JPMorgan Guia Investimento Indústria Química

Europe Equity Research
26 July 2010
Chemicals Primer
An investor's guide to the world of chemicals
Chemicals Neil C Tyler

AC
(44-20) 7325-9935 neil.c.tyler@jpmorgan.com J.P. Morgan Securities Ltd.
Martin Evans
AC
(44-20) 7155 6169 martin.evans@jpmorgan.com J.P. Morgan Securities Ltd.
Heidi Vesterinen
AC
(44-20) 7325-4537 heidi.m.vesterinen@jpmorgan.com J.P. Morgan Securities Ltd.
Neeraj Kumar
(91-22) 6157 3289 neeraj.z.kumar@jpmorgan.com J.P. Morgan India Private Limited
Hella Zouiten
(44-20) 7155-6408 hella.zouiten@jpmchase.com J.P. Morgan Securities Ltd.
See page 313 for analyst certification and important disclosures, including non-US analyst disclosures.
J.P. Morgan 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.
Neil C Tyler (44-20) 7325-9935 neil.c.tyler@jpmorgan.com
Europe Equity Research 26 July 2010
Table of Contents
Chemicals primer An investors reference guide......................................................6
Introduction ..............................................................................7
What makes up the chemicals sector?..........................................................................7 Five main subsectors....................................................................................................7 1. Commodity chemicals .............................................................................................8 2. Fertilisers/Agrochemicals ........................................................................................9 3. Industrial gases ......................................................................................................10 4. Specialty chemicals................................................................................................10 5. Pharmaceutical hybrids..........................................................................................10 The global chemical industry in numbers ..................................................................10 Production costs and energy structure........................................................................16
Investing in chemicals ...........................................................18

Key factors to look out for .........................................................................................18 1. Demand growth......................................................................................................18 2. Macroeconomic trends...........................................................................................21 3. Input costs/pricing power.......................................................................................23 4. Restructuring..........................................................................................................24 5. Capital discipline ...................................................................................................26 Valuation....................................................................................................................28 1. Key valuation methodologies.................................................................................28 2. Peak to trough valuation ........................................................................................30
Mergers and Acquisitions......................................................31

1) Increasing portfolio focus......................................................................................33 2) Increased balance sheet liquidity ...........................................................................36 3) Globalization .........................................................................................................37 4) Need to reduce cyclicality .....................................................................................38 5) Interest from financial buyers................................................................................41
Commodity Chemicals...........................................................44 Inorganic Chemicals ..............................................................44

Introduction................................................................................................................44 Chlor-alkali ................................................................................................................44 Soda Ash....................................................................................................................51 Titanium Dioxide.......................................................................................................54 Hydrogen Peroxide ....................................................................................................58
Petrochemicals .......................................................................60
Introduction................................................................................................................60 Feedstock ...................................................................................................................61
Olefins (primary).....................................................................64
Ethylene .....................................................................................................................65 Propylene ...................................................................................................................69 Butadiene ...................................................................................................................73
Aromatics (primary) ...............................................................77

Benzene......................................................................................................................77 Toluene ......................................................................................................................81 Paraxylene..................................................................................................................83
Other monomers (intermediates) ..........................................87

Ethylene Glycol .........................................................................................................87 Methanol ....................................................................................................................90 Phenol ........................................................................................................................94 Styrene Monomer ......................................................................................................97 Acrylic Acid.............................................................................................................100 Acrylonitrile.............................................................................................................102
Plastics (or Polymers)..........................................................106

Polyethylene.............................................................................................................107 Polypropylene ..........................................................................................................115 Polyvinyl Chloride (PVC)........................................................................................119 Polystyrene ..............................................................................................................123 Polyethylene Terephthalate (PET) ...........................................................................126
Other Polymers.....................................................................130
Polyurethanes...........................................................................................................130 Methylene-diphenyl diisocyanate (MDI).................................................................130 Toluene diisocyanate (TDI) .....................................................................................133 Polycarbonate...........................................................................................................135
Fibres.....................................................................................138
Polyester Fibre .........................................................................................................138 Polyamide (Nylon)...................................................................................................140
Fertiliser ................................................................................145
Fertiliser Measurement ............................................................................................145 Fertiliser Market and its Drivers ..............................................................................147 Nitrogen fertiliser.....................................................................................................154 1. Ammonia .............................................................................................................160 2. Urea......................................................................................................................164 Phosphate.................................................................................................................168 Potash.......................................................................................................................170
Agricultural Chemicals ........................................................174

Herbicides ................................................................................................................179 Fungicides................................................................................................................181 Insecticides ..............................................................................................................182 Seeds and GMOs .....................................................................................................182
The industrial Gases industry .............................................186

Introduction..............................................................................................................186 Industrial Gas companies are treated as defensive...................................................188 Air Separation Technology ......................................................................................190 Distribution ..............................................................................................................192 Cost structure ...........................................................................................................193 New opportunities....................................................................................................194
Atmospheric Gases..............................................................199
Nitrogen ...................................................................................................................199 Oxygen.....................................................................................................................200 Argon .......................................................................................................................203 Other Noble Gases ...................................................................................................204
Non-atmospheric Gases ......................................................205

Hydrogen .................................................................................................................205 Helium .....................................................................................................................208 Carbon Dioxide........................................................................................................208
Specialty Chemicals.............................................................210
Introduction..............................................................................................................210 Overview..................................................................................................................210 Specialty Chemicals Product Categories .................................................................214 Paints and Coatings..................................................................................................217 Adhesives & Sealants ..............................................................................................221 1) Adhesives ............................................................................................................222 2) Sealants................................................................................................................226 Colourants................................................................................................................228 1) Dyestuffs..............................................................................................................229 2) Pigments ..............................................................................................................230 3) Masterbatches ......................................................................................................234 Plastic Additives ......................................................................................................235 Water management chemicals .................................................................................238 Leather chemicals ....................................................................................................241 Consumer chemicals ................................................................................................242 1) Flavours and Fragrances......................................................................................243 2) Food ingredients ..................................................................................................249 3) Cosmetic ingredients ...........................................................................................253 Fine Chemicals ........................................................................................................256
Catalysts ...............................................................................259 European Chemicals: Companies at a glance ...................263 Air Liquide.............................................................................264 Akzo Nobel............................................................................266 Arkema ..................................................................................268 BASF......................................................................................270 Bayer .....................................................................................273 Clariant ..................................................................................275 Croda .....................................................................................277 DSM .......................................................................................279 Elementis ..............................................................................281 Johnson Matthey ..................................................................283 Kemira ...................................................................................285 K+S (Kali und Salz)...............................................................287 Lanxess .................................................................................289 Linde......................................................................................291 Rhodia ...................................................................................293 Solvay....................................................................................295 Symrise .................................................................................297 Syngenta ...............................................................................299 Umicore .................................................................................301 Victrex ...................................................................................303 Wacker Chemie.....................................................................305 Yara........................................................................................307 Yule Catto..............................................................................309
Chemicals primer An investors reference guide

We are publishing the second edition of our European Chemicals Primer to provide a broad introduction to both the major product areas and applications as well as an overview of the major European industry participants. This is intended as a reference guide for either information on specific areas of the chemical industry as well as on companies that are included in the sector. We have broken the industry down into a number of larger segments for the purpose of this overview. These sub-sectors include commodity chemicals, fertilisers and agrochemicals, industrial gases and the broad spectrum of specialty chemicals. It can be used in different ways: whether you need a general sector overview or specific information on chemical products, their production processes end markets, the supply/demand balance or price outlook. In addition, we have provided a series of company snapshots to offer a quick reference guide on some of the major listed European industry participants. Although this primer is primarily aimed at those who are new to the sector, we hope that it will also prove a useful source of reference for those who have worked on the sector for some time already. We also welcome your comments and suggestions on topics to be included in our next edition.
Introduction
What makes up the chemicals sector?
What are chemicals?
The chemicals industry converts raw materials derived principally from oil and natural gas, minerals, and air as well as plant based raw materials into more valuable products for use in industrial and consumer markets. The sector consists of a vast array of products, including fertilisers, paints and coatings, plastics, industrial gases, petrochemicals and vitamins. The range of 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. The chemicals sector is one of the most heterogeneous sectors in which to invest. Companies differ tremendously in their product offering, primary feedstock, customer structure and underlying technology. The vast range of end markets mean companies fortunes are driven by many different factors, with one of the key influences of its fortunes being GDP. As a result, the sector is still perceived as cyclical. This has resulted in a number of companies initiating portfolio moves in recent years to shift their portfolio base towards less cyclical products (e.g. DSM's sales of its Base Chemicals & Materials assets, Lindes disposal of KION forklift, Lanxess disposal of Lustran Polymers, Umicores spin-off of Nyrstar and BASFs acquisition of Cognis). The sector is characterized by global markets, with all of the major operators having international businesses. In response to globalization, and as part of the continued search for scale efficiencies, the industry has undergone considerable consolidation in recent years and we anticipate the trend of geographic diversification (investments as well as M&A) to continue.
Chemicals is one of the most heterogeneous sectors in which to invest
Five main subsectors

Although the chemicals sector consists of a vast array of products, companies operations can broadly be divided into five main categories: Commodity chemicals Fertilisers/agrochemicals Industrial gases Specialty chemicals Pharmaceutical hybrids Although the activities of the companies often span more than one of these areas, we adopt this demarcation in order to approach the sector methodically.
1. Commodity chemicals
Commodity chemicals are bulk chemicals, increasingly produced by upstream producers
Commodity chemicals are typically produced in large quantities, and sold on the basis of price, and, in some cases, by small, targeted variations in compositions. As the name suggests, customers tend to differentiate between suppliers on the basis of price rather than effect. Product types included within this category include organic chemicals, petrochemicals, basic plastics and other resins, inorganic chemicals, and man-made fibres. Because of the relative ease of vertically integrating production with the manufacture of its (usually petrochemical-based) feedstock, commodity chemicals are increasingly produced by companies with access to lower cost oil & gas reserves (e.g. Middle Eastern players) such as SABIC. Increasingly, these production assets are housed within the oil refining businesses. However, some oil companies have chosen to spin off their business (Total, BP). Prices tend to be set on a monthly contract basis or on a spot basis and the market participants are largely obliged to sell at this price ("price takers"). A number of companies remain in the US and Europe, although competition from Middle Eastern players and concerns over cyclicality has meant that Western companies are increasingly looking to exit these business areas (e.g. GE Plastics and DSM Petrochemicals sold to SABIC, Dow's attempted JV with PIC). It is worth noting that in the European chemicals sector there are now no listed commodity chemicals players of significant scale only parts of larger conglomerates, such as BASFs petrochemical business and Solvay and Arkemas PVC business. The two main petrochemical players in Europe are INEOS (ex Bayer) and LyondellBasell (ex BASF/Shell), both of which remain in private hands.
Figure 1: Main Types of Commodity chemicals
Commodity chemicals
Inorganic chemicals
Inorganic chemicals are principally derived from brines and minerals such as sulfur or phosphate rock. They form the foundations of major chains, such as the chlor-alkali chemicals, and of products such as salt, fertilisers, and oxides, including titanium dioxide and iron oxide
Source: J.P. Morgan
Organic chemicals (Petrochemicals)

Organic chemicals are either derived from crude oil or natural gas and can in turn be further broken down into single molecules (including the subsector monomers, which are typically combined to form long-chain compoundspolymers).
Key European commodity chemical players: BASF, Solvay, Arkema, Ineous, Lyondellbasell Key U.S. players: Dow, Du Pont, Eastman, Georgia Gulf
2. Fertilisers/Agrochemicals
Fertilisers and agrochemicals are used at different stages of the farming process
Fertilisers, agrochemicals and seeds are often categorized together, as they all assist different stages of the farming process. Fertilisers are substances that are added to the soil to replace essential nutrients depleted by crops. They contain one or more of the primary plant nutrients (nitrogen, phosphorous, and potassium) and sometimes also contain secondary trace nutrients (calcium, magnesium, sulfur, iron, copper, and zinc). Urea is the most basic of Nitrogen fertilisers, whereas DAP, NPK and CAN are more specialized compounds which command higher prices and margins. Key European fertiliser players: Yara, K+S Agrochemicals are pesticides, which can be divided principally between herbicides, fungicides, and insecticides, all of which are used to increase crop yields by combating weeds, fungal pests, and insects, respectively. The agrochemicals industry is characterized by high barriers to entry, as significant R&D costs and extensive intellectual property rights allow a small number of significant companies to dominate the industry globally. Many agrochemical manufacturers also have a seeds & GMO (genetically modified seeds) business which allows them access to a greater percentage of the farming value-chain. Key European agrochemical players: Syngenta, Bayer CropScience, BASF Agricultural Solutions
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3. Industrial gases
Industrial gas companies sell components of air and synthetic gases
Industrial gas companies separate air into its components and sell the units onto third parties. In addition, gas producers now provide an array of specialty gases for a wide variety of uses, including steel production, electronics and healthcare. Because of the comparatively high reliance on long-term contracts, the industry tends to be less cyclical than many other areas of the chemicals sector. Key European industrial gas players: Linde, Air Liquide
4. Specialty chemicals
Specialty chemicals encompass a vast array of products and are not typically large volume commodities
Specialty chemicals, in contrast to commodities, are those chemicals that are sold on the basis of their performance (and increasingly, technical service) rather than for their chemical composition or price. The variety of end products is vast, including both industry and function-specific chemicals. However, margins and returns vary dramatically within specialty chemicals. Examples of specialty chemicals include paints, plastic additives, high performance plastics, cosmetic ingredients and automotive catalysts. Key European specialty chemical players: Akzo Nobel, Arkema, BASF, Clariant, Croda, DSM, Givaudan, Kemira, Johnson Matthey, Lanxess, Rhodia, Symrise, Umicore, Victrex.
5. Pharmaceutical hybrids
A few chemical/pharma hybrids remain in Europe
A handful of chemical companies retain significant pharmaceutical operations. Although the majority of these hybrids have now spun off or sold their pharma business to become pure-play chemical players (eg BASF in 2000, Akzo Nobel and Altana in 2007, Solvay in 2009), there remain a number of European businesses which have retained a hybrid structure. Key European hybrid players: Bayer, Lonza and Merck
The global chemical industry in numbers

The global chemicals industry generated about 1.8tn of sales in 2009, as per BASF and CMAI. Asia accounted for the largest proportion of sales (37%), led by China (global #3) and India (#7). The EU25 accounted for 31% of the global sector, followed by NAFTA, accounting for 22%. Global chemical production is expected to continue to grow at a healthy rate in the next few decades, with the OECD estimating global output in 2020 to be 85% higher than in 1995 (CAGR=2.5%).
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Figure 2: Geographical distribution of world chemical sales (2010E)

Rest of Asia China 15% 15%
Others* Japan 7% 2% Latin America 5%
EU25 31%
Rest of Europe** 3% NAFTA 22%
Source: CEFIC and J.P. Morgan estimates Others* = Oceania and Africa, Rest of Europe** = Switzerland, Norway and other Central & Eastern Europe (excluding the new EU 12 countries)
According to CEFIC, the European chemicals sector accounts for 2% of GDP, or more than 7% of manufacturing value-added in Europe. Germany is the largest producer, with a 24% share of the European chemicals sector. European production is relatively concentrated, with the top four (Germany, France, UK and Italy) constituting almost two thirds (296bn, 60%) of the industry.
Figure 3: Geographic distribution of European chemical industry sales (2010E)
Belgium 6% Spain 7% Netherlands 10% Germany 24% Italy 11% UK 10% France 15% Ireland 5% Others 12%
Source: CEFIC and J.P. Morgan estimates, Others include Poland,Sweden,Finland,Austria,Czech republic,Hungry,Slovania,Portugal,Denmark
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Figure 4: Chemicals demand (excluding pharma) 2009

World
Figure 5: Chemicals demand, expected CAGR (2009-2020E)

World
South America
South America
North America
North America
Western Europe
Western Europe
Asia pac
Asia pac
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
0%
1%
2%
3%
4%
5%
6%
7%
Source: BASF
Source: BASF
From 2000-2010E, European production growth has slowed (+1.3% vs world average of 4.8%), as production was increasingly shifted to the emerging markets. World chemicals demand will however grow by 6.2% through 2009-20, as per BASF.
Highest growth rates in China, Mexico and India
Figure 6: Chemicals sales growth rate in % (2000-2010E CAGR)

18% 15% 12% 8.7% 9% 6% 3% 0% 7.6% 7.6% 7.3% 6.8% 5.4% 4.8% 4.0% 3.9% 3.4% 2.9% 2.1% 0.1% 16.5%
Ta iw an Ko re a, Re pu bl ic
In di a
EU -2 7
W or ld
C hi na
M ex ic o
an ad a
itz er la nd
Af ri c a
Source: CEFIC and J.P. Morgan estimates
Growth rates vary considerably between product groups (Figure 7). According to CEFIC, pharmaceuticals and consumer chemicals showed more resilience during the downturn in 2009. More cyclical areas - petrochemicals and polymers declined year on year.
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Ja pa n
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Br az il
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Figure 7: Chemical production growth rate by sector in %

6% 5% 4% 3% 2% 1% 0% -1% -2% -3% Pharmaceuticals Consumer Chemicals Overall Chemicals 2007 Specialty Chemicals 2008 Petrochemicals Basic Inorganics -1.4% 0.0% -0.6% -1.3% 2.7% 2.4% 2.4% 2.6% 1.8% 0.8% 0.3% 0.3% 1.5% 5.5% 3.9%
-1.2% -1.3%
-0.8% -1.5%
-0.9% -2.3% Polymers
2009
Source: CEFIC and J.P. Morgan estimates.
In terms of product type, base chemicals account for the largest share of the European chemicals sector, estimated at 43% in value terms. This category covers petrochemicals and derivatives, as well as basic inorganics. However as we outline below, the majority of the listed space in Europe occupies positions further along the value chain. Pharmaceutical, specialty and fine chemicals account for 28% and 19% respectively. These are followed by consumer chemicals, contributing c.10% in sales. These products are sold to producers of finished consumer products including soaps, detergents, perfumes and cosmetics.
Figure 8: Sectoral breakdown of EU chemical sales (2010E)
Pharmaceuticals 28% Crop protection Fertilizers 1% 2% Industrial gases 2% Man-made fibres 2% Other basic inorganics 4% Plastics & Sy nthetic rubber 17% Soaps & detergents 4% Paints & inks 6% Perfumes & cosmetics Other specialty 6% chemicals 12%
Figure 9: End market breakdown (2010E)

Rest of Indus. 10% Textile & Clothing 6% Agriculture 6% Elec. Goods 4% Office Mac. 1% Indus. Mac. 2% Metal Products 3% Services 16%
Consumers 31%
Petrochemicals 16%
Paper & Printing 5% Automotive 5%

Rest of Manufac. 6% Construction 5%
The chemical sector supplies a vast array of sectors across the economy. The largest end market is consumers like private households, government and non-profit organizations, with a share of 31%. Other important end markets in the industrial space are metals, mechanical & electrical industries, textile and clothing, and automotive and paper - which contribute 25%. In addition, services represent the other large end market, with a 16% share.
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European and US chemical companies still dominate in terms of sales. However, new players in China, Saudi Arabia and Taiwan already take important roles in the global chemical industry.
Figure 10: Top 30 chemicals producers by sales (2009)
$ million
80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0

BA SF (E ch U) em ica ls (U S) Ba ye r( EU ) Ine Ly os on (E de U) l lB as el l Si (U no S) pe Sa c( b ic Ch (S i na Ex au ) di xo nM Ar ab ob ia) il P et roc he Du m Po nt Mi (U t su S) bis hi (Ja pa n) Fo To rm ta l Ak os (E zo a U) No Pe be tr o l( ch EU em ) i ca l (T Su aiw mi an to mo ) (Ja Ai p rL Jo iqu a n) hn i de so (E nM U) at th e y( EU ) L in As de ah (E iK U) as To ei ray (Ja Ind pa us n)* Ev trie on s( ik Ja Ch pa em n) ica ls Sh (E in U) Et su PP Re (Ja G lia Ind pa nc n) us eP trie etr s( oc US he mi ) ca ls ( In di a So lva ) y( EU Sy ) ng en ta (E U) DS M (E U) Ya ra Um (EU ) i co re (E U) Pr ax a ir Ai (U rP S) ro du ct s (U S)
Source: Company reports and J.P. Morgan, numbers for ExxonMobil, Reliance, Total and Evonik include only the Chemicals division of these companies. Currency exchange rate: 2009 average FX rates. 14
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15
$ million
Figure 11: Top 34 chemicals producer by market cap (2009)
Source: Company reports and J.P. Morgan Currency exchange rate: 2009 average FX rates
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Production costs and energy structure

For the chemical industry as a whole, external purchases account for c.70-75% of total costs. On average the costs incurred by chemical companies are similar to that of other businesses, although there can be significant variation in cost structure, depending on the type of products produced. For example, the industrial gases business is more capital-intensive but requires less marketing costs, whereas many specialty chemicals businesses are the opposite.
Figure 12: Average cost structure of the EU chemical industry (2010E)
Gross operating surplus* 10% Trading 11%
labour cost 14%
Energy** 8%
Other costs 57%

Source: CEFIC and J.P. Morgan estimates * Gross operating surplus = value added - labour cost (payroll) = = profit before taxes, financial charges and depreciation **Energy is defined as all energy mining products, oil refining products and electricity and gas products
Input costs take a key position for chemical companies
The chemical industry upgrades energy and raw materials into products required by other industrial sectors as well as by final consumers. Therefore, input costs are a key determinant of a given operations competitiveness on the world market. Feedstock accounted for almost 60% of total input costs and fuel and power for the remaining 40%. Cost structures however differ significantly within the chemicals industry, as certain sub sectors like petrochemicals or industrial gas manufactures are much more sensitive to energy costs but have lower payroll and marketing costs. The opposite is true for specialty chemical companies, where service levels take a higher percentage of overall costs.
Figure 13: Energy consumption by source for the EU chemical industry
80 60 40 20 0 Oil Gas Electricity Feedstock
Source: CEFIC
Heat
Coal
Renew ables
Others
Fuel & Pow er
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Consistently since energy costs comprise a high percentage of overall costs and prices have been increasing in the recent few years, improving energy efficiency is essential for the chemical industry.
The chemical industry lowered its energy consumption by 42% in 15 years
In 2005, energy consumption per unit of production (incl. pharmaceuticals) was 42% lower than in 1990. Over the past 15 years, the chemical industry has succeeded in increasing continuously its output while at the same time decreasing the percentage of energy input. On average, the chemical industry has lowered its energy intensity per production unit by 3.6% annually.
Figure 14: Energy consumption (1990-2006)
Index 1990=100
160 140 120 100 80 60 40 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Energy Consumption Chemicals Production Energy Intensity
Source: CEFIC and Eurostat
The sector in recent years has increased its focus on utilizing natural raw materials (eg. Plants) in an effort to lower their carbon footprint and reliance on petrochemicals inputs. Biopolymers are a key example.
Figure 15: The EU manufacturing industry: Added value per employee- 2005
Index (chemicals=100)
Pharmaceutical Chemicals Office Machinery and computers Radio, TV and communication Basic metals Automotive Pulp & Paper Other transport equipment Medical,pres. & other optical ins. Publishing & Printing Machinery and equipment Manufacturing Recycling Other non metallic mineral products Electrical machinery & apparatus Rubber and plastic products Food products & beverages Fabricated metal products Furniture; manufacturing Wood & w ood products 0 20 40 60 80 100 120 140
Source: CEFIC, J.P. Morgan
Chemical is the second leading manufacturing sector (after pharmaceuticals) in terms of "added value per employee" in Europe. As a consequence, labor productivity in the chemical industry is growing by 3.9% annually and therefore faster than labor productivity in the total industry (2.4%).
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Investing in chemicals
Key factors to look out for
Given the heterogeneous nature of the chemicals sector, it is difficult to pinpoint any one theme that uniformly impacts the whole of the sector. As with most sectors, there is not one dominant variable, but a complex interaction of external factors. Below we present the five key factors to look out for, in our view, in evaluating any investment opportunity. 1. Demand growth 2. Macroeconomic developments 3. Input costs/pricing power 4. Restructuring and fixed cost base 5. Capital allocation
1. Demand growth
The global chemicals sector is influenced by expectations of GDP growth
In summary European chemicals are not as cyclical as often believed as endmarket exposures differ significantly, and in assessing demand growth it is critical to examine the end-market characteristics on a case-by-case basis. Demand remains the most important determinant of company profitability and returns. Therefore, the chemicals sector is heavily influenced by expectations about GDP growth and industrial production.
Figure 16: European Chemicals Average Capacity Utilisation

88.0%
86.0%
84.0%
82.0%
80.0%
78.0%
76.0%
74.0%
72.0%
70.0%
68.0%
66.0%
1Q 19 93 3Q 19 93 1Q 19 94 3Q 19 94 1Q 19 95 3Q 19 95 1Q 19 96 3Q 19 96 1Q 19 97 3Q 19 97 1Q 19 98 3Q 19 98 1Q 19 99 3Q 19 99 1Q 20 00 3Q 20 00 1Q 20 01 3Q 20 01 1Q 20 02 3Q 20 02 1Q 20 03 3Q 20 03 1Q 20 04 3Q 20 04 1Q 20 05 3Q 20 05 1Q 20 06 3Q 20 06 1Q 20 07 3Q 20 07 1Q 20 08 3Q 20 08 1Q 20 09 3Q 20 09 1Q 20 10
Source: CEFIC, J.P. Morgan research
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Figure 17: European Chemicals: Average volume growth* (yoy)

%
25.0% 20.0% 15.0% 10.0% 5.0% 0.0% -5.0% -10.0% -15.0% -20.0% -25.0% 1Q03 2Q03 3Q03 4Q03 1Q04 2Q04 3Q04 4Q04 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 Q108 Q208 Q308 Q408 Q109 Q209 Q309 Q409 Q110 Volume
Source: J.P. Morgan estimates, Company data. * Excluding Agchem/ fertilizer
yet the European sector remains relatively defensive, vs its US and Asian peers
Although from a global standpoint we believe the sector remains relatively cyclical and heavily exposed to economic activity, we believe the European sector to be less cyclical than the US and Asia due to the significant level of defensive elements in their portfolios. Table 1 shows the key end-markets serviced by each of the companies in the European sector. We estimate that over 50% of the market capitalization of European Chemicals plc is exposed to end-markets with strong structural growth drivers, and hence less dependent of GDP development.
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Table 1: European Chemicals end market split (% of sales)

DEFENSIVE PHARMA/HEALTH/CONSUMER Pharma 11% 5% 1% 33% 10% 10% 12% 68% 10% 5% 11% 10% 2% 50% 30% 20% 15% 11% 12% 10% 50% 5% 5% 5% 95% 10% 20% 10% 10% 7% 16% 3% 100% 15% 10% 4% 10% 20% 20% 50% 30% 20% 5% 15% 23% 9% 5% 10% 5% 4% 20% 5% 12% 9% 40% 5% 5% 5% 6% 15% 7% 15% 11% 24% 5% 3% 20% 5% 10% 12% 5% 5% 12% 21% 5% 5% AGRICULTURE Paper & Textile Packaging 2% 2% 3% 14% 5% 10% 6% 10% 7% 2% 14% 6% Metals Marine & processing Aero-space Electronics 27% 8% 5 9% 5% 10% 5% 4% 5% 5% 5% 5% 5% 30% 8% 6% GDP LINKED AUTOMATIVE CONSTRUCTION Gen. Industrial/ Chems Other 20% 6% 12% 5% 20% 5% 19% 14% 3% 3% 20% 3% 5% 13% 10% 10% 5% 7% 32% 20% 10% 15% 4% 22% 7% 6% 10% 11% 23%
Air Liquide* Akzo Nobel Arkema BASF Bayer Clariant Croda DSM Elementis JMAT K+S Kemira Lanxess Linde* Rhodia Solvay Symrise Syngenta Umicore* Victrex Wacker* Yara Yule Catto
Health / Nutrition Consumer Fertiliser CP/ seeds 11% 3% 12% 5% 10% 5% 2% 5% 6% 7% 15% 19% 17% 3% 50% 10% 38% 5%
Construction Construction OEM Tyres Autocats (new) (renov) Engineering 9% 8% 5% 6% 11% 22% 5% 15% 10% 11% 1% 5% 14% 1% 5% 5% 6% 4% 13% 7% 5% 5% 5% 7% 11% 20% 20% 4% 52% 4% 2%
10%
Source: Company data and J.P. Morgan estimates, *adjusted for take-or-pay
20
21
Key sectors which have historically shown defensive characteristics include pharma, consumer goods and oil & gas. The automotive catalyst producers, although influenced by cyclicality of the automotive sector, benefit from strong secular growth drivers, due to regulatory influences impacting volumes. The relative share price performance of the sector in the last period of slow demand (2008) indicates the relative strength of these defensive elements (Figure 18).
Figure 18: European Chemicals: Share price performance in 2007
120% 100% 80%
-30%
Figure 19: European Chemicals: Share price performance in 2008

0% -10% -20%
60% 40% 20%
-40% -50% -60% -70%
0% -20% -40% -60% -80%

K+ S YA RA BA JO YE HN R SO B N MA ASF TT H UM EY IC OR E LO S Y NZ NG A ST EN XE T 60 A A K 0 Ch ZO em NO BE L L IN D AR E KE A IR MA L IQ UI D DS ST M XE 60 CR 0 GIV ODA AU DA N KE MI RA RH OD S O IA Y U L VA LE Y CA T L A TO NX E CL S S AR IA N AL T TA NA MI E
-80% -90%
K+ S AG CR AL OD TA A GI VA NA UD AG AN -R EG A L SY I R L O N ZA NG IQ EN U ID CL TA E S AR AG A IA NT -R E AG G -R BA EG YE ST R AG XE L 60 I ND E 0 Ch AG JO em HN SO Pr N KO MA Y NI T T AR HE A NK LIJ Y P KE L DS C M SO N LV V AY B SA ST ASF XE SE 6 AK 00 Z O Pr NO B U M EL KE I CO M RE IR A W AC LAN OY KE XE J S R CH S A G E YU M IE LE AG CA TT AR O K R H EM OD A IA SA
Source: Bloomberg
W AC
KE R
CH E
Source: Bloomberg
2. Macroeconomic trends
In summary Earnings in European chemicals remain heavily influenced by currency fluctuations, with developments in , CHF, and $ being key. Changes in interest rates, on the other hand, have limited impact due to the low level of gearing across the sector. In addition to demand, exchange rates and interest rates are two other key macro economic drivers. Exchange rates Exchange rate developments can impact a companys earnings in three ways: First, there is the direct and simple translation effect on overseas earnings. Second, there is the potential impact on margins from transaction risk (i.e. where a company has a geographical mismatch between assets and sales). This has limited impact in Europe, since for the majority of European companies sales and assets tend to be fairly well managed. Third, there is a potential competitive effect, whereby a companys pricing strategies in international markets can be affected by exchange rates and can thus lead to market share gains or losses. Figure 20 shows the geographic exposure of our coverage universe. European chemicals companies derive an average of c.50% of sales within Europe, and another c.20-25% from the US. However we note that the recent weakness has benefited a large number of European players.
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22
Figure 20: Sales by region 2009

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%
Source: Company data and J.P. Morgan estimates.
Table 2: Annual US$/EUR exchange rates

Year 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Source: Datastream
Figure 21: US$ /EUR spot rate

USD/EUR
Exchange 1.11463 1.06579 0.92395 0.89672 0.94632 1.13245 1.24340 1.24324 1.25774 1.37193 1.47016 1.39465 1.33438
Source: Bloomberg
Interest rates Interest rates and the perception over monetary policy have historically had a significant influence on the performance of the chemicals sector relative to the market. However, given the relatively low level of gearing in the sector resulting from a period of healthy earnings growth and non-core asset disposals, we view the direct impact of changes in interest rates on the earnings in the sector as limited. We estimate that a 100bps increase in net borrowing cost would have an average impact of 1-2% on profit before tax. Moreover, interest rates also play an important role in overall industrial investment activity and are key for calculations on future projects.
22
Ai rL i Ak q u i d zo e No b Ar e l ke ma BA SF Cl ar ian t Cr od a DS Jo El e M hn me so n M n ti s a tt he y K+ Ke S mi ra O La yj nx es s Lin de Rh od ia So lv a Sy y mr Sy is e ng en U m ta ico re W ac Vi ctr ke e rC x he mi e Y Yu ar a le Ca tto
Europe
North America
Asia
Latam
ROW
2 1.5 1 0.5 0
19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09 20 10
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3. Input costs/pricing power

In summary the input cost/pricing power dynamic differs significantly across the sector, with those benefiting from strong market positions or differentiated product portfolios benefiting from greater pricing power, and thus greater earnings security. The balance between changes in input costs and selling prices is of significance in any industry. With the price of Brent crude remaining volatile, the topic has been an area of great concern within the chemicals sector due to its high level of reliance on petrochemical feedstock. Figure 22 indicates that the contract prices of the five main raw materials used by the sector have closely tracked the spot price of Brent crude.
Figure 22: Contract petrochemical prices have closely followed the price of spot Brent
400 350 300 250 200 150 100 50 0 Jan-2000
Figure 23: DJ Stoxx Chemicals vs Brent Oil

Rebased on the 31/12/1999=100
400 350 300 250 200 150 100 50 0 Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Jun-00 Jun-01 Jun-02 Jun-03 Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09
Jan-2001
Jan-2002 Benzene
Jan-2003
Jan-2004
Jan-2005 Butadiene
Jan-2006
Jan-2007
Jan-2008 Ethylene Crude Oil
Jan-2009
Jan-2010
STXE 600 Chem
Crude Oil /BBL
Polyethylene Low Density
Propylene Contained Value
Source: CMAI and CMAI estimates Note: Contract petrochemical prices in and Brent spot /BBL
Source: Bloomberg, Datastream
Although input cost developments have impacted earnings across the sector, it is worth noting here that the lack of commodity chemicals names in Europe has meant that there has been some level of decoupling between input costs and earnings momentum. Figure 24 show that pricing power differs significantly across the European sector due to wide variations in end-market characteristics, product lines and market positions. Companies with greater pricing power have tended to be those with (i) dominant market positions, (ii) a high quality product offering with high barriers to entry, (iii) a profit-incentivised sales force, (iv) a favourable supply/demand balance and (v) a consolidated industry environment. Key examples of companies with above-average pricing power in our view include the gas companies (Air Liquide, Linde), automotive catalyst companies (Johnson Matthey, Umicore) and Croda.
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24
Figure 24: European Chemicals: Average Pricing momentum (%, yoy)

