Most recent.to mid-sized producers. which now dominate the specialty chemical landscape to the extent that specialties now make up around 20% of the market cap of the global sector. the essential difference between commodity and specialty chemicals has been that the former are sold on price. Bayer demerged a number of its downstream chemicals businesses to create Lanxess. and the line between specialty and commodity chemicals is sometimes blurred. 2005–2006 14 June 2005 created from the chemicals. As the specialty industry has matured. 178 . the distinction between the two categories is increasingly blurred. such as high absorbency or anti-icing properties.Chemical Industry Primer. at the start of 2005. bespoke product development. consolidation and restructuring within the industry has produced a league of larger manufacturers. They provide important characteristics that enhance products with such elements as texture and color or provide key product qualities. and polymers businesses of Rhône-Poulenc in 1998. behind the industry that are worth highlighting. but also a much broader range of services to their customers. and storage solutions. As the revenues and market capitalizations of these groups have grown. In general terms. However. however. Competition within the industry is based upon product differentiation and innovation. problem solving. specialty chemical businesses tend to form a low proportion of the cost of the end application in which they are used (typically a few percent). this segment of the industry has been represented by a large number of small. Specialty chemical producers often supply not just a product. One of the defining features of these companies is the immensely broad range of activities included within their portfolios. both positive and negative. and certain logistical issues such as distribution capacity. Effect More Important than Price Traditionally. However. More recently. fibers.

Obviously. Not Supply-Driven—A Stable Pricing Environment A true specialty chemical product is typically characterized by a small number of global producers. and also tend to display a greater degree of product differentiation. As a result. while demand generally varies in-line with trends in the economy as a whole. The high price elasticity of a commodity chemical often leads to significant levels of volatility across the cycle. the production of many commodity chemicals is on an extremely large scale. Production of many specialties is on a relatively small scale and can be measured in terms of kilograms. These volumes apply particularly to products such as bulk actives for pharmaceutical or agrochemical products. This has in the past tended to lead to higher stock market valuations for specialties than commodity stocks because of a lower perceived risk in specialty production. they create an environment in which both margins and prices display comparatively higher levels of stability across the business cycle. 2005–2006 Exhibit 154: Specialty Chemicals Value Drivers External to the Chem ical Industry • Dow nsizing • Focus • Benchmarking • Outsourcing • Supplier C oncentration • Reduced Com petitive Advantage • Volume Grow th S low down • Deflationary P rice P ressure 14 June 2005 Internal to the C hemical Industry • S earch for V alue-Added • • • • • • • Supplier Relationships Higher S ervice Levels Pricing P ressures Focussed Core Com petencies Hunting for Growth Risk/Rew ard Increasing comm oditisation Strategic Drivers G eographic • Regional vs Global • • • • • Structural E uropean W eakness Globalized C ustomers Globalized S uppliers Globalized C ompetitors Global Positions Key Source: CSFB research. this premium will vary from company to company dependent on the product portfolio. growth rates tend to be at or slightly above prevailing GDP growth. 179 . although that is not to say that specialty chemicals companies necessarily enjoy pricing power. which tend to be further down the chemical processing chain (and thus further away from inputs such as crude oil). boosted by new applications and new product development. In contrast. This tends to be less pronounced in specialty chemicals. Although these factors do not mean that specialties will necessarily command higher selling prices or generate higher margins than commodities across the cycle.Chemical Industry Primer. stemming from a less volatile earnings stream. Demand. Greater Profit Stability Pricing trends for specialty chemical companies tend to be more stable than for commodities.

specialty chemicals often have lower levels of capital investment than are typically found in commodity chemicals. on the other hand.Chemical Industry Primer.) Commodities. The relatively small number of competitors within each product area of the specialty chemical sector. therefore. consolidation among customers has in many cases increased their bargaining power. on the whole. reduces the cyclical overcapacity problems that characterize the commodity chemical industry. The chemical industry has. Moreover. 180 . The high cost of doing business globally is more suited to production of goods that carry higher levels of intellectual content and service. (Good examples of such relationships are Lonza in some areas of the fine chemicals industry. much of the world’s commodity chemical production resides within oil and gas companies In the majority of cases. DSM. Barriers to Entry Higher than for Commodity Chemicals The high levels of technical expertise and the close nature of the supplier/customer relationship that typify the production of some specialty chemicals mean that some technical barriers to entry to the industry are often higher than for many commodity chemicals. initially continued to operate its more commodity-based operations in tandem with the new businesses. As incremental additions to capacity tend to reflect increases in demand. the need for an assured supply of product of a consistently high quality means that customers are unlikely to switch supplier. the fundamental imbalance between supply and demand that exists within the commodity chemical industry is less of a feature of the specialty chemical industry. for example ICI. However. DSM sold its commodity operations in 2001. Meanwhile. 2005–2006 14 June 2005 Prices for specialty chemicals tend to be more stable than for commodities. In addition. the features of the specialty industry that we have just outlined have attracted increasing numbers of participants in recent years. Givaudan in the flavors and fragrances industry. Specialties tend to include a high level of intellectual property content. this portfolio shift has involved a wholesale reorientation of a company’s activities. which expanded its life sciences operations substantially with the acquisition of Gist-Brocades in 1998. As a result. and Engelhard in the gas-to-liquids catalyst industry. the company has accelerated the transition downstream with the acquisition of Catalytica in 2002. However. A dwindling number of companies have maintained their presence in their traditional commodity markets while also diversifying into more specialty oriented businesses. much of the chemical industry has made significant efforts to reposition their portfolios and reduce their exposure to the highly cyclical commodity end of the chemicals industry. and Roche vitamins and Fine Chemicals in 2004. General Portfolio Shifts and Downstream Consolidation Over the past few years. shifted the balance of its portfolios downstream. In some end markets. leading to further downward pressure on prices. once a strong relationship is established with a customer. and some will be sold under patent (although these patents are more often than not superceded by advances in technology). where it can compete on areas other than cost alone. As a result many specialty categories now suffer from oversupply and price deflation. have very few comparable barriers to entry—customers will buy from the producer that can meet their requirements at the lowest cost.

and to locate production assets in areas of lower production cost. the pulp and paper industry (Enso and Stora). hence. driven further consolidation activity within the chemicals industry—global customers want to be serviced by global suppliers. brought with them a degree of commoditization. Customer Consolidation If consolidation was a defining feature of the specialty chemical industry in the 1990s. As the power of the customer has increased. such as textile dyes and some plastic additives. The commoditization of a product line implies that pricing declines will intensify over time. so too have the pricing pressures faced by chemical producers. of the industries that it services. increasingly this is driving out weaker competitors. 181 . paints (Akzo Nobel and Courtaulds). the pricing power that was once firmly in the hands of the chemical manufacturers is. to an even greater extent. leaving those who remain with prospects for improved profitability. would certainly now better be described as commodities. overall business trends between two different specialty producers could be completely different. Price deflation within the industry looks set to remain a defining feature of the specialty chemical landscape from this point onward. Some product lines. in many areas. we believe it is absolutely key for specialty chemical companies to pare their cost structure to the bone wherever possible. to a certain extent. The extent to which this is an issue for any given company depends entirely on the business portfolio and. perhaps inevitably. Consolidation within the customer base has. and pharmaceuticals (Hoechst and Rhône-Poulenc. now shifting in favor of the customer. Industry worldwide is reacting to the need to globalize and pursue purchasing and operating synergies in a drive to improve returns. are now only semi-specialties at best. When combined with the trend toward commoditization that we have outlined. From this point of view. Glaxo Wellcome and SmithKline Beecham).Chemical Industry Primer. Examples of the trend toward consolidation can be found in the auto industry (Daimler Benz and Chrysler). to find critical mass in their area of core competency. then the same is true. 2005–2006 14 June 2005 Commoditization Increasingly high levels of competition within certain product areas have. and some. Pfizer and Warner Lambert. While this price deflation may put returns under pressure in the short term. which were once true specialties.

which are sometimes considered specialty chemicals industries. as separate sections later in this report.Chemical Industry Primer. Exhibit 155: Global Specialty Chemicals Market Size. 2005–2006 14 June 2005 Specialty Product Categories The definition of what constitutes a specialty chemical is a loose one and the line between specialty and commodity is sometimes blurred. 182 . there is considerable overlap in this categorization. such as adhesives. Market-oriented products are groups of chemicals that are utilized by a specific industry or market such as oil field chemicals. Specialty chemicals can be categorized either as market oriented or functional product oriented. Naturally. therefore. we have attempted to bracket the vast array of operations of the companies within this subsector into a number of broad categories. CSFB research. antioxidants or biocides. Functional specialty chemicals are groups of products that serve the same defined function. we examine the agricultural chemicals and industrial gases industries. 2003 60000 50000 40000 $ Millions 30000 20000 10000 0 Active Pharmacuetical Ingrdients Pesticides Electronic Chemicals Advanced Ceramic Material Specialty Polymers Flavors & Fragrances Industrial & Institutional Cleaners Specialty Surfactants Catalysts Printing Inks Specialty Coatings Food Additives Specialty Paper Chemicals Water-soluable Polymers Cosmetic Chemicals Synthetic dyes Plastic Additives Textile Chemicals Adhesives & Sealants Image Chemicals & Materials Water Management Chemicals Oil Field Chemicals Seperation Membranes Nanoscale Chemicals Lubricating Oil Additives Biocides Anti Oxidents Enzymes Source: SRI. However. In addition to the categories outlined below.