10% 5% 0% -5% -10%
Source: J.P. Morgan estimates, Company data. Excluding K+S.
Average Pricing Growth (YoY)
24
1Q 03 2Q 03 3Q 03 4Q 03 1Q 04 2Q 04 3Q 04 4Q 04 1Q 05 2Q 05 3Q 05 4Q 05 1Q 06 2Q 06 3Q 06 4Q 06 1Q 07 2Q 07 3Q 07 4Q 07 Q1 08 Q2 08 Q3 08 Q4 08 Q1 09 Q2 09 Q3 09 Q4 09 Q1 10
Many commodity chemicals have enjoyed strong pricing power following several years of robust demand combined with limited supply growth. This has meant that input costs have been relatively quickly passed through in the form of price increases. Elsewhere in the sector, pricing power has been far more varied both between companies and also between individual businesses within those companies. With the recent exceptional environment being an exception, on the whole, companies have struggled to raise prices sufficiently to offset cost pressures and maintain gross margins. Although a rising oil price would normally be associated with some level of earnings pressure across the sector, we note that BASF, due to its Oil & Gas business, is a net beneficiary of an increased oil price. Chemicals companies have typically performed well during a high oil price environment since this is more often than note reflective of robust economic growth, and hence healthy demand, which we note above, is the most important factor n dictating operating performance.
4. Restructuring
In summary Restructuring remains a continuous theme, but optimization of COGS is the key to uplifting earnings. To focus on restructuring only is fairly ineffective without being able to generate any pricing power. Portfolio re-shaping and restructuring remain a perennial theme within the sector, with a view to increasing cost efficiency through effective utilization of plants, materials and workforce. An overview of the key ongoing programmes in this area is shown below:
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Table 3: European Chemicals: Overview of ongoing restructuring programs- June 2010 Update
Company Air Liquide Akzo Nobel Arkema BASF Clariant Croda DSM Lanxess Linde Rhodia Solvay Syngenta Cost cutting programme ALMA ICI synergies/restructuring Restructuring NEXT Wilton closure Restructuring Challenge 09 & 12/Petroflex HPO Restructuring Horizon project Operational efficiency restructuring prog Timeframe 2008-2012 2008-2011 2006-2010 2009-2012 2007-2010 2009-2010 2009-2010 2010 2009-2012 2010 2010-2012 2008-2011 Targeted savings (m) 600 340 600 1,000 SFr. 500 5 200m 140 650-800 130 120 $290 Savings still outstanding (m) 265 48 92 700 SFr. 350 5 na 0 350-500 130 120 $165
Source: Company reports and J.P. Morgan estimates
Although many of the current programmes are focused around reducing fixed costs with the aim to uplift margins, recent history suggests that for the majority of companies it is the gross margins, and not the operating expenses below that are key to determining operating performance. Figure 25 indicates that on average, COGS represents c.65% of sales across the sector, while SG&A typically represents only c.25% of sales. In addition, we highlight that although the recent credit crisis has prompted the majority of corporates to cut further cost, the sustainability of these savings remain questionable, with on average 50% of savings being variable in nature.
Figure 25: European chemicals: COGS/Sales (%), 2009
100% 90% 80% 70% 60% 50% 40% 30% 20%
a tt he y Rh od Ke i mi a ra Oy Ar j ke ma Um i co re Ya ra La nx Wa es ck s er Ch em i C la e ria nt Cr od a BA SF DS M E le me nt i s L in de K+ S So lv a y Sy m A k rise zo No b S y el ng en A ir ta Li q ui d e V ic tr e x
25
Source: Company reports
Our discussions with management teams in the sector indicate that raw materials and energy account for up to 65% of COGS, with an average of c.55%. Consequently, in the absence of price increases, we estimate that a 3% increase in raw material/energy costs would equate to c.100 bps of operating margin, or c.5% of costs below gross margin, all else remaining equal. Therefore we take the view that restructuring programmes are most effective when focused around improvements at the gross margin level, either through (i) optimization of COGS or (ii) when accompanied by pricing power.
Jo
hn
so
nM
26
5. Capital discipline
Capital allocation has been a key area of concern for investors in the past decade, with the industry track record punctuated with examples of destroying value through making expensive investments. Often at the top of the cycle, only for margins to be adversely affected at the bottom of the cycle, and paying excessive multiples for acquisition targets in order to fuel growth as a cycle run out of steam. However, capital discipline appears to have improved over time, with management teams increasingly focused on value creation and return-based management. This has rewarded companies with a significant improvement in ROIC.
Figure 26: European Chemicals: ROIC development
%
12 10 8 6 4 2 0
20 10 E 20 11 E 20 12 E 20 01 20 00 19 98 20 02 20 03 20 05 20 07 19 96 19 95 19 97 19 99 20 04 20 06 20 08 20 09
Figure 27: European chemicals: capex/sales development

12%
Figure 28: European chemicals: capex/depreciation development

200% 180%
10%
160% 140% 120%
8%
6%
100% 80%
4%
60% 40% 20%
2%
0%
19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 10 E 20 11 E 20 12 E 20 09 20 06 20 07 20 08
0%
19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09 20 10 E 20 11 E 20 12 E
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M&A Starting in the late 1990s, the sector has witnessed a number of major corporate deals, with a proliferation of demergers which created a stream of new companies e.g. Arkema, Ciba, Clariant, Givaudan, Lanxess, Rhodia, Symrise, Syngenta and Yara. Smaller asset disposals have also continued to be a key theme in the past three years, as companies increasingly strive to focus their portfolios. However, some companies sought to increase scale, and looked to reach critical mass through acquisition. Newly demerged companies, in an attempt to increase scale and utilize their balance sheets, acquired a number of assets, more often than not paying too high a price. We believe this has progressively improved over time, with management teams showing greater sensitivity to investor concerns over acquisition risk. We present further detail on the drivers and themes of chemicals M&A in the separate M&A section in this document. Return of cash to shareholders The increasing balance sheet strength of the sector in recent years has prompted a number of companies to increase distributions. Also, many companies are targeting the same assets for potential acquisitions (e.g. growth regions), resulting in difficulty in justifying high multiples. In the years of healthy demand growth (before the crisis of 2008), a number of companies including BASF, Akzo, DSM and Umicore all announced significantly increased shareholder distributions. The use of cash distributions in our view indicates a realization amongst companies that value-accretive acquisitions are increasingly difficult to identify. Cases where investment opportunities offer significantly positive returns are likely to remain limited, and where such opportunities are not available, we view this as an appropriate use of capital.
Lack of M&A targets at a fair price has resulted in increased cash distributions
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Table 4: European chemicals: 2009 dividend yield* (%)

Company Air Liquide Akzo Arkema BASF Bayer Clariant Croda DSM Elementis Johnson Matthey Kemira K+S Lanxess Linde Rhodia Solvay Symrise Syngenta Umicore Victrex Wacker Yara Yule Catto Dividend policy 45-50% of net income Minimum pay-out 45% of net income (adj) Grow dividend inline with groups performance Aim to increase each year or at least maintain 30-45% of net income No explicit policy Growth to be closely aligned to EPS (adj) Stable and preferably rising dividend No explicit policy (The Board intends to continue to review the dividend policy as earnings performance and debt levels permit) In line with EPS growth Aim is to distribute 40-60% of the operative net profit as dividend Payout ratio of 40-50% of group earnings (adj.) No explicit policy Earnings based policy No explicit policy Stable or preferably increasing To pay attractive dividend inline with peers No explicit policy Steady or gradually increasing Increase every year in line or above earnings growth Atleast 25% of net income Minimum 30% net income over business cycle Dividend was suspended in Dec 2008 to reduce the debt level below 100m. Now dividend distribution will commence from 2010 interims. Yield (%) 3.2 4.3 3.1 5.4 2.8 0.0 3.6 4.8 7.2 2.4 3.7 0.5 2.7 2.8 3.6 3.5 4.5 2.4 3.7 3.1 1.2 2.4 0.0
Source: Company reports and J.P. Morgan estimates. * calculated at 2009 average share price.
Valuation 1. Key valuation methodologies

Given the highly disparate nature of European chemicals companies, covering a wide range of sub-sectors including pharma, fertilisers, paints & coatings and oil & gas, we use a combination of relative and absolute methodologies to value each investment opportunity. The key methodologies are shown in Table 5. We use the DCF approach, which we treat as the most accurate methodology in setting the majority of our price targets, sense-checked against a number of relative valuation methods including EV/EBITDA, P/E, EV/IC vs ROIC and FCF yield.
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Table 5: Key valuation methodologies

Method DCF Advantages * Reflects growth potential and profitability * Reflects capital intensity (& leverage) * Allows calculation of growth rate implied by current/target price * Reflects value creation and profitability of business * Comparable across different jurisdictions Disadvantages * Highly sensitive to key assumptions (terminal growth, WACC) Popularity xxx Watch out for * Sensitivity to key assumptions (terminal growth/WACC) * Sustainability of long-term margin assumption * Sustainability of capex/depreciation ratio
Absolute
ROIC
Sum-ofthe-parts
* Requires good visibility over working capital movements * "Parts" reliant on relative valuation * Subjectivity of multiples applied * Does not reflect operational efficiency
xx
* Working capital movements
xx
* Difficulty in assigning a peer group to "parts" given conglomerate nature of many business models and lack of direct standalone peers.
EV/sales
EV/ EBITDA
Relative
P/E
* Comparable across different jurisdictions * Enables valuation of loss-making businesses * Comparable across different jurisdictions * Somewhat reflects capital intensity (through D&A) * Key indicator of shareholder returns * Reflects financial leverage
* Consistency in calculation of EV liabilities (pensions/off-balance sheet items, financial assets) * Does not reflect profitability of business
* Does not take into account leverage * Does not take into account growth potential * Not comparable across different jurisdictions * Relative difficulty of sourcing "clean" consensus EPS * Requires good visibility over working capital movements * Requires good visibility over working capital movements
xxx
* Consistency in calculation of EV liabilities (pensions/off-balance sheet items, financial assets)
xxx
* Relative differences in tax/interest rates * Consistency of EPS figures - reported, adjusted, company-defined
FCF yield
EV/IC
* Comparable across different jurisdictions * Reflects capital intensity * Reflects value creation
xxx
* Pre- vs post-interest calculations * Working capital movements
xx
* Consistency in calculation of EV liabilities (pensions/off-balance sheet items, financial assets) * Working capital movements
Source: J.P. Morgan
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2. Peak to trough valuation

Although the high level of corporate activity, including the birth of new companies in the past five years, has meant that historical analyses are unlikely to give a clear indication of the sector's performance through a cycle, we nevertheless provide some data on historical valuation, with the above caveat in mind. Based on current year estimates, our valuation analysis shows that the sector is trading inline with the long-term average. This can be explained in our view by the improvement in margins and ROIC across the sector, as capital discipline gained an increasing level of importance over the years, and portfolio moves and new restructuring programmes helped uplift margins.
Figure 29: European Chemicals: Average EV/EBITDA (x)
10.0x 9.0x 8.0x 7.0x 6.0x 5.0x 4.0x 3.0x 2.0x 1.0x 0.0x
0.0x
19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09 20 10 E 20 11 E 20 12 E
Figure 30: European Chemicals: Average P/E*

25.0x
20.0x
15.0x
10.0x
5.0x
E 11
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
19
19
19
19
19
20
20
20
20
20
20
20
20
20
20
20
20
20
12
Source: Company data and J.P. Morgan estimates, *P/E average excl. Rhodia
Figure 31: European Chemicals: Average EBIT margin

16% 14% 12% 10% 8% 6% 4% 2% 0%
98 99 95 02 00 01 04 07 05 06 97 96 03 08 09 E 10 E 19 19 19 20 19 20 20 20 20 19 20 20 20 20 20 20 20 20 11 12 E
Figure 32: European chemicals - 2010-2012E ROIC vs 2010E EV/IC

30%
Victrex
25%
ROIC Avg 2010E-2012E
20%
Yule Catto Croda
15%
10%
5%
Symrise Givaudan Umicore K+S BASF Syngenta Arkema Rhodia Johnson Matthey Air Liquide Clariant Akzo Nobel Linde Solvay Elementis Wacker Chemie DSM Lanxess Kemira Bayer
Yara
0% 0.0x 0.5x 1.0x 1.5x 2.0x 2.5x 3.0x 3.5x 4.0x 4.5x EV/ Invested Capital 2010E
Source: J.P. Morgan estimates
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Mergers and Acquisitions

Solvay, DSM and Akzo Nobel are likely to be actively looking for M&A
Last month BASF announced the acquisition of Cognis for 3.1bn while Akzo Nobel announced the sale of National Starch for 1.1bn. As economic activity improves, we see further M&A activity. We believe the combination of below drivers as likely to trigger an increasing level of M&A activity going forward. 1) Demand for portfolio focus, 2) Balance sheet liquidity, 3) Globalization 4) Need to reduce cyclicality 5) Financial sponsor activity
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Table 6: Recent transactions greater than $500mm ($mm)

Transaction value Synergies Date 06/23/10 BASF Acquirer Target Cognis TV ($) 3,795 ($) 159 LTM sales 1.2x LTM EBITDA 7.3x LTM EBITDA (w/synergies) 5.6x Rationale Becomes world leader in personal & home care ingredients Expands position for nutrition and health products Reduces earnings cyclicality 06/21/10 06/16/10 03/02/10 03/02/10 03/01/10 02/05/10 11/19/09 09/28/09 04/01/09 02/23/09 11/11/08 09/15/08 Corn Products Int. Rhodia CF Industries Bain Capital Solutia Air Products & chemicals Mitsubishi Chemicals Holding Corp. America Securities K+S IPIC Mitsubishi Rayon Co. Ltd BASF Ciba 5,395 568 0.9x 7.3x 5.5x Morton Salt Noca Chemicals Lucite Int. 1,600 103 0.9x 7.0x 4.8x 1,675 2,329 N/A N/A 1.4x 0.3x 6.2x 5.3x N/A N/A All-cash sale to help fill funding gap left by Rohm and Haas transaction Expands IPIC footprint into North American Sale driven by NOVAs need for liquidity Distressed sale: liquidity and covenants Additional consolidation in MMA Complementary portfolios Expands BASF specialty chemical presence
Source: Company fillings, press release, investor presentations, equity research 1 Based on mid point of 2010E normalized EBITDA range of $135mm to $150mm 2 Based on 2010E EBITDA multiple 3Based on a sale price of $600 (excluding $125mm for working capital)
National Starch Feixaing Chemicals Terra Industries Dow Styron Etimex Airgas Mitsubishi Rayon Co. Ltd Gentek
1,300 489 4,720 1,630 310 6,998 5,809 673
50 N/A 100 N/A N/A 250 111 N/A
1.1x N/A 2.5x 0.5x N/A 1.8x 1.3x 1.2x
9.1x1 9.0x2 9.1x 6.2x 9.1x 10.5x 18.6x 5.5x
6.8x1 N/A 7.6x N/A N/A 7.7x 13.7x N/A
Expansion of ingredient portfolio with improved product mix Complementary geographic footprint Strengthens leadership positions in specialty surfactants for the home & personal care, agrochemicals, oilfield and industrial markets North American consolidation Response to recent Yara Terra agreement Deleveraging and portfolio realignment for Dow EVA photovoltaic encapsulant technology complements Solutias existing PVB offering Consolidation of North American industrial gas industry Unsolicited all cash transaction Expanding the corporate scale while strengthening business competitiveness Realize high performance an high added-value businesses Depressed equity valuations
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1) Increasing portfolio focus

An increasingly important motivation in sector M&A activity has been to increase focus. Strategic moves by several companies have demonstrated a desire to move away from conglomerate business models, in order to concentrate on a reduced number of industries and end markets or acquire high growth/high margin businesses. For example Akzo Nobel sold National Starch to focus on its core business while BASF acquired Cognis to get entry in high margin consumer markets. Rhodia acquired 87.5% of the Feixiang Chemicals, the top player in specialty amines and surfactants in China to increase its presence in high growth emerging markets. We believe a more focused business is not only easier to optimize and to manage, but also more likely to generate higher returns, and hence benefit from a higher valuation. Focused assets tend to benefit from: Greater industry consolidation prompting improved capital discipline Increased scale leading to improved pricing power More efficient allocation of capital Simplified group structure leading to lower group overheads Disposals have so far led the drive for greater focus Improving portfolio focus within the sector has in large part been led by disposals. Value-creation through disposals is easier to achieve, particularly in the environment of buoyant asset prices like in 2006 and 2007. Currently we see asset prices as being less buoyant as not many buyers are available due to difficult economic conditions in the recent past.
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Recent examples of key divestitures which we believe were motivated by these drivers include: Akzo Nobels sale of National Starch for 1.1bn. Kemiras spin-off of Tikkurila Solvays 5.2bn disposal of Pharma Solutias c.U$50m disposal of its Nylon assets DSMs Base Chemicals & Material disposals Akzo Nobels 11bn sale of Organon and chemicals divestment programme and ICIs 410m sale of Uniqema and 1.2bn sale of Quest before the merger with Akzo Nobel. Lanxess 35m sale of Lustran Polymers. Altanas 4.5bn sale of its pharma assets. Bayers disposal of HC Starck and Wolff Walsrode (and previous demerger of Lanxess). Acquisitions set to continue the trend (but carry greater risk) A number of chemicals players are targeting acquisitions as a key component of their growth strategy. A direct effect of the significant disposals that have taken place is the increased ability of companies to pursue acquisitions. The track record of European Chemicals companies in making value-accretive acquisitions is far from blemish-free. In particular, at the peak of the last M&A cycle in the late 1990s, early 2000s, a number of deals were pursued that subsequently proved to be significantly value-destructive. We believe these deals contained factors that significantly increased risk. First, most were at the very top end of the multiple ranges, and second, in many instances the buyers were entering new business areas in which they did not have existing strength or expertise. Management discipline has however improved in recent years, in our view. We see Rhodias recent acquisition of shares (87.5%) in Feixiang Chemicals as expensive relative to Rhodia's current valuation, but with a strong track record of growth in the past 5 years (c.20% CAGR sales, c.40% CAGR EBITDA) and a likely healthy margin (JPMCe c.20% at EBITDA level) we view the valuation as fair. Rhodia paid $428m for Feixiang Chemicals share. BASFs acquisition of Cognis for 3.1bn (1.2x 09a sales and 9.1x adjusted EBITDA) marks another sensible strategic step that will help them in reducing cyclicity, in our view. The size of the deal is relatively modest in the context of the BASF balance sheet.
Acquisitions a key focus, yet carry a degree of risk
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Figure 33: Multiples of key chemicals transactions

Transaction multiple Yearly average for Transaction multiple Volume ($bn)
20.0x
Mitsubishi Chemical/Mitsubishi Rayon
120
Lubrizol/Noveon
MON/Delta & PineLand
Henkel/ICI-National starch
100
16.0x
Clariant/BTP GE/Organosilicones Business (Crompton) Givaudan/Quest Cytec/SurfaceSpecialties (UCB) PAI/Food ingredients (Chr. Hansen) BASF/Engelhard Apollo/GE Silicones
80
Akzo/ICI Air Products/ Airgas Solutia/ Etimex
12.0x
Degussa/Laporte Invitrogen/Dexter Ferro/dmc2 assets Bayer/Aventis CropScience
DuPont/24% of DuPont Canada Air Liquide/ Messer Griesheim Warburg/Polypore
BASF/Construction Chemicals (Degussa) Citicorp/ MacDermid Crompton/ Linde/BOC GreatLakes
Givaudan/Food Ingredients (Nestle) UCB/Solutias businesses
PPG/ SigmaKalon Carlyle/PQ Yara/Saskferco ASH/Hercules CF Industries/ Terra Industries
Corn Products / National Starch
60
8.0x
KKR/ Laporte Dow/ R&H AgChem
Altana Chemie/Eckart RAG/Degussa Umicore/ Precious Metals Apollo/Borden
Wendell/Materis
BASF/Ciba
BASF/ Cognis
Yara Nederland/ Kemira GrowHow
Mitsubishi Rayon/ Lucite Bain/ Styron American Securities/GenTek IPIC/ NOVA Chemicals
40
AEA/BF Goodrich
DSM/Roche Vitamins & Fine Chemicals
4.0x
Rockwood/ Dynamit Nobel Blackstone/ Celanese
Allianz Capital & GS Capital/ Messer Griesheim Berkshire Hathaway/ Benjamin Moore BASF/American Cyanamid General Electric/ BetzDearborn
Carlyle-Advent /HC starck
20
Schroder Ventures & Goldman Sachs/Cognis
Apollo-GS Capital-Blackstone/ Ondeo Nalco
0.0x
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 2000 Volume ($bn) Number of transactions 73 2001 31 2002 35 2003 25 2004 34 2005 52 2006 56 2007 103 2008 49 2009 18 1Q 2Q 20102 27
55
30
20
28
37
33
39
43
21
19
15
Source: Company filings, equity research Includes deals with transaction value above $200mm 2 YTD as of 06/25/2010.
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2) Increased balance sheet liquidity

Delevered balance sheets make acquisitions more affordable
The European Chemicals sector has de-levered significantly in recent years. This has been driven by the combination of a number of factors. Several years of robust economic growth, combined with cost-base rationalization (excluding recent economic slowdown) Improved capital discipline Significant proceeds from disposals of non-core assets. Figure 34 indicates that average net debt/EBITDA is likely to decline to 0.9x in 2010e below its 10-year trough and in the absence of any further corporate activity projected to reduce further to 0.7x-0.8x by 2011e.
Figure 34: European chemicals sector average Net debt/EBITDA (x)
2.0x 1.8x 1.6x 1.4x 1.2x 1.0x 0.8x 0.6x 0.4x 0.2x 0.0x 1998a 1999a 2000a 2001a 2002a 2003a 2004a 2005a 2006a 2007e 2008a 2009a 2010e 2011e 2012e
The low level of sector gearing (1.4x avg net debt/EBITDA between 2000 and 2009) has meant that chemicals players have had the possibility to play a significant role in consolidation, driving transformational deals including: BASFs acquisition of Cognis for 3.1bn Dows U$19bn acquisition of Rohm & Haas BASFs CHF6.1bn acquisition of Ciba Akzo Nobels 8bn acquisition of ICI and 4bn on-sale to Henkel Lindes 8bn acquisition of BOC
36
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3) Globalization
Globalization to address customer shift and fill market share gaps
The need for scale and increased global reach remain key motivations for M&A, in our view. Market leadership is associated with a number of advantages, including lower production costs, greater pricing power and greater negotiating power, both in terms of raw material procurement and customer contracts. The increase in global M&A in recent years has been driven by: the geographic shift in customer industries (e.g. automotive, manufacturing), to the emerging markets, the need to fill market share gaps and gain scale in the mature markets, to gain scale to optimize costs and compete with lower-cost players, as well as the desire for players in the emerging markets to establish a foothold in the Western markets. A recent examples of deals motivated by the desire to enhance global footprint and market leadership include Rhodia acquisition of share in Feixiang Chemicals, BASFs acquisition of Cognis and K+S's acquisition of Morton Salt. We view a handful of sectors (industrial gases, automotive catalysts) as fairly consolidated and therefore unlikely to see further large scale moves motivated by a desire for scale.
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4) Need to reduce cyclicality

Another key driver for sector M&A has been the drive to reduce cyclicality which has become an increasing focus following the unprecedented demand destruction experienced last year. As outlined previously, Solvay, as an example, is seeking a sizeable acquisition that would reduce its portfolio's cyclicality. BASF recently acquired Cognis for 3.1bn which will help BASF to reduce cyclicality as Cognis is more exposed to consumer markets. With a scarcity of defensive/less-cyclical assets in the chemicals sector, we view near-term value creation as likely to remain a challenge, in the absence sufficient synergies and/or a longer term focus. Screening for potential targets In assessing potential targets in a consolidation scenario, we screen for (i) assets currently officially held for sale, (ii) those currently owned by financial sponsors, and (iii) strategically attractive assets among listed European chemicals companies. (i) Assets currently for sale Despite recent sale of National Starch by Akzo and Cognis acquisition by BASF, we are currently aware of several assets in the European chemicals space which are either officially for sale or under strategic review, based on public management comments. Some of the examples are DSM Base Chemicals & Materials, BASF Styrenics (ex-Brazil PS sold) and INEOS various assets. However, the ongoing drive for increased focus should mean that more are likely to become available. In addition, many management teams choose not to publicize the non-core nature of a business in advance of its sale in case this has a negative impact on the performance of the business, as well as valuation. (ii) Sponsor-owned assets With a large number of chemicals assets in the hands of private equity, and numerous financial players reported by the press to have reported significant writedowns in response to the economic crisis last year, we expect a number of financial sponsorowned assets to become potentially available in the near term. Recent examples include Brenntag and Chr Hansen, which were both listed on the market. Cognis was acquired by BASF.
We are aware of several assets under strategic review or for sale within our coverage universe
Financial sponsor-owned assets may also provide opportunity
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Table 9 shows an overview of 100+ private equity-owned chemicals assets that we have been able to identify from public sources in Europe and the US. Although we are not aware of the strategic intentions or financial situation of each owner, we highlight that a large number of assets appear to fit the strategic aims of many of the companies across our sector namely to (a) enhance growth or margins, (b) reduce cyclicality, and increasingly to focus on (c) environmentally friendly solutions. In addition, we note that there are a few sizeable assets (1bn sales+) for which we would not rule out a potential IPO exit.
Table 7: Chemicals Sizeable private-equity-owned assets
Asset Arizona Chemicals Arysta Life Sciences Ascend Perf Materials (Solutia Nylon) Borsodchem British Vita Clondalkin Dynea DyStar Evonik (25%) Flint Fortis Plastics HC Starck Hexion Innophos Materis Momentive Perf Materials Oxea Perstorp Rockwood Sud Chemie (50%) Univar Vinnolit Owner Rhone Permira SK Capital Permira TPG Warburg Pincus Industri Kapital Platinum Equity CVC CVC Monomoy Cap Advent/Carlyle Apollo Bain Wendel Apollo Advent PAI KKR/CS One Equity Partners CVC Advent Investment year Dec-06 2008 Jun-09 2006 2005 2004 1999 Aug-04 Sep-08 Nov-04 Sep-08 Jan-07 Aug-04 2004 Feb-06 Dec-06 Feb-07 Dec-05 Jan-01 na Oct-07 Jul-00 Sales Country U$1bn US U$1.2bn Japan U$1.9bn 900m 1.5bn 900m 875m 800m 15.9bn 2.4bn na 856m $6.1bn U$935m 1.9bn $2.6bn 1bn SEK7.3bn U$3.4bn 1.2bn U$9.4bn 846m US Hungary Luxembourg Netherlands Finland Germany Germany Germany US Germany US US France US Germany Sweden US Germany US Germany Comment Pine-based materials for adhesives, inks, coatings, tyres, HPC, etc Agrochemicals and life science Nylon 66 Isocyanates (MDI, TDI) and vinyls (PVC, chloralkali) Cellular and industrial polymers, engineered thermoplastic sheet, non-wovens Packaging and printed products Adhesive and surface solutions for wood-working Dyes for textile & leather chemicals Specialty chemicals (Degussa), power generation, real estate Printing inks/plates/blankets/pigments Moulded plastics (injection moulding/extrusion capabilities) Refractory materials, advanced ceramics, electronic chemicals Global #1 in thermosetting resins Chemical grade phosphates; listed on NADAQ Construction Chemicals and paints Global #2 in silicones and derivatives Oxo chemicals and derivatives Value-adding ingredients for paints, resins, coatings Specialty chemicals, pigments & additives, advanced materials; listed on NYSE Adsorbents and catalysts Chemical distribution PVC
Source: J.P. Morgan estimates, Company data.
Whole company takeouts cannot be ruled out A number of companies in the European chemicals sector have been taken over in the recent past. Key examples include BASF/Cognis (2010) BASF/Ciba (2008) Akzo Nobel/ICI (2007) Linde/BOC (2006) TPG/British Vita (2005) In each case, the rationale for the deal has been either to consolidate the buyers market positions (with the exception of TPG) or get the entry to high margin business (BASF-Cognis deal). However going forward, with limited remaining overlap between different conglomerate portfolios or anti-trust concerns likely to prevent further consolidation (e.g. Industrial Gases), we expect consolidation to focus on (i) enhancing exposure to high-growth product areas and the emerging markets; (ii) reducing cyclicality; and (iii) gaining exposure to green trends.
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Table 8: European Chemicals: Screening for Potential Acquisition Targets

Signif. GDP++ exposure x Signif. Non-cyclical exposure x Signif. Emerging markets exposure x x xx x xx xx x x xx xx xx xx xx xx xx xx x xx x Significant green exposure xx x x x x x xx x x xx x x xx x xx x x xx x xx Pricing power xx x xx xx x x xx x xx x x xx
Air Liquide Akzo Nobel Arkema BASF Bayer Clariant Croda DSM Elementis Givaudan JMAT Kemira Lanxess Linde Lonza Rhodia Solvay Symrise Tessenderlo Umicore Victrex Wacker Yule Catto
x x x xx xx xx x xx
xx xx xx xx
x xx
Source: Bloomberg and J.P. Morgan estimates. Shading indicates companies with assets that we view as strategically attractive based on our screen.
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5) Interest from financial buyers

Financial buyers played an active role in chemicals M&A in 2006/7, as they benefited from a wide availability of funds, combined with the sectors underleveraged balance sheet and significant restructuring potential. Investment from financial buyers has slowed down since then. However it has started picking up once again as the economic growth is returning to normal pace. Aside from restructuring businesses and tightening expenditures to enhance cash flow, private equity firms have in the past come up with increasingly creative ways to create value, including the integration of several assets to create a scale leader (Flint Group, Hexion, and Symrise). Financial buyers have in the past raised competition for assets, and consequently valuation multiples. A key example is the apparent participation of Bain, Blackstone and Carlyle in the auction of GE Plastics - which resulted in SABIC paying 10.5x EBITDA for a highly cyclical, commodity business. This has made value creation through acquisition increasingly difficult from the point of view of the strategic buyer, with accurate and realistic identification of synergy potential being key to value creation.
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Table 9: Chemicals assets under private equity ownership

Asset Acomon Acordis A-D Technologies ADCO Global Akzo Nobel Crown Paints Almatis Archimica Arclin (Dynea North America) Aristech Acrylics Arizona Chemicals Armacell ArrMaz Custom Chemicals Arysta Life Sciences Ascend Perf Materials (Solutia Nylon) Atrium Innovations Avecia Biotechnology Aventine AZ Electronics Azelis Berry Plastics Bio Agri Mix BIOX Borsodchem Brenntag British Polythene Industries British Vita CariSal Chicago Oleochemicals China National Bluestar Chr. Hansen Citadel Plastics Clondalkin ColorMatrix Columbian Chemicals Compression Polymers (Vycom) CR Minerals CVR Energy DC Chemicals Diana Ingredients Druck Chemie Dufa Dynea DyStar Eco-bat Technologies Eliokem Emerald Performance Endeka Ceramics Evonik (25%) Excel Polymer Fibervision Flint Fortis Plastics Frontier Spinning Mills Genovique/Velsicol Chemical Graham Packaging HC Starck Hexion Holliday Chemical Houghton Innophos Innovia InteliCoat Isola KaMin Performance Minerals KemFine Owner Auctus CVC Audax Group Aurora Endless DIC Towerbrook Teachers' Pension Plan SK Capital Rhone Investcorp Snow, Phipps & Guggeheimn Permira SK Capital AXA Cinven/Investcorp Metalmark Capital Carlyle/Vestar Capital 3i Apollo Birch Hill Birch Hill Permira BC Partners 3i TPG Denham HIG Blackstone PAI Wind Point Partners Warburg Pincus Audax Group One Equity Partners AEA Imin Partners Goldman Sachs/KELSO & Co One Equity Partners AXA 3i Advent Industri Kapital Platinum Equity Apax AXA Sun Capital Pamplona CVC Lion Chemical Snow, Phipps & Guggeheimn CVC Monomoy Capital Sun Capital Arsenal Blackstone/CD&R Advent/Carlyle Apollo Apax AEA Bain Candover Sun Capital TPG Imin Partners 3i Investment year Oct-07 Dec-99 Apr-07 1998 Aug-08 Nov-07 Jun-06 Jul-07 Apr-08 Dec-06 2006 Aug-08 2008 Jun-09 Apr-08 Jun-99 May-03 Sept-04/Mar-07 Dec-06 Jun-06 Apr-06 Aug-06 2006 Jul-06 2005 Aug-08 May-08 Sep-08 Jul-05 na 2004 May-06 Feb-09 Apr-05 na Jun-05 na Jun-07 May-08 Aug-05 1999 Aug-04 na Sep-06 May-06 Mar-07 Sep-08 Aug-04 2006/8 Nov-04 Sep-08 Mar-08 Nov-05 Feb-98 Jan-07 Aug-04 na Dec-07 2004 Sep-04 na Apr-04 na Sep-08 Sales U$35m 390m na na 200m U$360m U$150m+ na na U$1bn na na U$1.2bn U$1.9bn U$222 60m U$2.2bn 400m 1,120m na na na 900m 7.4bn 480m 1.5bn na 88m RMB30bn+ 477m 900m na na na na U$5bn na 318m na na 875m 800m na 148m na na 15.9bn na na 2.4bn na na na U$4bn 856m $6.1bn na na U$935m 400m na na na 50m Country Switzerland Netherlands US US UK/Ireland Germany US Canada US US Germany US Japan US Canada UK US Luxembourg Belgium US Canada Canada Hungary Germany UK Luxembourg US US China Denmark US Netherlands US US US US US S Korea France Germany Romania Finland Germany Italy France US Spain Germany US Denmark Germany US US US US Germany US UK US US Belgium US US US Finland Comment Chemtura's optical monomers business Industrial & textile fibres HDPE duct, pipe and conduit products Adhesive, sealant, tape solutions Decorative paints Specialty alumina materials for steel refractories, ceramics, flame retardants API's and late stage pharma intermediates for the pharma industry Adhesive and surface solutions for wood-working Acrylic sheets Pine-based materials for adhesives, inks, coatings, tyres, HPC, etc Engineered foams Mining chemicals, asphalt additives, fertiliser, industrial minerals, water treatment Agrochemicals and life science Nylon 66 Active ingredients & chemicals for cosmetics, pharma, chemicals, nutrition Biologics and DNA manufacture; rest of Avecia businesses sold Bioethanol; listed on NASDAQ Electronic materials for semiconductors/flat panel displays Chemicals distribution; targeting flotation in 2012 Film, containers, packaging Medicated feed additives Biodiesel Isocyanates (MDI, TDI) and vinyls (PVC, chloralkali) Chemicals distribution; targeting flotation in 2009/10e Polythene products Cellular and industrial polymers, engineered thermoplastic sheet, non-wovens Calcium chloride, caustic soda, other specialty chemicals Fatt acids and glycerin for HPC, industrial formulations Subsidiary of China national Chem Corp/ Natural food ingredients; listed on CSE Compounder of thermoplastic and thermoset resins Packaging and printed products Plastic colourants and additives Carbon black additives for rubber, plastics, liquid products Industrial plastic sheet products Processed pumice for water filtration, abrasives, polishes Petroleum refining, fuels, nitrogen fertilisers (Coffeyville Resources); listed on NYSE Inorganic chemicals, petrochemicals, coal chemicals, PVC window systems Flavouring, pet food products, colorants, health food products Provides printing industry with chemicals, consumables & services Romanian decorative paints Adhesive and surface solutions for wood-working Dyes for textile & leather chemicals Recycling of lead batteries Special resins, elastomeric modifiers, antioxidants, rubber chemicals Polymers and performance materials Raw materials and intermediates for ceramics Specialty chemicals (Degussa), power generation, real estate Rubber/elastomer compounding, roll compounds, rubber chemicals Polyolefin staple fibres for non-wovens Printing inks/plates/blankets/pigments Moulded plastics (injection moulding/extrusion capabilities) Cotton and cotton/polyester yarns Benzoic acid, agrochemical intermediates Blow-moulded plastic containers for consumer products; listed on NYSE Refractory materials, advanced ceramics, electronic chemicals Global #1 in thermosetting resins Metalworking fluids and chemical mgmt Chemical grade phosphates; listed on NADAQ Cellulose film, biaxially oriented polypropylene film, surface engineering Coated film and specialty substrates High performance base materials for multilayer circuit boards High quality hydrous and calcined kaolin Custom manufacturing of fine chemicals for agchem, pharma and specialties
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Asset Klockner Pentaplast Koppers Kraton Polymers Lion Copolymer Lonza (PIA Singapore) MacDermid Marsulex (61%) Merisant MetoKote Midcontinental Chemical Molycorp Minerals Momentive Performance Materials Neochimiki New Horizon Plastics Recycling Niotan Norit NOVACAP Novasep Novolyte NuCO2 Inc Nusil Oxea Panolam Industries PC Cox Performance Fibers Perstorp Pliant Polymer Group (69%) PolymerLatex Polypipe Polypore PPC Industries PQ Profine Provimi Rockwood Royal Adhesives & Sealants Rutgers (Evonik) Sonneborn Stahl Sud Chemie (50%) Synagro Synbra Synutra (7%) Taminco Treofan True Textiles Turf Care Unifrax Holding United Plastics Group Univar Universal Fiber Systems Universal Lubricants Vertellus Specialties Vestolit Vinnolit VitAG Warwick International Wellman International
Owner Blackstone Saratoga CCMP Capital/TPG Lion Chemical PAI Court Square/Weston Presidio Birch Hill Pegasus CCMP Capital Imin Partners Pegasus Apollo Carlyle JHW Greentree Doughton Hanson Bain Gilde Arsenal Aurora Quad-C Advent Sterling Group CVC Sun Capital PAI CCMP Capital Matlin Patterson Towerbrook Halifax Group Warburg Pincus AEA Carlyle Arcapita Permira KKR/CS Quad-C Triton Sun Capital Carlyle One Equity Partners Carlyle Gilde Warburg Pincus CVC Goldman Sachs Sun Capital Platinum Equity AEA Aurora CVC Sterling Group Pegasus Wind Point Partners Srategic Value Partners Advent Denham Close Brothers Aurelius
Investment year Jul-07 Dec-97 Dec-03 2005/7 Sep-07 Dec-06 Jan-09 2000 na na na Dec-06 May-08 2005 na Jun-07 na Jan-07 Oct-08 May-08 Sep-05 Feb-07 2005 May-97 Dec-04 Dec-05 2000 2003 May-03 Feb-05 2004 Mar-06 Jul-07 Aug-07 2007 Jan-01 na Dec-07 Jun-05 Jun-06 na Apr-07 Dec-99 2007 Aug-07 Apr-05 Jul-07 Oct-05 May-06 Sep-08 Oct-07 Oct-07 May-07 na Sep-06 Jul-00 Aug-08 Aug-08 na
Sales 1,100m U$1.4bn U$1226 na na U$738m C$320m U$260 na na na $2.6bn na na na 370m 520m 350m na na U$75m 1bn U$267m 18m na SEK7.3bn U$1bn+ U$1bn 516m na U$610m na na 869m 2bn U$3.4bn na 650m na 307m 1.2bn U$1,200 na U$310m 650m 480m na na na na U$9.4bn na na na 300m 846m na na 110m
Country Germany US US US Singapore US Canada US US US US US Greece US US Netherlands France France US US US Germany US UK US Sweden US US Germany US US US US Germany Netherlands US US Germany US Netherlands Germany US Netherlands China Belgium Germany US US US US US US US US Germany Germany US UK Germany
Comment Rigid plastic films for pharma, medical, food, electronics, printing, etc. Carbon materials & chemicals, railroad ties, roof systems; listed on NYSE Styrenic block copolymers Synthetic rubber (DSM SBR, Chemtura EPDM) Purified isophthalic acid; integrated into Perstorp Electronic and industrial solutions Emission control, handling of industrial by-products, industrial chemicals Artificial sweeteners; currently under chapter 11 bankruptcy Custom protective coatings; environmentally sound coating solutions Additives for petroleum, lubricants, pipeline operators Rare earth mining and technologies Global #2 in silicones and derivatives Chemical distribution/production & distribution of fertilisers, raw materials for coatings Recycling of PET Tantalum and niobium materials for electronics Purification technologies for water/beverage markets Soda ash, sodium bicarbonate, phenol, acetone Custom synthesis; tun-key physical purification solutions Specialty electrolyte materials/solvents for lithium ion batteries Bulk CO2 provider for food service/hospitality Silicone compounds Oxo chemicals and derivatives Decorative laminate Sealant applicators High-tenacity polyester and other synthetic fibres and fabrics Value-adding ingredients for paints, resins, coatings Flexible film packaging materials; #1 in North America Engineered materials for non-wovens; listed on NYSE #3 latex producer in Europe Polyethylene pressure pipe Engineered filtration products; listed on NYSE Flexible packaging for medical/pharma, food processing, industrial applications Inorganic specialty chemicals and engineered glass materials World leader in PVC profiles Animal nutrition Specialty chemicals, pigments & additives, advanced materials; listed on NYSE Commercial and industrial adhesives & sealants Coal tar White oils, petrolatums, waxes, hydrocarbons Leather chemicals & non-leather coatings Adsorbents and catalysts Recycler of organic, non-hazardous waste and wastewater residue Expanded polystyrene and specialty foams Dairy-based nutritional products; listed on NASDAQ Animal feed and water treatment Polypropylene films Largest US contract manufacturers of interior fabrics Fertiliser products, grass seed, turf management solutions High temperature insulation products Chemical distribution High performance synthetic fibres Lubricants, advanced engine oils Specialty chemicals for agroscience, nutrition, pharma, performance materials PVC products PVC Converts municipal biosolids into nitrogen fertiliser Bleach activators for laundry/detergents; chemical distribution Polyester staple fibres, recycle PET bottles
Source: Company reports, media reports.
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Commodity Chemicals Inorganic Chemicals