roof coatings and marine applications. Major markets include industrial construction and maintenance. Somewhat ironically. Demand for these products is closely allied to the level of industrial activity. and machinery. Short-term swings in sales growth tend to reflect the level of home redecorating. usually applied using heat. furniture and building products. appliances. 2005–2006 14 June 2005 Paints and Coatings Paints and coatings are used to create a decorative and/or protective layer. and therefore are driven by general activity in the housing market. Other This final category includes products such as paint thinners and removers. additives. as they are also used during decoration. Used on residential. The substances from which they are made include resins. dilutants. wood fillers and sealants such as putty and other glazing compounds.Chemical Industry Primer. The usage ratio is approximately 60:40 interior to exterior use. Manufacturers have also been focusing on the development of new paints and process techniques to increase application efficiency. Paints and Coatings Industry Trends and Value Drivers Recently. The industry breaks down into four main categories: Architectural Coatings This is the largest market by volume. Special-Purpose Coatings These products are formulated for special conditions such as extreme temperatures or corrosive conditions. as well as solvent cleaners. the industry has been under pressure to reduce the amounts of solvents used in paint and to limit the emission of volatile organic compounds (VOCs). pigments. which are dry solventless coatings. and in some products. automotive and machinery refinishing. This has led to an increase in the use of water-based and solventless paints. OEM Coatings Original equipment manufacturer (OEM) coatings are applied to equipment and objects during manufacturing. road markings and traffic signs. The market is considered mature. Such objects include cars and trucks. The coatings are manufactured to each customer’s specifications and include powder coatings. the majority (80%) is water-based. solvents. Competition comes from alternative materials such as interior wall coverings and wood paneling. this has in turn led to a decrease in paint consumption. 183 . and we expect long-term growth to remain in-line with GDP. commercial and industrial buildings and sold through wholesalers and retailers. Demand for these products follows the fortunes of the architectural coatings market closely.

Manufacturing assembly and consumer use comprise other important markets. Starch Adhesives These adhesives are manufactured from a variety of natural starches. cornstarch. Sealants Silicone sealant is the largest product type. They are the oldest form of glues. but their popularity is waning because of the superior performance of synthetic substitutes and also because of their strong odors. Adhesives make up a very small proportion of the fastening market. Other types of synthetic adhesives are reactive. and thereby gives very good penetration of the adhesive. construction. and urea. Synthetic sealants continue to replace natural materials. fish products. milk-derived glues are still widely used for woodworking and in the manufacturing of paper cups. including potato starch. Despite this. Sealants are materials used to fill the gap between two materials and prevent the passage of liquids and gases between them. hotmelt. the use of solvent-based adhesives is declining at approximately 2% per year. although the increased use of plastic parts in engineering is fueling demand from this industry. The major source of demand comes from the construction and transport equipment markets. but they are the fastest-growing of all methods.Chemical Industry Primer. They have the advantage of being cheap to produce. but many are derived from ethylene. but their relatively low strength and poor resistance to water mean that they are being replaced by synthetics. Their continuing substitution for natural adhesives means that they now account for over 70% of the adhesives market. However. Synthetic Adhesives Synthetic adhesives use a broad range of raw materials. and furniture/woodworking. In both the adhesives and sealants markets. which now make up a very small proportion of the market. 184 . Natural Adhesives Animal Glues These are made from animal bone. followed by sealants made from urethanes. tapioca flour. synthetic materials continue to replace natural ones despite a strong move to reduce the emission of solvents and other VOCs within the industry. However. or milk derivatives. The main uses for starch adhesives are in woodworking for veneers and plywood. The use of solvent provides the adhesive with excellent wetting properties. and water-soluble. and wheat flour. The largest end markets for adhesives are packaging. Adhesives and Sealants Industry Trends and Value Drivers The adhesive sector comprises approximately 80% of global sales. it is unlikely that they will ever replace traditional fastening methods such as welding or rivets. because of continuing concerns about the long-term reliability of adhesive bonds. formaldehyde. as well as for postage stamps. while sealants generate roughly 20%. 2005–2006 14 June 2005 Adhesives and Sealants Adhesives are materials used to attach or bond two solids together.

therefore. Industrial markets consume approximately 75% of water treatment chemicals. commercial. including solid waste. and municipal applications. petroleum refining. which combat bacteria in water. Municipal applications consist of treatments for drinking and for waste water. and paint industries. and after its use in industrial. 2005–2006 14 June 2005 Water Treatment We define this category as those chemicals that are added to water to improve its purity before. from water. the developing economies of Latin America and Asia. demand growth is driven by alternative applications such as the health of the pulp and paper industry. and aluminum compounds. They are used as disinfectants in a wide variety of industrial and commercial applications. However. unlikely to exceed 1-2% per annum in developed economies. therefore. such as polyacrylamides and acrylic acid polymers. offer the greatest potential for growth. The chemicals used include water-soluble polymers. as are industrial and consumer health and population growth. during. Smaller volume specialty products in this category include biocides and bromine compounds. They account for the largest category of water treatment chemicals by volume. Environmental regulation is a key factor. Oxidizers and Biocides This category of chemicals includes the bulk commodity chemicals of chlorine and hydrogen peroxide. Demand growth for the most part is allied to population growth and is. Coagulants and Flocculants Used principally in the municipal water treatment industry. as well as their derivatives. Water softening and purification chemicals are widely used commercially in food and beverages manufacturing. Water Treatment Uses The major industrial consumers of these chemicals are the pulp and paper. closely tied to the level of industrial activity. while treatment chemicals for swimming pools also generate significant demand. metal finishing electronics. Growth in demand for corrosion inhibitors is. Water Treatment Industry Trends and Value Drivers The broad definition and the consequent wide range of applications mean that a wide range of factors drive demand. with cooling water the largest application and pulp and paper the largest market. with their improving living standards. chemical processing. As specialty applications constitute a very small proportion of the demand for these major chemicals. Corrosion inhibitors These chemicals are added to water used in industrial applications to prevent the formation of lime scale and to prevent corrosion of metal parts caused by dissolved salts. 185 . in our view.Chemical Industry Primer. these chemicals help to separate suspended matter and contaminants.

Combined. which provide another means of separating suspended matter and contaminants from water. end of the production scale. Other Uses Specialty chemicals are used in a number of other capacities in the treatment of water: defoamers and sequestering agents. The chemicals used themselves include lime. sodium derivatives. these uses account for approximately 15% of the market for water-treatment chemicals. They are used to maintain pH levels in both industrial and household water by eliminating the effects of calcium and magnesium. 2005–2006 14 June 2005 pH Adjusters and Water Softeners These chemicals also tend to be at the commodity.Chemical Industry Primer. and sulfuric and hydrochloric acid. rather than the specialty. 186 . as well as filter media and adsorbents.

and the terms tend to be used together to describe a single segment of the chemical industry. 3. we estimate. Although flavors and fragrances are two quite distinct product groups. 2003: $16 billion Aroma chemicals 13% Flavor Compositions 43% Essential Oil/ Natural Extracts 17% Fragrance Compositions 27% Source: SRI. which are produced by the synthesis of naturally occurring essential oils for direct use in compounding and for chemical conversion to other aroma compounds. Flavor and fragrance compounds. which are derived from a multitude of botanical sources. However.Chemical Industry Primer. Essential oils and natural extracts. which are a reasonably complex mix of aromatic materials. and often privately owned. These comprise a blend of the first two groupings of essential oils and/or aroma chemicals. using different chemical reactions and techniques and with different market dynamics. worth around US$16 billion in 2003. relatively small-scale. 2005–2006 14 June 2005 Flavors and Fragrances Industry Overview The global flavors and fragrances industry was. the industry is by no means homogeneous and is an umbrella term for three differentiated business sectors: 1. 2. Aroma chemicals. Exhibit 156: Flavors and Fragrances Market. 187 . CSFB research. most major players in the industry are involved in the production of both flavors and fragrances. Many of the suppliers of these products are from developing countries.