Introduction
Inorganic Chemicals are derived from ores or brines whereas organic chemicals are derived from crude oil or natural gas
The majority of inorganic chemicals are derived from mineral ores or brines. These substances are used as building-block materials and as processing aids and catalysts in the production of other chemical and non-chemicals products, particularly within the agricultural and industrial sectors. Inorganic chemicals differ from organic chemicals, which are principally derived from hydrocarbons such as crude oil / natural gas. Inorganic chemicals are largely considered high-volume commodities, and operations are characterized by limited R&D spending, with emphasis placed instead on improving margins by reducing feedstock costs, energy requirements, and labor costs through process improvements. Economy of scale is of key importance. There are four main types of inorganic chemicals: Chlor-alkali, Soda ash, Titanium dioxide and Hydrogen peroxide.
Chlor-alkali
Introduction Two of the most important products of the alkali industry are chlorine and caustic soda (also known as sodium hydroxide). These chemicals have an enormously diverse range of applications, so wide in fact that almost all consumer products will, at some stage of production, be dependent on them. As a result, the chlor-alkali industry is one of the largest chemical industries (by value). Since the chlor-alkali industry is greatly influenced by economic growth, the profitability of the industry is highly cyclical.
Table 10: Chlorine and caustic soda at a glance
Chlorine Growth rate (CAGR to 2014E) Current operating rate Key end-markets Key demand regions Key players Market structure Key Inputs Threats 3.7% c.75% Vinyls, Organics Asia (53%), N America (20%) Dow, Oxy, Olin, PPG, Bayer, FPC, Solvay Top 10 producers amount up to 25% of world production Salt, water, power New capacities in China and the Middle East Caustic soda 3.6% c.75% Organics, Soaps/ Detergent/ Textiles, Pulp & paper, Asia (52%), N America (19%) Dow, Oxy, PPG, Olin, FPC Top 10 producers amount up to 25% of world production Salt, water, power New capacities in China and the Middle East
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Chlorine demand is highly dependent on demand for PVC, whereas caustic soda is used in many different applications
Overview & Outlook Chlorine capacity grew by 4.8% per year from 2004-2009. In the same period, demand grew by 1.6%. Chlorine demand is expected by CMAI to grow by a much higher rate of 3.7% until 2014, whereas capacity growth is estimated to be 2.7% for the same period. Chlorine demand is highly dependent on demand for PVC, and thus, on the health of the construction industry (for example, PVC pipes). Caustic soda demand grew by 2% CAGR from 2004-2009. In the same period, capacity grew by 5%. Through 2009-14, CMAI expects caustic demand growth to be higher at 5.4% and capacity growth to be lower at 2.0%. Demand for caustic soda does not have one single end use category such as the size of PVC for chlorine. Since caustic is consumed in a large variety of end uses for many different applications, it is the local manufacturing sector that tends to be the primary driver of caustic demand growth. For both Chlorine and Caustic soda, Asia (dominated by China) is the only region with strong chlor-alkali capacity growth. Western European companies are suffering a loss of competitiveness in exports markets. This is due to a combination of new capacities coming from China and cheaper US energy prices. As a consequence, exports in Europe will be falling in the coming year; whereas US companies will see their exports increase. Production process Chlorine and caustic soda are made simultaneously by the electrolysis of brine (sodium chloride/salt solution), which is an energy-intensive process, making it the second largest consumer of electricity (2,400 billion kWh) among all electrolytic industries. Electricity and other utilities typically account for 4050% of production costs. The demand for Chlorine, as a corrosive, toxic gas that is dangerous to store, has a greater impact on the operating rate than Caustics demand.
Figure 35: Chlor alkali production process
Electrolysis Salt solution Chlorine (1 unit) Caustic soda (1.1 unit)
PVC
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There are three different production processes:

Table 11: Production types within the chlor-alkali industry
Mercury cell 9% This is the oldest and most energy-intensive method of production. It is being phased out because of environmental risks surrounding the use of mercury. Mercury, which is used as the cathode, is highly toxic and would be extremely damaging if released into the water table. The advantage of this process is the ability to produce caustic soda in high concentration, reducing the need for evaporation.
Source: J.P. Morgan
Membrane cell. 88% In this process, the electrolysis cell contains a Similar to the diaphragm cell, the membrane tends to diaphragm (usually made of asbestos fibres) in order be more effective, and thus, although more to keep the chlorine and caustic soda separate. concentrated brine is required, a far more Although this method of production can use fairly concentrated product is produced. impure brine, it tends to produce less concentrated caustic soda, and consumes a large amount of energy in the process.
Diaphragm cell
Table 12: Comparison of key chlor-alkali technologies

Global capacity % World % Europe % US Future expansion Overall cost Energy usage (KWH/mt) Salt purity requirement* Purity of by-product (caustic)** Capital intensity Environmental concerns Overall rating Diaphragm Medium 30% 18% 65% None Medium 3,803 Low Low Medium Asbestos x Mercury Least common 10% 30% 33% Low High 2,921 Low High High Mercury xx Membrane Most common 60% 53% 2% High Low 3,142 High High Medium None xxx
Source: J.P. Morgan estimates, CMAI. * Purity of input; ** Purity of by-product (caustic soda) which can be sold on the market
Mercury capacity will continue to be under pressure, more so from a cost perspective than from environmental and/or legislative pressures, since production costs for mercury cells are about 30 percent higher than for membrane.
Figure 36: World Chlorine Technology Change
120% 100% 80% 60% 40% 20% 0% 2004 2005 2006 2007 Membrane
Source: CMAI and J.P. Morgan
2008
2009
2010E 2011E 2012E 2013E 2014E Mercury Others
Diaphragm
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Figure 37: European chlorine players - exposure by technology (% capacity, 2009E)

100% 75% 50% 25% 0%
Do w In eo s Vi nn oli t Ba ye r So lv a y Te ss e
Pulp & Others 27% Paper 13% Alumina 11%
Diaphragm
Source: CMAI.
Membrane
Ar k
Mercury
Other
Approximately 1.1 units of caustic soda are produced per unit of chlorine. As the ratio for the production of the two products is fixed, the pricing of each commodity can be volatile when demand for one product is out of balance with other. However, these two products are consumed in quite different industries, leading to a problem of balancing the demand on a chlor-alkali plant. Chlor-alkali production is generally chlorine driven. Demand Chlorine has a wide variety of applications; the largest use is in the manufacture of ethylene dichloride (EDC), which is used to make vinyl chloride monomer for PVC. It is also used in the pulp and paper industries as a bleaching agent, but it increasingly is being replaced by hydrogen peroxide and especially sodium chlorate because of environmental reasons. Caustic soda is used in many industries, mostly as a strong chemical base in the manufacture of pulp and paper, alumina, textiles, drinking water, soaps and detergents and as a drain cleaner. More than 50% of caustic soda production is used in the manufacture of other chemicals.
Figure 39: Caustic soda by end market
Vinyls 33%
Demand growth for chlorine and caustic soda in Northeast, particularly China, will be the driving force for additional chloralkali capacity. Demand growth in this region is forecast by CMAI to increase by 6-7% through 2009-14
Figure 38: Chlorine by end market

Others 31%
Water Treatment 7% Pulp & Paper 2% Inorganics 2% Organics 25%
Water Treatment 5% Inorganic Chemicals 12% Soaps/ Detergents/ Textiles 15%

Organics 17%
BA SF
Er ro s
Ak zo
em a
nd .
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Figure 40: Chlorine demand by region

North America 20% South America 3% West Europe 16% Central AME 4%
Figure 41: Chlorine demand growth by regions in % (2008-2014E CAGR)

AM E Asia WORLD Central Europe South America West Europe North America
Asia 53%
Europe 4%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
Figure 42: Caustic demand by region
America 19% South America 6% West Europe 14% Central
Figure 43: Caustic demand growth by regions in % (2008-2014E CAGR)

AM E A sia WORLD Central Euro pe So uth A merica West Euro pe No rth A merica
Asia 52%
AME 5%
Europe 4%
0%
1%
2%
3%
4%
5%
6%
7%
Supply/Key players The chlor-alkali market is highly fragmented, with Dow holding the largest market share (c.8%), followed by Oxy, PPG and Olin.
Capacity moves to the Middle East and Asia.
Until the end of 1990, the United States dominated the global market. The competitive advantages in its chlor-alkali production have largely vanished with the steep increase in energy prices, and future capacity growth is now expected to come from the Middle East (7%) and China (6%) in particular.
Figure 44: cash cost of chlor-alkali production by region (2008), US$/mt
600
400
200
0 Western Europe
Source: CMAI, 2008
NE Asia
US
China
Middle East
The supply/demand balance was tight until 2007. However, operating rates declined from 88% to 70-75% in 2009 with the weak economic environment. Operating rates have started rising as the economic condition improving.
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From now and until 2014, approximately 14.7 million metric tons of capacity is scheduled to be brought on-stream, with almost 72% of the new capacity projected to be in China. In order to fill the gap between the supply and the demand, the additional net capacity will be much lower than the rise in demand of 32.5 million metric tons.
Figure 45: Chlorine demand/capacity (000- Metric tons)
100000 80000 60000 40000 20000 0 2004 2005 2006 2007 2008 2009 2010E 2011E 2012E 2013E 2014E Total Demand Operating Rate, % 90 85 80 75 70 65
Figure 46: Caustic demand/capacity(000- Metric tons )

Total Capacity
Total Capacity
Table 13: Top 10 chlorine producers (2009)

Thousand of metric tons West Europe Dow INEOS Chlor Vinyls Bayer Akzo Nobel Chem Solvin Solvay Arkema Ercros SA Vinnolit Tessenderlo 1,795 1,249 1,187 1,167 868 842 836 462 448 438 9,292 North America Dow Oxy Olin PPG FPC USA Oxy Vinyls LP Georgia Gulf Mexichem SHINTECH Bayer 3,601 2,610 1,630 1,611 736 500 427 341 320 310 12,086 Asia FPC TOSOH Hanwha Chemical Juhua Group Tianjin Dagu JAP_CHL Asahi Glass Shandong Bohui Shanxi Yushe Tokuyama Corp. 1,452 1,145 739 536 527 500 493 454 454 440 6,740 Middle East SADAF QVC Bandar Imam PC Dead Sea/VW jv Petkim Cristal Dead Sea Brom. JANA AIP BCI 690 296 220 100 100 73 45 45 40 39 1,648 Rest of the World Braskem Tianyuan Huasheng Xinjiang Zhongtai Dow Brasil Yibin Tianyuan SP Chemicals Qilu PC BASF SE Suzhou Fine Chem. Shenyang Chem. 480 431 418 415 409 409 409 385 382 364 4,102
Table 14: Chlorine world capacity overview

Thousand metric tons `REGION North America South America West Europe Central Europe CIS & Baltic States Middle East Africa Indian Subcontinent Northeast Asia Southeast Asia WORLD Growth rate
2008 13,789 2,153 11,570 1,563 1,888 1,928 815 2,747 29,830 1,931 68,215 6.64%
2009 13,595 2,248 11,499 1,517 1,888 1,959 818 2,949 33,052 1,934 71,460 4.76%
2010E 13,801 2,257 11,302 1,578 1,888 2,259 866 3,029 36,178 1,934 75,094 5.09%
2011E 14,105 2,257 11,281 1,578 1,888 2,552 914 3,029 39,134 1,934 78,674 4.77%
2012E 14,425 2,302 11,281 1,578 1,888 2,664 914 3,029 40,836 1,934 80,853 2.77%
2013E 14,425 2,347 11,281 1,578 2,093 2,867 914 3,029 41,082 1,934 81,552 0.86%
2014E 14,425 2,347 11,281 1,578 2,093 2,867 914 3,029 41,082 2,184 81,802 0.31%
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Table 15: Top 10 Caustic producers (2009)

Thousand metric tons West Europe Dow INEOS Chlor Vinyls Akzo Nobel Chem Bayer Solvin Solvay Arkema Vinnolit Syndial BASF SE 1,975 1,375 1,284 979 955 926 919 491 380 364 9,647 North America Dow Oxy PPG Olin FPC USA Oxy Vinyls LP Georgia Gulf Mexichem SHINTECH Bayer 3,957 2,662 1,772 1,733 810 550 470 375 352 341 13,022 Asia FPC TOSOH Hanwha Chemical Juhua Group Tianjin Dagu Shandong Bohui Shanxi Yushe Asahi Glass Tokuyama Corp. Tianyuan Huasheng 1,597 1,260 814 590 580 500 500 489 484 473 7,287 Middle East SADAF QVC Bandar Imam PC Petkim Cristal JANA Dead Sea Brom. AIP BCI Makhteshim Chem 759 325 250 110 80 50 50 44 43 39 1,750 Rest of the World Braskem Xinjiang Zhongtai Dow Brasil Yibin Tianyuan SP Chemicals Qilu PC Suzhou Fine Chem. Shenyang Chem. Shandong Befar Xinjiang Tianchen 540 460 457 450 450 450 420 400 400 400 4,427
Table 16: Caustic world capacity overview

Thousand metric tons REGION North America South America West Europe Central Europe CIS & Baltic States Middle East Africa Indian Subcontinent Northeast Asia Southeast Asia WORLD Growth rate
2008 14,541 2,364 11,842 1,691 2,254 1,992 875 2,889 31,561 2,109 72,118 6.81%
2009 14,453 2,468 11,774 1,640 2,259 2,026 878 3,119 34,911 2,111 75,640 4.88%
2010E 14,670 2,468 11,657 1,707 2,259 2,357 932 3,199 38,518 2,111 79,879 5.60%
2011E 15,009 2,468 11,634 1,707 2,259 2,678 985 3,199 41,775 2,111 83,827 4.94%
2012E 15,364 2,518 11,634 1,707 2,259 2,803 985 3,199 43,653 2,111 86,235 2.87%
2013E 15,364 2,568 11,634 1,707 2,485 3,028 985 3,199 43,923 2,111 87,005 0.89%
2014E 15,364 2,568 11,634 1,707 2,485 3,028 985 3,199 43,923 2,391 87,285 0.32%
Figure 47: Caustic soda: European market shares
Source: J.P. Morgan estimates, Company data
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Pricing In 2009, Global chloralkali operating rates fell to their lowest level in 10 years on weak demand for chlorine especially from the construction sector although demand for caustic soda remained more resilient until mid 2009. A combination of a strong caustic demand and a low chloralkali production rate had led to a sharp increase in the caustic price until mid-2009. Prices are returning back to normalized levels as the economy gains momentum. CMAI expects chlorine prices to slightly decrease in 2010-2011 and come back to pre-crisis levels.
Figure 48: Chlorine price chart
500.00 400.00 300.00 200.00 100.00 0.00 Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Chlorine (US$/Short ton)
Figure 49: Caustic soda price chart

1,000.00 800.00 600.00 400.00 200.00 0.00 Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Caustic Soda Flakes ($/ MT)
Forecast
Caustic Soda Pearls ($/ MT)
Soda Ash
Introduction Soda ash is a white crystalline solid that is also known as disodium carbonate or sodium carbonate. It is the second-largest alkali in volume terms behind caustic soda and has a number of diversified uses (mainly glass manufacturing and air treatment).
Table 17: Soda Ash at a glance
Growth rate (CAGR 2008- 2013E) Current operating rate Key end-markets Key demand regions Key players Market structure Key Inputs Threats
Source: J.P. Morgan estimates.
2.3% c.87% Glass manufacturing, air treatment, water softening Asia (49%), N America (15%), Europe (17%) Solvay, FMC, Tata Chemicals Top 3 producers amount to up to 31% of global capacity Chinese companies represents 35% of global capacity Trona, Limestone, Salt New Capacity in China
Overview & Outlook World consumption of soda ash is forecast by SRI to increase at an average annual rate of 2.3% from 2008 through 2013 to reach 54 metric tons. Of this, Asian demand is expected to account for about 53.5% of total demand and 94% of the incremental volume growth through 2014. For the U.S. and Europe we expect demand for soda ash to fall because of the continued demise in demand for derivative products, notably glass.
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Production process Soda Ash can be produced either through synthetic processing using limestone, salt and ammonia (known as Solvay process) or through the refining of mined trona. About 70% of world soda ash production is derived from synthetic processes and 30% is recovered from natural trona deposits. The Solvay process This process combines limestone and salt to produce soda ash. This process is more expensive than mining natural sodium carbonate deposits due to high-energy requirements. In addition, the effluent containing highly visible pollutants that settle to the bottom of the solution are a big environmental problem. Refining of mined trona This process involves mining trona ore and then refining it to produce soda ash. The refining can refine trona in either dense soda ash (used for glass manufacture) or light soda ash (used for dry detergent compounds and applications which involve dissolving the ash). The enormous natural trona deposits will not be exhausted for decades to come. Demand Glass manufacturing is the largest application for soda ash, whether it is in the production of containers, fibreglass insulation, or flat glass for the housing, commercial building, and automotive industries. Soda ash also is used to clean the air, soften water and as an intermediate to manufacture products that sweeten soft drinks (corn sweeteners), relieve physical discomfort (sodium bicarbonate) and improve foods and toiletries (phosphates) Soda ash consumption in flat glass production has been declining in past few years because of weak economic conditions especially in the construction and automotive sector industry. Flat glass demand is considered as highly cyclical rises as the economy recovers. Globally, glass output for packaging applications has shown lower demand growth in recent years; demand for soda ash has been dented by the replacement of glass bottles in the beverages industry with PET and recycled glass bottles. The economic crisis has led to further negative impact in 2008-2009. In the coming five years, container glass consumption is expected, by SRI, to be slightly decreasing in developed countries and to increase at an average annual growth rate of 5.7% in Asia. To sustain new capacity from China, the European soda ash industry will be forced to further modernize. Restructuring will likely lead to integration into global players in our view, which include additional trans-European players created through mergers, alliances or joint ventures.
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Figure 50: Soda Ash consumption by end market

Others 20%
Soaps and Detergents 8%
Glass 49%
Chemicals 23%
Source: SRI and J.P. Morgan
Figure 51: Soda Ash consumption by region

Others 8% North America 15% Central & South America 5%
Figure 52: Soda Ash demand growth by region (2005-2013E CAGR)

Others Asia Central & South America World Africa & the M iddle East
Europe Asia 49% Africa & the Middle East 6%

North America Europe
17%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
Supply/Key players In 2008, globally, soda ash was produced in over 100 plants, in 30 different countries, according to SRI. Almost 32% of capacity was concentrated in China, 24% in the U.S. and 18% in Europe. Most soda ash producers are back-integrated into trona. Synthetic producers have access to captive raw materials or purchase them under long-term supply contracts. Some companies, for example Solvay, control and own production locations for salt and limestone.
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Figure 53: Soda Ash capacity/demand, 2008 (-000 Metric tons)

25000 20000 15000 10000 5000 0 North America Central & South America Capacity
100 80 60 40 20 0 Europe Africa & the Middle East Demand Av erage Operating Rate % Asia Others
Figure 54: Top 10 Soda Ash producers (mt)

10000 8000 6000 4000 2000 0 OCI Nirma Ciech Shandong Chemicals chemical Russian Group Group FMC General Haihua Tata Sanayii Solvay soda Soda
Pricing The price of soda ash and caustic soda is linked, as they are interchangeable in certain applications (a volume of 200-400 thousand metric tons is interchangeable between the two alkali sources). However, as caustic soda is produced in far larger volumes, soda ash is more influenced by the price of caustic soda than vice versa.
Titanium Dioxide
Introduction Titanium dioxide, or "TiO2", is a multi-million ton-per-year global product, manufactured by a relatively small number of specialist producers. It is the brightest white pigment with the highest opacity of any commercial product and therefore the most important pigment in the world, accounting for approximately 70% of total volume.
Table 18: Titanium Dioxide at a glance
Growth rate (CAGR 2008- 2013E) Current operating rate Key end-markets Key demand regions Key players Market structure Key Inputs Threats
3.5% 80% Paints, Coatings, Plastics, Paper and paper boards China (26%), North America (22%), Western Europe (21%) Du Pont (19%), Cristal Global (12%), Various Chinese Producers (20%), Top 10 producers account for more than 70% of production Minerals (ilmenite ore, titanium slag) Increase in raw material prices
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Overview & Outlook The titanium dioxide industry is consolidated with the top ten producers accounting for more than 70% of production. Its growth rate is broadly in line with demand for paint as a significant consumption of titanium dioxide is within the paints industry. Since 2000, approximately 80% of the global growth in demand for titanium dioxide has been in Asia, with 50% of that attributable to China. In 2008-2013E, the region is expected to grow by 6-7% per year, with China seeing about 8.5% per year and above. Forecasts for growth in the U.S. and Europe are only at 1.5-2.5% per year, with higher growth at around 6% per year in Eastern and Central Europe (by SRI). Production process TiO2 pigments are made from one of two chemical processes - the chloride process which produces TiO2 products by reacting titanium ores with chlorine gas; and the sulphate process which produces TiO2 products by reacting titanium ores with sulphuric acid.
Figure 55: Titanium Dioxide production process
Titanium Ore Sulphate Process Sulphuric acid Prod. & Purification Recycled Titanium Dioxide
Titanium Ore Chloride Process Chlorine Recycled

Source: J.P. Morgan
Prod. & Purification
Titanium Dioxide
Waste disposal is an important factor in the production choice of TiO2 pigments: The sulphate process causes more problems in waste disposal than the chloride process because of large amounts of iron sulphate as a by-product. Moreover, the chloride process is less energy & labour cost-intensive and results in a better quality. Therefore, the chloride route is increasingly being adopted: Currently, about 70% of European production is from the sulphate route and 30% from chloride. Demand Titanium Dioxide is used to provide whiteness and opacity to products such as paints, coatings, plastics, papers, inks, foods, medicines (i.e. pills and tablets) as well as most toothpastes. It can also improve the durability of coatings and films. Additional demand stems from the manufacturing of rubber, printing inks, floor coverings, ceramics, textiles, and cosmetics. An architectural coating is a key end market contribute (36%) in paints and coatings.. As per SRI, top ten coating producers accounted for 50% of the market versus 20% in 1980.
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Figure 56: Titanium dioxide consumption by end market

Plastics 24% Paints and Coating 49% Paper 13% Others 14%
Figure 57: Titanium Dioxide consumption by region

Central and Eastern Central and South America 5% Japan 4% AME 4% Western China 21%
Figure 58: Titanium dioxide capacity growth by region 2008-2014E (%)

AM E Asia WORLD Central Europe North America South America West Europe
ROW 11%
North America 25%
Europe 6%
Europe 24%
-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
Capacity growth is expected only for China.
Supply/Key Players In recent years, the industry has undergone considerable consolidation and considerable amounts of capacity have been added, mainly in China, since 2006. Titanium dioxide capacity is expected to increase by a CAGR of 2% through 2014E with capacities mainly in China, Africa and the Middle East region. Its capacity in Asia is expected to grow by a CAGR of 6-7% through 2014E.
Table 19: Top 10 Titanium dioxide producers (2009)

Thousand metric tons West Europe Huntsman PC KRONOS Sachtleben Tronox Cristal Kronos Titan 370 288 220 190 185 69 North America DuPont Tronox Cristal Louisiana Pigm. KRONOS Huntsman PC 1,025 335 265 145 99 52 Asia DuPont ISK Tiwest China_TIO2 Gansu Ying. Nanjing TIO2 Cristal Sichuan Lomon Henan Billions Yuxing Chem Wks 165 160 135 130 100 100 95 80 80 80 1,125 Middle East Cristal 210 Rest of the World Krymsky Titan Cristal JSC Sumykhimprom Z.C. Police Precheza Huntsman PC Cinkarna Metal 91 80 50 36 35 25 25
1,322
1,921
210
342
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Table 20: Titanium dioxide world capacity overview

2008 1,921 95 1,507 96 141 180 25 84 1,652 361 6,062 6.37%
2009 1,921 80 1,322 96 141 210 25 97 1,932 386 6,210 2.44%
2010E 1,761 80 1,117 96 141 330 25 97 2,482 411 6,540 5.31%
2011E 1,761 80 1,117 96 141 330 25 97 2,742 411 6,800 3.98%
2012E 1,761 80 1,117 96 141 330 25 97 2,802 411 6,860 0.88%
2013E 1,761 80 1,117 96 141 330 25 97 2,802 411 6,860 0.00%
2014E 1,761 80 1,117 96 141 330 25 97 2,802 411 6,860 0.00%
Pricing Titanium dioxide prices have been increasing together with energy costs, transportation costs and other costs. Producers using the sulphate process have been more affected due to its higher intensity compared to chloride process.
Figure 59: Titanium dioxide price chart
2.5 2.4 2.3 2.2 2.1 2.0 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10
Source: DataStream
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Hydrogen Peroxide
Introduction Hydrogen peroxide (H2O2) is a very pale blue liquid which appears colourless in a diluted solution, and is slightly more viscous than water. It has strong oxidizing properties and is therefore a powerful bleaching agent that is mostly used for bleaching paper.
Table 21: Hydrogen peroxide at a glance
Growth rate (CAGR 2008-2013E) Current operating rate Key end-markets Key demand regions Key players Market structure Key Inputs Opportunity
4.4% 75%-80% Bleaching in the paper industry Europe (27%), North America (20%), China (26%) Solvay, Evonik, Arkema Top 6 producers amount to up to 56% of capacity alkylanthraquinone, hydrogen and gas Move to total chlorine-free bleaching, HPPO
Overview & Outlook Overall, growth for hydrogen peroxide is expected to be 4% in 2008-2013E (SRI). However, growth and demand is largely driven by Asia (6% annual growth rate) due to the large demand for hydrogen peroxide in its growing pulp and textile bleaching industry. There is a significant increase in hydrogen peroxide demnd in China up to 30 times from 1990 level. Production process The most widely used processing method is the AO (Autoxidation) process. This production type is environmentally friendly; it uses alkylanthraquinone, hydrogen and gas only. Due to this, hydrogen peroxide is replacing chlorine more and more in pulp bleaching and other applications. Dow Chemical invented a process that produces hydrogen peroxide by an oxygen reduction electronic route. The technology is economically only useful for high capacity plants that produce seven or more tons of hydrogen peroxide per day. Demand The Pulp & paper industry represents by far the largest end-use market of hydrogen peroxide, with 54% of demand. The estimated market growth of the paper industry is expected to be in line with GDP. However, the primary factor for growth in hydrogen peroxide consumption is the concern for the environment. Hydrogen peroxide decomposes into water and oxygen and is replacing oxidizing compounds such as chlorine. While the hydrogen peroxide market has traditionally been diversified across a broad spectrum of uses, rapid growth in consumption in pulp bleaching has forced the business to be driven primarily by demand in this one application. A relatively new demand driver for hydrogen peroxide is the commercialization of a process to produce propylene oxide from hydrogen peroxide (HPPO process) developed by BASF and Dow. The benefits of this alternative process include (i) lower capital costs than traditional PO plants, (ii) reduced dependence on petrochemical inputs and (iii) reduced waste (wastewater reduced by 70-80%, energy reduced by 35%).
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Figure 60: Hydrogen peroxide consumption by end market

Env ironmental / Mining application 4% Tex tiles 12% Pulp and Paper 54% Chemicals & Laundry Products 22%
Specialty Grades & Other 8%
Figure 61: Hydrogen peroxide consumption by region

Others 11% North America 20%
Figure 62: Hydrogen peroxide demand growth rate, (2008-2013E CAGR)

Other Asia Commonwealth of Independent States C&S America
C&S America China 26% 7%
World AME China Europe North America
Japan 6%
AME 3%
Europe 27%
Japan
-2%
0%
2%
4%
6%
8%
10%
12%
14%
16%
Supply/Key Players Europe is the largest hydrogen dioxide producer. China has overtaken the United States as the worlds second largest hydrogen peroxide producer with a capacity of 1.26 million metric tons in 2008, very close to total European capacity.
Figure 63: Hydrogen peroxide top producers (%)
Solvay 16%
Others 41%
Degussa 14%
Arkema 9% Mitsubishi 3% Kemira 5% Eka 6% FMC 6%