2005–2006 Exhibit 157: Structure of the Flavors and Fragrances Industry Natural 14 June 2005 Synthetic Raw Material Animals Plants Chemical Intermediates Odoriferous Substances Secretions Exudates Essential Oils Aroma Chemicals (natural and synthetic Flavor and Fragrance Compounds Captive Compounds (compounding by end users) Merchant Compounds (compounding by the flavour and fragrance industry Finished Goods (End Users) Soaps and Detergents Cosmetics and Toiletries Foodstuff. 2004 Aroma/Flavor 24% Confectionery 16% Fragrance ingredients 34% Dairy 19% Consumer products 50% Beverages 28% Others 13% Fine Fragrances 16% Source: Givaudan. Pharmaceuticals Industrial Uses Source: Company data. Flavors are used in small quantities to enhance the taste and texture of all manner of processed food and beverages. CSFB estimates.Chemical Industry Primer. Exhibit 158: Flavor Market End Uses. Flavors and Fragrances Uses Fragrance products are sold principally to manufacturers of perfumes. cosmetics. 188 . detergents. Source: Givaudan. Beverages Tobacco. CSFB research. and other personal and household care products. 2004 Exhibit 159: Fragrances Market End Uses. CSFB research. Both flavors and fragrances may be derived from naturally occurring essential oils and plant extracts or from chemicals produced from organic synthesis.

Hasegaw a 2% Sensient 3% Takasago 5% Givaudan 12% Quest 5% Symrise 7% IFF 11% Firmenich 9% Source: Givaudan. Small. Exhibit 160: Major Manufacturers of Flavors and Fragrances. Flavors and Fragrances Industry Trends and Value Drivers Although few major flavor and fragrance manufacturers are involved directly in the sourcing of essential oils and natural extracts. 2. Large chemical companies participate in these markets by upgrading small portions of their large-scale chemical production to flavor and fragrance specification (such as Rhodia. three types of chemical companies produce flavors and fragrances chemicals: 1. since the process is more costly than synthesis. 2003 Other 40% Danisco 2% Mane 2% Ogaw a & CO 2% T. despite well-publicized fears over GMOs in Europe.Chemical Industry Primer. Their competitive advantage is a very specialized technical know-how for manufacturing certain classes of chemical (such as IFF and Givaudan). 3.to medium-sized custom synthesis houses with a specialized technical knowhow. However. with organic synthesis remaining the primary production method. Biotechnology is playing an increasingly important role in the aroma chemicals industry. The traditional flavor and fragrance houses produce chemicals as needed for their own compounding and also for sale in the open market. The influence of such companies is dwindling as purified chemicals shift to less-profitable commodity status. BASF. 2005–2006 14 June 2005 Flavors and Fragrances Manufacturers Worldwide. Eastman and Cognis). it remains restricted to a relatively limited range of aroma chemicals at present. a number are back-integrated into the production of aroma chemicals. CSFB research. 189 .

and low-cholesterol. In 1985. the industry continues to find new and innovative uses for fragrances. while customer consolidation has led to increased buyer power. and pricing power has become less significant. Consequently. By 1999. 2005–2006 14 June 2005 The flavors and fragrances industry is increasingly moving toward a two-tier structure. with a large number of significantly smaller companies operating in niche markets. Industrialization and higher disposable income lie at the heart of the demand for flavors and fragrances. demand for products such as male toiletries and deodorants has grown significantly. We expect medium. 190 . soft drinks. The “money rich. as income rises so does demand for processed food and higher quality personal and household care products. while new markets are constantly emerging. In the field of flavors. the pace of consolidation had been such that the combined sales of just five manufacturers accounted for around 55% of the total market. as has the market for designer fragrances. significant consolidation has taken place over the past few years. product lines have been rationalized. products such as convenience foods. In the fragrances market. dominated by a handful of major players. demand has slowed. In the developing world. as well as for luxury goods such as fine fragrances.Chemical Industry Primer. such as aromatherapy. time poor” society means that convenience foods and high-performance household products are high on most consumers’ shopping lists. 23 companies accounted for around 55% of the total market for flavors and fragrances. low-fat foods have all boomed in popularity. Flavor and Fragrances Growth Prospects The number of applications in which flavors and fragrances products are used has grown rapidly in recent years. Despite the industry’s fragmented structure.to long-term growth in this industry to settle at around twice the rate of GDP growth. however. Meanwhile. Recently.

Chemical Industry Primer. Chemical Catalysts Chemical catalysts are used in a variety of different industries. while they undergo no reaction themselves. which in recent years has not been good. which is the source of by far the largest share of industrial products. 2005–2006 14 June 2005 Catalysts Catalysts are substances that alter the rate at which other chemicals react. catalysts can be recovered in their original form following the reaction. • Reforming catalysts are used to further refine and enhance petroleum components to create gasoline and petrochemical feedstocks. In theory. including chemicals. Petroleum Catalysts Petroleum refining. there are three types: • Fluid cracking catalysts (FCCs) comprise roughly 50% of overall demand and are used to assist in the conversion of petroleum in gasoline and other fuels. they have a useful life that varies according to the application. Johnson Matthey-owned Synetix is Europe’s principal producer of hydroprocessing catalysts. 2001 Chemical Processing Catalysts 20% Petroleum Refining Catalysts 41% Emmison control Catalysts 39% Source: SRI. Exhibit 161: Catalyst Markets by Type. hydrogenation 191 . pharmaceuticals. CSFB estimates. We expect longer-term growth rates to be in the region of 2-3% per annum. consists almost entirely of catalytic processes. The greatest demand comes from manufacturers of polymers. Other large markets are for oxidization (in the production of ethylene oxide). and food. organic synthesis. but in practice. polymers. Engelhard and Grace (which bought Akzo Nobel’s business in 2004) are the major manufacturers of FCC catalysts in the world. The vast majority of chemical processes involve a catalyst of some sort. Used principally for the production of fuels and other petroleum derivatives. Demand for these chemicals relies largely upon the health of the oil refining industry. • Hydroprocessing catalysts are used for the removal of impurities from crude oil prior to its distillation. although upside could be driven by a major expansion in gas-to-liquid (GTL) technology.

The auto market is the key driver of the environmental catalysts industry. However. In addition. with certain properties and advantages. polymer catalysts have been developed that not only affect the rate of polymerization.Chemical Industry Primer.5% over the next five years. and other industrial plants. snow mobiles. power stations. They reduce the levels of substances such as carbon monoxide and volatile organic compounds (VOCs) and sulfurous substances within waste gases. and gas synthesis (used in the manufacturing of hydrogen. Demand stems from both OEM manufacturers and from retrospective fitting of catalysts to vehicles already in circulation. and methanol). tougher emissions legislation around the world has driven demand growth in recent years.) come under scrutiny.0% beyond this period. 2005–2006 14 June 2005 and dehydrogenation. Environmental Catalysts Environmental catalysts are used to control pollutant emissions from a number of sources such as auto engines (in catalytic converters). Recently. and is likely to continue to do so. ammonia. We estimate long-term demand growth in this area of approximately 2-3% per year. 192 . As a result. etc. Growth in the industry has historically been in the region of 3%. Demand for these catalysts reflects a wide range of drivers but broadly follows overall industrial activity. lawn care. as emissions from industrial plants and other nonauto-related industries (construction vehicles. we expect tightening emissions legislation to lead to growth of around 6. Exhibit 162: Vehicle-Emissions Legislation Source: Johnson Matthey. industrialization of developing economies offers further potential for growth. but also increase the output of a polymer of a certain molecular weight. falling to 5.

193 .Chemical Industry Primer. 2005–2006 Exhibit 163: HDD: World Diesel Fuel Standards 14 June 2005 Source: Johnson Matthey.

detergents. or in some instances. The greatest demand is for plasticizers. but they are also widely used in furniture and textile manufacturing. • Heat stabilizers are used to maintain plastics resins throughout their processing and service life. The wide range of additives is manufactured along product lines by a large number of different manufacturers. We expect the increasing substitution of polymers for other materials in manufacturing to continue to support growth of a similar level in the medium to long term. for which the most common plasticizer is phthalate. and transport markets. • Light (UV) stabilizers are used in plastics. as with many areas within the specialty sector. In addition. Modifiers These are products that change the physical properties of the plastic resin. flame-retardants. flame-retardants antioxidants and antistatic agents. They absorb or deflect UV radiation that would otherwise cause the plastic to degrade. Demand is largely driven by demand for flexible PVC resins. • Flame retardants help the material to which they are added to resist combustion when exposed to extreme temperatures. Property Extenders This category includes heat and light stabilizers. rubber-based impact modifiers are used to improve plastic’s resistance to stress by absorbing force. The most significant demand comes from PVC manufacturing. colorants. because of the high temperatures at which the resins are processed. lubricants. The diversity of uses for plastics means that demand for the products is driven by a number of different factors. and many others. PVC is the resin that consumes the majority of polymer additives. consolidation is an ongoing theme. particularly modifiers and processing aids. the industry is viewed as largely fragmented. However. The range of additives is broad and includes modifiers. As a result. Approximately 75% of plastics additives are sold to the manufacturers of plastics products. 2005–2006 14 June 2005 Additives Additives are chemicals that are added to materials such as plastics to provide them with certain qualities. The overwhelming majority of additives are used in the manufacturing and processing of plastics. and thereby improve their functionality or processability. the majority of additives are also consumed in this region. while the remainder is sold to the manufacturers of plastics resins. Overall manufacturing activity is the main driver that has seen the additives industry grow at around 4% in recent years. a commodity derivative of phthalic anhydride. The majority of these chemicals are utilized in the production of plastics. the vast majority of flame retardants are used in products for the construction. property extenders. As the majority of plastics consumption is in Asia/Pacific (for electronics products). during processing. They are used to ensure the stability of resins during use. Of the plastics applications. 194 . which increase a material’s flexibility. plasticizers. but also in other products such as paints. electronics.Chemical Industry Primer.