Pricing Hydrogen peroxide prices are heavily influenced by the health of the paper and pulp industry.
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Petrochemicals
Introduction
Organic Chemicals are derived from crude oil or natural gas whereas inorganic chemicals are derived from ores or brines
In value terms, around 35%- 40% of all chemicals produced are petrochemicals (or organic chemicals). They are often manufactured as part of the oil refining process and are derived from crude oil and natural gas. Increasingly, oil and gas companies are undertaking the manufacturing of first-generation commodity organic chemicals, as they possess a number of cost advantages that lead to greater production efficiency. Foremost among these are: Security of feedstock, or the ability to integrate the chemical production into a refinery, and consequently, gain significant capex advantages; and location in a deep-sea port enabling ease of transport of the end product. Oil/Gas producers located in the Middle East and other oil-rich zones are also expanding their market positions fairly rapidly, taking advantage of cheap raw materials in their locales and exporting the derived chemical products. In this context, a number of joint ventures have been set up in recent years involving Kuwait, Petronas, and SABIC together with Western partners including Dow Chemical, Exxon Mobil and Royal Dutch. Primary or base petrochemicals are the building blocks for polymers that are part of everyday life and are used in the production of industrial chemicals. These polymers can either be produced directly from primary chemicals only, or by using more steps and the addition of intermediates. The whole process by which primary and intermediate petrochemicals are converted into plastics, fibres and resins is known as polymerization.
Figure 64: Overview of key petrochemicals
M onom er P r im a r y / B a s e C h e m ic a l s In t e r m e d ia t e s / D e r iv a t i v e s P o ly m e r E n d -P r o d u c ts
Middle Eastern players strongly increase their position in the petrochemicals industry.
Base chemicals are used for polymerization
P la s tic s E th y le n e G ly c o l O le f in s E th y le n e P r o p y le n e P henol B u ta d ie n e PET P r o p y le n e O x id e A r o m a tic s B enzene T o u le n e X y le n e A c e to n e F ib e r s A c r y lic A c id A c r y lo n itr ile N y lo n 6 a n d 6 6 P o ly e s te r F ib e r A c r y lic F ib e r S ty r e n e M o n o m e r S y n th e tic R e s in s M D I/T D I P o ly c a r b o n a te P o ly s t y r e n e M e th a n o l P o ly p ro p y le n e P o ly v in y l C h lo r id e P o ly e th y le n e
Source: J.P. Morgan
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The manufacture of the primary monomer is rarely part of the plastics industry and is usually carried out at a chemical or petroleum plant. Primary chemicals fall into two broad categories: Olefins (Ethylene, Propylene and Butadiene): A class of unsaturated aliphatic hydrocarbons characterized by a straight carbon chain. Aromatics (Benzene, Toluene and Xylene): A group of unsaturated cyclic hydrocarbons containing one or more structural carbon rings which are highly reactive and chemically versatile. The groups name derives from the strong odour characterized by chemicals in this family. The most important organic chemical is Ethylene, with around 100m tonnes produced each year, forming a base for approx. 350m tonnes of chemicals and polymers.
Feedstock
Naphtha and natural gas are the main feedstocks in the chemical production chain
Crude oil consists of many different hydrocarbons, and includes many undesirable impurities. Therefore, refineries are used to separating these different elements and maximizing the creation of particular products. The principal feedstocks for an olefin plant are the derivative naphtha (a low-octane form of gasoline made by fractional distillation of crude oil), used more frequently in Europe and Asia/Pacific, and natural gas (or more specifically its natural gas liquids (NGLs) - ethane, propane, and butane), used more often in the United States and the Middle East. Besides the distillation of crude oil (naphtha has a boiling point of approx. 100200oC) the majority of organic base chemicals are manufactured in an olefin plant or cracker. This conversion process breaks heavy hydrocarbons into simpler molecules (e.g. light hydrocarbons) that change the molecular structure, essentially. The rate of cracking and therefore the end product that is produced is heavily dependent on the temperature, the catalyst, or the chosen degree of pressure.
Figure 65: Oil refinery process
Organic base chemicals are produced by cracking hydrocarbons
Oil Refinery
Fractional Distillation
Petrochemical Industry
Olefin Plant (Cracker)
Petroleum Gas Naphta
Olefins Ethylene Propylene
Kerosene Crude Oil Diesel
Butadiene
Aromatics Lubricating Oil Bitumen Benzene Toulene Xylene
Source: J.P. Morgan
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The cost of the feedstock has a significant influence on the profitability of the participants in the olefin industry. It is the principal component in the manufacturing of the majority of base chemicals and polymers and it also reflects the cost of the energy that the cracking process consumes in large quantities. Also, global operating rates play an important part in determining profitability, reflecting any potential for further volume or price increases. There is no European spot market for natural gas, as all of the capacity is traded under long-term contracts, the terms of which are kept confidential. The price of natural gas liquids tends, however, to track the price of crude oil, sometimes with a lag of three to six months.
Figure 66: Crude oil prices vs. natural gas price chart
250 200 150 100 50 0 Feb06 Jun06 Oct06 Feb07 Jun07 Oct07 Feb08 Jun08 Oct08 Feb09 Jun09 Oct09 Feb10
Brent Crude Oil Index U$/ BBL- PRICE INDEX Natural Gas- Henry Hub $/MMBTU- PRICE INDEX
Source: Bloomberg and J.P. Morgan
Higher costs for natural gas lead to disadvantages for Western producers.
Although the gap is narrowing, natural gas costs in North America and Western Europe are still much higher than in other regions, in part due to higher industrial demand and lower supply. This leads to a big disadvantage for producers in those regions. For petrochemical companies, consumption of oil, natural gas, and/or their derivatives for both fuel and raw materials accounts for the vast majority of the total cost of production. Even chlorine and caustic soda production requires energy (in the form of electricity) as the largest input cost. A significant proportion of the feedstock is often purchased under long-term contracts in an attempt to stabilize this proportion of the cost base. These contracts typically lock-in volumes, but fixed-price contracts are difficult to engineer. Thus, significant volatility can still have a large effect on margins within the industry.
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Figure 67: World Natural Gas Costs (July 31st, 2009)

$US/MMBtu
Figure 68: Ethylene Price and Cash Margins

1,500 1,300 1,100 900 700 500 300 100 -100 -300 Jun-2009
Sep-2009 Ethy lene Spot ($/mt)
Dec-2009
Mar-2010 Cash Margins ($/mt)
Jun-2010
Source: Potash Corp and Fertecon
Source: CMAI and J.P. Morgan estimates
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Olefins (primary)
Olefins form the building blocks for a vast variety of chemicals
The three most important olefins are ethylene, propylene, and butadienethese form the building blocks for the majority of both organic chemicals and synthetic materials. About 75% of all chemicals produced are based on these three olefins. After supply/demand dynamics, the price of crude oil (or more specifically, of naphtha or gas oil) and natural gas are the most important drivers of profitability in olefin production. The commodity nature of these businesses implies that a significant change in raw material pricing passes straight to the bottom line. Over the short term, this is because NGLs and naphtha pricing are established daily, but contracts for olefins prices are set on a monthly basis and the majority of volume is sold under monthly contracts.
Figure 69: Olefins and their derivatives
60%
Feedstock costs are the key driver for profitability
Polyethylene
12%
HD Polyethylene HD Polyethylene Vinyl Chloride Polyvinyl Chloride
Ethylene Dichloride
14%
Ethylene
Ethylene Oxide
Ethyl Glycol
7%
Ethyl Bezene Benzene
Styrene
Polystyrene
7%
Others Others
68%
Polypropylene
7%
Acrylic fibers Acrylonitrile ABS resins ABS resins
4%
Propylene
Cumene Phenolic resins

7%
Propylene oxide Polyurethanes resins Polyurethanes resins

11%
others Styrene butadiene

55%
Synthetic rubbers Polybutadiene Butadiene Latexes

45%
other others Nylon fibers and resins
Source: J.P. Morgan
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Ethylene
Introduction Ethylene is a colorless gas and is the lightest and most used hydrocarbon in the world. Ethylene itself has no end-use, but it is a basic chemical raw material for a variety of industrial products. As one of the largest-volume petrochemicals worldwide with a diverse derivative portfolio, ethylene is often used as a surrogate for the performance of the petrochemical industry at large.
Table 22: Ethylene at a glance
Growth rate (CAGR to 2014E) Current operating rate Key end-markets Key demand regions Key players Market structure Key Inputs Threats
4.8% 80-85% Plastics (Polyethylene, Polyvinyl Chloride, Polystyrene) Asia (35%), North America (24%), Western Europe (17%) Exxon Mobill, Equistar, Dow, Ineos, Chevron, Top 10 producers amount to up to 26% of total production Crude oil, Natural Gas, Naphta Increase in feedstock prices, new capacity in the Middle East and Asia
Overview & Outlook Global ethylene demand has grown by 1.1% CAGR from 2004-2009. In the same period, capacity grew by 3.6%. Through 2009-14E, world ethylene demand growth is expected to grow by 4.8% CAGR (according to CMAI), with polyethylene and ethylene oxide (for ethylene glycol & polyester) being the dominant drivers for growth. For the same period, capacity growth is estimated to be 3.1% CAGR. Production Process Steam cracking is the primary process for production of ethylene. The recovery from refinery off-gas streams, ethanol dehydration (in India and Pakistan) and the recovery from coal and coal-based liquids (in South Africa) are alternative production methods. Ethylene may also be recovered from coal and coal-based liquids (in South Africa). Construction costs for ethylene plants vary with the choice of feedstock. Ethanebased facilities require the least capital investment because the small quantities of byproduct may not warrant inclusion of recovery equipment for these products. Naphtha- and gas oilbased crackers are about 1.5 and 1.7 times more capital intensive than ethane-based plants, but offer value of the by-products obtained from their cracking. There is a high degree of product technology standardization in particular with regard to product quality and purity of polymer grade product. Competitors therefore focus on producing the product at the lowest cost. Many companies are creating joint projects and alliances in either monomer or derivative production to spread the investment risk.
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Demand Demand for ethylene, and therefore its price, is largely driven by demand for its derivative plastics polyethylene, polyvinyl chloride, and polystyrene, which combined account for more than 78% of demand for ethylene. (These plastics are discussed in more detail later in this report.) Much of the remaining use is linked to demand for ethylene glycol, used in the manufacturing of antifreeze, PET bottle resin and polyester fibres.
Figure 70: Ethylene and its derivatives
60% Polyethylene 12% Ethylene Dichloride Vinyl Chloride Monomer Polyvinyl Chloride High Density Polyethylene
Ethylene
14% 7%
Ethylene Oxide
Ethylene Glycol
Ethyl Benzene
Styrene e
Polystyrene
7%
Others
Source: J.P. Morgan
Figure 71: Ethylene demand by region

North America, 24% Asia, 35%
Figure 72: Ethylene demand growth by region (2008-2014E)

AME Asia WORLD
South America, 4%
South America Central Europe North America
West Europe, AME, 15% Central Europe, 4%

West Europe -2% 0% 2% 4% 6% 8% 10% 12% 14%
17%
Supply/Key Players As with many commodity petrochemicals, ethylene production is increasingly being consolidated among only the largest oil and chemical companies, including those with secure sources of cheap feedstocks. 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. Finally, 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.
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Figure 73: Ethylene demand/ capacity

Thousands metric tons
200000 150000 100000 50000 0 2004 2005 2006 2007 2008 2009 2010E 2011E 2012E 2013E 2014E Total Demand Oper. Rate
95 90 85 80 75 70
Total Capacity
Until 2000, North American olefins producers dominated global trade of ethylene derivatives, based on natural gas and feedstock prices that enabled a competitive position. Since then, changing energy market dynamics in North America, as well as in global crude oil markets, have caused regional competitiveness to change dramatically, causing a reduction of North American market share towards Asia and the Middle East. By 2015, Asia Pacific will account to 33% of world ethylene capacity. Almost half of this new capacity will be added in China. Despite this Asia Pacific will remain a net importer until 2015. The Middle East will account for around 36% of new capacities coming online from 2010-15. Some of these new capacities are coming at the expense of closures in North America.
Table 23: Top 10 Ethylene producers (2009)
Thousand metric tons
Western Europe Ineos SABIC Europe Polimeri Europa Dow Benelux LyondellBasell FAO Repsol Quimica Ruhr Oel BASF Antwerp OMV 2,260 2,115 2,055 1,785 1,780 1,380 1,300 1,080 1,080 945 15,780 North America Equistar ExxonMobil Dow Chevron Phillips Shell Chemical Nova Chemical Ineos FPC USA PEMEX Westlake 4,467 3,988 3,628 3,413 2,632 2,375 1,746 1,495 1,382 1,334 26,460 Asia FPCC Reliance Industries YNCC Honam PC LG Chem PTT Chemical Mitsub. Chemical CPC-Taiwan Idemitsu Kosan PCS 2,935 2,032 1,800 1,750 1,620 1,378 1,275 1,115 1,101 1,080 16,086 Middle East Petrokemya YANPET JUPC Jam PC SADAF Marun PC Arya Sasol PC SEPC Petro-Rabigh Equate 2,900 1,855 1,350 1,320 1,280 1,100 1,000 1,000 975 920 13,700 Rest of the World Braskem Quattor PBB Polisur SASOL PKN Orlen TVK NKNK Pequiven Unipetrol RPA Kazanorgsintez 2,530 1,240 828 720 700 650 600 600 544 430 8,842
Table 24: World Capacity overview

Thousand metric tons
REGION North America South America West Europe Central Europe CIS & Baltic States Middle East Africa Indian Subcontinent Northeast Asia Southeast Asia WORLD Growth rate
Source: CMAI and J.P. Morgan.
2008 35,135 5,286 24,581 2,754 3,709 17,094 1,810 3,170 29,512 7,200 130,250 3.77%
2009 33,474 5,399 24,268 2,754 3,746 20,810 1,810 3,170 30,427 7,300 133,158 2.23%
2010E 32,690 5,399 24,268 2,754 3,816 25,059 1,810 3,998 34,517 9,559 143,870 8.04%
2011E 32,639 5,399 24,268 2,754 3,886 27,793 1,810 4,237 34,999 11,000 148,785 3.42%
2012E 32,639 5,399 24,348 2,754 3,886 28,851 1,810 4,237 36,232 11,000 151,156 1.59%
2013E 32,639 5,399 24,428 2,754 4,306 28,851 1,810 5,107 38,802 11,240 155,336 2.77%
2014E 32,639 5,399 24,428 2,754 4,306 29,601 1,810 5,557 39,664 12,370 158,528 2.05%
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Table 25: Key Ethylene capacity additions by producer

Thousand metric tons Year 2009 Region Korea Saudi Arabia Saudi Arabia Kuwait Saudi Arabia China Iran China Saudi Arabia China Saudi Arabia Qatar Thailand China Abu Dhabi, Ruwais Thailand China Singapore India China China Saudi Arabia Iran Saudi Arabia Romania China Saudi Arabia Singapore Abu Dhabi, Ruwais Saudi Arabia Qatar China Thailand India Iran Saudi Arabia China Iran China China India Taiwan China China China China India Abu Dhabi, Ruwais China India China Producer Honam PC Petro-Rabigh Yansab TKOC SEPC Dushanzi PC Jam PC Fujian Ref & Chem Jubail ChevPhill Secco SHARQ RLOC PTT Polyethylene ZRCC Borouge MOC Dushanzi PC Shell Chemical Indian Oil Fujian Ref & Chem Panjin Ethylene Yansab Morvarid PC Petro-Rabigh Oltchim Secco Kayan ExxonMobil Borouge Saudi Polymers RLOC ZRCC MOC Indian Oil Morvarid PC Saudi Polymers Fushun PC Ilam PC Sichuan PC SINOPEC Wuhan OPAL CPC-Taiwan Daqing PC Sichuan PC Fushun PC Yulin Energy & Chemical Co. BCPL Borouge Shanghai PC OPAL Daqing PC New Capacity 1000 975 867 743 550 333 330 267 150 150 1100 975 917 750 700 675 667 667 643 533 450 433 334 325 200 150 1325 1000 700 600 325 250 225 214 166 600 533 458 400 733 642 600 450 400 267 225 220 750 600 458 150 In % of 2009 Capacity 0.75% 0.73% 0.65% 0.56% 0.41% 0.25% 0.25% 0.20% 0.11% 0.11% 0.83% 0.73% 0.69% 0.56% 0.53% 0.51% 0.50% 0.50% 0.48% 0.40% 0.34% 0.33% 0.25% 0.24% 0.15% 0.11% 1.00% 0.75% 0.53% 0.45% 0.24% 0.19% 0.17% 0.16% 0.12% 0.45% 0.40% 0.34% 0.30% 0.55% 0.48% 0.45% 0.34% 0.30% 0.20% 0.17% 0.17% 0.56% 0.45% 0.34% 0.11% Feedstock Naphtha Ethane/ Propane Ethane/ Propane Ethane EPB EPB/ Naphtha/ Gas Oil/ Residues EPB Naphtha EPB/ Naphtha Naphtha EPB/ Naphtha Ethane/ Propane Ethane Ethane EPB/ Naphtha Ethane Naphtha EPB/ Naphtha/ Gas Oil/ Residues Naphtha/ Gas Oil/ Residues Naphtha EPB/ Naphtha EPB/ Naphtha Ethane/ Propane Ethane Ethane/ Propane Naphtha EPB/ Naphtha EPB Naphtha/ Gas Oil/ Residues Ethane Ethane/ Propane Ethane EPB/ Naphtha Naphtha Naphtha Ethane Ethane/ Propane Naphtha/ Gas Oil/ Residues EPB/ Naphtha Naphtha/ Gas Oil/ Residues EPB/ Naphtha EPB/ Naphtha Naphtha EPB/ Naphtha/ Gas Oil/ Residues Naphtha/ Gas Oil/ Residues Naphtha/ Gas Oil/ Residues Methanol to Olefins EPB/ Naphtha Ethane Naphtha/ Gas Oil/ Residues EPB/ Naphtha EPB/ Naphtha/ Gas Oil/ Residues
2010
2011
2012
2013
2014
Pricing Ethylene prices started to rise strongly in 2003 and were pushed further in 2005 and 2006 by rising input costs and tightening supply/ demand. However, there was a huge fall in prices on demand weakness as a result of recession in late 2008-early 2009. In the longer term, we see weakness in ethylene prices on new capacity coming online especially in the Middle East. In near Term, we see strong prices on unplanned cracker incidents around the world.
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Figure 74: Ethylene price chart

2,100 1,800 1,500 1,200 900 600 300 0 Jan1990 Jan1992 Jan1994 Jan1996 Jan1998 Jan2000 Jan2002 Jan2004 Jan2006 Jan2008 Jan2010
Ethy lene (Contract) / MT Ethy lene (spot) $/ MT
Forecast (Contract) Forecast (Spot)
Propylene
Propylene is a colorless, odorless and highly flammable gas. Of the two principal grades of propylene, chemical grade can be manufactured in both crackers and refineries, while polymer grade can be manufactured only in crackers.
Table 26: Propylene at a glance
5.5% 75-80% Production of Polypropylene Asia (45%) of which China (15%)-, North America (19%), Western Europe (19%) Exxon, Reliance Industries, Equistar, FPCC, Ineos Top 10 producers accumulate up to 22.4% of capacity Crude oil, Natural gas, Naphta New capacity in the Middle East and Asia
Overview & Outlook According to CMAI, Propylene demand grew by 1.6% CAGR from 2004-2009. In the same period, capacity grew by only 5%, causing an overcapacity in the propylene market. For the future, Propylene is estimated by CMAI to grow by 5.5% CAGR until 2014, whereas capacity growth is estimated to be lower at 1.5% CAGR.
Strong demand growth coming from the Middle East and China
The highest growth in consumption is expected in the Middle East at a CAGR of 17% through 2009-14E, followed by China at about 13% per year. The established consuming regions of North America, Western Europe and Japan will be hard pressed to show any measurable growth. North America is expected flat demand while Western Europe is expected to decline by CAGR of -1.4% through 2009-14, as per CMAI. Production Process Like ethylene, propylene can be manufactured either in an olefin plant or as part of the oil refining process. About 58% of the worldwide production of propylene is obtained as a co-product of ethylene manufacture. Another 34% is produced as a byproduct of petroleum refining.
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There are a number of projects using alternative on-purpose technologies, including propane dehydrogenation (PDH) and ethylene/butene metathesis; these forms of supply are growing at a fast pace. In 2009, around 6% of global propylene was produced from on-purpose technology. SRI estimates that 23% of global propylene capacity growth over the next five years will come from these plants. A few projects are looking at other technologies such as methanol-to-olefins (MTO) and methanol-to-propylene (MTP). Demand The largest market for propylene is manufacturing of polypropylene resin, an important intermediate product in the manufacturing of a wide range of consumer and industrial goods (see polypropylene section). It is also used in the manufacture of a number of derivative chemicals that are used to produce certain textiles, fibres, coatings, and plastic- Acrylonitrile is used in a variety of elastomeric polymers and fibre applications such as nitrile rubber, ABS resins and acrylic fibres. Propylene oxide is used mainly in producing propylene glycol and in the polyols/urethanes industry. Cumene is the main feedstock for the manufacture of phenol and acetone.
Figure 75: Propylene and its derivatives
68% 65%
Propylene has only a few direct uses. By far the biggest market is production of polypropylene resins.
Polypropylene
7%
Acrylic Acrylonitrile
fibers
Propylene
4%
ABS resins Cumene Phenolic Propylene oxide Polyurethanes resins others resins
7%%
11%
Propylene demand growth has continued to outpace ethylene demand growth for a number of years. This stronger demand growth for propylene over ethylene is based upon the rapid growth of polypropylene, which has been led by demand for injection molding in the automotive and transport industry.
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Figure 76: Propylene demand by region

North America Rest of Asia 30% South America 4% 19%
Figure 77: Propylene (Polymer/ Chemical grade) demand growth by region in % (2008-2014E)
AME China South America WORLD Central Europe Rest of Asia North America
West Europe 19% China 15% AME 8%

West Europe
-5.0%
Central Europe 5%
0.0%
5.0%
10.0%
15.0%
20.0%
Supply/Key Players During 2010-2014E, an additional 20 million metric tons per year of propylene capacity are forecast to come on stream worldwide (CMAI). Most capacity additions will be in Asia and the Middle East. China will account for 38% of new capacity additions in the next five years while the Middle East will account for 20%. Dow aside, the majority of propylene producers are petroleum-refining companies. Therefore, most propylene is produced as a by-product of steam cracking for the production of ethylene. However, propylene demand has grown quicker than ethylene demand in recent years as new steam crackers have not provided adequate growth in propylene supplies. Also, much of the new capacity in the Middle East is based on an ethane feedstock that produces negligible propylene.
Figure 78: Propylene demand/ capacity (-000- Metric tons)
100000 80000 60000 40000 20000 0 2004 2005 2006 2007 2008 2009 2010E 2011E 2012E 2013E 2014E Total Demand Total Oper. Rate % 90 85 80 75 70
Total Capacity
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Table 27: Top 10 propylene producers (2009)

Thousand metric tons West Europe Polimeri Europa SABIC Europe LyondellBasell Ineos OMV Dow Benelux Ruhr Oel Shell Chem Neth Borealis FAO
1,200 1,161 1,155 1,155 955 870 770 750 730 710 9,456
North America Equistar ExxonMobil Shell Chemical Chevron Phillips Dow Enterprise/Total Enterprise BASF/FINA LP FPC USA Ineos
2,527 1,779 1,593 1,324 1,257 1,235 862 856 823 790 13,046
Asia Reliance Industries FPCC Nippon Petrol. SK Energy LG Chem Mitsub. Chemical YNCC Honam PC CPC-Taiwan PCS
2,599 2,468 1,220 1,040 960 955 910 880 835 820 12,687
Middle East Petrokemya Petro-Rabigh Saudi Polyolefins Co. Carmel Olefins NATPET Oman Ref. Co. Al-Waha Jam PC Advanced PP Co. SEPC
710 608 450 450 420 340 338 305 300 285 4,206
Rest of the World Braskem SASOL Petrobras PKN Orlen Quattor TVK Slovnaft NKNK Unipetrol RPA Pequiven
1,287 990 568 485 375 320 295 270 266 260 5,116
The supply of propylene remains highly dependent on the health of the ethylene industry as well as refinery plant economics. Propylene availability from ethylene plants is dictated by the supply/demand balance for ethylene, its feedstock slate and cracker operating conditions.
Table 28: World Capacity overview
2008 20,498 3,551 17,290 1,926 2,002 4,617 1,386 2,524 24,938 4,887 83,618 5.59%
2009 19,871 3,551 17,097 1,926 2,020 6,693 1,386 3,199 26,018 5,213 86,974 4.01%
2010E 20,076 3,551 17,122 1,926 2,051 7,614 1,586 3,979 29,665 6,479 94,049 8.13%
2011E 20,358 3,551 17,147 1,926 2,083 9,208 1,786 4,374 30,633 7,469 98,535 4.77%
2012E 20,374 3,551 17,187 1,926 2,580 9,878 1,786 4,594 31,815 7,659 101,350 2.86%
2013E 20,374 3,779 17,227 1,926 2,793 10,007 1,786 5,264 33,373 7,902 104,431 3.04%
2014E 20,374 4,006 17,227 1,926 2,793 10,636 1,786 5,434 33,841 8,549 106,572 2.05%
Pricing In 2H10, we expect propylene prices returning to more normalized level of 800/tn from peak level of 1000/mt as the capacities are back from overhaul. New capacity additions will further put downside pressure on propylene prices.
Figure 79: Propylene price chart
1,200 1,000 800 600 400 200 0 Jan1991 Jul1992 Jan1994 Jul1995 Jan1997 Jul1998 Jan2000 Jul2001 Jan2003 Jul2004 Jan2006 Jul2007 Jan2009 Jul2010
Propy lene Chemical Grade (/ MT) Propy lene Poly mer Grade (/ MT)
Forecast (Chemical Grade) Forecast (Poly mer Grade)
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Butadiene
Butadiene is an important industrial chemical used as a monomer in the production of synthetic rubber. This in turn is used in the manufacturing of tyres and other fabricated items. Other demand for butadiene comes from manufacturers of latex, ABS resins (used in engineering plastics, such as computers), and nylon 66 fibres.
Table 29: Butadiene at a glance
3.9% 75-80% Rubber, Latex, Plastics and Fibres Asia (40%) China(15%) & Japan (9%)- , W Europe (19%), N America (17%) Texas PC, Equistar, FPCC, Shell, Sabina Top 10 producer account for 35% of world production Crude Oil, Natural gas, Naphtha Asia becoming self-sufficient
Overview & Outlook There has been lot of volatility in butadiene prices in last 2-3 years. Butadiene production is governed by the demand of Ethylene and the feedstock used as it is mainly a byproduct in ethylene production. Demand depends on health of the autos and tyre industries as it is mainly used to make intermediates (SBR, PBR) for making tyres. Production process The raw materials for butadiene production are (as for ethylene and propylene) crude oil, natural gas or naphtha. Therefore, most butadiene is not produced per se, but occurs as a by-product of ethylene production from steam crackers (96% of production). As the third major product of the cracking process, butadiene is produced by the same companies that produce ethylene and propylene, although the proportions of butadiene produced is dependent upon the feedstock used. Demand The production of the two major commodity types of synthetic rubber polybutadiene rubber (PBR) and styrene butadiene rubber (SBR) - accounts for over 50% of global butadiene demand. Butadiene is also used for ABS resins for common plastics found in telephones and computers, carpet backing and other rubber materials such as neoprene wet suits.
Figure 80: Butadiene and its derivatives
Styrene butadiene
55%
Synthetic rubbers Polybutadiene Butadiene Latexes

45%
other others Nylon fibers and resins

Source: J.P. Morgan
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Global demand for butadiene consumed into ABS resin production is estimated to grow at an annual rate of around 5-6%, due to heavy use of thermoplastics in the manufacture of computer equipment and other appliances, mainly in China.
Figure 81: Butadiene demand by end market
ABS Resins Others 22% 13%
Sty rene Butadiene Latex 10%
Poly butadiene 28%
Sty rene Butadiene Rubber 27%

Figure 82: Butadiene demand by region (2009)

Rest of Asia 26% 17%
North America
Figure 83: Butadiene demand growth by regions % (2008-2014E)

AME China Central Europe South America WORLD Asia
South America 3%
China 15% Japan 9%

West Europe 19%
West Europe North America
Central Europe AME 4% 7%
-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
Figure 84: Tire production growth rates

%
15% 10% 5% 0% -5% -10% -15%
ine nt Ce ntr al Eu ro pe or ld er s ur op e US ina Ja pa n Ot h Ch W
Figure 85: Tire demand growth rate

%
20% 15% 10% 5% 0% -5% -10%
or ld Ot he rs ine nt US es te rn Eu ro pe Ce ntr al Eu ro pe Ch ina Ja pa n W
ub co nt
ns
es te
In dia ns
ub co nt
rn E
In dia
2009-14
2004-09
2009-14
2004-09
Source: CMAI
Source: CMAI
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Tyre industry trends have a significant impact on the butadiene market. The industry is already dominated by demand in China, which is expected to produce 38% of the global tyre production by 2014. Japan and Western Europe will have just under 10% of global production each, as per CMAI. Supply/Key Players Worldwide capacity for butadiene is estimated at 11.9 million metric tons in 2009. Of this total, 97% is based on the extraction of crude C4 streams generated as a coproduct of ethylene production. 92% of global butadiene capacity additions planned between 2009 and 2014 will be coming in Asia, particularly in China, Singapore, Korea, India, Taiwan and Malaysia. Key additions (2010-2014) are coming from: TPC Group, 380,000 metric tons in Houston (3.2% of 2009 global capacity), Texas and 260,000 metric tons in Port Neches, Texas (2.2%) Shell Chemicals 155,000 metric tons plant (1.3%) in Singapore Chinese companies: SINOPEC/SABIC Tianjin PC: 166,000 metric tons in Tianjin, Tianjin (1.4%) ZRCC: 150,000 metric tons in Ningbo, Zhejiang (1.3%) Sichan PC: 150,000 metric tons in Chengdu, Sichuan (1.3%) BASF/Yangzi JV with 130,000 metric tons (1%) in Nanjing (1.1%) Dushanzi PC 120,000 metric tons in Dushanzi, Xinjiang (1%) Fushun PC: 120,000 metric tons in Fushun, Liaoning (1%) SINOPEC Wuhan: 120,000 metric tons in Wuhan, Hubei (1%)
Figure 86: Butadiene demand/ capacity (-000- Metric tons)
15000 10000 5000 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 90 85 80 75 70 65
Total Capacity
Total Demand
Operating Rate, %
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Table 30: Butadiene Top 10 producers (2009)

Thousand metric tons West Europe Ineos Polimeri Europa LyondellBasell SABIC Europe Oxeno Repsol Quimica Dow Benelux Naphtachimie Shell Chem Neth Dow BASF SE 310 285 250 230 220 207 170 120 115 105 105 2,117 North America Texas PC Equistar Shell Chemical Sabina PC ExxonMobil Lanxess Ineos 835 483 411 408 322 120 98 Asia FPCC JSR LG Chem Korea Kumho YNCC Yangzi PC Reliance Industries Chiba Butadiene CPC-Taiwan CNOOC & Shell PC Maoming PC 447 268 260 237 218 210 200 177 173 165 150 2,505 Middle East Petrokemya Bandar Imam PC Amir Kabir PC Arak PC Tabriz PC Jam PC 130 77 50 33 17 10 Rest of the World Braskem NKNK Tobolsk-Neftekhim Synthos Kralupy Omsk Kauchuk Quattor Syntezkauchuk PKN Orlen Lukoil Neftochim Bourgas FSK Elemir. Kauchuk Sterlitamak 299 254 195 90 90 80 75 70 50 45 45 1,293
2,677
317
Table 31: Butadiene World Capacity overview

Thousand metric tons REGION North America South America West Europe Central Europe CIS & Baltic States Middle East Indian Subcontinent Northeast Asia Southeast Asia WORLD Growth rate
2008 2,878 379 2,372 250 700 307 275 4,381 348 11,890 2.77%
2009 2,677 379 2,372 255 700 317 275 4,505 365 11,845 -0.38%
2010E 2,387 379 2,372 275 700 422 293 5,135 494 12,457 5.17%
2011E 2,387 379 2,372 295 700 422 297 5,310 520 12,682 1.81%
2012E 2,387 379 2,372 295 700 422 297 5,565 520 12,937 2.01%
2013E 2,387 379 2,372 295 700 422 345 5,914 520 13,334 3.07%
2014E 2,387 379 2,372 295 700 422 392 6,030 520 13,497 1.22%
Pricing There has been volatility in butadiene prices in the last 2-3 years. Spot prices reach a level of $2500/mt before returning to lows of $200/mt in 1H 2008. We expect moderation in butadiene prices as auto production rates moderate, but we expect volatility to continue on continued tight supplies at least in the short term. In the longer term, CMAI expects butadiene prices will be set by Asia as most of the new capacities are arriving there. Western Europe and North America seem likely to track Asian prices.
Figure 87: Butadiene price chart
3,000 2,500 2,000 1,500 1,000 500 0 Jan1990 Jan1992 Jan1994 Jan1996 Jan1998 Jan2000 Jan2002 Jan2004 Jan2006 Jan2008 Jan2010
Butadiene (Contract-Market) / MT Butadiene (Spot) US$/MT

Source: CMAI and J.P. Morgan 76
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Aromatics (primary)
Like the olefins, the aromatics including benzene, toluene, and the xylenesare derived either through cracking or from petroleum refining.
As a large proportion of aromatics are produced in the petroleum refining industry, the economics of the aromatic chain are closely linked to those of crude oil and gasoline. Prices for aromatics therefore tend to amongst the most volatile of any of the base chemicals.
Figure 88: Principal Derivatives of Aromatics
Nylon 6, 66
Cumene
Phenol
Polycarbonate
Benzene Toluene Xylene
Ethylbenzene Dinitrotoulene Paraxylene
Styrene
Polystyrene
Polyurethanes (MDI/TDI)
PTA
PET
Acetic acid
Source: J.P. Morgan
Ethylene Glycol
Benzene
Benzene is the largest of the aromatics
Benzene is one of the largest volume petrochemicals and is the largest of the aromatics. Benzene is a colorless and highly flammable liquid. It can be derived from petroleum-based sources or coal and is the most important aromatic hydrocarbon in terms of world consumption. Benzene is used to produce a number of petrochemical intermediates such as ethylbenzene for styrene production, cumene for phenol and acetone, cyclohexane and nitrobenzene.
Table 32: Benzene at a glance
3.7% 70-75% Plastics and rubber North America (19%), Western Europe (18%) and Asia (49%) ExxonMobil, FCFC, Total PC, Dow Chemical Top 20 producers amount to up to 41.5% of capacity Petroleum or Coal Increasing supply in Asia and the Middle East
Overview & Outlook According to CMAI, Benzene demand grew by 0.5% CAGR from 2004-2009. In the same period, capacity grew by 3.8% which created an oversupply in the market. Through 2009-14, 57% of incremental capacity is coming from China. CMAI estimates Benzene to grow by 3.7% CAGR until 2014 whereas capacity growth is estimated to be 2.5% CAGR. Because of high cost economies, North America and Europe will be net importers in 2010, while India and Middle East will be net exporters.
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Production Process Benzene is derived from petroleum or coal, with petroleum accounting for approximately 95% of global supply. Petroleum sources include refinery streams or pyrolysis gasoline (a by-product of ethylene manufacture in cracking naphtha, gas oil or LPG feed). A growing source of benzene is by the selective disproportionation of toluene, where benzene is co-produced in the manufacture of paraxylene-rich xylenes streams. Demand Benzene demand throughout the world is dominated by the production of three derivatives: ethylbenzene (styrene production for polystyrene plastics and synthetic rubber), cumene (phenol for resins and adhesives) and cyclohexane (nylon and gasoline component). These derivatives accounted for more than 80% of benzene consumed globally in 2009. Smaller amounts of benzene are used to make some types of rubbers, lubricants, dyes, detergents, drugs, explosives, and pesticides.
Figure 89: Benzene consumption by end market Alkylbenzene Others 2% 3% Chlorobenzene Nitrobenzene 8% 2% Maleic Anhyd. Cumene 19% 2%
Cyclohexane 12% Ethylbenzene 52%

Figure 90: Benzene consumption by region

North America 19%
Figure 91: Benzene demand growth by region

AME Asia
South America 2% Asia 49% West Europe 18%
WORLD Central Europe South America West Europe North America
-1%
0%
1%
2%
3%
4%
5%
6%
7%
8%
AME 7%
Central Europe 5%
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New capacity moves to Asia and the Middle East
Supply/Key Players The regional concentration of new investment in both benzene production capacity and derivatives is driving a global shift away from the traditional established markets towards Asia and the Middle East. The established western markets are continuing to see pressures on production caused by high alternative feed costs, diminishing refinery feed volumes and an aging asset base. The three major regions (North America, Western Europe and Japan) accounted for 55% of total world production in 2009. Due to capacity build-ups in Asia and the Middle East, this number should continue to fall to below 40% by 2014E. Most of the new capacities in the next few years will be coming in Northeast Asia, particularly China and Japan. Through 2009-14E, China will be adding 5.9 million metric tons of new capacity or equivalent to 11% of 2009 global capacity for benzene. Japan will add 1.1 million metric tons of new capacities through 2009-14.
Figure 92: Benzene demand/capacity (-000- Metric tons)
70000 60000 50000 40000 30000 20000 10000 0 2004 2005 2006 2007 2008 2009 2010E 2011E 2012E 2013E 2014E Total Oper. Rate % 90 85 80 75 70 65 60
Total Capacity
Total Demand
Table 33: Top 10 Benzene producers (2009)

Thousand metric tons West Europe Dow Benelux Total PC ExxonMobil CEPSA Polimeri Europa Deutsche Shell SABIC Europe Shell Chem Neth Ineos Ruhr Oel 900 890 725 665 600 600 515 500 490 375 6,260 North America ExxonMobil Equistar Flint Hills Resources BP Dow Shell Chemical Chevron Phillips CITGO ConocoPhillips Shell Canada 1,635 870 847 847 751 670 601 558 492 435 7,706 Asia FCFC Idemitsu Kosan PTTAR GS-Caltex Nippon Petrol. Samsung Total PC Reliance Industries SK Energy Mitsub. Chemical Yangzi PC 1,235 911 874 829 800 730 670 650 622 608 7,929 Middle East Saudi ChevPhill Borzuyeh PC Ibn Rushd SASREF Petrokemya Bandar Imam PC Bou Ali Sina PC Gadiv Petkim Yansab 845 430 350 300 230 230 180 135 134 134 2,968 Rest of the World Braskem Unipetrol RPA Quattor Ufaneftekhim Omsknefteorgsintez RUS_Benzene MOL Group PKN Orlen Lukoil Bourgas NKNK 733 340 255 250 235 200 195 180 173 172 2,733
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Table 34: Benzene world capacity