and silica.Chemical Industry Primer. sweetening. Pigments and dyes are examined in more detail later in the report. These are distinct from products in the flavors and fragrances segment. and esters. chromates. The most common use for antiblocking agents is to prevent two contacting layers of plastic film (such as kitchen film) from sticking together. Colorants Colorants are pigments and dyes that are used to give color to plastics. amines. demand is growing for nonhalogen products to replace chlorinated and bromine-based products that currently dominate the market. hydrocarbons. and alcohols. Other Additives Food Additives We use food additives as the generic term for a wide range of specialty chemicals that are added to foodstuffs for a variety of reasons. The two largest volume pigments used in plastics are titanium dioxide (white) and carbon black (black). Additional colors are achieved using a variety of metal oxides. fermentation. while the major types of antioxidants are alkylated phenols. • Lubricants include metallic stearates. mold-release. and also enhance mold release by compensating for any imperfections in machinery and materials. phosphates. and cadmiums. polypropylene. • Antiblocking agents include talc. and slip agents. Processing aids include lubricants. The greatest demand comes from polyolefins (polyethylene. 195 . and polystyrene). Processing Aids This broad term covers chemicals that improve the compounding or molding of resins. calcium carbonate. and health benefits. fatty acids. • Antioxidants prevent or delay the oxidization of plastics that would otherwise lead to their breakdown. They assist resin flow during production. antiblocking. 2005–2006 14 June 2005 Because of medical and environmental concerns. including preservative.

2004 Flavor enhancers Yeast Hydrocolloids Functional Proteins Intense Sweeteners Acidulants Emulsifiers Colors Starch Vitamins Fat replacers Enzymes Antimicrobial agents Antioxidants Cultures and media Functional Food ingredients Other Food ingredients 0 1 2 3 US$ bn Source: DSM. immune system. Specialty surfactants are also widely used. Products that mitigate the effects of aging are particularly sought after by consumers. among other things. and silicone oils. the aging population is fueling demand for foods that can provide circulatory. Ingredients from plant and vegetable origins are playing an increasingly important role. Cosmetic Additives Cosmetic additives are the active ingredients in shampoos. 2005–2006 Exhibit 164: Global Food Additives Sales by Value. 196 . 14 June 2005 4 5 6 Increasing demand for food to contain not only nutritional benefits but also added health value has driven growth for highly developed food additives. and moisturizers. The increasingly close fit with life sciences activities is attracting many of the same players to the food additives market. soaps. and even anticancer benefits.Chemical Industry Primer. and we expect this to be a good indication for future growth. conditioners. Demand in the food additives market has grown at approximately 5% in recent years. while the increasing R&D costs of these activities have led to industry consolidation in recent years. principally in soaps and shampoos. amino acids. minerals. Conditioning polymers are the largest raw material sector by volume and are used in hair conditioners and skin moisturizers. In addition. They include vitamins.

197 . However. Demand growth for cosmetic chemicals has been rapid in recent years and has even outpaced the growth of the cosmetics industry as a whole. In addition.Chemical Industry Primer. 2004 Fixative Polymers 5% Antimicrobials 7% Specialty emolients 11% UV absorbers 5% 14 June 2005 Exhibit 166: Cosmetic Additive Sales by Value.5% but to vary between approximately 1. Rather than purely functional products. fierce competition has meant that few companies have been able to generate significant profit growth in this field. 2004 Actives 1% Conditioning Polymers 34% UV absorbers 9% Fixative Polymers 6% Actives 6% Conditioning Polymers 30% Antimicrobials 16% Thickeners 13% Specialty Surfactants 24% Specialty emolients Thickeners 7% 11% Specialty Surfactants 15% Source: CSFB estimates.0% for different categories of additive.5% and 6. 2005–2006 Exhibit 165: Cosmetic Additive Sales by Volume. We expect demand growth to continue at around 3. Source: CSFB estimates. environmental laws have played an important role in shaping new formulations. the trend has moved toward providing perceived added value within cosmetic products.

Chemical Industry Primer. • In recent years. 2002 1400 1200 1000 800 600 400 200 0 M sa ical za SF ant im rex nth yer dia DS gus em Lon BA lari lhe mb osy Ba ho R C nge Ca Di De Ch I er ow g D rin eh Bo l s a d h is is G lo le al m M m lly el ei der ldric frie Fin he hes ar LS ake che hes mic yw PP R n L e y ynt he eg Ato soc ynt bem cia A t n e ax I Si S ss Al ve rea O d S n C Ho s A E' mic G r Te igm a a P a S m ga st SN yn rre Ea D o B Source: Company data. Fine Chemicals Manufacturers Exhibit 167: Major Manufacturers of Life Science Ingredients. clinical trials. pushed up by more stringent regulatory requirements and more complex R&D procedures—the proliferation of technologies applied in drug manufacturing has made it increasingly less efficient for life sciences companies to invest in and maintain a complete “toolbox. particularly given increasing levels of generic competition and intensification in the overall competitive environment. In particular. and laboratory chemicals. biocides (antibacterial or disinfectant agents that are added to a wide range of products and processes). pharmaceutical majors were increasingly relying on third parties to produce and supply active ingredients and bulk intermediates. while freeing up capital and consequently improving returns. Fine Chemicals Industry Trends and Value Drivers • In the early-to-mid-1990s. Fine chemicals are manufactured to an exact chemical specification and utilized for their medicinal or agricultural effect. bulk medicinals and pesticides. rather than on in-house manufacturing capabilities. 198 .” It has become essential to minimize time to market for new drugs or agrochemicals to keep down costs and maintain or improve margins. Outsourcing allowed life sciences companies to focus their resources on core competencies. and manufacturing. CSFB research. 2005–2006 14 June 2005 Fine Chemicals The term fine chemical is now used almost exclusively in reference to life science intermediates. the trend within life sciences was toward outsourcing of key functions such as drug discovery. The broad categories within this definition are pharmaceutical intermediates. such as drug development and marketing. costs of drug production have risen significantly.

• Fine chemicals businesses tend to have comparatively high capital intensity and R&D requirements.Chemical Industry Primer. (Dwindling pipelines at large pharma houses. While increased scale helps combat this by reducing reliance on any individual contract.) 199 . In addition. However. • Production of active ingredients for pharmaceuticals must take place in highly sterile. and this has become increasingly difficult for many of the leading listed fine chemical producers. many Asian competitors have been able to offer the products at a greatly reduced cost. customers must be convinced that the manufacturer is capable of providing a consistent. tend to be highly operationally geared. in 2005. FDA- certified plants designed to meet current good manufacturing process (cGMP) standards. few fine chemicals producers have managed to survive. New Hampshire. increasingly important to run plants as close to maximum capacity as possible. 2005–2006 14 June 2005 • The consequence of this trend toward outsourcing was that operating margins and growth rates were generally higher than those experienced elsewhere in the specialty chemical industry. high-quality product in a reliable manner. • Fine chemical companies. many Western producers of fine chemicals have found themselves increasingly subject to significant cost competition from Asian (particularly Indian and Chinese) producers. as a result. the volatility and poor visibility associated with life sciences contracts present a clear risk. As a result. Significant R&D expenditure needs to be directed toward the development of new products and processes. increased challenges from generic producers and increased FDA scrutiny meant that in recent years a reversal in the outsourcing trend has taken place. the timing of the launch of new pharmaceutical products means that the revenue stream from pharmaceutical intermediates is inherently lumpy and difficult to predict. as well as on improving existing processes. therefore. The growth of individual fine chemical players is likely to be tied to a handful of major products. in our view. (We forecast that Lonza will generate an EBITDA margin of over 40% on its new. large amounts of capital expenditure are required to build plants that meet cGMP standards (around 30% more than the cost of a non-cGMP fine chemical plant). This trend attracted many of the more traditional broad-based specialty chemical companies to expand into the fine chemicals area. It is. fully loaded capacity in Portsmouth. Because of the high proportion of personnel cost involved in the production of these chemicals. the burden of investment inevitably falls on the contract manufacturers. Furthermore. the rewards can be significant if capacity utilization rates remain healthy.) • In addition. with high levels of fixed costs. The consequence was that much of the industry became rapidly oversupplied at the same time as demand was waning. While the outsourcing argument has clear cash flow benefits for the pharmaceutical and agrochemicals industries. whose success or failure is much harder to predict than that of the life sciences industry as a whole. • Furthermore.

The manufacturing of active intermediates for the agrochemicals industry forms a smaller. in our view. on our estimates). the fine chemicals industry should deliver top-line growth of around 5-8% in the long term. According to DSM. This includes both primary manufacturing (the manufacturing of active ingredients) and secondary manufacturing (the production and formulation of the final dosages). as well as by the increasing trend among life sciences companies to outsource production of key intermediates. 200 .Chemical Industry Primer. 2005–2006 14 June 2005 Fine Chemicals Growth Prospects According to SRI. the global market for pharmaceutical manufacturing is estimated at around US$120 billion. of which around 25% is currently outsourced. This is driven by the growth of the end markets (7-10% for pharmaceuticals and 1-2% for agrochemicals. although still substantial market. Whether or not those listed players within the chemicals sector are able to meaningfully compete with the numerous Asian competitors over the long term and therefore take advantage of this growth rate remains far less certain.

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Colorants
Colorants are substances used to alter the color of a product. They include dyestuffs, pigments, printing inks, and masterbatches. Bayer, BASF, Ciba Specialty Chemicals, Clariant, and Engelhard all hold significant colorant operations.

Dyestuffs
Dyes are used principally on textiles, but also on paper and leather and are soluble in water (whereas pigments are insoluble). There are a number of different chemical varieties of dyes, and these can be broadly classified according to their application.
Exhibit 168: Different Applications of Dyes
Dye type Characteristics Uses

Acid Dyes Azoic Dyes Basic Dyes Direct Dyes Disperse Dyes Reactive Dyes Sulfur Dyes

Insoluble in acid baths. Used for dyeing protein fibers, wool, silk, leather, paper, nylon. Made using ice to keep the chemicals at low temperature Long lasting, bright and very versatile, used principally on cotton. Soluble in acid, insoluble once alkali is added. Used for duplicator inks (carbon paper, typewriter ribbons) Soluble in water, used on paper, cotton, rayon and linen. Used to dye cotton and mixed cotton, wool and silk Hardly soluble in water. Used to dye synthetics, mainly polyester React to form chemical link between dye and fiber. Very fade resistant Used for dyeing cellulose fibers and some nylons Large low-cost category Used for 'natural' shades on cotton.

Source: CSFB research.

Growth rates of dyes are directly linked to the demand for the fiber on which they are used. As a result, the growth of synthetic fiber dyes (especially for polyester) should be strongest. In addition, fashion plays an important role in demand for pigments, as darker colors require significantly more dye. The emergence of a significant number of Asian producers has led to a period of oversupply, and as a result operating rates and margins have declined. The industry has addressed this with a period of consolidation and restructuring, although overall we do not expect demand growth much ahead of the historical rate of 2-3%, with pricing trends remaining negative for the foreseeable future.

Pigments
Titanium dioxide (white) and carbon black (black) are the two largest volume pigments. Color pigments are iron oxides (red, yellow, brown, and black), chromates (yellow and orange), cadmiums (red, yellow, orange, and maroon) and chromium oxides (green). The principal uses for pigments are in paints and coatings and in printing inks. Carbon black’s principal use is in the manufacturing of rubber goods, especially tires. Titanium dioxide’s main use is in paper manufacturing, as well as in paints. The pigments industry is viewed as mature and is reliant on the level of industrial production for its wellbeing. Global capacity has grown rapidly in recent years, operating rates have therefore fallen, and with them, margins. We expect demand growth for the pigments industry to remain broadly in-line with GDP%.

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Printing Inks
Printing inks comprise pigments, resins, solvents, and oils. They are used not only in publishing, but also in printing for packaging as well as commercial printing. Demand is, therefore, largely driven by a wide variety of end-market factors, including the level of magazine advertising and demand for consumer goods. We expect the printing ink market to grow faster than its end markets because of the increased popularity of improved graphics, which require higher-priced and betterquality inks. Digital inks for screen-printing have been the fastest-growing segment in recent years, followed by flexographic inks for packaging. Overall, we expect demand for printing inks to grow marginally ahead of GDP growth over the medium term.

Masterbatches
Masterbatches are the pelletized colorants and additives that plastics producers combine with resins. Ingredients may include pigments, titanium dioxide, UV blockers, antistatic agents, and agents for effects such as pearlescence. Demand from plastics producers is for less masterbatch concentrate per unit of resin, producers are therefore tending to load more ingredients into their masterbatches. However, the trend is toward price inelasticity in the industry, and as a result, many producers are pursuing higher-value niches. In addition to trying to pass on ingredients costs to the customer, masterbatch makers charge for technical support. In particular, the boom in PET bottles for soft drinks has driven demand for masterbatches in recent years. In addition, a trend toward brighter colors for consumer goods such as computers and their peripherals has fueled demand. Long term, the market for masterbatches has been growing at 3-4% per year; however, faster growth is likely in regions such as Asia and South America as the pace of industrialization picks up and living standards rise.

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XIV. Pharmaceutical Hybrid Companies
Introduction
The final section of this sector overview is not intended to deal with a particular part of the chemicals sector, but rather examines those companies that have significant pharmaceutical operations in addition to their chemicals businesses and considers the issues that are related to this structure. We do not propose to provide a synopsis of the pharmaceutical industry. Within European chemicals, the three companies under our coverage that fall within the “hybrid” definition are Akzo Nobel, Bayer, and Solvay. Undoubtedly the biggest challenges to these companies are: 1. The consolidation of the life sciences industry, which is raising a number of issues that bring into question the competitiveness of a pharmaceutical business within the hybrid structure. 2. The relatively slim pickings in the product pipelines.

Company Overviews
Akzo Nobel
Exhibit 169: Akzo Nobel: Sales by Division, 2004

Chemicals 31% Coatings 43%

Pharmaceuticals 26%

Source: Company data, CSFB research.

The three main business units within Akzo’s pharma division are human healthcare (Organon), animal healthcare (Intervet), and fine chemicals (Diosynth). Other healthcare businesses, OTC products and diagnostics, were sold in 2001. Akzo has a broad coatings portfolio, ranging from industrial coatings to decorative paints to automotive refinishing. This puts Akzo Nobel Coatings in one of the strongest positions globally, in our view. However, the coatings market remains fragmented, with less than 50% in the

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hands of ten players in a market worth US$65 billion. Chemicals is the group’s third leg, consisting of nine different business units, the largest being pulp and paper chemicals, functional chemicals, and surfactants. The main strategic thrust here is to reduce capital intensity and sell off noncore assets.

Bayer
Exhibit 170: Bayer: Sales by Division, 2004

Healthcare 37% Material Sceince 37%

Crop Science 26%

Source: Company data, CSFB estimates.

Bayer has recently reorganized its structure, and there are four new elements to the Bayer structure relative to the shape of the group in 2003. 1. Bayer spun off Lanxess, a blend of some activities in its former Chemical and Polymer divisions. 2. Bayer agreed to buy Roche’s OTC consumer-care franchise for a total of €2.38 billion. 3. Bayer agreed to sell the Blood Plasma business to Cerebrus and Ampersand for €450 million. 4. Bayer agreed to form a strategic alliance with Schering-Plough in certain parts of its Pharmaceutical business. While these changes do not affect the status of Bayer as a hybrid conglomerate, we believe this strategy will lead to stable cash flow. Also, in our view, Healthcare will be more critical for Bayer’s future performance.

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Solvay
Exhibit 171: Solvay: Sales by Division, 2004

Chemicals 32% Plastics 46%

Pharmaceuticals 22%

Source: Company data, CSFB estimates.

Solvay operates through the following divisions: chemicals, plastics, and pharmaceuticals. The company's key strategic aim is to accelerate growth in the pharmaceuticals division via organic growth, the acquisition of new products, and the acquisition of companies. The Solvay family shareholding (55%), we believe, will continue to preclude any major strategic change over the short term. That said, the company has been successful in divesting some of the more commodity operations (polypropylene) and acquiring more stable downstream assets (Ausimont specialty chemicals).

Industry Trends and Value Drivers
The life sciences industry has seen significant consolidation in recent years, fueled by the ever-increasing requirement for R&D resource and marketing and sales support. Against this backdrop, a hybrid strategy is, we believe, likely to continue to be increasingly questioned by investors, because the potential growth of the pharmaceuticals businesses might be compromised by focus on the chemical divisions. In theory, conglomerate companies could release significant value for their shareholders by disposing of their pharma businesses and reinvesting the proceeds into their core operations. BASF and DuPont did exactly this in 2000 and 2001. That said, given the current growth prospects in healthcare of both Akzo Nobel and Bayer, there is probably only limited potential for management to successfully add value through M&A. In other words, BASF and DuPont have, in hindsight, proved shrewder in strategic timing than any of the existing hybrids.

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Lack of Pharmaceutical Scale
Despite impressive market positions in a number of therapeutic areas, the pharma divisions of the hybrid companies are becoming increasingly small within the context of the overall pharmaceuticals market. A raft of M&A activity has taken place in recent years: Astra merged with Zeneca; Rhône-Poulenc with Hoechst to form Aventis; Glaxo Wellcome with SmithKline Beecham; and Pfizer with Warner Lambert. GlaxoSmithKline had (based on 2000 sales) a combined 7.3% share of the total global market. By contrast, we estimate that both Bayer and Akzo Nobel rank 16th and 29th, respectively, in global pharmaceuticals (although both have more significant market positions in other healthcare industries such as animal health). We believe that, among other things, two major factors are playing a part in this process of consolidation: an ambition to increase each entity’s overall R&D budget and the creation of a powerful sales and marketing network on a global basis.