Thousand metric tons REGION North America South America West Europe Central Europe CIS & Baltic States Middle East Africa Indian Subcontinent Northeast Asia Southeast Asia WORLD Growth Rate
2008 10,585 1,320 10,048 1,549 2,603 3,038 211 1,227 17,772 2,826 51,179 5.67%
2009 10,294 1,353 9,793 1,549 2,603 3,307 211 1,227 19,594 3,135 53,066 3.69%
2010E 10,111 1,353 9,853 1,549 2,618 3,788 211 1,337 21,562 3,481 55,863 5.27%
2011E 10,291 1,353 9,853 1,659 2,618 3,903 211 1,371 22,503 3,909 57,671 3.24%
2012E 10,291 1,353 9,853 1,659 2,618 3,903 211 1,371 23,338 3,909 58,506 1.45%
2013E 10,291 1,353 9,853 1,659 2,618 3,973 411 1,939 24,300 3,909 60,306 3.08%
2014E 10,291 1,353 9,853 1,659 2,748 4,043 411 2,106 24,476 3,909 60,849 0.90%
Pricing In the short term, benzene prices will depend on the demand of benzene derivatives, which depends on the overall health of economy, and the cost of incremental supply from domestic production and/or imports. In the long term, it will be more governed by cost of supply of incremental production from Asia.
Figure 93: Benzene price chart
1,500 1,200 900 600 300 0 Jan1990 Jan1992 Jan1994 Jan1996 Jan1998 Jan2000 Jan2002 Jan2004 Jan2006 Jan2008 Jan2010
Benzene (Contract) / MT Benzene (Spot) $/ MT

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Toluene
Toluene is primarily used in the chemicals industry to produce xylenes, benzene and phenol, and as a solvent for use in paints, lacquers, gums and resins. It is also blended into unleaded gasoline for octane improvement.
Table 35: Toluene at a glance
5.4% 60-65% Feedstock for Benzene, Xylene, Phenol Asia (61%), North America (21%), Western Europe (7%) Exxon, China petrochemical corporation, China National Petroleum Top 10 producers amount to up to 40.5%% of capacity Naphta Additional Asian capacity
Overview & Outlook Toluene consumption is expected to grow globally by 5.4% per year until 2014E according to CMAI, with China growing by 7% and the Middle East growing 8% per year. In the US and Western Europe, consumption growth is not expected to be as high as in emerging markets but still positive (CAGR of 2.4% per year and 3.7% per year respectively). Production Process Toluene is present in low concentrations in crude oil and is also present in the gasoline fractions that result from thermal and catalytic cracking. However, toluene is not isolated from either of these sources. The chief source of toluene (about 90%) is Naphtha (via catalytic reformate). Three grades of Toluene are produced: TDI grade with a Toluene content of over 99% Nitration grade with a toluene content of 98.5% Commercial grade with a toluene content of 90-98% Demand Demand for Toluene is strongly dependent on the demand for its end products: The majority of toluene produced is used as a feedstock for xylene, benzene and phenol production (which is the reason why Toluene is never really removed from refinery streams). Toluene hydrodealkylation converts toluene to benzene.Where a chemical complex has similar demands for both benzene and xylene, then toluene disproportionation (TDP) may be an attractive alternative to the toluene hydrodealkylation (HDA), although this needs twice as much Toluene as an input.
Table 36: Two production types for Benzene production
Production unit Toluene Hydrodealkylation (HDA) Toluene Disproportionation (TDP)
Toluene demand is highly related to the Benzene and Xylene demand ratio.
Raw material Toluene Toluene
End-product Benzene Benzene/ Xylene
Toluene/Benzene ratio 1:1 2:1
When xylene demand is stronger than benzene demand, TDP units will operate, tending to cause HDA units to shut down and demand for toluene increases.
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Figure 94: Toluene consumption by end market

Other 21%
Toluene Diisocy anate (TDI) 6% Solv ent 13% Benzene/ Xy lenes 60%
Figure 95: Toluene consumption by region

ROW 1% North America 21% C&S America 3% Western Europe 7% Asia 61% C&E Europe 2% Middle East 5%
Figure 96: Toluene demand growth rate % (2009-2014E CAGR

Middle East C&E Europe Asia World Western Europe ROW North America C&S America 0% 1% 2% 3% 4% 5% 6% 7% 8% 9%
Supply/Key Players Total capacity of toluene amounted to 30 million metric tonnes in 2009, with North America holding 28% of overall capacity. Western Europe accounts for 9.6%, Middle East 6% and Asia 53%. Most of the new capacities are coming in Asia, particularly China. China is adding new capacities of around 7 million metric tons by 2014E.
Figure 97: Toluene capacity demand by region (-000- Metric tons)
18000 13000 8000 3000 -2000 North America C&S America Western Europe Capacity Operating Rate (%) C&E Europe Middle East Asia Others 80.0 60.0 40.0 20.0 0.0
Demand
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Table 37: Top 10- Toluene producers (2010)

Thousand metric tons Western Europe Shell & DEA Oil Polimeri Europa Dow Benelux ExxonMobil Chemical CEPSA Ruhr Oel Petroleos de Portugal BASF Shell Chemicals UK INEOS 415 375 338 250 240 220 155 155 150 120 2,418 North America ExxonMobil Flint Hills Resources INEOS ConocoPhillips Suncor Energy Husky Energy Hovensa CITGO Sunoco Valero Energy 901 814 806 557 440 352 295 289 269 224 4,947 Asia Reliance Industries SK Energy FCFC Nippon Petroleum PTT Aromatics GS- Caltex Oil CPC-Taiwan Petrochina Dalian CNOOC Fujian 1168 894 745 744 738 710 551 475 450 450 6,925 Middle East Ibn Rushd Saudi Aramco Shell Bandar Imam Saudi Chev Phill Gadiv Safia 358 310 285 250 188 103 Rest of the World Braskem PEMEX PKN Orlen Repsol YPF Petrobras Energia Pavlodar Refinery Naftan TNK- BP Lukoil Petrobras 421 309 180 170 150 150 150 140 90 83 1,843
1,494
Pricing Toluene economics depends on the price of oil, refining margins, and supply/demand conditions in the aromatics business in general, including benzene. Because of its use as a gasoline additive, prices are primarily driven by gasoline prices and are also therefore closely linked to the price of oil.
Figure 98: Toluene price chart
1,400 1,200 1,000 800 600 400 200 0 Jan1990 Jan1992 Jan1994 Jan1996 Jan1998 Jan2000 Jan2002 Jan2004 Jan2006 Jan2008 Jan2010
Toluene Nitration Grade (Spot) $/ MT

Forecast
Paraxylene
Introduction Mixed xylenes are the second most important aromatic product in terms of world consumption for chemical manufacture, ranking behind benzene and ahead of toluene. Isolation of paraxylene accounted for more than 80% of global mixed xylenes consumption Xylene is a colourless, sweet-smelling liquid that is very flammable. It is used primarily as a solvent and as an additive in gasoline. For use in the chemical industry, xylene is separated into three isomers: paraxylene, orthoxylene, and metaxylene - which slightly differ in configuration, in the way the CH3 groups are attached to the benzene ring.
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Table 38: Paraxylenes at a glance

Growth rate (CAGR 2009-14E) Current operating rate Key end-markets Key demand regions Key players Market structure Key Inputs Threats
Source: CMAI and J.P. Morgan estimates.
6.0%-6.5% 75% Feedstock for Polyester NE Asia (76%), N America (17%), W Europe (7%) Exxon, China Petrochemical, BP Top 10 producers amount to up to 43% of paraxylene production Naphtha or Coal New capacity in Asia
Overview& Outlook- Paraxylene Overall, annual demand for paraxylene is expected to grow by 6.0%-6.5% over the next few years (2009-14E), according to CMAI. However, this demand growth will be very regional: Asia accounts for 60-70% of this global demand growth, growth in Western Europe will be 2% and U.S is expected to be almost flat. Although, China will have the largest capacity increase it will continue to be a major importer of paraxylene even with this substantial amount of added capacity. Production Process Xylenes can be produced by several methods. When petroleum is catalytically reformed in refineries, aromatics are a major component of the product stream and the isolation from this stream is the major source of xylenes. Toluene (or toluene-rich streams) may also be converted to benzene and xylenes through disproportionation (see Toluene section).
Figure 99: Production of Xylenes
Source: SRI
84
85
Demand Almost all paraxylene is converted into either terephtalic acid (TPA) or dimethyl terephtalic acid (DMT), which comprises the basic intermediates for polyester fibres and films and polyethylene terephtalate (PET) resins. It is also used to manufacture polybutylene terephtalate (PBT), a specialty engineering resin. Most of the demand is coming from North East Asia, particularly China on increasing demand of fibres from textile industry. As per CMAI, terephthalic acid demand will increase by CAGR of 7% through 2009-14E.
Figure 100: Paraxylene demand
Dimethy l Terephalate 4%
Terephthalic Acid 96%

Source: CMAI
Supply/Key Players Asia is the largest paraxylene producing region, with 64% of global capacity; North America accounts for 13% and Western Europe amounts to 7%. A significant amount of paraxylene is traded, with the major trade route being from North America to Asia as a net importer. Most of the new capacities are coming in Asia particularly, China and Indian subcontinent. Northeast Asia will account for 50% while Indian subcontinent will account for 20% of new capacity additions through 2009-14E.
Figure 101: Para Xylenes demand/capacity (-000- Metric tons)
50000 40000 30000 20000 10000 0 2004 2005 2006 2007 2008 2009 2010E 2011E 2012E 2013E 2014E Oper. Rate % 95 90 85 80 75 70
Total Capacity
Total Demand
85
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Table 39: Top 10 Para Xylene producers (2009)

Thousand metric tons Western Europe ExxonMobil BP Ruhr Oel Deutsche Shell Total PC PETROGAL Polimeri Europa CEPSA PCK Schwedt 650 600 190 140 135 125 100 100 60 2100
North America BP ExxonMobil Flint Hills Resources Chevron Phillips Parachem Chalmette LLC
1,600 948 590 450 350 185
NE Asia FCFC Nippon Petrol. GS-Caltex Yangzi PC SK Energy KP Chemical CPC-Taiwan Liaoyang PC Lidong Chemical S-Oil
4123
1,460 1,200 1,050 850 750 730 720 700 700 700 8860
Middle East Borzuyeh PC Bou Ali Sina PC Ibn Rushd KARO Bandar Imam PC Gadiv Petkim Oman Oil Co JV Esfahan PC
750 400 386 206 180 160 139 132 44 2,397
Indian subcontinent Reliance Industries Indian Oil
1,910 360
2270
Prices Prices were firm in the past few months on strong demand mainly from China, particularly from textile industry. However, we expect prices to soften as the demand stabilizes and new capacities come online. New capacities of 1.2mmt will come online in Middle East and 1.7mmt will come online in NE Asia in 2010.
Figure 102: Paraxylene price chart
1,200 1,000 800 600 400 200 0 Jan1999 Jan2000 Jan2001 Jan2002 Jan2003 Jan2004 Jan2005 Jan2006 Jan2007 Jan2008 Jan2009 Jan2010 Jan2011
Parax y lene(/mt)
forecast
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Other monomers (intermediates)

Ethylene Glycol
Introduction Ethylene glycol is an ethylene derivative and is used primarily in the manufacture of polyester (84%) and antifreeze (10%). Of the ethylene glycol consumed for polyester production, 50% is used for PET resins (bottling), 40% for polyester fibres, and 10% for polyester films. Antifreeze is used in motor vehicles, pumps and heating, and serves to lower the freezing point of water. Other smaller outputs include resins for surface coatings, and hydraulic brake and shock absorber fluids.
Table 40: Ethylene Glycol at a glance
Growth rate (CAGR to 2009-14E) Current operating rate Key end-markets Key demand regions Key players Market structure Key Inputs Threats
4% 70-75% Bottling, Fibres and Antifreeze Asia, China in particular Sabic, Dow, Formosa Top10 producers amount to up to 60% of capacity Ethylene, Oxygen Increasing capacity in the Middle East and China
Overview & Outlook Ethylene glycols growth is highly dependent on demand for polyester fibres and resins. Demand for Ethylene Glycol grew by 5-6% in the past three years due to strong demand for polyester fibre in Asia, in particular China. SRI anticipates growth rates of 4% through 2009-14. Both China and Middle East will grow by more than 5% (China +5.4%, Middle East +5.2%) through 2009-14. While Western Europe and the U.S. are expected to grow at lower rates (each will grow by +2.5% through 200914). The ethylene glycol market is consolidating and moving more towards China and other Asian countries (ex Japan). Production Process Ethylene Glycol is produced predominantly by the noncatalytic liquid-phase hydration of ethylene oxide. Nearly all big producers operate an integrated ethylene oxide facility. The most competitive ethylene oxide/glycol producers have a basic position in ethylene and/or a technology and manufacturing cost advantage.
Figure 103: Production of Ethylene Glycol
Ethylene Etyhlene Oxide Ethylene Glycol Oxygen
Source: J.P. Morgan
Water
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88
Demand Ethylene Glycol demand growth depends on growth in the general economy as it is mainly used to make polyester resins and automotive antifreeze which grow in line with the GDP. Going forward demand may be impacted by recycling as ethylene glycol has recycling potential.
Figure 104: Ethylene glycol consumption by end market
Antifreeze 10% Poly ethy lene Terephthalate (PET) 84% Other 6%
Supply/Key Players In 2009, Ethylene Glycol capacity amounted to 23.7 million metric tonnes worldwide, and the largest producers are located in Saudi Arabia, Kuwait, Canada and the United States. With the new capacity expansions, global operating rates are dropping and now production is shifting from developed markets to the Middle East, Taiwan, Korea and China.
Figure 105: Ethylene glycol: Capacity and demand growth rate through 2009-14E
%
20% 15% 10% 5% 0% -5% North America Central and South America capacity grow th rate demand grow th rate Western Europe Middle East Japan China Others Total
Source: SRI and J.P. Morgan estimates.
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Figure 106: Top 10 monoethylene glycol producers (-000- Metric tons)

3 14% 12% 2 10% 8% 6% 4% 2% 0 SABIC Dow Formosa Plastics Shell China SPDC Ltd. Honam Petchem. Reliance Indus. Petchem Indus. (Kuw ait) Global percentage share Capacity BASF Petrochemical 0%
Pricing Ethylene glycol prices are primarily governed by demand/supply conditions and input cost pressures. Movements in the ethylene prices have a marked influenced on ethylene glycol prices.
Figure 107: Ethylene glycol price chart
1200 1000 800 600 400 200 0 Q1 2000 Q1 2001 Q1 2002 Q1 2003 Q1 2004 Q1 2005 Q1 2006 Q1 2007 Q1 2008 Q1 2009 Western Europe Ethy lene Gly col price (/TN)
Q1 2010
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90
Methanol
Methanol (methyl alcohol or wood alcohol) is one of the most important commodity chemicals as it is used as a raw material in several intermediate chemicals and end uses. Its most important derivative is formaldehyde for the construction industry.
Table 41: Methanol at a glance
9.9% 61.6% Formaldehyde (Wood Industry) Fuel Additive N America (10%), Asia (38%), W Europe (11%), AME (22%) Methanex, Ar Raz Top 10 Producers (34%) Syngas Oversupply of Chinese Production, ban of MTBE usage in the U.S., Increasing concern about Formaldehyde side effects.
Overview & Outlook World demand for methanol is projected by CMAI to grow at CAGR of 9.9% from 2009 to 2014E, with much smaller growth in the industrialized areas where markets are mature. Capacity growth is estimated at 7% per year through 2009-14. More than 50% of demand for the next five years is coming from China. Other key demand areas are the Middle East and South America while only 34% of capacities are concentrated with the top 10 producers. Key use of methanol is to make formaldehyde. It is important to point out that formaldehyde causes concerns because it is a probable human carcinogen. Many studies have been conducted to assess the risk of human exposure, but results are varied among different research reports. The lack of conclusive evidence has led to widespread disagreement among industry, government agencies and unions regarding the appropriate risk assessment of formaldehyde. Production Process Methanol is one of the few organic base chemicals that are not produced in an olefin plant. Instead, the vast majority (90%) is produced by reforming natural gas or, more specifically, synthesis gas with steam.
Figure 108: Production of Methanol
Carbon Monoxide Synthetic Gas Hydrogen Water Carbon Dioxide or other gases
Source: J.P. Morgan
Methanol
90
91
Because of the various applications of input materials used for the production of Methanol, such as Hydrogen (also used in the Steel and Healthcare Industry and for LNG and CTL applications) and Carbon Dioxide (for urea fertilizer production), Methanol producers face strong competition for resources. Since price increases in these industries outperformed price increases for Methanol, increased prices for input costs decreased margins for methanol producers. Demand Globally, formaldehyde production is the largest consumer of methanol, accounting for 32% of world methanol demand. This demand is driven by the construction industry, since formaldehyde is used primarily to produce adhesives for the manufacture of various construction board products. Other important derivatives of methanol are MTBE (fuel additive) and acetic acid. The conversion of methanol to gasoline has been used commercially by Exxon at a 14,500/bbl/d plant in New Zealand. This process converts methanol to an equilibrium mixture of methanol, dimethylether and water. This mixture can then be converted to a premium quality, high octane gasoline which can be blended with refinery gasoline or sold separately. Although this technology is not widely used in the coal-to-liquids industry, if the oil price returns to high levels and alternative fuel solutions become more economically important, we expect increasing demand for methanol coming from these technologies.
Figure 109: Methanol consumption by end market
Others 19% Formaldehy de 32% Solv ents 4% Dimethy l Ether 7% Gasoline/Fuel 13% MTBE/TAME 13%
Acetic Acid 12%
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Figure 110: Methanol consumption by region

North America 10% South America Asia 38% 14%
Figure 111: Methanol demand growth rate (%) 2008-2014E

Asia AME WORLD South America West Europe
West Europe 11% Central AME 22%

North America Central Europe -10% -5% 0% 5% 10% 15% 20%
Europe 6%
Supply/Key Players In 2009, world methanol capacity amounted to 68 million metric tonnes. NE Asia holds the largest share (36%, mainly China), followed by Middle East (21%) and the South America (19%). World methanol capacity is expected to reach almost 96 million metric tons by 2014 by CMAI.
Figure 112: Methanol demand/ capacity (-000- Metric tons)
Total Capacity
A significant factor in the methanol market is that the new mega-methanol plants (1.54.0 million metric tons per year) are much larger than existing plants. Thus they will have reduced fixed costs, as well as greatly reduced natural gas costs due to strategically located feedstock giving a significant cost advantage. This is likely to drive down the cost of methanol, and cause major shifts in trade patterns. Locations for these large new methanol plants will be Iran, Saudi Arabia, Qatar, and Trinidad and Tobago. Methanex is the largest producer and marketer of methanol in the world, accounting for approximately 8% of worldwide 2009 methanol capacity. Methanex is a genuine worldwide supplier, with plants currently operating in Trinidad and Tobago, Chile, China and New Zealand.
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Table 42: Top 10 Methanol producers (2009)

Thousand metric tons West Europe STATOIL TOTAL BASF SE Shell & DEA Oil BioMethanol Chemie BP RP 900 660 460 400 365 285 North America Millennium Eastman PEMEX Terra Industries Praxair 620 195 180 120 45 Asia Petronas Methanex Boyuan Unichem Shanghai Coking Kingboard Zhongyuan Chem Kaltim Methanol Henan Shaanxi Yulin Yanzhou Coal 2,520 1,220 1,000 850 795 730 710 700 610 600 9,735 Middle East Ar Razi Zagros PC IMC Oman Methanol Fanavaran PC Ibn Sina QAFAC Kharg GIPC Chemanol 4,850 2,500 1,100 1,050 1,000 1,000 990 660 425 230 13,805 Rest of the World Methanex MHTL - M5 Methanex - Atlas AMPCO Azot Togliatti Metafrax Methanex - Titan Metor Supermetanol Tomsk Methanol 3,840 1,900 1,750 1,150 1,000 1,000 850 850 790 750 13,880
3,070
1,160
Table 43: Methanol world capacity overview

2008 1,160 12,656 3,205 805 4,243 12,114 2,100 420 18,848 3,430 58,981 17.78%
2009 1,160 12,756 3,070 805 4,316 13,944 2,100 470 24,558 4,750 67,929 15.17%
2010E 1,160 13,256 3,105 805 4,367 15,244 2,700 470 34,373 5,980 81,460 19.92%
2011E 1,160 13,606 3,205 805 4,777 16,044 3,360 470 39,098 6,230 88,755 8.96%
2012E 1,160 13,606 3,305 805 4,917 16,044 3,360 470 39,798 6,230 89,695 1.06%
2013E 1,160 13,606 3,405 805 4,917 16,044 4,360 470 41,148 6,230 92,145 2.73%
2014E 1,160 13,606 3,505 805 4,917 19,044 4,360 470 41,598 6,230 95,695 3.85%
Table 44: Top Methanol capacity additions (2010)

Thousand metric tons Company Metor Kharg Zagros PC Salalah Methanol Almet Emethanex Baotou Shenhua Datang Int'l Power Kingboard/CNOOC Shandong Jiutai Shenhua Ningmei Yulin Energy & Chemical Co. Brunei Methanol Company
Country Venezuela Iran Iran Oman Algeria Egypt China China China China China China Brunei
Location Jose, Anz Kharg Island Bandar Assaluyeh Sohar Arzew Damietta Baotou, Mongolia Duolun, Mongolia Dongfang, Hainan Erdos, Inner Mongolia Ningdong, Ningxia Yulin, Shaanxi Sungai Lang
2010 500 ---800 650 ---400 500 420 200 ---1020 ---600
2011 350 ------650 ---860 1,500 1,260 600 1,000 1260 ---250
2012 ----------------------------------------
2013 ---------------------------------1350 ----
2014 ---1,400 ------1,000 ------------------450 ----
Total 850 1400 800 1300 1000 1260 2000 1680 800 1000 2280 1800 850
in % of 2009 capacity 1.3% 2.1% 1.2% 1.9% 1.5% 1.9% 2.9% 2.5% 1.2% 1.5% 3.4% 2.6% 1.3%
Pricing Methanol pricing was relatively volatile over the last few years. Apart from recessionary pressures last year, it was more the supply issues than the demand issues which unpinned the extreme volatility. We expect tight supply condition to soften as new capacities equal to 20% of 2009 capacity will be coming through 2014. More than 50% of the new capacities are coming in China.
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Figure 113: Methanol price chart

600 500 400 300 200 100 0 Jan-1995 Jan-1997 Jan-1999 Jan-2001 Jan-2003 Jan-2005 Jan-2007 Jan-2009 Jan-2011
Methanol (Contract) / MT Methanol (Spot) / MT

Phenol
Phenol (carbolic acid) is a toxic, colourless crystalline solid with a sweet, tarry odor. Key phenol derivatives are bisphenol A (used in production of polycarbonates and expoxy resins), phenol-formaldehyde resins (used in wood products) and caprolactam (nylon production). The remaining derivatives are mainly alkyl phenols.
Table 45: Phenol at a glance
4.7% 70-75% Plastics (Polycarbonate via Bi-Phenol A and and Nylon via Cyclohexane) Asia (47%), North America (23%), Western Europe (23%) Ineos, Sunocco, Shell Chemicals Top10 producers amounting to 60% of capacity Cumene, Oxygen Volume decrease in Polycarbonate demand
Overview & Outlook Phenol demand is expected to grow by CAGR of 4.7% through 2009-14. Stronger growth is possible, depending on whether polycarbonate demand returns to doubledigit growth rates. The main demand driver of Phenol is demand from the North East Asia region, particularly China. NE Asia will account to 41% of global phenol demand in 2014E versus 33% in 2008. Production Process Phenol can be produced via several processes. However, cumene peroxidation is the most common, since it currently offers the most cost-effective process economics. In this process, cumene is prepared by alkylating benzene with propylene. 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 coproduct acetone. However, commercialization has been put on hold owing to oversupply, and a change in Solutias strategy implies the company might prefer to license the technology rather than committing its own capital.
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Figure 114: Production of Phenol

Benzene Cumene Propylene Acetone Oxygen
Phenol
Demand Demand for phenol is highly sensitive to the overall economy, as end-uses lie predominantly in the construction and auto sectors. Bisphenol A is a precursor of polycarbonates, which are engineering plastics used in various applications such as a substitution of glass (car industry) and epoxy resins, which are employed in various Plastics (also CDs/DVDs, especially in China). Phenol has a positive demand growth outlook as the steady growth in mature markets and expanded market penetration of polycarbonate.
Figure 115: Phenol consumption by end market
Alky lphenol Others 6% 4% Aniline 1%
Phenolic Resin 27% Bisphenol A 47% PPO/Orthox y l enol 2%

Ny lon-KA Oil 13%
Figure 116: Phenol consumption by region

North America, 23%
Figure 117: Phenol demand growth rate (%) 2008-2014E CAGR
AME Asia South America
Asia, 47%
South America, 2%
WORLD Central Europe West Europe
West Europe, AME, 1% Central Europe, 4%

North America -5% 0% 5% 10% 15% 20% 25% 30%
23%
95
96
Supply/Key Players It is important to consider that the economics of producing phenol are strongly impacted by the demand for its by-product acetone, with 0.6 tonnes produced for every tonne of phenol. This reduces the potential for phenol producers to improve margins when phenol markets are tight and vice versa. 74% of new capacity additions through 2009-14E will be coming in NE Asia, particularly China. Middle East will contribute to 18% of new capacity additions through 2009-14.
Figure 118: Phenol demand/ capacity (-000- Metric tons)
14000 12000 10000 8000 6000 4000 2000 0 2004 2005 2006 2007 2008 2009 2010E 2011E 2012E 2013E 2014E Total Demand Total Oper. Rate % 100 80 60 40 20 0
Total Capacity
Table 46: Top 10 Phenol producers (2009)

Thousand metric tons West Europe Ineos Phenol CEPSA Quimica Polimeri Europa Borealis Poly Syndial NOVACAP DOMO Chemicals 1,340 570 300 190 180 155 150 North America Sunoco Shell Chemical Ineos Phenol MtVernon Phenol Dow Georgia Gulf Blue Island Phenol Dakota Gas. Co. Merisol 860 600 540 350 295 227 45 20 8 2,945 Asia Kumho P&B FCFC Mitsui Chemicals Taiwan Prosperity Chang Chun PC Mitsui Phenols Mitsub. Chemical Chiba Phenol LG Chem Sinopec Gao Qiao 405 400 390 340 300 300 250 230 230 205 3,050 Rest of the World Rhodia Samara Syn Alc Ufaorgsintez Kazanorgsintez PKN Orlen Omsk Kauchuk Slovnaft Saratovorgsintez Merisol Carom S.A. 245 74 71 65 60 58 50 43 40 25 731
2,885
Table 47: Phenol world capacity overview

2008 2,945 195 2,855 157 318 ---40 82 2,962 317 9,871 4.97%
2009 2,945 245 2,885 157 318 ---40 82 3,215 500 10,387 5.23%
2010E 2,945 245 2,885 157 334 ---40 82 3,396 546 10,630 2.34%
2011E 2,945 245 2,885 157 364 54 40 82 3,451 550 10,773 1.35%
2012E 2,945 245 2,885 157 364 216 40 82 3,451 550 10,935 1.50%
2013E 2,945 245 2,885 157 364 216 40 82 4,039 550 11,523 5.38%
2014E 2,945 245 2,885 157 364 216 40 82 4,101 550 11,585 0.54%
96
97
Pricing Phenol is mainly used in the autos and construction sectors where growth is very much GDP dependent. Phenol prices had good run in the 1H10 on autos recovery. We see moderation in phenol prices in 2H10 as the growth subsides and new capacities come online.
Figure 119: Phenol price chart
1,500 1,000 500 0 Jan-2000 Jan-2002 Jan-2004 Jan-2006 Jan-2008 Jan-2010
Phenol (Contract Mkt) / MT

Forecast
Styrene Monomer
Introduction Styrene is a colourless, water-insoluble liquid. It is a monomer that is predominantly used to manufacture of polystyrene (which is used for the production of Plastics). Other uses are the production of acrylonitrile-butadiene-styrene (ABS)/styreneacrylonitrile (SAN) resins and also styrene-butadiene (S/B) copolymer latexes.
Table 48: Styrene monomer at a glance
3.6% 70-75% Plastics (via Polystyrene) Asia (54%), North America (18%) and Western Europe (16%) INEOS, LyondellBasell, FCFC The Top 10 producers amount to up to 36% Etylene Benzene or Ethyl Benzene Hyperoxide and Propylene New capacity in Asia
Overview & Outlook Consolidation has been a key trend in the styrenics industry. In 2007, Ineos and Nova put their global styrenics businesses into a joint venture, with plant closures in Europe and North America. Lanxess moved its Lustran Polymers business into a global joint venture with Ineos. Dow Chemicals sold it styrenics business in 2010 to Bain Capital for $1.6bn while the styrenics business of BASF is up for sale. According to CMAI, styrene demand grew by -0.2% CAGR from 2004-2009. In the same period, capacity grew by 2.5%, leading the market into oversupply. Styrene is estimated to grow by CAGR of 3.6% through 2009-14, whereas capacity growth is estimated to be 2.1% during the same period. Production Process Styrene monomer is mostly manufactured through the oxidation of ethyl benzene, which is produced via the alkylation of benzene with ethylene using a catalyst.
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Figure 120: Ethyl benzene dehydrogenation process

Styrene Ethylbenzene Hydrogen
Dow and Snamprogetti are also jointly developing a new process to manufacture styrene monomer from ethane and benzene. If this process becomes operational, they would be able to take advantage of a much lower-cost feedstock in ethane (90% lower in the Middle East than in the US), eliminating the need for upstream investment in ethylene production at a stream cracker or ethylene purchase. It is expected that this process results in a cost of production of about 10% lower than the ethylene-based process. Demand World styrene demand is still dominated by its main derivative: polystyrene (58%), which is estimated to grow by 3-4% per year, while second largest demand comes from ABS resins which is expected to grow by 4%. Demand growth is strongly fueled by China, representing more than 50% of overall growth (driven by additional demand for Polystyrene and ABS production) through 2009-14E. Traditional Markets in North America and Western Europe, still represent about 40% of capacity, are expected to decline by -0.5% through 2009-14E.
Figure 121: Styrene consumption by end market
Others 17%
Copoly mers Latex es 8% Poly sty rene 58%
ABS/ SAN Resins 17%

Figure 122: Styrene consumption by region

North America 18% South America 3% Asia 54% West Europe 16% Central Europe AME 7% 3%
Figure 123: Styrene demand growth rate 2008-2014E CAGR

AME South America Asia WORLD Central Europe West Europe North America -2% 0% 2% 4% 6% 8% 10% 12% 14%
98
99
Supply/Key Players Styrene capacity is expected to increase by a CAGR of 2.1% through 2009-14E versus 2.5% through 2004-09. Most of the new capacities will be coming in NE Asia (particularly China) and the Middle East. No new capacities will be added in Western Europe while capacity will contract by 2% in North America through 2009-14E.
Figure 124: Styrene demand/ capacity (-000- Metric tons)
40000 30000 20000 10000 0 2004 2005 2006 2007 2008 2009 2010E 2011E 2012E 2013E 2014E Oper. Rate % 95 90 85 80 75 70 65
Total Capacity
Total Demand
Table 49: Top 10 Styrene producers (2009)

Thousand metric tons West Europe Polimeri Europa Lyondell/Bayer Repsol Quimica Total PC Ellba BASF SE BASF Antwerp Dow Benelux Shell Chem Neth Ineos
655 640 610 600 550 550 500 500 440 350 5,395
North America INEOS NOVA LyondellBasell Cosmar Americas Styrenics Dow Shell Canada Westlake PEMEX
1,702 1,259 1,150 953 467 450 261 150 6,392
Asia FCFC Samsung Total PC Asahi Kasei Chem. LG Chem Secco CNOOC & Shell PC Idemitsu Kosan Ellba Eastern Honam PC Nippon Steel
1,200 930 710 670 575 560 550 550 500 440 6,685
Rest of the World NKNK Innova Salavatnftgsz Synthos Kralupy Petrobras Energia EDN Sibur Khimpron Synthos Dwory CBE Angarsk Petchem
275 256 200 170 160 160 135 120 120 44 1,640
Table 50: Styrene world capacity overview

Thousands metric tons REGION North America South America West Europe Central Europe CIS & Baltic States Middle East Indian Subcontinent Northeast Asia Southeast Asia WORLD Growth rate
2008 6,384 536 6,342 290 689 1,504 ---11,687 2,080 29,512 -0.75%
2009 6,392 696 5,722 290 724 2,178 ---11,593 2,080 29,675 0.55%
2010E 5,925 696 5,722 290 724 3,095 ---13,286 1,980 31,718 6.88%
2011E 5,925 736 5,722 290 724 3,095 ---13,611 1,980 32,083 1.15%
2012E 5,925 776 5,722 290 724 3,095 ---14,313 1,980 32,825 2.31%
2013E 5,925 901 5,722 290 724 3,095 ---14,313 1,980 32,950 0.38%
2014E 5,925 1,026 5,722 290 724 3,095 ---14,313 1,980 33,075 0.38%
Pricing Styrene is a global, non-differentiated commodity product and thus the styrene market is highly price-competitive. Styrene market is oversupplied and operating rates are low and hence margins can be compressed.. Traditionally North America has been one of the major exporters. Longer term North East Asia will be the price driver as this region will be largest net exporter of styrene.
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Figure 125: Styrene price chart

100 90 80 70 60 50 40 30 20 10 0 Jan-1990 Jan-1993 Jan-1996 Jan-1999 Jan-2002 Jan-2005 Forecast (Contract) Forecast (Spot) Jan-2008 Jan-2011
Sty rene (Contract) Cents/ Pound Sty rene (Spot) Cents/ Pound
Acrylic Acid
Introduction Acrylic Acid is a clear, colourless liquid with a characteristic acrid odor. The most common grades are crude acrylic acid and glacial acrylic acid, while only the latter is sold commercially and in bigger volumes. Together with other monomers, acrylic acid is used for the production of polymers that are used in the manufacture of plastics (hygiene applications), coatings, adhesives, elastomers as well as floor polishes and paints.
Table 51: Acrylic acid at a glance
2-3% 70% Plastics, Coatings, Adhesives Western Europe, Japan, NE Asia (China) Dow, FPC, Nippon Shokubai, BASF The Top 10 producers amount to up to 81% of overall production Propylene, Oxygen New capacity in Middle East
Overview& Outlook World demand for acrylic acid is expected to grow at approximately 2% CAGR in the next few years (2009-2014E), mainly because of an increase in super-absorbent polymers (SAP). Key areas of growth are Asia Pacific mainly China, Latin America, Central and Eastern Europe. Global acrylic acid capacity was 5.3 million metric tons in 2009, according to CMAI. Consumption is expected to overtake production levels by 2014, driven by strong demand in developing countries. Production process The most common (and economically efficient) path of acrylic acid production is the oxidation of propylene to acrolein and then to acrylic acid, employing various catalysts. The catalyst is a critical component of the associated cost economics of acrylic acid manufacture.
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Demand The main end-use for acrylic acid is for super absorbent polymers, which are able to absorb and retain large amounts of water. These polymers are often used in hygiene applications (e.g. diapers). The market is estimated by SRI to grow 3-4%, driven by growth in adult incontinence products, and increasing demand for diapers in the emerging markets. The next important end use is in surface coatings (waterborne acrylic and styreneacrylic coatings), of which c.65% is in architectural coatings. SRI expects growth of c.2.8% per year through 2011. Wood coatings are a much smaller end use, but it is expected that consumption of acrylic esters will see above-average growth in this segment. Overall demand for wood coatings is rising, since more consumers in Western Europe are opting for wooden or parquet flooring instead of carpeting.
Figure 126: Acrylics - demand by end market
Others 11% Hy giene (SAP*) 35% Detergents 5% Plastic additiv es 5% Water treatment 6% Adhesiv es 9% Coatings 29%
Source: SRI, Arkema H109 presentation Source: SRI. * Acrylic acid & esters
Figure 127: Acrylics - demand by geography