Questions Surrounding the Hybrid Model
Structurally, the radical change in the industry is likely to leave the hybrids at a competitive disadvantage for two reasons: a limited R&D budget and a smaller-thanaverage sales network. As a result, some investors are questioning whether or not these pharmaceutical businesses are meeting their full potential as part of a chemical company, or whether more value could be released by a sale of these businesses before they cease to be competitive.
Limited R&D Budget

We believe a major driver behind the industry consolidation is the requirement to increase R&D firepower to diversify the risk associated with a drug product pipeline. With the chemical businesses also making significant demands on their capital, hybrid companies cannot realistically devote the funds to match the industry leaders in terms of scale. As a result, their narrower portfolios become more reliant on individual products and more exposed to the risk of failure of one of those products. The withdrawal of Bayer’s Baycol/Lipobay in August 2000 is an example of this risk.
Small Sales Network

The risk exists that the competitive advantage of individual drugs will be eroded by these industrywide developments. The U.S. sales force of Akzo’ Nobel’s pharmaceutical division, Organon, currently numbers approximately 1,300. This compares with AHP’s 3,800, and Pfizer’s 8,000, Novartis’ 4,000, and GlaxoSmithKline’s 6,800. (These numbers are pharmaceutical-related only.) This lack of scale can have a direct effect on profitability, as hybrid companies are forced to share profits within joint venture agreements, which are the only way to market and distribute their drugs.

206

sales growth potential. For this reason. For now.Chemical Industry Primer. management of hybrid companies historically tended to be keen to hold on to this prized asset. especially with Akzo Nobel and Bayer. 2005–2006 Releasing Value 14 June 2005 Superior profitability. 207 . and higher ROIC have made the pharmaceutical divisions the key driver of the hybrid company’s share price performance over the long term. management has a very different proposition—the improvement of both their healthcare franchises represents one of the greatest challenges. and because of the defensive qualities of pharmaceutical businesses.

com 208 .sri. www.cefic. Margaret Wells Phillips McDougall. www.sric.com Chemical News Intelligence (CNI).phillipsmcdougall.ecom.cnionline. www.com Asian Chemical News (ACN). www.americanchemistry.be European Chemical News (ECN).Chemical Industry Primer. G. 2005–2006 14 June 2005 XV.com European Chemical Industry Council (CEFIC). George T. A Reed Business Publication Chemical Market Associates. Oxford University Press Shreves Chemical Process Industries Handbook.cmaiglobal. www. www. Nicholas Basta SRI Consulting (SRI). Sources American Chemistry Council. Austin. A Reed Business Publication Handbook of Petrochemicals and Process.com Oxford Dictionary of Chemistry. Inc. (CMAI).

209 .Chemical Industry Primer. 2005–2006 14 June 2005 Appendix 1 Exhibit 172: Abbreviations Found in This Report ABS ASU CAP DMT ECU EOR EPS FCCs GMO HDPE LDPE LLDPE LPG MDI MMA MTBE PBT PE PET PP PS PSA PU PVC SB TDI TPA UAN VCM VOCs Acrylonitrile Butadiene Styrene Air Separation Unit Common Agricultural Policy Dimethyl Terephthalic Acid Electrochemical Unit Enhanced Oil Recovery Expandable Polystyrene Fluid Cracking Catalysts Genetically Modified Organisms High-density Polyethylene Low-density Polyethylene Linear low-density Polyethylene Liquid Petroleum Gas Methylene-di-para phenylene Isocyanate Methyl Methacrylate Methyl Tertiary Butyl Ether Polybutylene Terephthalate Polyethylene Polyethylene Terephthalate Polypropylene Polystyrene Pressure Swing Adsorption Polyurethane Polyvinyl Chloride Styrene Butadiene Toluene Di-isocyanate Terephthalic Acid Urea Ammonium Nitrate Vinyl Chloride Monomer Volatile Organic Compounds Source: CSFB research.

Chemical Industry Primer.N P P G .2 5 2 .8 5 1 .N W L K .V X C L R Z n .9 0 0 .L J M A T .0 0 0 .9 0 1 1 .5 2 5 6 .N G G C .P A A K Z O .7 0 0 .4 5 1 1 .V X IC I.7 0 3 .A S B A S F .2 0 5 3 .2 0 4 7 .O L Y U L C .5 0 4 7 .6 5 1 0 .4 5 1 1 .0 0 6 7 .5 0 2 .0 0 4 3 .K S 1 2 9 9 0 .8 3 2 5 .8 5 3 3 .N E M N .N P O L .0 0 3 .3 7 4 0 .8 0 1 0 2 .2 5 1 6 .4 2 2 8 .1 3 2 8 .N D D .1 3 6 1 .K S 1 1 1 7 0 .V X R H A .2 6 4 7 .N V A L .0 0 3 0 .7 9 1 9 .4 5 8 6 .N U A P H .N P O T .2 5 5 6 .H K NT$ W ON W ON W ON NT$ AUD IR HK$ HK$ HK$ 5 3 .7 7 2 .B R S Y N Z n .7 3 7 7 .7 6 3 0 .L C IB N n .N M O N .5 0 5 8 .T W 0 9 8 3 0 .N C M P .0 0 2 .N A P D .N P X .6 9 5 5 .5 9 1 0 .6 2 2 3 .3 0 9 .N E C .7 5 3 .0 0 9 5 .0 0 7 1 0 .L L X S G .N A V Y .5 2 S to c k R a t in g O u tp e r f o r m O u tp e r f o r m O u tp e r f o r m O u tp e r f o r m U n d e rp e rfo rm O u tp e r f o r m U n d e rp e rfo rm O u tp e r f o r m N e u tr a l O u tp e r f o r m O u tp e r f o r m U n d e rp e rfo rm O u tp e r f o r m U n d e rp e rfo rm O u tp e r f o r m O u tp e r f o r m U n d e rp e rfo rm O u tp e r f o r m N e u tr a l O u tp e r f o r m N e u tr a l U n d e rp e rfo rm N e u tr a l O u tp e r f o r m N e u tr a l N e u tr a l O u tp e r f o r m R a t in g N e u tr a l U n d e rp e rfo rm O u tp e r f o r m N e u tr a l N e u tr a l N e u tr a l U n d e rp e rfo rm N e u tr a l N e u tr a l N e u tr a l O u tp e r f o r m U n d e rp e rfo rm U n d e rp e rfo rm N e u tr a l U n d e rp e rfo rm N e u tr a l U n d e rp e rfo rm U n d e rp e rfo rm O u tp e r f o r m O u tp e r f o r m N e u tr a l N e u tr a l EUR EUR EUR EUR GBP GBP CHF CHF GBP EUR EUR CHF GBP GBP EUR EUR CHF EUR EUR CHF NO K GBP USD USD USD USD USD USD USD USD USD USD USD USD USD USD USD USD USD USD USD USD USD USD USD USD USD USD USD Target P r ic e 99 23 67 59 24 62 29 63 52 77 38 34 24 53 54 36 63 51 9 77 49 85 53 57 17 49 35 Target P r ic e 1 3 5 .2 6 2 4 .7 5 1 7 .L D G X G .0 0 3 .N N C X .0 0 0 2 5 .0 0 2 5 .D E B V IT .A S G IV Z n .H K 0 3 3 8 .N S E E .7 5 7 5 4 .9 9 3 4 .7 5 2 9 .V X Y A R .0 0 1 9 .N L Y O .D E D S M N .A X R E L I.0 0 0 40 19 475 2 3 1 Target P ric e 500 280 550 470 500 650 270 700 950 4500 790 2300 930 2300 420 2000 A sahi Kasei S howa Denko S u m ito m o C h e m ic a l M its u b is h i C h e m ic a l T osoh M its u i C h e m ic a l U b e In d u s trie s M its u b is h i G a s C h e m ic a l T okuyam a S h in -E ts u C h e m ic a l S u m ito m o B a k e lite JS R Zeon H ita c h i C h e m ic a l R a s a In d u s trie s M im a s u S e m ic o n d u c to r 3407 4004 4005 4010 4042 4183 4208 4182 4043 4063 4203 4185 4205 4217 4022 8155 JP Y JP Y JP Y JP Y JP Y JP Y JP Y JP Y JP Y JP Y JP Y JP Y JP Y JP Y JP Y JP Y 528 260 503 309 438 618 214 563 818 3970 702 2240 957 2025 351 1586 N e u tra l N e u tra l N e u tra l O u tp e rfo rm N e u tra l N e u tra l O u tp e rfo rm O u tp e rfo rm O u tp e rfo rm O u tp e rfo rm O u tp e rfo rm N e u tra l N e u tra l O u tp e rfo rm O u tp e rfo rm O u tp e rfo rm 210 .L S to c k C u rre n c y USD USD USD USD USD USD USD USD USD USD USD USD USD USD USD USD USD USD USD USD USD USD USD USD USD USD USD S to c k C u rre n c y EUR EUR EUR EUR GBP GBP CHF CHF GBP EUR EUR CHF GBP GBP EUR EUR CHF EUR EUR CHF NOK GBP C u rre n t P r ic e 7 5 .0 0 0 4 6 .V X C R D A .4 0 3 2 .5 1 9 1 .1 8 5 1 . 2005–2006 14 June 2005 Appendix 2 Exhibit 173: Listed Stocks Mentioned in This Report prices are as of June 10.K S 1 3 0 3 .0 0 2 8 .N R O H .P A S O L B t.1 4 4 6 .8 8 4 5 .9 6 3 2 .N T ic k e r A IR P .0 0 4 3 .T W O R I.3 5 0 .8 6 7 6 .B O 0 3 2 5 .F L O N Z n .2 1 5 7 .6 9 6 .N D L P .N D O W .N C Y T .4 9 3 .0 0 6 6 .4 0 A S IA F o rm o s a P la s tic s H a n w h a C h e m ic a l H o n a m P e tro c h e m ic a l L G P e tro c h e m ic a l N a n Y a P la s tic s O ric a R e lia n c e In d u s trie s S in o p e c B e ijin g Y a n h u a S in o p e c S h a n g h a i P e tro c h e m ic a l S in o p e c Y iz h e n g C h e m ic a l JAPAN 1 3 0 1 .0 7 6 3 .0 0 1 5 0 .N E C L .0 0 6 8 .4 1 4 7 .4 2 1 6 .D E L IN G .7 3 5 6 6 .5 8 6 5 .2 9 U n d e rp e rfo rm O u tp e rfo rm U n d e rp e rfo rm U n d e rp e rfo rm U n d e rp e rfo rm O u tp e rfo rm O u tp e rfo rm U n d e rp e rfo rm U n d e rp e rfo rm N e u tra l NT$ W ON W ON W ON NT$ AUD IR HK$ HK$ HK$ Target P ric e 45 1 7 .9 0 2 4 .N F M C .0 0 2 .9 3 1 9 .3 1 1 8 . 2005 N O R T H A M E R IC A 3M A g r iu m A ir P r o d u c ts a n d C h e m ic a ls A v e r y D e n n is o n C o r p C o m p a s s M in e r a l C y te c C o r p D e lta a n d P in e L a n d D o w C h e m ic a l D u P ont E a s tm a n C h e m ic a l E c o la b E n g e lh a r d C o r p F e rro C o rp FMC G e o r g ia G u lf L y o n d e ll C h e m ic a l M o n s a n to N o v a C h e m ic a ls P o ly o n e C o r p P P G In d u s tr ie s P r a x a ir P o ta s h R ohm and H aas S e a le d A ir C o r p U A P H o ld in g V a ls p a r W e s tla k e C h e m ic a ls EURO PE A ir L iq u id e A kzo N obel BASF B ayer B r itis h V ita BOC C ib a C la r ia n t C ro d a D eg ussa DSM G iv a u d a n IC I J o h n s o n M a tth e y L a n xe ss L in d e L o n za R h o d ia S o lv a y S y n g e n ta Y a ra Y u le C a tto T ic k e r M M M .N A G U .D E B A Y G .7 0 1 3 4 .L B O C .6 3 1 .N F O E .H K 1 0 3 3 .0 0 5 4 .0 0 9 9 .5 2 C u rre n t P r ic e 1 4 3 .

52. TP $52. Du Pont (DD. NEUTRAL. $23. MARKET WEIGHT) Shin-Etsu Chemical (4063. TP SFr19.VX. Eu56. NEUTRAL. $56.00. TP ¥4500. TP NT$45. TP $62.00 p.22. OUTPERFORM. $47. UNDERWEIGHT) British Vita (BVIT. OUTPERFORM.00.40.50.PA.73. MARKET WEIGHT) Degussa (DGXG.L.13. UNDERWEIGHT) Bayer (BAYG. TP Eu66.00.00) Nova Chemicals (NCX. TP $71.25. UNDERWEIGHT) BOC Group (BOC.TW.10.TW.35.51. $46. UNDERWEIGHT) Ciba Specialty Chemicals (CIBN. Inc.00 p.37. (AGU. 358. NEUTRAL. TP $77. TP $85. TP Eu47.00.75.PA. Inc. TP Eu30.79.TW. NEUTRAL.00. NEUTRAL.83. (GGC. (APD.00) Georgia Gulf Corp.25.00.L.00. OVERWEIGHT) DSM (DSMN. MARKET WEIGHT) Mitsui Chemicals (4183. Eu1. ¥528.00. OUTPERFORM.00. $34. UNDERPERFORM. $25. NT$53. $51.VX. TP $9.00.VX. OUTPERFORM.DE. $61. OVERWEIGHT) Ecolab (ECL.00. UNDERWEIGHT) Lyondell Chemical Company (LYO.70. TP Eu29. ¥351.69.88.00. TP SFr54. TP Rs475. TP $99. TP $51. TP 1145. $28. OVERWEIGHT) Croda International (CRDA. $19. OUTPERFORM. MARKET WEIGHT) Akzo Nobel (AKZO. UNDERPERFORM [V]. Eu33.F. UNDERWEIGHT) Air Products and Chemicals. NEUTRAL. OUTPERFORM. MARKET WEIGHT) Mitsubishi Chemical (4010.00. OUTPERFORM. NEUTRAL. MARKET WEIGHT) Lanxess (LXSG.00. TP ¥650. (PX. NEUTRAL. NEUTRAL. OUTPERFORM [V].00. OUTPERFORM. UNDERWEIGHT) JSR (4185. 1031. OUTPERFORM. ¥309.51.20.80.00. Eu143. UNDERWEIGHT) Rohm and Haas Company (ROH.75.00 p.90.DE. OVERWEIGHT) Eastman Chemical (EMN. MARKET WEIGHT) Mitsubishi Gas Chemical (4182. OUTPERFORM. SFr76. TP $59. NEUTRAL. MARKET WEIGHT) Ferro (FOE. UNDERWEIGHT) Linde (LING. UNDERPERFORM. (AVY.00. OVERWEIGHT) Praxair Inc. ¥618. $45. ¥260.00.07. OVERWEIGHT) Mimasu Semiconductor Industry (8155. OVERWEIGHT) Givaudan (GIVN. OVERWEIGHT) Air Liquide (AIRP. UNDERPERFORM. NEUTRAL. 385. NEUTRAL. TP $24.00.00.00.00. OUTPERFORM. NEUTRAL. $30. NEUTRAL. OVERWEIGHT) Formosa Chemical & Fibre (1326.00. OW) Hitachi Chemical (4217. TP $54.00. $24.AS. OVERWEIGHT) ICI (ICI. OUTPERFORM. OUTPERFORM.50. 1073. $65. UNDERWEIGHT) Delta and Pine Land (DLP.00. $18. MARKET WEIGHT) Engelhard Corporation (EC. UNDERPERFORM. TP ¥500. SFr77.00. TP SFr710. OVERWEIGHT) PPG Industries. OUTPERFORM. TP NT$51. UNDERPERFORM.I. (PPG. UNDERPERFORM.00. ¥1586. NT$43.00.00.00. NEUTRAL. OUTPERFORM.00. OUTPERFORM.L. TP $53. SFr17.00.58.AS. UNDERWEIGHT) E.00.42.00.90. UNDERPERFORM. MARKET WEIGHT) 211 . OVERWEIGHT) Dow Chemical Company (DOW.00. $6. TP ¥470. UNDERPERFORM. SFr754. UNDERPERFORM.00. UNDERWEIGHT) Clariant (CLN. OUTPERFORM. NEUTRAL.00. TP $38.58.00.00. MARKET WEIGHT) BASF (BASF. TP ¥2300.K. RESTRICTED. Eu57. TP 245. UNDERWEIGHT) Cytec (CYT.69. TP ¥420. TP $34.DE. 264. UNDERWEIGHT) GlaxoSmithKline (GSK. TP $24. OUTPERFORM. TP Eu0. $19. MARKET WEIGHT) Monsanto Company (MON. TP Eu11.99. TP $49.93.62. UNDERPERFORM. TP ¥700.86.Chemical Industry Primer. OVERWEIGHT) PolyOne Corp.BO.00p.00. OUTPERFORM.DE. $75. OUTPERFORM. 2005–2006 14 June 2005 Companies Mentioned (Price as of 10 Jun 05) 3M (MMM.20. MARKET WEIGHT) Avery Dennison Corp. OUTPERFORM. $53.L. ¥2025.00. OVERWEIGHT) Sealed Air Corp. MARKET WEIGHT) FMC Corporation (FMC.75 p. UNDERWEIGHT) Compass Minerals International (CMP. OUTPERFORM. NEUTRAL. TP NT$40.00. TP ¥2000. TP A$19. $32.00. UNDERPERFORM [V]. TP $36.18. Eu32.50. TP Eu28.VX. Rs566. Eu18. $91.96.75.00) Rhodia (RHA.00. OVERWEIGHT) Potash Corporation of Saskatchewan (POT.00) Formosa Plastics (1301. (4004.45. TP 330. TP $23.00 p. MARKET WEIGHT) Rasa Industries (4022.50. UNDERWEIGHT) Johnson Matthey (JMAT.L. Eu28.00.41. TP ¥280. TP 900.00.00 p. UNDERPERFORM. UNDERPERFORM. OVERWEIGHT) Orica Limited (ORI. TP Eu67. MARKET WEIGHT) Showa Denko K.00. UNDERWEIGHT) Asahi Kasei (3407. OUTPERFORM.75 p.90. UNDERWEIGHT) Lonza Group Ltd (LONN. MARKET WEIGHT) Reliance Industries (RELI. TP $67. MARKET WEIGHT) Huntsman Corporation (HUN. UNDERPERFORM.00 p. NT$60. (SEE. TP $53. $63.76.14. TP Eu135.00 p. TP $63.L.AX. MARKET WEIGHT) Agrium Inc.00. A$16. ¥3970. $55.00 p. ¥563.00. $40.85. OVERWEIGHT) Nan Ya Plastics (1303. Eu58.00. TP SFr68.00. TP 375. OUTPERFORM.00. $47.00.00.00. TP ¥2300. (POL.42. TP $25. OUTPERFORM. ¥2240. TP $33. TP $63. 1356. TP $57.