S America 2% Europe 29% N America 36%
Asia 33%
Figure 128: Acrylic acid capacity growth by region 2008-2014E CAGR

AME Rest of the world Asia WORLD West Europe North America
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
Supply/Key Players The industry is highly consolidated, with the Top 10 producers amounting to more than 80% of global production. Consolidation in the industry is expected to be almost complete, following Dows acquisition of Rohm & Haas. BASF is the largest producer and remains the global cost leader due to its expanding productivity work on catalyst efficiency.
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For SAP, Evonik is one of the leaders after the acquisition of Dows superabsorbent business in 2006 and expanding existing plants. Currently it accounts for more than 65% of global capacity in SAP.
Figure 129: Top 10 Acrylic acid producers (-000- Metric tons)
1,200 1,000 800 600 400 200 ---BASF Dow StoHaas FPC Nippon Shokubai Capacity
25.0% 20.0% 15.0% 10.0% 5.0% 0.0%
Arkema
Jiangsu LG Chem Jurong
Global percentage share
Table 52: Acrylic acid world capacity overview (2009)

Thousand metric tons REGION North America West Europe Central Europe CIS & Baltic States Middle East Africa Northeast Asia Southeast Asia WORLD Growth rate
2008 1,369 1,216 55 29 ---80 1,904 280 4,933 4.05%
2009 1,369 1,360 55 29 ---80 2,114 280 5,287 7.18%
2010E 1,369 1,360 55 64 ---80 2,265 280 5,473 3.52%
2011E 1,369 1,360 55 64 ---80 2,265 280 5,473 0.00%
2012E 1,369 1,360 55 64 125 80 2,265 280 5,598 2.28%
2013E 1,369 1,360 55 64 250 80 2,265 280 5,723 2.23%
2014E 1,369 1,360 55 64 250 80 2,265 280 5,723 0.00%
Acrylonitrile
Introduction Acrylonitrile (or cyanoethylene or vinyl cyanide) is a pungent-smelling, colourless liquid that is used principally as a monomer in the manufacture of synthetic polymers, especially polyacrylonitrile which comprises acrylic fibres. It is also important for the manufacture of ABS and SAN resins used in the electronics (televisions, computers) and car industry.
Table 53: Acrylonitrile at a glance
Growth rate (CAGR 2009-2014E) Current operating rate (2007) Key end-markets Key demand regions (2007) Key players (2009) Market structure (2009) Key Inputs Threats
2% 70-80% Fibres, Synthetic rubber Asia, North America , Western Europe Ineos, Asahi, Secco, Solutia, BASF, Lanxess, DSM Top 10 producers amount to up to 66.5% of global capacity Propylene, Ammonia, Oxygen New capacity in Asia
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Overview & Outlook Global Acrylonitrile demand is estimated to grow at a CAGR of 2% through 200914E, according to CMAI. Robust Asian demand growth is expected to be partially offset by much slower growth in the mature European and North American markets. World production of acrylonitrile saw a shift from Western to Asian countries during the past 5 years, with the most growth coming from China. For the following years this trend is expected to continue, with global production growth in line with demand growth around 2% per year until 2014E. North America is still the largest acrylonitrile exporter while Asia is the major import area. However, the shift in global expansion should result in a shrinking export market for North America. Production process Acrylonitrile is produced via ammoxidation from propylene, ammonia, and air. The by-products of this process are acetonitrile and hydrogen cyanide. This propylene-based route was developed by Standard Oil of Ohio in the 1950s and is referred to as the Sohio process. The process replaced a higher-cost route that employed acetylene and hydrogen cyanide. New production processes based on propane ammoxidation are currently being developed by a number of producers who claim a 30% production cost advantage compared to the propylene route.
Figure 130: Manufacturing process for acrylonitrile
Propylene Hydrogen Cyanide Ammonia Acrylonitrile Ammonium Sulphate Oxygen
Demand The largest end use for acrylonitrile is acrylic fibres, which accounts for nearly half of total output. The second biggest demand (32%) comes from the production of Acrylonitrile-butadiene-styrene (ABS) and styrene-acrylonitrile (SAN) resins. The consumption of these thermoplastic resins is primarily in the manufacture of durable goods, including automobile components, appliances, business machines, and pipes and fittings. Adiponitrile (ADN) is used exclusively in the production of hexamethylenediamine (HMDA), which is a precursor for nylon 66 resins and fibres. The growth of acrylic fibres and ABS resin capacity in the Far East has been the key driver of acrylonitrile demand in the past few years.
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Figure 131: Acrylonitrile consumption by end market

Nitrile Rubber 4% Adiponitrille 6% Acry lamide 9% Acry lic Fibers 43% Other 4%
ABS/SAN Resins 34%

Figure 132: Acrylonitrile consumption by region

North America 10% Western Europe 16% Other Asia 23% Japan 11% Others 12%
Figure 133: Acrylonitrile capacity growth by region (%) 2008-2014E

Central Europe Asia WORLD West Europe North America South America
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
China 28%
Source: SRI and J.P. Morgan Source: CMAI and J.P. Morgan
Supply/Key players Globally, Ineos and Asahi are the leading producers of Acrylonitrile. The market is still very regional, with Ineos and Solutia in the U.S., BASF, DSM and Lanxess in Western Europe and Asahi and Sinopec in Asia. In next 5 years, new capacity equivalent to 10% of 2009 capacity is coming online. Significant part (50%) of new capacity will come from China. However, there will also be combined capacity closure of 0.2 million metric tons in US and Spain through 2009-14E.
Figure 134: Top 10 Acrylonitrile producers (-000- Metric tons)
Jilin Others
Taekw ang FPC Secco DSM Solutia Asahi

Source: DSM
Ineos
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Table 54: Acrylonitrile world capacity overview

Thousand metric tons REGION North America South America West Europe Central Europe Middle East Indian Subcontinent Northeast Asia WORLD Growth rate
2008 1,328 45 1,614 190 ---30 1,778 4,985 0.51%
2009 1,328 45 1,654 190 ---30 2,016 5,263 0.93%
2010E 1,385 45 1,674 190 40 30 2,098 5,462 -1.31%
2011E 1385 45 1,684 245 40 30 2,398 5,827 1.73%
2012E 1,385 45 1,694 300 40 30 2,498 5,992 1.70%
2013E 1,385 45 1,894 300 40 30 2,498 6,192 1.92%
2014E 1,385 45 1,894 300 40 30 2,498 6,192 1.72%
Pricing Costs of acrylonitrile production are highly dependent upon propylene and ammonia prices. Acrylonitrile prices have recently risen because of demand recovery and increase in feedstock prices. According to CMAI, significant acrylonitrile trade (more than 80%) is under long term contracts (based on pricing formulas) in the US. Acrylonitrile prices most often adjust monthly based on raw material pricepropylene, ammonia- along with conversion fee.
Figure 135: Acrylonitrile price chart
2,500 2,000 1,500 1,000 500 0 Jan1990 Jan1992 Jan1994 Jan1996 Jan1998 Jan2000 Jan2002 Jan2004 Jan2006 Forecast Jan2008 Jan2010
Acry lonitrile (Spot) $/MT

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Plastics (or Polymers)

Plastics are polymers that are combined with additives and other ingredients before being molded into a solid state using pressure and heat. Polymers are created through the linking of monomers (such as ethylene), into long chains, typically using heat, pressure, and a catalyst. The combination of performance and processing flexibility allows plastics to be used in numerous applications ranging from inexpensive disposable items to expensive components. Applications are in the automotive, construction, packaging, electronics and even the healthcare industry. Plastics can provide the following advantages for product designers and manufacturers:
Table 55: Advantages of plastics
Design flexibility High strength and toughness Corrosion resistance High reproducibility of parts Electrical insulation Thermal insulations
Source: Instron
Stiffness Low weight High manufacturing throughput Reduced manufacturing costs Almost any color of surface texture Waterproof
Some polymers are made from a single monomer, such as polyethylene and nylon 6, while others, such as styrene-butadiene latex, ABS, and nylon 66, are produced using two or more monomers.
Table 56: Types of polymerization
Polymerization Process Bulk/Gas phase polymerization Description This method is used with gaseous monomers such as ethylene, tetrafluoroethylene, and vinyl chloride. The monomer is introduced under pressure into a reaction vessel containing a polymerization initiator. Once polymerization begins, monomer molecules diffuse to the growing polymer chains. The resulting polymer is obtained as a granular solid. Solution polymerization A polymerization process in which the monomers and the polymerization initiators are dissolved in a nonmonomeric liquid solvent at the beginning of the polymerization reaction. The liquid is usually also a solvent for the resulting polymer or copolymer. The conducting of polymerization reactions in a solvent is an effective way to disperse heat; in addition, solutions are much easier to stir than bulk polymerizations. Solvents must be carefully chosen, however, so that they do not undergo chain-transfer reactions with the polymer. Slurry polymerization Suspension polymerization In this process polymer is produced as a slurry or paste from a solvent based systems A polymerization process in which the monomer, or mixture of monomers, is dispersed by mechanical agitation in a liquid phase, usually water, in which the monomer droplets are polymerized while they are dispersed by continuous agitation. Used primarily for PVC polymerization. Emulsion Polymerization A type of radical polymerization that usually starts with an emulsion incorporating water, monomer, and surfactant. The most common type of emulsion polymerization is an oil-in-water emulsion, in which droplets of monomer (the oil) are emulsified (with surfactants) in a continuous phase of water. Water-soluble polymers, such as certain polyvinyl alcohols or hydroxyethyl celluloses, can also be used to act as emulsifiers/stabilizers.
The two types of plastics are thermoplastics, which can be heated and resoftened into their original state, and thermosets, which cannot be resoftened. Thermosets are produced in far smaller volumes than thermoplastics.
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Table 57: Common types of plastics

Thermoplastics Polyvinyl chloride Polystyrene PET resins HDPE/ LLDPE/ LDPE
Source: J.P. Morgan
Thermo sets Phenolic resins Epoxy MDI TDI
Thermoplastics accounted for approximately 90% of total plastic production in recent years. The five-largest volume thermoplastics are polyethylene (PE), polyvinyl chloride (PVC), polypropylene (PP), polystyrene, and polyester (PET).
Figure 136: Demand by major polymers
PS PET 8% LDPE 10% 5% ABS PC 4% 2% PP 25%
LLDPE 11% HDPE 17%

Source: CMAI
PVC 18%
Polyethylene
Introduction Polyethylene is the largest volume plastic. About two-thirds of all ethylene produced is polymerized to polyethylene. The three principal types of polyethylene are high-, low-, and linear low-density polyethylene (HDPE/LDPE/LLDPE). Their manufacturing process differs in usage of different combinations of pressure, temperature or additives. The majority of polyethylene is used for packaging in consumer and institutional products (mainly plastic bags).
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Figure 137: Polyethylene consumption by end market

Other 16%
Figure 138: Polyethylene consumption by product type

LLDPE 28%
Blow Molding 12% Pipe & Profile 7% Injection Molding 13%

Source: CMAI and J.P. Morgan Source: CMAI and J.P. Morgan
Film & Sheet 52%
HDPE 45%
LDPE 27%
Figure 139: World consumption of polyethylene by region (-000- Metric tons)

25,000 20,000 15,000 10,000 5,000 ---Nort h America South America Western Europe Cent ral and Eastern Europe M iddle East China Japan Rest of Asia Ot her
2009
2014E
High and linear low density polyethylene High-density polyethylene. HDPE is a rigid plastic made at low temperature and low pressure. After PVC and polypropylene (PP), it is the third largest commodity plastic material. It is used as a resin for blow-moulding bottles and containers (32%), or can also be manufactured into sheets or films for packaging and bags (26%). It is also used for injection-molding items such as crates, tubs, fuel tanks, and containers (22%). Linear low-density polyethylene (LLDPE). LLDPE is actually a copolymer, as other monomers, such as butene or octane, are added to it. The main use (75%) is for film applications for food and non-food packaging. Another key use is for molding (15%). HDPE and LLDPE are often produced in the same plant and can be replaced by each other (swing facility).
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Table 58: HDPE and LLDPE at a glance

Growth rate (CAGR to 2014E) Current operating rate Key end-markets Key players Market structure Key Inputs Threats
HDPE 6% 80-85% Containers, bottles, fuel tanks, plastic bags, waterpipes, fuel tanks Ineos, Chevron Philips, ExxonMobil, Equistar Top 10 producers amount to up to 33% of world capacity Ethylene New Capacity in the Middle East and Asia and reduced European and US exports
LLDPE 6-7% 85-90% Plastic bags and sheets, toys, flexible tubes Exxon Mobil, Dow, Nova Chemical, KEMYA Top 10 producers amount to up to 43.5% of world capacity Ethylene Substantial new Middle Eastern capacity
Overview & Outlook The global HDPE industry saw extensive restructuring and consolidation in recent years. While low feedstock costs are still the most important factor in decreasing costs per unit, production scale has diminished as a significant cost advantage due to the need of improving profitability. During the next five years, world consumption of HDPE is estimated to grow at over 6% per year. Regions expect to exhibit high growth rates include the Middle East (14%), Indian subcontinent (11%, though on low base) and NE Asia (particularly China, 5%) through 2009-14. Capacity growth is estimated to be CAGR of 4.2% through 2009-14. For LLDPE, annual growth will be CAGR of 6-7% until 2014 also with strong demand from Middle East (13%), Indian subcontinent (13%) and Southeast Asia (11%) through 2009-14. Capacity growth is estimated to be CAGR of 4.3% through 2009-14. Strong capacity additions in the Middle East and China in the last three years -with higher growth rates than demand - have caused existing producers outside the lowfeedstock-cost region to fear a major downturn. These regions continue to show huge expansions in the petrochemical industry involving increasing capacity for ethylene. Production process HDPE and LLDPE are produced by the polymerization of ethylene via a variety of processes and catalysts. A number of companies use different technologies and manufacturing processes according to product capabilities, plant flexibility and production economics. Major advances in polymerization technology have been a result primarily of catalyst development. Because ethylene is the largest component of production costs, producers tend to have either a captive or guaranteed supply of ethylene feedstock. LLDPE is manufactured using lower temperature and pressure than either HDPE or LDPE. Thus, the manufacturing process is more cost-effective.
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Figure 140: HDPE demand by region
Demand
North America 22%
Figure 141: HDPE demand growth by region (%), 2008-2014E

AM E Asia
Asia 37% South America 5% West Europe AME 15%

WORLD South America Central Europe West Europe North America
Central Europe 6%
14%
-1%
1%
3%
5%
7%
9%
11%
13%
15%
Figure 142: LLDPE demand by region

North America 28% Asia 37%
Figure 143: LLDPE demand growth by region (%), 2008-2014E

AME Asia Central Europe WORLD
South America 6% West Europe Central Europe 13% 2%
South America West Europe North America
AME 14%
-2%
0%
2%
4%
6%
8%
10%
12%
Supply/Key players Due to the need for cost reductions and lower unit costs the average size of worldscale polyethylene production units has increased substantially over the years. From 50 thousand metric tons in the 1970s, reactor sizes have increased to 350 thousand metric tons per year for conventional HDPE units and even 450 thousand metric tons per year for Ziegler and chromium-based swing plants. The short term outlook for HDPE and LLDPE indicates capacity growth will outpace demand growth. This will result in lower utilization rates. However, for the long term it is expected that units in higher cost areas such as Japan and Western Europe will be forced to shut down and new volumes from the Middle East will refocus trade flows in Western Europe and Asia. China is adding new HDPE capacities of 3.8 million metric tons or 32% of new capacity additions through 2009-14. Saudi Arabia will add HDPE capacities of 2.9 million metric tons or 25% of new HDPE capacities coming online through 200914E. In addition, China is adding 3.3 million metric tons of new LLDPE capacities equivalent to 37% of new capacities coming online through 2009-14E. Saudi Arabia will add 1.5million metric tons of new LLDPE capacities.
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Figure 144: HDPE demand/capacity (-000- Metric tons)

Figure 145: LLDPE demand/capacity (-000- Metric tons)

35000 30000 25000 20000 15000 10000 5000 0 2004 2005 2006 2007 2008 2009 2010E 2011E 2012E 2013E 2014E Total Demand Operating Rate, % 90 85 80 75 70 65
Total Capacity
Total Capacity
Table 59: Top 10 HDPE producers (2009)

Thousand metric tons Western Europe Ineos LyondellBasell Total PC SABIC Europe Borealis Repsol Quimica Polimeri Europa Dow Belgium Syndial Dow Iberica 1,130 1,090 905 720 705 380 230 165 110 40 5,475 North America Chevron Phillips ExxonMobil Equistar Ineos FPC USA Dow Dow Canada Nova Chemical Total PC Imperial Oil 1,578 1,376 1,364 767 766 730 700 515 440 395 8,631 Asia TPE Japan Polyethylene FPC LG Chem Reliance Industries Honam PC Haldia KPIC Chevron Phillips Sing. Daelim 600 569 535 520 508 460 450 450 400 380 4,872 Middle East YANPET Q-Chem Borouge Jam PC SEPC Petrokemya/JUPC Equate KEMYA Marun PC Amir Kabir PC 1,300 469 455 425 400 400 375 300 300 290 4,714 Rest of the World Braskem Quattor TVK Kazanorgsintez Unipetrol RPA BasellOrlen Polyolefins Stavrolen PBB Polisur Polinter Safripol 825 500 410 400 320 320 300 270 270 180 3,795
Table 60: HDPE world capacity overview

2008 9,345 1,755 5,400 1,220 920 4,561 638 1,245 7,242 2,985 35,311 1.25%
2009 9,296 1,888 5,500 1,220 1,125 5,769 638 1,313 7,638 3,023 37,410 5.94%
2010 9,259 1,865 5,449 1,220 1,155 7,258 638 1,741 9,195 3,589 41,369 10.58%
2011 9,259 1,865 5,395 1,220 1,155 8,629 638 1,870 9,317 3,985 43,333 4.75%
2012 9,259 1,865 5,395 1,220 1,155 9,479 638 1,870 9,955 4,035 44,871 3.55%
2013 9,259 1,865 5,395 1,220 1,155 9,479 638 2,250 11,109 4,035 46,405 3.42%
2014 9,259 1,865 5,395 1,220 1,155 9,749 638 2,520 11,402 4,285 47,488 2.33%
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Table 61: Top 10 LLDPE producers by region (2009)

Thousand metric tons West Europe Borealis Dow Benelux Dow Iberica Polimeri Europa Ineos ExxonMobil Dow SABIC Europe Dex Plastomer Repsol Quimica 680 680 535 530 500 425 210 175 120 40 3,895 North America Dow ExxonMobil Nova Chemical Dow Canada Equistar Westlake Chevron Phillips FPC USA PEMEX Imperial Oil 1,630 1,540 1,000 745 512 415 293 284 238 100 6,757 Asia ExxonMobil Reliance Industries Hanwha Chemical Japan Polyethylene Siam PE Secco Yangzi PC Jilin Chemical FPC Honam PC 555 420 396 373 350 338 300 300 264 240 3,536 Middle East KEMYA SHARQ Petrokemya/JUPC Equate Petro-Rabigh Yansab Borouge Amir Kabir PC Jam PC Arak PC 900 830 400 375 283 188 165 150 125 75 3,491 Rest of the World Braskem PBB Polisur Quattor Tomskneftekhim Kazanorgsintez Sintezkauchuk SASOL Polinter Polimir ELEME PC 670 290 270 200 197 157 150 140 140 135 2,349
Table 62: LLDPE world capacity overview

Thousand metric tons REGION North America South America West Europe CIS & Baltic States Middle East Africa Indian Subcontinent Northeast Asia Southeast Asia WORLD Growth rate
2008 6,801 1,360 3,895 150 2,830 477 645 4,671 1,775 22,604 1.86%
2009 6,832 1,370 3,895 265 3,551 477 645 5,037 1,833 23,905 5.76%
2010 6,807 1,370 3,861 265 5,170 477 855 6,308 2,425 27,538 15.20%
2011 6,807 1,370 3,850 265 5,260 477 935 6,401 3,425 28,790 4.55%
2012 6,807 1,370 3,850 265 5,260 477 935 6,701 3,475 29,140 1.22%
2013 6,807 1,370 3,850 265 5,260 477 1,315 7,633 3,475 30,452 4.50%
2014 6,807 1,370 3,850 265 5,530 477 1,585 7,926 3,725 31,535 3.56%
Pricing The increasing cost of ethylene, driven by a sustained high crude oil price and the inability of converters to pass on the full extent of such high price increase will lead to continuing margin decrease. Therefore, upstream integration is becoming an essential component of the economic success of PE operations outside the low-feedstock-cost areas.
Figure 146: HDPE price chart
2,000 1,500 1,000 500 0 Jan1990 Jan1992 Jan1994 Jan1996 Jan1998 Jan2000 Jan2002 Jan2004 Jan2006 Jan2008 Jan2010
0 Jan1990 Jan1992 Jan1994 Jan1996 Jan1998 t Jan2000 Jan2002 Jan2004 Jan2006 Jan2008 Jan2010
Figure 147: LLDPE price chart

2,000 1,500 1,000 500
HDPE (Blow Mol.) / MT HDPE (Inj Mol.) / MT
Forecast (Blow Mol.) Forecast (Injection Mol.)
LLDPE, Butene film, / MT LLDPE, Octene fil, / MT
Forecast (LLDPE, Butene film) Forecast (LLDPE, Octene film)
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Low density polyethylene Low-density polyethylene (LDPE). LDPE is made at high temperature and pressure and is more flexible than HDPE. Its major use is for sheets and films for packaging and non packaging use (75%), extrusion coating (9%) and molding (9%). LDPE was the first grade of polyethylene, produced in 1933 by Imperial Chemical Industries (ICI).
Table 63: Low density polyethylene at a glance
Growth rate (CAGR to 2014) Current operating rate Key end-markets Key players Market structure Key Inputs Threats
3.7% 80-85% Containers, bottles, tubing, plastic bags and sheets, computer components ExxonMobil, LyndollBasell, Dow,Polimeri Europa, Westlake Top 10 producers amount to up to 35% global capacity Ethylene Continuing replacement from LLDPE, Capacity additions in the Middle East
Overview & Outlook In recent years LDPE was continuously substituted by LLDPE in many applications due to its bigger range of properties and a cheaper manufacturing process. LDPE demand grew by only 0.5% per year from 2004-2009. In the same period, capacity grew by only 1.8%. Demand (+3.7%) is expected to grow faster than capacity (+2.2%) through 2009-14E. We believe the excessive capacity additions in China and the Middle East will force producers with the uncompetitive cost structures to shut down the least efficient operations. Therefore, probability of further shutdowns in Western Europe and Japan remains high, in our view. Demand The largest market for LDPE is film applications accounting for 55% of world consumption. This includes packaging applications in the food industry and non packaging applications such as heavy-duty sacks, merchandise and garment bags.
Figure 148: LDPE demand by region
North America 17% South America 6%
Figure 149: LDPE demand growth by region (%), 2008-2014E

AME Asia WORLD South America West Europe
Asia 38%
West Europe 19% AME 12% Central Europe 8%

Central Europe North America 0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%
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Supply/ Key players Most of the new capacities are coming in the Middle East. Iran is adding 0.9 million metric tons of capacity through 2009-14E or equivalent to 4% of 2009 global capacity. Saudi Arabia is adding 0.75 million metric tons of new capacity through 2009-14E. While 0.85 million metric tons of capacity will be rationalized mainly in US and Western Europe through 2009-14E.
Figure 150: LDPE demand/capacity (-000- Metric tons)
25000 20000 15000 10000 5000 0 2004 2005 2006 2007 2008 2009 2010E 2011E 2012E 2013E 2014E Operating Rate, % 95 90 85 80 75
Total Capacity
Total Demand
Table 64: Top 10 LDPE producers by region (2009)

Thousand metric tons West Europe LyondellBasell Polimeri Europa ExxonMobil SABIC Europe Ineos Repsol Quimica Borealis Total PC Dow Benelux Dow 990 837 690 585 510 410 340 305 265 160 5,092 Noth America Westlake Dow ExxonMobil Equistar DuPont PEMEX Chevron Phillips AT Plastics Nova Chemical Flint Hills Resources 692 679 666 649 347 285 281 146 125 94 3,964 Asia Hanwha Chemical BASF/Yangzi PC Maoming PC Japan Polyethylene LG Chem TPC Daqing PC Petlin CNOOC & Shell PC Yanshan PC 420 400 370 357 335 270 265 255 250 243 3,165 Middle East QAPCO Petkim Arya Sasol PC SEPC KEMYA Laleh PC Carmel Olefins Bandar Imam PC Amir Kabir PC Ministry of Ind 370 335 300 283 215 175 160 130 75 60 2,103 Rest of the World Braskem Quattor SASOL Tomskneftekhim Kazanorgsintez Slovnaft Sintezkauchuk Basell Orlen Polyolefins Polimir Ufaorgsintez 440 270 220 200 197 170 157 150 140 90 2,034
Table 65: LDPE world capacity overview

2008 4,217 1,065 5,770 849 935 1,295 285 200 4,985 1,100 20,701 0.47%
2009 3,964 1,065 5,632 806 935 2,103 285 200 5,000 1,100 21,090 1.88%
2010E 3,845 1,065 5,796 814 935 2,570 285 200 5,056 1,375 21,941 4.04%
2011E 3,872 1,065 5,787 814 935 2,570 285 200 5,075 1,400 22,003 0.28%
2012E 3,899 1,065 5,787 814 935 2,820 285 200 5,075 1,400 22,280 1.26%
2013E 3,899 1,065 5,787 814 1,335 3,170 285 200 5,075 1,400 23,030 3.37%
2014E 3,899 1,065 5,787 814 1,335 3,345 285 200 5,075 1,700 23,505 2.06%
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Pricing The most important raw material for LDPE is ethylene. Prices of LDPE move with prices of ethylene feedstock and demand/supply in different regions. (Please see the section on 'Ethylene' for further information on the price drivers for ethylene).
Figure 151: LDPE price chart
2,000 1,500 1,000 500 0 Jan1990 Jan1992 Jan1994 Jan1996 Jan1998 Jan2000 Jan2002 Jan2004 Jan2006 Jan2008 Forecast Jan2010
Poly ethy lene Low Density (Contract) / MT

Polypropylene
Introduction Polypropylene (PP) is the second largest plastic resin globally by volume. It has a wide range of applications depending on the grade, including packaging, fibres, and automotive parts. Film grade PP is used for packaging of confectionary goods, cigarettes, and electrical capacitors, thermoformed food containers, which can be either blow or injection moulded. Copolymer PP is used primarily in car and truck bumper manufacturing but also has medical applications, while PP fibres are used in carpets, clothing, and nonwoven textiles.
Table 66: Polypropylene at a glance
6.2% 80-85% Packaging products, Automotive and Electronic industry Western Europe (16%), Asia (47%), N America (15%), LyondellBasell, Reliance industries, Total PC, Exxon Mobil Top 10 producers amout to up to 35% globally Propylene New production capacity in the China and Middle East
Overview & Outlook World consumption of polypropylene is expected by CMAI to reach 60 million metric tons in 2014E representing an average annual growth of 6%, whereas capacity growth is estimated to be CAGR of 4.5% through 2009-14E.
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Unlike other commodity thermoplastics that have seen decreasing demand relative to the economic growth, polypropylene consumption should continue to grow at a healthy rate of 6% through 2009-14. Regions like the Middle East (15%) and Indian subcontinent (13%) should grow strongly where it profits from investments in catalyst technology and continuous substitution of other polymers. Global capacity is expected to grow by 4.5% per year mainly driven by Middle East and Asia where capacity is expected to grow by 10-15% pa until 2014. There will be a possible reduction in operating rates as the new capacity comes online resulting in lower margins for polypropylene producers. Production process Gas phase production offers cost advantages over solution and slurry polymerization methods (see polymer introduction) and is the most applied production method. However, 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), its availability is a key driver of the profitability of the PP industry. Demand The biggest demand for polypropylene comes from injection moulding. The major market is the automotive and transportation sector due to the very low density of polypropylene (0.89-0.91 gram per cubic centimeter) which is important for the weight-conscious automotive market. Other uses for injection molding are container and a wide range of household and miscellaneous products. Polypropylene film provides excellent optical clarity and low moisture vapor transmission. It is therefore mainly used in food packaging, tape backing and labels. In the fibre arena, PP is used in carpet backing and carpet face yarn and the nonwovens market.
Figure 152: Polypropylene consumption by end market
Other 8% Raffia 17% Film & Sheet 23%
Fiber 14% Pipe & Ex trusion 3%

Injection Molding 35%
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Figure 153: Polypropylene consumption by region

North America 15% South America 5% Asia 47% West Europe 16% Central Europe AME 12%
Figure 154: Polypropylene demand growth by region (%) 2008-2014E (CAGR)

AME South America Asia WORLD Central Europe North America West Europe
5%
-2%
0%
2%
4%
6%
8%
10%
12%
14%
16%
Supply/Key players Polypropylene capacity is widely spread: SRI estimates currently over 12 major producers have capacities exceeding one million metric tons. The biggest new capacity is thought to be coming from Saudi Arabia with 3.9 million metric tons or equivalent to 7% of 2009 global capacity through 2009-14E. India is number two in adding new capacity, adding 2.9 million metric tons of new capacity or equivalent to 5% of 2009 global capacity through 2009-14E. Other major capacity additions are in the UAE (1.3 mmt), Russia (0.8mmt) and Thailand (0.75 mmt).
Figure 155: Polypropylene demand/capacity (-000- Metric tons)
75000 65000 55000 45000 35000 25000 15000 5000 -5000 2004 2005 2006 2007 2008 2009 2010E 2011E 2012E 2013E 2014E Operating Rate, % 80 75 70 95 90 85
Total Capacity
Total Demand
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Table 67: Top 10 Polypropylene producers by region (2009)

Thousand metric tons West Europe LyondellBasell Borealis SABIC Europe Total PC Ineos Dow Repsol Quimica ExxonMobil Appryl Borealis Poly 2,630 1,700 1,130 1,100 790 560 510 420 300 245 9,385 North America LyondellBasell ExxonMobil Total PC FPC USA Ineos Sunoco Indelpro Flint Hills Resources Pinnacle Polymers Dow 1,417 1,230 1,180 822 810 688 640 450 430 420 8,087 Asia Reliance Industries Prime Polymer Co. Japan Polypropylene Honam PC FPC Poly Mirae TPC Maoming PC Samsung Total PC FCFC 2,525 1,181 1,107 950 900 700 625 610 570 510 9,678 Middle East Ibn Zahr Saudi Polyolefins Co. Carmel Olefins NATPET Petro-Rabigh Oman Polypropylene Marun PC Advanced PP Co. Al-Waha YANPET 1,220 630 410 400 365 340 300 300 263 260 4,487 Rest of the World Braskem Quattor SASOL Ecopetrol Basell Orlen Polyolef TVK Unipetrol RPA Slovnaft Oriental PC NKNK 1,180 875 520 445 400 285 275 255 200 180 4,615
Table 68: Polypropylene world capacity overview

2008 9,397 2,728 10,176 1,395 730 3,677 982 2,120 16,123 3,430 50,758 4.38%
2009 9,089 3,040 9,995 1,420 805 5,771 1,007 2,795 17,114 3,860 54,896 8.15%
2010E 9,055 3,085 9,603 1,420 820 6,884 1,207 3,537 20,776 4,473 60,860 10.86%
2011E 9,085 3,095 9,415 1,420 1,000 8,159 1,407 3,920 21,808 5,610 64,919 6.67%
2012E 9,085 3,095 9,415 1,420 1,292 8,734 1,407 4,140 22,765 5,610 66,963 3.15%
2013E 9,085 3,320 9,415 1,420 1,500 8,734 1,407 4,810 23,972 5,610 69,273 3.45%
2014E 9,085 3,545 9,415 1,420 1,500 9,184 1,407 4,980 24,455 6,210 71,201 2.78%
Pricing The polypropylene market is expected to see significant oversupply by 2010 (by SRI). This will cause Western and North American producers to close some of their less efficient production plants due to negative cash margins. There will be capacity closures of over 1.5 million metric tons (mainly in US and Western Europe) which will offset some of the new capacity additions and improve the oversupply situation.
Figure 156: Polypropylene price chart
1,500
1,000
500
0 Jan1990 Jan1992 Jan1994 Jan1996 Jan1998 Jan2000 Jan2002 Jan2004 Jan2006 Jan2008 Jan2010
PP (Copoly mer) / MT PP (Fibre Grade) / MT

Forecast (Copoly mer) Forecast (Fibre Grade)
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Polyvinyl Chloride (PVC)

Introduction PVC is the most widely used plastic globally due to its diverse properties and production cost advantages compared to other plastics. PVCs principal use is in the building and construction industry, where it is employed to manufacture pipes, siding, gutters, flooring, windows molding, and wire coating. It is also used in food packaging.
Table 69: PVC at a glance
6.6% 70% Building and Construction, Packaging Asia (51%), Western Europe (14%), North America (18%) Shintech, FPC, Oxy, Ineos, Solvay Top 10 producers amount to up to 31% of global capacity Vinyl chloride monomer (through Ethylene and Chloride) Overcapacity
Overview & Outlook The close ties of PVC to the construction industry means that demand for PVC can be heavily cyclical. The market for the product is fairly mature. According to CMAI, PVC demand grew by 0.8% CAGR from 2004-2009. In the same period, capacity grew by a much higher pace of 6.6%. PVC demand is estimated to grow by 6.6% CAGR until 2014E whereas capacity growth is estimated to grow only at 2.8% CAGR helping to reduce oversupply according to CMAI. Consumption growth rates are highest in Middle East (10.3%) and Indian subcontinent (9.5%) though on a lower base. NE Asia, particularly China, is expected to grow by 7%. It is unlikely that further capacity additions will take place in the developed economies of North America and Western Europe due to high feedstock, energy costs and low profitability with further restructuring being likely. New capacity is expected to come in Asia and the Middle East. The PVC industry has been under close scrutiny in recent years because of environmental concerns. The manufacturing of both chlorine and Vinyl chloride monomer (VCM) produces small quantities of toxic dioxins, which are believed to have a detrimental effect on human fertility and may be carcinogenic. Western Europe governments are planning to restrict PVC usage for some markets due to these concerns. Production Process PVC is produced by the polymerization of vinyl chloride monomer using a slurrybased process. Therefore, the variable production cost of PVC manufacture depends primarily on the cost of ethylene and chlorine with an estimated 70-79% of total plant gate cost.
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Figure 157: Production of PVC

Ethylene Vinyl chloride monomer Chlorine
Polyvinyl chloride
Historically, chlor-alkali prices have been generally lower in the United States than elsewhere in the world because of the favorable cost for electricity. However, the United States has lost these advantages in recent years, when natural gas prices rose dramatically. Demand PVC is the most versatile of all thermoplastics. The general performance characteristic of PVC plastics includes mechanical toughness, good resistance to water and many chemicals (including strong mineral acids) and it also has electrical insulating properties.
Figure 158: PVC demand by end uses
Transportation 3% Electrical/ Electronics 5% Consumer Goods 7% Packaging 7% Home Furnishings 2% Other 3%
Construction 73%
Source: SRI and J.P. Morgan.
Building/ construction is the key sector which generates almost 60% of PVC demand. The consumption is for pipe, fittings, windows, fencing and other applications. PVC has increasingly been used as a replacement for the traditional construction materials such as wood and metals. Because PVC is used as a substitute product; its growth has been above that experienced by the overall construction industry in recent years.
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Figure 159: PVC consumption by region