(UAPH. TP SFr150.52.00.00. Young. TP $49. Eu86. where stock ratings are relative to the relevant country index. is or will be directly or indirectly related to the specific recommendations or views expressed in this report.40) Solvay (SOLBt. MARKET WEIGHT) Disclosure Appendix Important Global Disclosures I. UNDERWEIGHT) Zeon (4205. 212 . $24.00.Chemical Industry Primer. the Firm has requested that analysts maintain at least 15% of their rated coverage universe as Underperform.OL.00.00. ¥818. UNDERWEIGHT) Sumitomo Bakelite (4203. Neutral: The stock’s total return is expected to be in line with the industry average* (range of ±10%) over the next 12 months. TP ¥270. depending on perceived risk) over the next 12 months. Market Weight: Industry expected to perform in-line with the relevant broad market benchmark over the next 12 months.HK.. NEUTRAL. including general market conditions. All CSFB HOLT Small and Mid-Cap Advisor stocks are automatically rated volatile. ***For Australian and New Zealand stocks a 7. Latin America and Emerging Markets. including an investment recommendation.Fibre . MARKET WEIGHT) UAP Holding Corp.65.HK. OUTPERFORM [V]. SFr134.5% threshold replaces the 10% level in all three rating definitions. HK$3.00. TP NKr95. during the course of CSFB's engagement in an investment banking transaction and in certain other circumstances. where stock ratings are relative to the regional CSFB HOLT Small and Mid-Cap Advisor investment universe. Analysts’ coverage universe weightings* are distinct from analysts’ stock ratings and are based on the expected performance of an analyst’s coverage universe** versus the relevant broad market benchmark***: Overweight: Industry expected to outperform the relevant broad market benchmark over the next 12 months.26. MARKET WEIGHT) Valspar (VAL. OUTPERFORM.25. certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was. TP HK$2. OUTPERFORM.70. OVERWEIGHT) Yara International ASA (YAR. ¥503. TP Eu102. ¥214. NEUTRAL. TP ¥790. and CSFB HOLT Small and Mid-Cap Advisor stocks. TP ¥500. TP HK$1. UNDERWEIGHT) Tokuyama (4043. NKr99. OVERWEIGHT) Ube Industries (4208. Analysts’ stock ratings are defined as follows***: Outperform: The stock’s total return is expected to exceed the industry average* by at least 10-15% (or more.00.00. This guideline is subject to change depending on several factors. UNDERPERFORM [V]. TP 240. TP $35. Ph.00. The analyst(s) responsible for preparing this research report received compensation that is based upon various factors including CSFB's total revenues. MARKET WEIGHT) Syngenta (SYNN.L.00.H (0325.D.00. ¥957. OUTPERFORM. NEUTRAL. 252. *The industry average refers to the average total return of the analyst's industry coverage universe (except with respect to Asia/Pacific. Underweight: Industry expected to underperform the relevant broad market benchmark over the next 12 months.00. NEUTRAL. 2005–2006 14 June 2005 Sinopec Beijing Yanhua . NEUTRAL.00. TP ¥950.00 p.00. Restricted: In certain circumstances. $16. HK$2.H (0338. William R. MARKET WEIGHT) Westlake Chemical (WLK. All IPO stocks are automatically rated volatile within the first 12 months of trading. Volatility Indicator [V]: A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward. ¥438. HK$1.00 p.75) Sinopec Yizheng Chm.00. OUTPERFORM.H (1033. CSFB policy and/or applicable law and regulations preclude certain types of communications. $47. UNDERWEIGHT) Yule Catto (YULC. NEUTRAL. OUTPERFORM. NEUTRAL.00. TP ¥550. RESTRICTED [V]. ¥702. TP ¥930.00. **In an effort to achieve a more balanced distribution of stock ratings. Underperform**: The stock’s total return is expected to underperform the industry average* by 10-15% or more over the next 12 months.78) Sinopec Shanghai Petrochem .HK. MARKET WEIGHT) Tosoh (4042.BR.26. a portion of which are generated by CSFB's investment banking activities.29.VX. MARKET WEIGHT) Sumitomo Chemical (4005.00.

PA. Individuals receiving this report from a Canadian investment dealer that is not affiliated with CSFB should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report. however. SYNN. GIVN. **An analyst’s coverage universe consists of all companies covered by the analyst within the relevant sector. Thirdparty data (including consensus earnings estimates) are systematically translated into a number of default variables and incorporated into the algorithms available in the CSFB HOLT valuation model. RHA.com/legal_terms/canada_research_policy. Hold.VX.csfb. (Please refer to definitions above.AS. the meanings are not the same. JMAT. Important CSFB HOLT Disclosures With respect to the analysis in this report based on the CSFB HOLT methodology. The default variables may also be adjusted to produce alternative warranted prices.com/researchdisclosures or call +1 (877) 291-2683.. For disclosure information on other companies mentioned in this report. any of which could occur.L. SVS--Subordinate Voting Shares. Neutral. 2005–2006 14 June 2005 *CSFB HOLT Small and Mid-Cap Advisor stocks do not have coverage universe weightings. and as the thirdparty data are updated. CLN. please visit the website at www. respectively.S.VX.OL. LXSG. For Credit Suisse First Boston Canada Inc. The default scenario that is produced by the CSFB HOLT valuation model establishes a warranted price for a security.csfb.DE. and other individual factors. that are consistently applied to all the companies included in its database. The default scenario that is produced by the CSFB HOLT valuation model establishes the baseline valuation for a security.'s policies and procedures regarding the dissemination of equity research.) over the next 12 months. pricing.DE. These adjustments provide consistency when analyzing a single company across time. BOC.g. or analyzing multiple companies across industries or national borders. The following disclosed European company/ies have estimates that comply with IFRS: BASF. RVS--Restricted Voting Shares. and Underperform most closely correspond to Buy. DSMN. is. and a user then may adjust the default variables to produce alternative scenarios.VX. current holdings.L.Chemical Industry Primer. CSFB certifies that (1) the views expressed in this report accurately reflect the CSFB HOLT methodology and (2) no part of the Firm’s compensation was.shtml. SOLBt.) An investor's decision to buy or sell a security should be based on investment objectives. It is an analytical tool that involves use of a set of proprietary quantitative algorithms and warranted value calculations. the warranted price may also change. Additional information about the CSFB HOLT methodology is available on request.DE. The source financial statement. Credit Suisse First Boston (Europe) Limited (CSFB) acts as broker to JMAT. as our stock ratings are determined on a relative basis. The CSFB HOLT methodology does not assign ratings to a security. 213 . our stock ratings of Outperform. the S&P 500 in the U. ***The broad market benchmark is based on the expected return of the local market index (e. Additional information about the CSFB HOLT methodology is available on request. CSFB’s distribution of stock ratings (and banking clients) is: Global Ratings Distribution Outperform/Buy* 39% (54% banking clients) Neutral/Hold* 43% (54% banking clients) Underperform/Sell* 15% (44% banking clients) Restricted 3% *For purposes of the NYSE and NASD ratings distribution disclosure requirements. any of which could occur. Disclaimers continue on next page. BAYG. The CSFB HOLT methodology does not assign a price target to a security. YAR. and Sell. ICI. Important Regional Disclosures Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares. collectively called the CSFB HOLT valuation model. please visit http://www.L.BR. and earnings data provided by outside data vendors are subject to quality control and may also be adjusted to more closely measure the underlying economics of firm performance.L. or will be directly related to the specific views disclosed in this report.

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