North America 18%
Figure 160: PVC demand growth by region (%) 2008-2014E (CAGR)

A sia AM E
South America 5% Asia 51% West Europe 14%
WORLD No rth A merica So uth A merica West Euro pe Central Euro pe
Central Europe AME 7% 5%
0%
1%
2%
3%
4%
5%
6%
7%
8%
Source:CMAI and J.P. Morgan
Source:CMAI and J.P. Morgan
Supply/Key players As for many petrochemical products, competition is fierce in the PVC industry. Feedstock integration is critical to control production costs and companies have adopted various strategies like consolidation, streamlining operations and forward integration to remain competitive. Typical world-scale plants are now in the 250 thousand metric ton-per-year capacity range. Most of the new capacity additions (7.6mmt) through 2009-14E are coming in China or equivalent to 17% of 2009 global capacity. These new capacity additions in China are equal to 78% of new capacity addition through 2009-14E.
Figure 161: PVC demand/capacity (-000- Metric tons)
60000 50000 40000 30000 20000 10000 0 2004 2005 2006 2007 2008 2009 2010E 2011E 2012E 2013E 2014E Operating Rate, % 100 80 60 40 20 0
Total Capacity
Total Demand
Table 70: Top 10 PVC producers by region (2009)

Thousand metric tons West Europe INEOS Chlor Vinyls Solvin Vinnolit Arkema LVM Shin-Etsu Vestolit Vinilis Vinylberre CIRES
1,606 1,120 792 685 500 450 432 315 285 210 6,395
North America SHINTECH Oxy Vinyls LP FPC USA Georgia Gulf Westlake Mexichem Policyd Certain Teed PolyOne Dow
2,340 1,649 1,210 1,204 692 306 235 218 116 40 8,010
Asia FPC LG Chem Tianjin Dagu Reliance Industries Thai Plastic Qilu PC Taiyo Vinyl Shin-Etsu Yibin Tianyuan Hanwha Chemical
1,753 880 800 650 607 600 560 550 550 545 7,495
Middle East Ibn Hayyan Bandar Imam PC Petkim Abadan PC
406 175 150 60
Rest of the World Braskem Solvay Indupa Oltchim Mexichem Borsodchem Anwil SA Sayanskkhimplast SASOL Polymers Pequiven Kaustik Sterlit
791
544 541 450 416 400 340 250 190 185 160 3,476
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Table 71: PVC world capacity overview

2008 8,338 1,636 6,896 1,445 629 791 425 1,245 19,569 2,324 43,298 6.72%
2009 8,042 1,686 6,974 1,483 629 791 425 1,345 20,440 2,339 44,154 1.98%
2010E 8,118 1,656 6,889 1,483 653 1,091 525 1,495 22,965 2,409 47,284 7.09%
2011E 8,592 1,656 6,819 1,603 953 1,290 625 1,495 25,381 2,449 50,863 7.57%
2012E 8,592 1,756 6,819 1,603 953 1,290 625 1,495 26,726 2,449 52,308 2.84%
2013E 8,592 1,851 6,819 1,603 1,283 1,515 625 1,495 27,051 2,449 53,283 1.86%
2014E 8,592 1,886 6,819 1,603 1,283 1,740 625 1,495 27,051 2,449 53,543 0.49%
Figure 162: PVC Global market shares (2008A)

Shin-Etsu Fo rmo sa 8% 7% Occidental 4% INEOS So lvay 4% 3% Geo rgia Gulf 3% LG 2% Westlake 2% Vinno lit A rkema 2% 2%
Figure 163: PVC - European market share (2008A)

CIRES Aiscondel Other Vestolit 3% 1% 3% 6% Shin-Etsu 7% LVM 7% Vinnolit 10% Arkema 13%
Source: SRI.
INEOS 30%
Other 63%
Solv ay 20%
Source: SRI.
Pricing PVC prices are governed primarily by input costs and demand/ supply balance but it is strongly influenced by the construction and housing industry.
Figure 164: PVC price chart
1,500 1,000 500 0 Jan1990 Jan1992 Jan1994 Jan1996 Jan1998 Jan2000 Jan2002 Jan2004 Jan2006 Jan2008 Jan2010
PVC Suspension (Contract Mkt) / MT

Forecast (Contract)
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Polystyrene
Introduction Polystyrene is primarily used in the packaging industry for producing plastic model assembly kits, license plate frames, plastic cutlery, CD cases, and many other objects where a fairly rigid, economical plastic is desired. It is manufactured by the polymerization of styrene monomer and occurs in several grades with general purpose (GP), high impact (HPIS) and expandable (EPS) being the most important ones.
Table 72: Polystyrene at a glance
1.5-2.0% 70% Packaging for the food, construction, IT and home application industries Asia (48%), North America (19%) and Western Europe (17%) BASF, Total PC, Nova, Dow Top 10 producers amount to up to 47% of global capacity Styrene monomer (through Ethane and Benzene) Increasing feedstock costs, substitution
Overview & Outlook As packaging (one time use) accounts for 39% of demand for polystyrene, this area is relatively resilient against recession. However, its role in this industry is being eroded by the increasing use of polypropylene and ABS resins. Lower consumption growth for polystyrene in the developed world (Western Europe: -1%, N America: +1%) is offset by high growth in the Middle East (+11%) and S America (+3.2%) through 2009-14E. Global consumption is expected to grow only by 1.5-1.2% until 2014E. After increasing consumption and strong global capacity additions in recent years, oversupply is now an issue for the polystyrene market. Since margins are low for most producers, consolidation has become a key feature in the industry of the industry to reach future scale effects. Some of the recent mergers, acquisitions and divestitures in developed markets for styrenics are Ineos/Nova and Dow/CPChem. Part of BASF styrenics is up for sale since early this year. Consolidation has yet to start in Asia. Polystyrene has recently been criticised for environmental concerns and its health effects caused by consumption when it migrates from food containers (primarily from a leaching caused by heat exchange) into food. Production Process Polystyrene is produced by the polymerization of styrene monomer (produced by reacting ethylene and benzene). The solid plastic is then expanded into foam through the use of heat, usually steam. HIPS is produced by dissolving polybutadiene in styrene monomer before bulk polymerization while EPS is produced from a mixture of about 90-95% polystyrene and 5-10% gaseous blowing agent, most commonly pentane or carbon dioxide.
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Figure 165: Production of Polystyrene

Ethane Ethylbenzene Benzene
Styrene
Polystyrene
Demand General purpose polystyrene is a glassy and crystal clear plastic while high-impact polystyrene is a stronger and more durable plastic. Both forms are used in a variety of products, mainly for packaging- one time use (39%) and electronics/ appliances (30%).
Figure 166: Polystyrene consumption by end market
Others 31%
Packaging - one time use 39%
Electronics / Appliances 30%

Figure 167: Polystyrene consumption by region

North America 19%
Figure 168: Polystyrene demand growth by region (%) 2008-2014E

AME South America
South America 5% Asia 48%
Asia WORLD Central Europe
West Europe 17% Central Europe 5%
North America West Europe
AME 6%
-4%
-2%
0%
2%
4%
6%
8%
10%
Supply/Key players World polystyrene capacities estimated to increase at an average annual rate of only 0.4% through 2009 to 2014E. New capacity additions will be 0.22 million metric tons through 2009-14E. Most of the new capacities are coming in China (0.8mmt, 6% of 2009 global capacity) and the Middle East (0.4mmt). These new capacity additions will be offset by capacity closures of 1.07mmt mainly in developed markets, through 2009-14E.
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Figure 169: Polystyrene demand/capacity (-000- Metric tons)

15000 10000 5000 0 2004 2005 2006 2007 2008 2009 2010E 2011E 2012E 2013E 2014E Oper. Rate %
78 76 74 72 70 68 66
Total Capacity
Total Demand
Table 73: Top 10 Polystyrene producers by region (2009)

Thousand metric tons West Europe INEOS NOVA BASF Antwerp Total PC Polimeri Europa Dow Belgium BASF SE Dow Total PC Iberica Dow Iberica Dow Hellas 520 440 400 360 265 177 130 80 50 30 2,452
North America Total PC Americas Styrenics INEOS NOVA BASF SE Resirene Dart Container SABIC Plastics Nova American PS Productos Sesi Ebro-Quimex
749 729 705 160 150 93 45 45 30 4 4 2,714
Asia FCFC PS Japan Zhenjiang ChiMei Secco Chi Mei Supreme PC Dow Pacific Toyo Styrene BASF Korea Denki KK BASF/Yangzi PC
580 445 360 300 300 300 285 278 235 200 195 3,478
Middle East Petrokemya Tabriz PC Baser Petrokimya
165 105 50
Rest of the World Americas Styrenics BASF SE NKNK Innova Videolar SAT Operating Aktau Polystyrol Synthos Kralupy Dunastyr Petrobras Energia Estizulia
320
260 190 170 150 120 110 96 78 67 65 63 1,369
Table 74: Polystyrene capacity overview

2008 2,985 891 2,562 255 481 366 5 476 5,527 1,006 14,554 -0.32%
2009 2,716 891 2,464 255 511 366 5 476 5,535 953 14,172 -2.62%
2010E 2,689 891 2,207 255 561 366 5 476 5,620 888 13,958 -1.51%
2011E 2,689 891 2,207 255 561 466 5 476 5,800 888 14,238 2.01%
2012E 2,689 891 2,207 255 561 766 5 476 5,800 888 14,538 2.11%
2013E 2,689 891 2,147 255 561 766 5 476 5,800 888 14,478 -0.41%
2014E 2,689 891 2,147 255 561 766 5 476 5,800 888 14,478 0.00%
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Pricing The greatest influence on the polystyrene price is monomer cost. As the styrene prices increase there is a increase in polystyrene pricing though with a lag.
Figure 170: Polystyrene price chart
2,000 1,500 1,000 500 0 Jan-1990 Jan-1992 Jan-1994 Jan-1996 Jan-1998 Jan-2000 Jan-2002 Jan-2004 Jan-2006 Jan-2008 Jan-2010 Poly sty rene General Purp(Contract Mkt) / MT Poly sty rene High Imp(Contract Mkt) / MT
Forecast (General Purposes) Forecast (High impact Poly sty rene)
Polyethylene Terephthalate (PET)

Introduction Polyethylene terephthelate (PET) is a downstream product of paraxylene and ethylene glycol. The largest outlet for PET is for the production of synthetic fibres because of its inherent properties that are well suited for lightweight, large-capacity and shatterresistant containers. PET has also become the plastic packaging of choice for many food products, particularly beverages like bottled water, carbonated soft drinks and other liquid containers.
Table 75: Polyethylene Terephthalate (PET) at a glance
Growth rate (CAGR 2009-14E) Current operating rate Key end-markets Key demand regions Key players Market structure Key Inputs Threats
5% 75% Textiles, Food Packaging Asia (39%), North America (22%), Western Europe (14%) Mossi & Ghisolfi, Artenius, Jiangsu Sanfang Top 10 producers amount to up to 42% of global capacity Paraxylene, Ethylene Glycol Oversupply/ New capacity in Asia
Overview & Outlook Demand for PET increased greatly in recent years because of its rapidly expanding use in the bottled drinks industry. PET bottle resin is a material driver of growth in many developing countries. CMAI estimates polyester (bottled resins) demand to grow by 5% CAGR until 2014E whereas capacity growth is estimated to be 3.4% CAGR. However, global PET business has deteriorated since mid-1996 in terms of price stability, operating margins and industry profitability. Highly increased capacity in Europe, North America and Asia resulted in an excess of supply and a better demand/supply balance is not in sight for at least the next few years.
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Demand for PET is currently also affected by the development of Ecobottles. Ecobottles are plastic bottles that are made from 100% recycled PET - even the cap and trademark/description. Instead of using paper labels, the surface of the bottle is marked with the commercial and legal information using a deformation (or similar) process as well as inscription using laser beams or thermal shock. Ecobottles are stackable, very light, 100% recyclable and do not need a special process for recycling since they are free from label, gum, ink and paints. As ecobottles are eco friendly their demand is expected to grow and the replacement of expensive glass bottles is expected to continue. Production process Currently, the more popular and more economic route of PET production involves the co-polymerization of purified terephthalic acid (PTA) with ethylene glycol (EG), producing a by product of water. The main raw material is therefore paraxylene (PX). The polymer produced melt-phase PET can be melted and extruded through spinnerettes into man-made polyester fibre.
Figure 171: Production of PET
Propylene Hydrogen Cyanide Ammonia Acrylonitrile Ammonium Sulphate Oxygen
Demand Demand drivers for PET continue to vary by region. Absolute demand and demand growth in Asia continue to be dominated by polyester fibre, which dwarfs the market size of PET bottle resin even though the latter has grown significantly. An untapped market for PET is beer packaging with substantial conversion still yet to materialize. Until 2006, PET was considered unsuitable for beer due to the materials permeability and sensitivity to oxygen and carbon dioxide. Though things have changed now, PET bottle manufacturers have developed a barrier to minimize oxygen and carbon dioxide permeation and can preserve the flavour characteristics of beer in PET containers for up to six months. PET has captured only 5-10% of the beer market, in which glass has a 50-60% major share and metal cans have 25-30%.
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Figure 172: Polyester bottle resins consumption by end market

Other PET Pharmaceutical 1% Cosmetics 1% 10% Food 6%
Bev erage 82%

Figure 173: Polyester bottle resins consumption by region

North America 22%
Figure 174: Polyester bottle resins demand growth (%) 2008-2014E (CAGR)
AME South America
Asia 39% South America 7%
WORLD Asia Central Europe
AME 9%
West Europe 14% Central Europe 9%
North America West Europe -4% -2% 0% 2% 4% 6% 8% 10% 12% 14% 16%
Supply/Key players New capacity additions of 6mmt are coming on line through 2009-14E or equivalent to 32% of 2009 global capacity. Most of the new capacity is coming in China (2.4mmt, 13% of 2009 global capacity). Other key capacity additions are Oman (0.75mmt, 4% of 2009 global capacity) and Brazil (0.65mmt, 3% of 2009 global capacity) through 2009-14E.
Figure 175: Polyester bottle resins demand/capacity (-000- Metric tons)
25000 20000 15000 10000 5000 0 2004 2005 2006 2007 2008 2009 2010E 2011E 2012E 2013E 2014E Total Oper. Rate % 90 85 80 75 70 65
Total Capacity
Total Demand
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Table 76: Top 10 Polyester bottle resins producer (2009)

Thousand metric tons West Europe Artenius Equipolymers Indorama Petrochem Novapet M & G Polimeri Invista Plastipak Tergal Fibers 810 496 320 225 193 113 100 38 2,295
North America Invista Mossi & Ghisolfi Eastman DAK Americas Wellman Nan Ya StarPET Alpha PET
793 765 730 650 435 405 225 161 4,164
Asia Jiangsu Sanfang. KP Chemical China Resources Shanghai Far Eastern Far Eastern Group Yizheng Chem. Reliance Industries TK Chemical Jiangsu Chenxing Gatron
923 471 470 423 373 370 330 280 260 230 4,130
Middle East JBF RAK Shahid Tondguyan Octal Holdings Ibn Rushd Artenius Korteks
360 309 300 300 135 30
Rest of the World Mossi & Ghisolfi Neo Group DAK Americas Orion PET HOSAF SK Eurochem Polief Belpak Europlast Sibur-PET
1,434
600 308 186 170 120 120 120 115 100 53 1,892
Table 77: Polyester bottle resins world capacity overview

2008 4,663 674 2,579 180 836 1,185 147 821 6,213 1,296 18,594 5.33%
2009 4,164 826 2,295 120 866 1,434 145 993 6,281 1,371 18,495 -0.53%
2010E 4,473 876 2,217 120 1,148 1,434 120 993 7,106 1,477 19,963 7.94%
2011E 4,625 1,214 2,254 120 1,203 1,559 120 993 7,985 1,477 21,550 7.95%
2012E 4,625 1,326 2,254 120 1,203 2,144 120 993 8,400 1,477 22,662 5.16%
2013E 4,625 1,326 2,254 120 1,203 2,354 670 993 8,400 1,477 23,422 3.35%
2014E 4,625 1,326 2,254 120 1,403 2,354 670 993 8,400 1,477 23,622 0.85%
Pricing Prices depend on how the key raw material prices are changing and the demand/ supply balance.
Figure 176: Polyester price chart
2,000 1,500 1,000 500 0 Jan-2000 Jan-2002 Jan-2004 Jan-2006 Jan-2008 Jan-2010
Poly ester POY, /MT Poly ester Staple Fiber, /MT

Forecast (POY) Forecast (Staple Fiber)
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Other Polymers
Polyurethanes
Introduction Polyurethanes are types of thermoset foams that are used in a wide range of applications and markets because of their cushioning and insulating properties. They are made from glycol and di-isocyanate and are easily manufactured into a wide range of different physical forms. The two main types of polyurethane foam are MDI-based rigid polyurethanes and TDI-based flexible polyurethane.
Figure 177: Production of Polyurethanes (overview)
Benzene MDI Rigid Polyurethane
Toulene
Source: J.P. Morgan
TDI
Flexible Polyurethane
Methylene-diphenyl diisocyanate (MDI)

Introduction The main use for MDI is in the production of rigid and semi-rigid foams (for example shoe soles, foams for cars and furniture) which account for approximately 80% of global output of polyurethanes. MDI is also widely used to dampen noise and for energy savings through heat insulation in the construction industry. Other usages are for refrigeration, packaging and rubber.
Table 78: MDI at a glance
Growth rate (CAGR 2008- 2013E) Current operating rate Key end-markets Key capacity regions Key players Market structure Key Inputs Threats
5% 74% Construction, Automotive Asia (42%), Western Europe (30%), North America (24%) Bayer, BASF, Huntsman, Dow, NPU Top 6 producers amount to up to 84% of global capacity Benzene, Propylene New capacity in Asia
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Overview & Outlook Operating rates for MDI have fallen in the last 2-3 years due to Asian capacity additions, and weak demand from construction, though partially offset by good demand from auto industry in the last few months. MDI continues to take market share from TDI because of its wider applications. CMAI estimates MDI demand to grow by 5% CAGR through 2008-13E while capacity growth is estimated to be 4%. Production Process For the production of MDI, aniline (which is derived from nitrobenzene) is reacted with formaldehyde. MDI is then reacted with a poyol for the manufacture of rigid polyurethanes.
Figure 178: Production of MDI
Propylene Propylene Oxide Polyol
Benzene
Aniline
MDI
Formaldehyde
Rigid Polyurethane
Source: J.P. Morgan
Demand MDI demand was depressed in 2008-09 on weak end markets - construction, autos, footwear. Since then demand has been improving driven by construction and automotive sector. Moreover, strong demand is coming from Asia, driven by a boom in the footwear, automobile and construction sectors. Supply/Key players Several thousand producers in the world manufacture polyurethane foams, frequently at multiple plant locations. However, the MDI market is shared by just a few major players. The top ten six producers have 84% of the global capacities. New capacities of c1.2mmt are coming online through 2009-14E or 23% of 2009 global MDI capacity. China is adding 0.65mmt of capacities or 12% of 2009 global MDI capacity through 2009-14E. Germany is adding 0.24mmt of new capacities or 5% of 2009 global capacity.
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Figure 179: MDI capacity by region
North America 24%
Figure 180: MDI capacity growth (%) 2008-2014E (CAGR)

Central Europe Asia
Asia 42% South America 1%
WORLD West Europe North America South America 0% 1% 2% 3% 4% 5% 6% 7% 8% 9%
Central Europe 3%
West Europe 30%

Figure 181: Top MDI producers (-000- Metric tons)

1,400 1,200 1,000 800 600 400 200 ---Bayer BASF Huntsman Dow NPU Ningbo Wanhua SHG Lianheng Iso.
25% 20% 15% 10% 5% 0%
Capacity
Percentage market share
Table 79: MDI world capacity overview

Thousand metric tons REGION North America South America West Europe Central Europe Middle East Indian Subcontinent Northeast Asia WORLD Growth rate
2008 1,328 45 1,614 190 ---30 1,778 4,985 13.73%
2009 1,328 45 1,654 190 ---30 2,016 5,263 5.58%
2010E 1,385 45 1,674 190 40 30 2,098 5,462 3.78%
2011E 1,385 45 1,684 245 40 30 2,398 5,827 6.68%
2012E 1,385 45 1,694 300 40 30 2,498 5,992 2.83%
2013E 1,385 45 1,894 300 40 30 2,498 6,192 3.34%
2014E 1,385 45 1,894 300 40 30 2,498 6,192 0.00%
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Toluene diisocyanate (TDI)

Introduction TDI is used principally in the manufacturing of furniture (interior components of automobiles in seats, headrests, armrests, roof liners, dashboards and instrument panels). It can also be used to produce coatings, rigid foam adhesives, sealants, and cast elastomers.
Table 80: TDI at a glance
Growth rate (CAGR 2008-2013E) Current operating rate Key end-markets Key regions Key players Market structure Key Inputs Threats
4% 70-80% Furniture, automotive interiors Asia (47%), North America (22%), Western Europe (18%), BASF, Bayer, Mitsui Takeda, Dow, Top 8 producer amount to up to 80% Benzene New capacity in Asia
Overview & Outlook MDI continues to take market share from TDI because of its wider applications. This will continue to soften demand growth for TDI. TDI demand will grow by 4% versus capacity growth of 5% through 2008-13E. Production Process For the production of TDI, Toluene (derived from Benzene) is converted into diamine which is then reacted to produce TDI. Like for MDI, TDI is also reacted with polyol to manufacture flexible polyurethane.
Figure 182: Production of TDI
Propylene Propylene Oxide Polyol
Toulene
Toulene Diamine
TDI
Flexible Polyurethane
Source: J.P. Morgan
Demand Low growth rate in developed markets -Western Europe (2%), North America (2%)will be offset by high growth rates in Eastern and Central Europe, Middle East and Africa (4-5%), driven by rising incomes and increasing demand for TDI end products. Growth in Asia, where China accounts for three-quarters of TDI consumption, is put at about 5%/year. With most of TDIs output going into the furniture and automotive sectors, demand remains sensitive to economic activity.
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Supply/Key players Flexible and rigid polyurethane capacities are expanding and shifting to China and other Asian countries (excluding Japan). New capacity additions of 2.1mmt is coming online or equivalent to 34% of 2009 global capacity through 2009-14E. Ths biggest capacity addition is coming in China with 0.51mmt or 25% of 2009 global capacity. Some of the new capacity additions will be offset by capacity closures. As per CMAI, there will be capacity closure of 0.1mmt in US through 2009-14E.
Figure 183: TDI capacity by region
Middle East 1% North America 22%
Rest o f the Wo rld A sia
Figure 184: TDI capacity growth (%) 2008-2014E (CAGR)
Asia 47%
South America c 4% West Europe 18% Central Europe
WORLD West Euro pe No rth A merica
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
Figure 185: Top 10 TDI producers (-000- Metric tons)

600 28% 23% 400 18% 13% 200 8% 3% ---BASF Bay er Mitsui Takeda Capacity
-2% Dow Perstorp AB Borsodchem Cangzhou Dahua KFC
Global percentage share (%)
Table 81: TDI world capacity overview

Thousand metric tons REGION North America South America West Europe Central Europe CIS & Baltic States Middle East Indian Subcontinent Northeast Asia WORLD Growth rate
2008 460 90 385 168 4 ---45 865 2,017 1.66%
2009 460 90 385 168 4 30 45 907 2,089 3.57%
2010E 385 90 385 168 4 40 45 1,015 2,132 2.05%
2011E 360 90 385 243 4 40 45 1,268 2,435 14.21%
2012E 360 90 385 318 4 40 45 1,380 2,622 7.68%
2013E 360 90 385 318 4 40 45 1,380 2,622 0.00%
2014E 360 90 500 318 4 40 45 1,380 2,737 4.39%
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Polycarbonate
Introduction Polycarbonate resins are tough thermoplastics usually derived from bisphenol A and phosgene. The major markets are the electrical/electronic sectors such as computer and business equipment and CDs and the automotive industry. They are also used for the production of safety helmets and shields, housing components, household appliances and sporting goods.
Table 82: Polycarbonates at a glance
Source: J.P. Morgan estimates and CMAI
5.7% 76% Electronics, glazing and sheets Asia (64%), W Europe (16%), N America (14%) Bayer, SABIC, Dow Top 3 producers amount to up to 63.2% of production Acetone, Phenol New capacities coming on stream in Asia
Overview & Outlook Despite slower growth in optical media (CDs, DVDs), future demand is still expected to be healthy in the medium term. According to CMAI, polycarbonate demand will grow by 5.7% CAGR from 2009-2014E. In the same period, capacity will grow by 5.2%. Asia Pacific already is the largest polycarbonate market worldwide representing almost half of the global market of 4.2mm tones in 2009. Major players will continue to announce capacity additions in this region. Production Process Polycarbonate is produced from Bisphenol A (BPA) mostly by using the interfacial process, where BPA is reacted with phosgene in an aqueous solution with methylene chloride as a solvent. Because of environmental concerns about the highly toxic nature of phosgene, the industry shows considerable interest in processes that do not involve phosgene. The second production process, transesterification, reacts BPA with diphenyl carbonate (DPC) and without a solvent.
Figure 186: Production of Polycarbonate (interfacial) Phenol Biphenol A Polycarbonate Methylene Chloride Phosgene
Acetone
Source: J.P. Morgan
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Demand Demand for optical media production is expected to slow significantly as CDs and recordable CDs are replaced by MP3 players, high internet bandwidth and USB drives. However, growth is still expected in other sectors such as alloys used in automotive and electronic products, cell phones, TVs, business equipment and sheet and construction products. Applications are expected to widen into back lights and rear windows in truck cabins, moveable side windows and vehicle top applications, promoted by the significant weight benefit over glass. However, there has been strong resistance from the automobile manufacturers in the more general replacement of glass. One of the problems is the poor scratch resistance of polycarbonate. The higher cost compared to glass could be another limiting factor although polycarbonate does offer weight savings, broader design options and easier handling that could bring efficiencies on the automotive production line as well as improved fuel economy.
Figure 187: Polycarbonate uses by end market
Other 18% Electrical/ Electronic 27%
Transportation 14%
Optical Media Glazing and Sheet 20%

21%
Figure 188: Polycarbonate demand by region

North America 14% South America 1% West Europe 16%
Figure 189 Polycarbonate demand growth by region (%) 2008-2014 (CAGR)
AME Central Europe Asia WORLD South America North America West Europe
Asia 64%
Central Europe 3% AME 2%
-5%
0%
5%
10%
15%
20%
25%
30%
Supply/Key players The polycarbonate resin market is global, with three dominant producers. The market sees intense competition among the big players to gain market share. SABIC is the largest worldwide producer, accounting for 27% of world capacity, followed by Bayer.
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New capacities of order 0.73mmt are coming online or equivalent to 18% of 2009 global capacity of polycarbonate. Most of these capacities are coming in China (0.41mmt or 10% of 2009 global capacity) and Saudi Arabia (0.26mmt).
Figure 190: Polycarbonate demand/capacity (-000- Metric tons)
6000 5000 4000 3000 2000 1000 0 2004 2005 2006 2007 2008 2009 2010E 2011E 2012E 2013E 2014E Total Oper. Rate % 95 90 85 80 75 70 65
Total Capacity
Total Demand
Until 2004, the requirement for initial large investments created high barriers to entry into the polycarbonate resin business. However, in recent years these costs have been rapidly falling so that many smaller plants have been created.
Table 83: Top 10 Polycarbonate producers by region (2009)
Thousand metric tons West Europe Bayer SABIC Plastics Dow ISL Polymers 568 505 105 5 North America SABIC Plastics Bayer Dow 598 260 90 Asia Teijin Bayer* Teijin Polycarb Formosa Idemitsu Thai Polycarbonate LG Dow Polycarb. Chi Mei-Asahi Mitsubishi Eng Plastics Sam Yang Bayer Poly Shanghai 226 220 210 175 160 160 140 125 120 100 1,636 Middle East Khuzestan PC 25 Rest of the World Kazanorgsintez Unigel 60 15
1,183
Source: CMAI and J.P. Morgan, * including poly shanghai
948
25
75
Table 84: Polycarbonate capacity additions

Thousand metric tons COMPANY Kayan Bayer Poly Shanghai Blue Star Mitsubishi Eng Plastics Zhenjiang ChiMei MCC/MEP/SINOPEC JV Mitsubishi Eng Plastics
Country Saudi Arabia China China China China China Japan
LOCATION Al Jubail Caojing, Shanghai Various_CHI Shanghai Zhenjiang, Jiangsu Yanshan, Beijing Kurosaki
2010 ---66 ------------45
2011 65 34 ---------40 15
2012 195 ------40 35 20 ----
2013 ------100 40 40 -------
2014 ----------------------
TOTAL 260 100 100 80 75 60 60
as % of global cap. 2009 6.2% 2.4% 2.4% 1.9% 1.8% 1.4% 1.4%
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Fibres
Synthetic fibres amount to significant portion of global fibre production. Polyester takes the most important role, leaving Nylon and Acrylic Fibres far behind. Other fibres are based on natural materials such as cotton or wool.
Figure 191: Global Man-Made fibre production (2009: 56kt) Acetate 0.2% Acry lic 5.1% Ray on 6.7% Ny lon 10.4%
Poly ester 77.6%

Source: SRI and J.P. Morgan estimates
Polyester Fibre
Introduction Polyester is the most economical among fibres used in textiles because its physical properties fit to apparel use and owing to low production costs. The most common polyester for fibre purposes is polyethylene terephthalate, or simply PET. This is also the polymer used for many soft drink bottles and it is becoming increasingly common.
Table 85: Polyester Fibre at a glance
Growth rate (CAGR to 2009-14E) Current operating rate Key end-markets Key demand regions Key players Market structure Key Inputs Threats
8% 70% Textile Industry Asia (92%) Reliance, China Petrochemical Corporation, Koch, Formosa Plastics Top 15 producers amount to up to 23% of global capacity Ethylene Glycol, purified Terephthalic acid, Dimethyl Terephthalate, Capacity additions in Asia
Overview & Outlook Significant low-cost capacity, especially in Asia, continues to hurt European and American producers and the shift from developed countries to emerging countries, especially to Asia, will continue with substantial decreases in both production and consumption According to CMAI, Polyester (textile filament) demand grew by about 6% CAGR from 2004-2009E. In the same period, capacity grew by 4%. For the future outlook, CMAI estimates polyester textile filament demand to grow by 8% CAGR until 200914, driven by growth in China and India. Global capacity growth is forecasted to be 5% CAGR through 2009-14.
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Production process Polyester filament yarn and staple are manufactured via spinning by extruding moulten PET polymer through a metal plate or thimble with fine holes, called a spinnerette. The key raw materials are purified terephthalic acid (PTA) or dimethyl terephthalate (DMT) and ethylene glycol. PTA and DMT are derived from Paraxylene (produced in naphtha crackers or refineries), and EG is an ethylene derivative. Demand China, the worlds biggest producer of polyester fibres, is also the biggest consumer. It consumes fibres in a chain of textile weaving, dyeing and apparel-making industries, and then exports large amounts of finished goods, including apparel, curtains and bedding to all countries in the world. Polyester demand is also influenced by cotton, which is a competing but natural fibre, especially in apparel end uses. Current depressed cotton prices mean substitution demand is limited. In the long term, limitations on cotton supply, in the form of a finite area of cultivation, should work in favor of polyester in our view.
Figure 192: Polyester (textile filament) demand by region Figure 193 Polyester demand growth by region (%) 2008-2014E (CAGR)
Asia WORLD South America
Asia 92%
Others 4% AME 4%
AME North America Central Europe West Europe
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
Supply/Key players CMAI expects capacity addition of 6.9mmt through 2009-14E or equivalent to 26% of 2009 global capacity. Most of new capacities are coming in China and India. New capacities of order of 5.9mmt will be coming in China through 2009-14E or equivalent to 22% of 2009 global capacity. India will be adding new capacities of 1.05mmt through 2009-14E. Though, some of the new capacities will be offset by capacity closures. CMAI expects capacity closures of 0.31mmt through 2009-14E. Biggest closures will be coming in Taiwan (0.11mmt) and Turkey (72mt), as per CMAI.
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Figure 194: Top 10 polyester (textile filament) producer (-000- Metric tons)
4.0% 2000 3.5% 3.0% 1500 2.5% 2.0% 1000 1.5% 500 1.0% 0.5% 0
Reliance Industries China Petrochemical Corporation Koch Industries Formosa Plastics Corp. Tuntex Group Zhejiang Yuandong Chemical Fibers Group Lohia Toray Industries Performance Fibers Teijin
Figure 195: Polyester (textile filament) demand/capacity (-000- Metric tons)

35000 30000 25000 20000 15000 10000 5000 0 2004 2005 2006 2007 2008 2009E 2010E 2011E 2012E 2013E 2014E Total Demand Total Oper. Rate % 100 80 60 40 20 0
0.0%
Total Capacity
CAPACITY
Table 86: Polyester (textile filament) world capacity overview

Source: CMAI and J.P. Morgan,
2008 346 148 234 119 55 444 48 2,492 20,001 1,689 25,576 4.4%
2009 324 153 234 119 55 372 48 2,608 21,202 1,699 26,814 4.8%
2010E 324 144 199 119 55 372 48 2,860 22,457 1,699 28,277 5.5%
2011E 324 190 199 119 64 372 48 2,993 24,672 1,699 30,680 8.5%
2012E 324 329 199 119 72 372 48 3,220 25,647 1,735 32,065 4.5%
2013E 324 329 199 119 72 372 48 3,360 25,772 1,735 32,330 0.8%
2014E 324 329 199 119 72 372 48 3,540 25,772 1,735 32,510 0.6%
Polyamide (Nylon)
Introduction Nylon 6 and 6,6 are the main nylon types and account for over 90% of all nylon production. Both types have a considerable interchange and are used as Nylon Fibre in the textile industry or as Nylon resins for injection molding and extrusion applications. Nylon fibre is used principally for the manufacturing of carpets and rugs. Other uses include apparel goods and industrial applications, such as auto-related products (e.g., airbags, tyre cords and ropes). Important nylon fibre characteristics include abrasion resistance and high-tensile strength. Nylon resins are characterized by high tensile strength and strong chemical and heat resistance, performing mechanical duties that have traditionally relied on metal parts. These advantages have led to many new automotive applications for nylon 6 resins as automobile manufacturers try to reduce the weight of motor vehicles by replacing metals with plastic.
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Table 87: Nylon resins at a glance

Growth rate (CAGR to 2014E) Key end-markets Key demand regions (Resins) Key players (Resins) Market structure Key Inputs Threats
5% Textile/Carpet industry (Fibres), automotive applications (resins) Asia (54%), Western Europe (20%), North America (16%) BASF, Invista,DuPont, Rhodia, Li Peng, Ascend, DSM, Lanxess, Ube Fragmented with Top 10 players contributing c.40% of total capacity Caprolactam, adipic acid Capacity growth in Asia
Overview & Outlook Nylon demand is projected to grow in line with demand for resins in automotive, construction and film application. Growth is in some applications affected by increasing replacement by polyester e.g. in textiles and alternative flooring products in houses (like laminate, PVC, wood). However, the replacement of metal (e.g. in automotive applications, construction) has been a key growth driver in recent years. With the end-use industries (textile, autos) shifting to the emerging markets, demand has shifted from mature to developing markets. Therefore most nylon capacity growth in recent years has been in Asia, particularly in China and Taiwan, where labour is cheaper and end demand is rising strongly. Production process Nylon 6 is polymerized from caprolactam, which is mixed with water and other additives. Nylon 66 is made from adipic acid and hexamethylenediamine.
Figure 196: Production of Nylon 6
Caprolactam Aminocaprioc acid Water
Source: J.P. Morgan
Condensation
Nylon 6
Figure 197: Production of Nylon 66

Adipic acid Nylon salt HMDA
Source: J.P. Morgan HMDA stands for Hexamethylene diamine
Condensation
Nylon 66
Demand The difference in performance characteristics between the two major types of nylon resins is limited, with some degree of substitution being possible over time. Nylon 6,6 generally tends to exhibit higher tensile strength and greater hardness and stiffness and has slightly better flame retardance. Nylon 6 has better surface appearance (particularly in glass-reinforced compounds) and flow characteristics and can be more easily colored.
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Figure 198: Nylon resins consumption by region
North America 16% South America 3%
Figure 199: Nylon resins demand growth (%), CAGR 2008-2014E

SE Asia Middle East North America WORLD West Europe Central Europe NE Asia South America 0% 2% 4% 6% 8% 10%
Asia 54% West Europe 20%
AME 2%
Central Europe 5%
CMAI estimates nylon demand to grow at a CAGR of 6% in the mature market of North America (2009-14e) driven by engineering resins. However, much of the growth is expected in 2010/11e, after which point growth is expected to normalize to GDP rates.
Figure 200:Nylon-6 consumption by end market
Staple Fiber 2% Engineering Resins & Other 35% Bulked continuous filament 12%
Figure 201: Nylon-6,6 consumption by end market

Bulked continuous filament 3% Staple Fiber 1% Tex tile Filament Yarn 23%
Tex tile Filament Yarn 35% Industrial Filamant Yarn 16%
Engineering Resins & Other 59% Industrial Filamant Yarn 14%
Key end markets include the automotive, electronics, textile, carpet and construction sectors. Supply/Key players The same feedstocks are used to produce nylon resins and nylon fibres. Relative to nylon resins, the production of nylon fibres consumes much larger amounts of feedstock. Therefore, the economics of nylon resin production are also affected by the supply and demand balance for nylon fibres. Operating rates have been very high in the industry in H1 2010, with a number of players reporting full operating rates in Q1 2010. This has been driven by tight supply resulting from capacity closures (e.g. BASF, Invista) and plant turnarounds, combined with a surge in restocking-led demand. However, under more normalised conditions, CMAI anticipates overcapacity in the industry, with operating rates in nylon 6 unlikely to rise beyond 80%.
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Figure 202: Nylon 6 resin demand/capacity (000 metric tons)

6000 100
Figure 203: Nylon 6,6 resin demand/capacity (000 metric tons)

2500 2000 95
4000 80 2000
1500 1000 500
85
75
0
2004 2005 2006 2007 2008 2009 201 201 E201 0E 1 2E201 3E201 4E
60 Total Demand Total Capacity Operating Rate %
0
2004 2005 2006 2007 2008 2009 201 201 E 201 0E 1 2E201 3E201 4E
65 Total Demand Total Capacity Operating Rate %
Although demand at c.5% per annum is set to outpace capacity growth at c.2%, overcapacity remains a concern, which will likely place pressure on company margins in the medium-term.
Figure 204: Top 10 nylon 6 and 6,6 resin producers (-000- Metric tons)
700 600 500 400 300 200 100 ---B A SF SE Invista DuP o nt Rho dia Li P eng DSM Eng. P lastics FCFC A scend Xinhui M eida DSM Ho neywell Zig Sheng
9.00% 8.00% 7.00% 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% 0.00%
Capacity
Source: CMAI
Figure 205: Top nylon 6,6 Intermediates, Engineering Plastics and Fibre producers
2008 sales in EURO million
Source: Rhodia.
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In recent years, a number of players have begun to develop niche, high performance polyamides (e.g. types 11, 12, 46), as shown below.
Table 88: Polyamide resins - key players by type
6 Arkema BASF DSM DuPont EMS Evonik Lanxess Rhodia Solutia/Ascend
Source: SRI.
66 x x x x x x
x x x x x x x
11 x
12 x
46 x
x x
Pricing The nylon industry has enjoyed strong price momentum in H1 2010, benefiting from tightness of supply. However with overcapacity in the industry combined with rising input costs, we view this favourable trend as unlikely to be sustained. Resins for engineering plastics used in high-growth applications (e.g. metal replacement in autos) have tended to enjoy greater pricing power than resins for textile and carpet fibres. Also niche polyamides such as 4,6 (DSM) and 1,1 (Arkema) tend to enjoy higher prices than more commoditised product (e.g. 6 and 6,6).
Figure 206: Nylon price chart
200 150 100 50 0 JulAprJanOctJulAprJanOctJulAprJanOctJulApr2001 2002 2003 2003 2004 2005 2006 2006 2007 2008 2009 2009 2010 2011 Ny lon 6 (Fiber Grade) Cents/ Pounds Ny lon 6,6 (Fiber Grade) Cents/ Pounds
Forecast (Ny lon 6) Forecast (Ny lon 6,6)
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Fertiliser
Since the beginning of agriculture, farmers have wished to improve soil quality and crop yield. To this end, they have employed such techniques as crop rotation or liming. Through trial and error, they were able to increase the three primary soil nutrients nitrogen, phosphorus, and potassium though not always in the most efficient or rigorous manner. Today, from fertilisers that contain a specific quantity of the three essential nutrients to algorithms that quantify volume of fertiliser application for a desired crop yield on any given small plot, farmers have access to advanced methods to increase soil and crop efficiency. Nutrients are classified into three primary nutrients and three secondary nutrients:
Figure 207: Market share of main nutrients
Nitrogen (N) is essential for development and growth in plants. Supply of nitrogen determines a plant's growth, vigour, colour and yield Phosphorus (P) is used for vital root development and to help the plant resist drought. Potassium (K) is essential to the translocation of photosynthesis within plants and for high-yielding crops. The secondary nutrients Sulphur (S), Calcium (Ca) and Magnesium (Mg) are required for optimum crop growth.
Source: Yara and IFA statistics (2007/2008)
The market for primary nutrients amounted up to 160 million tones. Thereof, Nitrogen is the largest nutrient by volume, with 62% of production.
Fertiliser Measurement
As an industry convention, the comparison of fertilisers is based on concentrations of the primary nutrients. Nitrogen is an element in the periodic table with the symbol N. As N2, it is a gas that makes up four-fifths of the earths atmosphere. Nitrogen-containing fertilisers are measured in units of N. Some of the most common nitrogencontaining fertilisers include Ammonia (NH3), Urea (CO(NH2)2), or ammonium nitrate (NH4NO3). Nitrogen represents 82% of the content of anhydrous ammonia, 46% for urea, and 34% for ammonium nitrate. CAN, (calcium ammonium nitrate) and UAN (urea ammonium nitrate) solutions vary in nitrogen content from 28-32%. Phosphorus is measured in units of phosphoric pentoxide (P2O5). To convert P to P2O5, multiply by 2.29. P2O5 tonnes are the unit of measurement of phosphoruscontaining fertilisers, which vary in concentration from product to product. For example, Diammonium Phosphate (DAP) is 46% P2O5 and Monoammonium Phosphate (MAP) is 52% P2O5..
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Potassium/Potash is typically measured in units of potassium oxide (K2O). K2O tonnes are the measurement of the nutrient value of potassium-containing fertilisers. Potash (KCl) is a term typically used to denote potassium-based fertiliser. Most potash fertiliser is potassium chloride, also called muriate of potash. To convert KCl product tonnes to K2O tonnes, multiply by 0.61.
Figure 208: Key global fertiliser product categories
Nitrogen N
Ammonia 4% Other 13%
DAP/MAP 6% Urea 52% NPK 11%
AN/CAN 9% UAN 5%
99 million tons
Potash K2O
Other 1% NPK 29%
Phosphate P2O5
Other 2% TSP 6% SSP 17%
DAP/MAP 48%
MOP/SOP 70%
NPK 27%
24 million tons
Source: Yara and IFA statistics 2008/2009 (nutrient totals) & 2005 (product split)
36 million tons
Because of their high market share, Urea, DAP/MAP and MOP play the most important role for primary nutrients. Also NPK, as a mix of all three types of fertiliser categories, takes a big share as well.
Table 89: Fertiliser Industry key facts
Base product Geographic availability of raw material Cost of new capacity Greenfield development time Producing countries Potash Potassium chloride (KCL) Limited App.$2.8bn for 2 mn tons KCL Min 7 years 12 (Based on KCL) #1-Canada #2-Russia #3-Belarus #4-Germany 19% 3-4% KCL #1-US #2-Brazil #3-India #4-China Nitrogen Ammonia (NH3) Readily available App.$1.4bn for 1mn tons NH3 Min 3 yrs ~60 (based on NH3) #1-China #2-India #3-Russia #4-US 57% 2.5-3% Ammonia #1-US #2-India #3-South Korea Phosphate Phosphate rock-Phosphoric acid(P2O5) Availabel App. $1.5bn for 1 mn tons P2O5 3-4 yrs ~40 (Based on P2O5) #1-China #2-US #3-Morocco #4-Russia 46% 2-2.5% DAP #1-India #2-Brazil #3-Japan #4-Pakistan
State/subsidy-controlled production Expected long-term fertiliser consumption growth rate Major importers
Source: J.P. Morgan and PotashCorp
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Fertiliser Market and its Drivers

Global fertiliser consumption amounts to around $70bn per year. The key publiclytraded players in the fertiliser market are Yara (ex Norsk Hydro), Mosaic (IMC and Cargill), PotashCorp, Kali und Salz K+S (previously BASF), ICL, CF industries and Agrium. Within the fertiliser market, grain crops account for around 60% of fertiliser usage. Corn requires around five times more Nitrogen fertiliser per hectare than Soybeans, and around twice as much as Wheat.
Figure 209: Fertiliser company revenues (2009)
USD mn
Mosaic Yara Agrium K+S ICL Potash CF Industry Uralkali
Figure 210: Fertiliser market by application

Fruit & Vegetables 17% Other 17%
Sugar corps 5% Cotton 4% Other oil seed 4% Soy bean 4%

0 2000 4000 6000 8000 10000
Wheat 15%
Other cereal 5% Maize 15%
Rice 14%
Source: Company reports and J.P. Morgan Based on 2009 FX rates average NOKUSD=0.1599, EURUSD= 1.3947 and RUBUSD= 0.03163
Source: Yara, IFA (2008/2009) and J.P. Morgan
Fertilisers increase crop yield, improve soil quality and add to the overall health of the plant. In fact, the correct application of fertiliser can increase the profitability of crops dramatically, with a net return on investment at current prices in fertiliser up to 700% (vs. Agchem 80-100%) in recent years.
Figure 211: Yield response (monetary value) to N fertiliser rate
1200 1000
Income / ha
800 600 400 200 0 0 50 100 150 200 250 300 350
Fertilizer application, kg N/ha

Source: Yara
In 1989-1994 fertiliser consumption declined due to the collapse of communism in Eastern Europe and the Soviet Union and the very significant reduction in nutrient use in that region.
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Figure 212: Consumption per nutrient

Nutrient million t
120 100 80 60 40 20 0
Figure 213: Nitrogen consumption per continent Nutrient million t

2.1% per year
40 35 30 25
China: 1.1% per year
N P K
4.1% per year
20 15 10
India: 2.6% per year Rest of Asia: 3.8% per year Europe: 1.8% per year N America: 1.7% per year Latin America: 3% per year
4.6% per year
5 0
95 99 97 05 93 03 01 07 F F 11 20 19 19 20 19 19 20 20 20 09
Source: Yara, IFA and J.P. Morgan
Source: Yara, IFA and J.P. Morgan
Structurally, the long-term global demand for fertilisers appears well supported.
We believe increasing food and grain consumption will continue to support global crop prices over the long term. A combination of population growth and the increasing population wealth should continue to place substantial demands on global crop production. On a regional basis and on a shorter time horizon, we concede that demand trends are more dependent on factors that are more difficult to predict, such as weather patterns.
148
20
20
13
149
Figure 214: Planting calendar
Source: Potash Corp.
149
150
Figure 215: US & Global Corn yield - EXPECTATIONS REMAIN AT RECORD HIGHS (MT/HA)
12 10 8 6 4 2 0
61
63
69
73
67
79
81
83
99
01
65
75
87
77
89
95
03
05
07
71
85
91
93
97
09
19 72 /19
19 76 /19
19 92 /19
19 64 /19
19 70 /19
19 84 /19
19 90 /19
World
US
Source: USDA
Growing demand in emerging economies.
The increasing influence of emerging economies in meeting the needs of growing populations will play a key role in supporting demand. We estimate that China, India and Brazil together account for over 50% of global nutrient demand. According to the International Plant Nutrition Institute (IPNI), China needs to more than double its annual potash applications and increase its nitrogen and phosphate use by 40 percent to properly sustain its agricultural land and maximize yields. The increase in Chinese export duties on fertilisers from 35% to 135% in May 2008 and further to 185% in September 2008 underlines how China tend to keep stable price environment and sufficient local crop supply, during strong domestic demand periods.
Figure 216: Current and Potential Fertiliser Consumption Growth
Million Tons
80 60 40 20 0 Current Potential Current Potential Current Potential
P2O5
KCL
Source: PotashCorp, IPNI and Fertecon
We expect the proportion of fertilizer consumption being driven by emerging economies to increase. Populations in these regions become wealthier, their dietary requirements increase, and this increases farming intensity. In fact, fertilizer consumption has grown by approximately 70% over the past 15 years in China, Brazil, India and Southeast Asia combined (fertecon). While this growth rate may moderate over time and despite the global economic crisis in 2009, we believe that the long-term fundamental fertilizer business drivers (population and economies expansion in the developing countries) remain undamaged. Moreover, since income will likely increase in these countries, people are expected to switch from starch-based to protein-rich diets. More meat means more grain and other feed supplements will be required to support commercial animal stocks.
150
20 10 /20
19 60 /19
19 62 /19
19 66 /19
19 78 /19
19 80 /19
19 82 /19
19 98 /19
20 00 /20
19 74 /19
19 86 /19
19 88 /19
19 94 /19
20 02 /20
20 06 /20
20 08 /20
19 96 /19
19 68 /19
20 04 /20
11
151
We expect little growth in domestic Fertilizer production in India. Constraints on Natural Gas have led to a significant rise in energy costs and a consequent lack of investment in capacity growth in the region. Therefore India will remain reliant on imports. In Brazil, fertilizer sales in 2009 were flat compared to 2008 (22.5 million tonnes). Local supply declined by 19 million tons which have led to a sharp decrease in distributors inventories. A combination of the recovery in the agricultural economy and low stock levels will support fertilizers consumption rebound for the coming years. Furthermore, demand in the US and Europe in particular appears likely to continue to be supported by high grain prices and consequent healthy farm incomes. As well as growing demand for grain from emerging economies, biofuels have emerged as an additional source of demand (esp. for Corn in the US), which will likely support prices at levels well above historical averages. Grain inventories levels are the key determinant of global grian prices. Until 2009, rising consumption was outpacing yields with the result that inventories had been declining for a number of years. This trend has reversed somewhat in 2009 due to record yields and a decline in demand. It remains to be seen whether the recent production can be maintained and how rapidly demand recovers.
Figure 217: Global Wheat & Coarse Grain Inventories.
m tonnes
1000 900 800 700 600 500 400 300 200 100 0
19 88 /8 9 19 89 /9 0 19 90 /9 1 19 91 /9 2 19 92 /9 3 19 93 /9 4 19 94 /9 5 19 95 /9 6 19 96 /9 7 19 97 /9 8 19 98 /9 9 19 99 /0 0 20 00 /0 1 20 01 /0 2 20 02 /0 3 20 03 /0 4 20 04 /0 5 20 05 /0 6 20 06 /0 7 20 07 /0 8 20 08 /0 9 20 09 /1 0 20 10 /1 1
50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0%
Production
Consumption
Ending stocks as % of comsumption
Source: USDA
Figure 218: World Grain and Soybean Stocks

Million Tons
250 200 150 100 50 0
Wheat Rice
Maize Soybeans
04 -0 5 20 06 -0 7
10 -1 1
08 -0 9
06 -0 7
08 -0 9
04 -0 5
06 -0 7
10 -1 1
08 -0 9
04 -0 5
06 -0 7
04 -0 5
08 -0 9
02 -0
02 -0
02 -0
02 -0
10 -1 1
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
Source: Phillips McDougall, USDA.
20
20
20
10 -
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An Ever-Rising Population
The worlds population has more than doubled since 1950, from 2.5 billion people to 6.7 billion. Much of that growth came from Africa and Asia, where densely populated countries have significant demand for food. Therefore, Global population growth continues to act as the principal long-term driver behind increased global demand for fertiliser. In addition, the improving dietary standards of that growing population have and will continue to place an increasing burden on available agricultural land. As people become wealthier, their dietary standards typically improve to include a greater proportion of protein. Raising animals (for example, chicken and cattle) to provide this protein in turn places greater demand on the available agricultural land in terms of required yield. At the same time, the amount of cultivated land globally is decreasing, with the effect that less agricultural land has to provide food for more people. As outlined above, this trend is most evident currently in China. A combination of encroaching desert and the industrialization of the economy have led to decline in the land area being cultivated for grain production of 20% since 1999. Evidently, growth in demand for fertilisers is likely to be greater in those areas of the globe with higher population growth.
Figure 219: World population and arable land per capita trends to 2020
10 9 8 7 (bn) 6 5 4 3 2 1960 1970 1980 1990 2000 2010E 0.50 0.45 0.40 (Hectare) 0.35 0.30 0.25 0.20 0.15 0.10
Arable land av ailable per person (RHS)

Source: IFA, Worldmarkets.co and J.P. Morgan estimates
World population (LHS)
Crops for Fuel add new demand
Besides food demand, the growing industry of biofuels made from grains and oilseeds is now also having an impact. World ethanol and biodiesel production increased significantly over recent years, which led to more corn, palm oil and sugar cane being used for ethanol production. World biofuel output is projected to more than double in 2010 from 2006 level by Potash Corp. For biofuels, U.S. is dominant producer, closely followed by Brazil. However, the biofuels remain a small segment of the global grain demand.
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Figure 220:World ethanol* production

Billion gallons
30 25 20 15 10 5 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Figure 221 World biodiesel* production

Billion gallons
6 5 4 3 2 1 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Source: PIRA and Potash Corp. *for transportation fuel use only.
Source: PIRA and Potash Corp. * for transportation fuel use only.
Rising crop prices support fertiliser use
As well as the long-term (demographic) argument supporting demand for fertilisers (see above), short-term demand drivers may in fact play a more important role in influencing the operating performance of the fertiliser industry. Higher grain prices stimulate grain production as farmers attempt to take advantage of more favorable economics. As grain crops account for approximately 70% of fertiliser use (6% cash crops, 3% cotton, 21% other), rising grain prices tend also to lead to increased demand for fertilisers and upward pressure on fertiliser prices.
Figure 222: Crop prices (rebased to 100)
300 250 200 150 100 50 0 Jul-07 Jan-08 Jul-08 Corn ($/bus) Jan-09 Jul-09 Jan-10 Soy bean ($/bus) Wheat ($/bus) Jul-10
Source: DataStream, J.P. Morgan research
Biotechnology not a major threat
Owing to the likely limited availability of land suitable for cultivation, the ability of genetically modified crops to improve yields will likely provide an important component of the solution to the problem posed by the rapid population growth in a number of developing countries. However, the ability of fertilisers to significantly improve yield will likely support their continued use in conjunction with other biotech-driven solutions in our view. Therefore, we would not view the increased adoption of GM as a significant negative threat to the rate of global fertiliser consumption growth. Fertilizers cost share in the total grain production costs increased from 15% in 20072008 to 26% in 2009. However the return on investment for fertilizers application remains high as grain prices went up.
Fertiliser costs are small compared to total grain production costs.
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Figure 223: Breakdown of Grain production costs (2009)

%
Labour 5% Chemicals 5%
Other 5% Fertilizer 26%
Seed 14%
Land 20%
Source: Yara, USDA and J.P. Morgan
Pow er & Machinery 25%
Figure 224: US & Global Corn yield - EXPECTATIONS REMAIN AT RECORD HIGHS (MT/HA)
12 10 8 6 4 2 0
77 93 81 79 97 61 73 75 95 99 85 01 83 65 63 67 69 71 87 89 91 03 05 07 09 19 80 /19 19 96 /19 19 76 /19 19 78 /19 19 74 /19 19 72 /19 19 92 /19 19 94 /19 19 98 /19 19 60 /19 20 00 /20 19 84 /19 20 06 /20 19 82 /19 19 86 /19 19 88 /19 19 66 /19 19 90 /19 19 62 /19 19 64 /19 19 68 /19 19 70 /19 20 02 /20 20 04 /20 20 08 /20 20 10 /20 11
World
US
Source: USDA
Nitrogen fertiliser
Introduction Nitrogen is a gas which makes up 80% of the atmosphere and is an essential nutrient for plant growth. Some plants, including legumes such as soybeans, can fix nitrogen from the air, but most take it from the soil. It must be applied to soil annually because its nutrient value is consumed during each growing season. Nitrogen is essential for growth and development in plants. Supply of nitrogen determines a plants growth, vigour, colour and yield. Production Process Nitrogen is produced by natural gas, which is synthesized with steam and air to produce ammonia.
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Figure 225: Nitrogen Production

Carbon Dioxide Natural Gas Urea Ammonia UAN
Air
Nitric Acid
Ammonium Nitrate
Calcium
CAN
Potash (K)
NPK
Phosphate (P)
Source: J.P. Morgan
Demand The main commercial fertilisers that provide nitrogen either contain, or are byproducts of ammonia, which is in turn produced primarily from natural gas and nitrogen in the air. These fertilisers are anhydrous ammonia (NH3), urea [CO(NH2)2], ammonium nitrate (NH4NO3), nitric acid (HNO3) and nitrogen solutions (CAN, UAN).
Figure 226: Nitrogen fertiliser consumption by product
MAP Urea 48% 2% Amm. Sulphate 4% Cal. Amm. Nitrate 4% Direct App.4% DAP Others 11% Amm. Nitrate 9% UAN 5% 6% Amm. Bicarbonate 7%
North America 15%
Figure 227: Nitrogen fertiliser consumption by region

AME 7% C&E Europe 5% C&S America 5% Western europe 9% Asia 58% Others 1%
The amount of Nitrogen depends on many variables
The amount of nitrogen that farmers apply depends on soil quality, desired crop yield, prior crops harvested, and the crop to be grown. Certain crops require greater amounts of nitrogen in the soil than others. Corn, for example, may require up to five times as much nitrogen fertiliser as soybeans, but only 1.6 or 2.0 times as much as for cotton.
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Moreover, economic efficiency bears consideration. Farmers must analyze the marginal increase in crop yield provided by additional fertiliser application. While greater nitrogen application does result in higher crop yields, the marginal returns, in terms of pricing, diminish prior to maximum yield. Of course, such an analysis must also include other variables, which cannot always be controlledland price, weather, and government subsidies, for example. As mentioned above, nitrogen fertiliser comes in many forms. Urea accounts for 49% of the world consumption of nitrogen fertiliser. Nitrate, Phosphate and Ammonia (CAN) and urea ammonium nitrate (UAN) solutions follow, but are significantly behind, accounting for only 9% and 6% of world nitrogen fertiliser consumption. However, Nitrates can easily be absorbed by plants and are therefore regarded as a quality fertiliser for European agricultural conditions. While direct application of ammonia accounts for only 3% of the world nitrogen consumption, it makes up 20% of the consumption in the U.S. There is also a considerable difference in the product mix for different regions of the world. Urea, the fastest growing nitrogen product, is particularly popular in warmer climates. Urea ammonium nitrate (UAN) is mainly used in North America, while nitrates (e.g. CAN) are mainly applied in Europe.
Figure 228: European fertiliser market : Nitrate the preferred fertiliser
DAP/MAP 2% Other 7% UAN 11% Nitrates 45% NPK 14%
Figure 229: European fertiliser market: Yara the leading player
Imports 12%
Other Europe 65% Yara 23%

Urea 21%
Source: IFA (2005), EFMA (2008/2009), Yara and J.P. Morgan Source: J.P. Morgan and Yara
In contrast to Phosphorus and Potassium, Nitrogen must be applied every year to maintain yield and biomass.
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Figure 230: Nitrogen Fertiliser demand - 5 key regions
Source: Yara and IFA (2005) EFMA (2008/09)
Supply/Key players Before 2008, the nitrogen industry was affected by higher natural gas prices and rising construction costs. These conditions combined to the negative impact of the international economic crisis are making new Greenfield investment less attractive. Yara expects a new, mid-size production plant for urea to cost about $1.5bn (compared to $500m two years ago). The strong increase is fueled by higher equipment costs (steel) and strong demand coming from other petrochemical projects. Moreover, only a few companies have enough expertise to set up a new plant of that scale. The Natural Gas price also plays a significant role in investment decision-making. Replacement cost for nitrogen fertilizer Our analysis suggests if we are doing the investment of $2000m, total cost (capital cost and production cost) will be $197/mt gr of urea, assuming natural gas price of $4/mmbtu. If we do the sensitivity analysis of total cost keeping all the parameter same except natural gas prices, for every increase of $0.5 /mmbtu in natural gas price, total cost increase by 6-7%. Below Table 90 states the other assumptions we have used in our analysis.
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Table 90: Replacement cost for nitrogen fertilizer

Cash costs Ammonia
Gas Price Gas consumption Total Gas cost Other production cost Total Cash Cost Ammonia
4 36 144 30 174 174 0.58 101 21 24 146
US$ / mmbtu mmbtu/mt NH3 US$/mt NH3 US$/mt NH3 US$/mt NH3 US$/mt NH3 NH3 / my gr Urea US$ / mt gr Urea US$ / mt gr Urea US$ / mt gr Urea US$ / mt gr Urea
Urea
Ammonia price Ammonia consumption Total Ammonia cost Process gas cost Other production costs Total Cash production cost Urea
Capital Cost Investment Capacity Asset life Capital cost / annum Capital cost /tonne Total Cash production Cost Total Capital cost Total cost
2000 1.3 30 67 51 146 51 197
US$ m m tonnes /annum years US$ m US$ m US$ / mt gr Urea US$ / mt gr Urea US$ / mt gr Urea
Below Figure 231 illustrates IRR development at given urea prices. Our analysis suggests urea prices need to be more than $400/tn to generate IRR of more than 10%. key assumptions we are using i) $2000m capital investment over four years will create capacity of 1.3mmt of urea and ii) tax rate of 25%.
Figure 231: IRR at different urea prices
20% 15%
IRR (%)
10% 5% 0% 250 275 300 325 350 375 400 425 450 475 500 Urea prices ($/tn) 525 550 575 600
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Table 91: Yara: Overview of Nitrogen supply/demand dynamics

Supply China Driver Raising of export tariff Closure of smaller players Tightening envt regulations Middle East Russia/CIS EU US Demand China Capacity growth Capacity growth Capacity closures Capacity closures Driver Efficient fertiliser use Population growth Meat consumption Increased farming Increased application rate Population growth Farming subsidies Fertiliser subsidies Crop rotation Low Starting inventories Postponement of set-aside Environmental applications High crop prices/ low grain inventories Demand destruction Land vs population growth Increased use of biofuels Impact on supply Decrease Decrease Decrease Increase Decrease Decrease Decrease Impact on demand Decrease Increase Increase Increase Increase Increase Increase Increase Decrease Increase Increase Increase Increase Reduce Increase Increase Likely influence on Prices vs 2007 Increase None None Negative None Small positive Small positive Small negative Positive Positive Positive Positive Positive Positive Positive Negative Positive Positive Positive Positive Positive Positive Positive Comments Govt varies export duty on fertilisers from 10% to 110% depending on domestic demand Removal/reduction of tariff unlikely given low inventory and growing population Less efficient, unprofitable players may be forced to close due to high energy costs and domestic price caps Much of Chinese production based on older, less energy-efficient technology. Also some based on highly polluting Ammonium Bicarbonate. Stricter regulation may force closure of facilities Principal source of low-cost, export-orientated capacity growth. Resource (e.g. engineering) bottlenecks and competition for resources make it likely that forecast growth rates will not be met. Growing gas pipeline infrastructure 'de-strands' Russian gas, and limits attractiveness of its use for fertiliser. Rising input costs for FSU states, e.g. Ukraine provide margin pressure on smaller, inefficient producers. Capacity closures in 2007 decrease 'domestic' supply Capacity closures (Agrium - Alsaka) in 2007 decrease 'domestic' supply Comments Inefficient/over-fertilization of Nitrogen by Chinese farmers has reduced soil fertility Balanced fertilization may reduce consumption Urbanization of rural communities reduces cultivated land and also increases need for greater farming efficiencies. Increased meat consumption requires increased farming for livestock feed Brazilian ag economy benefiting from increased productivity and foreign investment Fertiliser application rates currently significantly lower than in US/Europe Scope for further agricultural productivity through increased fertiliser use Indian population expected to grow 1.6% CAGR Agricultural subsidies support farmers in face of increased fertiliser costs Doubling of fertiliser subsidies in 2008 to continue to feel growth Switch out of corn to less nitrogen-intensive crops would decrease demand Low inventories at the start of the application season should cushion the impact of lower domestic demand on the export market Higher cultivated acres should lead to increased volumes Use of Urea in Heavy Duty Diesel and stationary emission reduction systems will provide additional demand High crop prices encourage farming. Increased fertiliser costs may be passed on to customers given small % of total cost Significant negative impact on yield will force the majority of those who have postponed purchases back to the market in '08 Continued emphasis on yield to support farmers Limited land available for biofuel crops given debate over using land for fuel (vs. food) Key crops (rapeseed, corn) require more fertiliser per acre than others
Brazil India US EU ROW
Source: J.P. Morgan
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Pricing In 2008, nitrogen prices and margins reached their peak, due to higher natural gas prices, rising construction costs, tight demand/supply fundamentals and the sharp rise of the Chinese taxes. Starting mid-2008, falling prices and the global economic downturn pushed demand down leading to temporary negative cash margins.
Figure 232: Ammonia and urea cash margins
250
200
150
100
50
-50 Jul-09
Sep-09
Nov -09
Jan-10
Mar-10 Urea cash Margin - $/t Urea
May -10
Ammonia cash margin - $/t NH3

Source: Bloomberg, ICIS and JPMorgan.
1. Ammonia
Introduction Ammonia is the basis for all nitrogen fertilisers and contains the highest amount of nitrogen (82%). It can be applied directly to the soil or further processed into urea or nitrates before application (e.g. to meet environmental standards). Ammonia is the basic building block for all of the nitrogen fertilisers.
Table 92: Ammonia at a glance
3% 83% Production of Specialty fertilliser, fertilliser for corn and wheat (US) Asia (50%), North America (13%), Europe (13%) Yara, Terra, Agrium Top 5 producers amount to up to 14% of global capacity Natural Gas, Air Large capacity additions in the Middle East
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Production Process Natural gas, as a source of energy and hydrogen, fixes nitrogen from the air with hydrogen to create ammonia (NH3).
Figure 233: First Step: Production of Ammonia Natural Gas (Hydrogen)
Air (Nitrogen)
Ammonia (NH3) Ammon (NH3)
Source: J.P. Morgan
Natural Gas main Raw material
Natural gas comprises the largest cost of ammonia production, amounting up to 7590% of total cost. Most of the other production costs are almost stable and therefore subject to scale advantages. Natural gas costs in North America and Western Europe have historically been much higher than in other regions. However, the gap is narrowing now. Natural gas price influences the floor price of nitrogen fertiliser. Moreover, global LNG activity and higher pipeline capacity into Europe might decrease the spread between low-cost producers in the Middle East/Trinidad and Western countries. For the production of one tonne of ammonia, 36 mmbtu of natural gas are needed: a new, highly efficient plant may use natural gas in the low thirties range to produce one tonne of ammonia, the corresponding figure for old, poorly maintained plants will be in the mid forties.
Figure 234: Ammonia Production Costs
$US/Short Ton Product
500 400 300 200 100 0 3.00 4.00 5.00 6.00 7.00 8.00 9.00 10.00
Gas cost (/ mmbtu)

Source: Yara, Blue Johnson & Associates and J.P. Morgan
Conv ersion cost
Since natural gas is relatively plentiful and special handling considerations for ammonia lead to high transport costs, only 13% of ammonia production was traded in 2008. Asia, led by China is the worlds largest ammonia consumer, but is largely self-sufficient. Ammonia consumption and capacity has shifted from the Western countries to Asia and South America in recent years.
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Fertiliser use accounts for around 85% of Ammonia demand.
Demand Fertiliser use accounts for around 85% of Ammonia demand. Other usages are as intermediate in the production of nylons, acrylonitrile for fibres and plastics, isocyanates for polyurethanes, hydrazine and explosives. Almost half of ammonia production is used to produce urea. It is important to highlight that urea capacity is always integrated with ammonia, as urea requires Co2 which conveniently is a by-product in the ammonia process.
Figure 235: Ammonia consumption by fertilizer end market(2006-08 average)

Direct Other Fertilizers 5% DAP/ MAP 6% Ammonium Nitrate 15% Urea 52% Application 3%
Figure 236: Ammonia consumption by region (2008)

Latin America 3% Middle East 6% FSU 10% Asia 50% North America 13% Europe 13%
Source: Potash Corp, Fertecon and J.P. Morgan
Others 5%
Non-Fertilizer 19%
Source: Potash Corp, Fertecon and J.P. Morgan
Although only accounting for 3% of world consumption of nitrogen fertiliser, anhydrous ammonia comprises 20% of U.S. consumption. In ambient conditions, ammonia is a gas, but it can be stored as a liquid under pressure or under refrigeration. Hence, direct application of anhydrous ammonia requires fairly sophisticated equipment to inject the liquid into the soil. Furthermore, ammonia must be shipped in refrigerated or pressurized ocean-going vessels, river barges, or railroad tank cars, as it quickly becomes a hazardous gas under normal conditions. Supply/Key players The global nitrogen market is less consolidated than for Potash or Phosphate, but some regions, such as Europe and the U.S., have seen significant restructuring of their nitrogen industries. Several of the largest ammonia producers, including Agrium, Koch, PotashCorp, and CF Industries, have majority of their ammonia production based on U.S. Gulf Coast natural gas which has affected a competitive advantage in recent years. Yara International, the company formed by the demerger of the fertiliser and related operations from Norsk Hydro, became a public company in March 2004. The firms core business is nitrogen-based fertilisers, including ammonia, urea, and nitrates. Yara has cost-advantaged nitrogen production in the Middle East and in Trinidad as well as (high cost) production in Western Europe. The firm sells third-party-sourced phosphate and potash fertilisers to offer customers a balanced mix of fertilisers. Industry consolidation continues, with CF Industries purchasing Terra Industries in 2010.
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Figure 237: Top Ammonia producers (MMT)

8 7 6 5 4 3 2 1 0 Yara
Source: Yara
Terra
Agrium
PCS
Koch
Figure 238: Changes in Ammonia Capacity and Consumption

Million Tonnes
Source: Fertecon
Pricing Ammonia prices soared in 2008 and Black Sea prices rose briefly to over $800/ton to a new record level. Prices were strong with higher gas prices in the U.S., Western Europe and the Ukraine lifting the floor price to new levels. However, things have changed in 2009 with depressed fertilizer demand. For most of 2009, ammonia prices were in the range of $200-300/tn. Now ammonia prices are picking up as the demand is improving. We expect production capability to grow 2.0-2.5% per year in the coming years as new plants come online. The global operating rate is projected to remain in the low to mid 80s in 2010 and 2011.
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Tight nitrogen fundamentals have historically motivated capacity expansions, as new ammonia plants can be built in a relatively short lead time. Although several expansions have been proposed, high capital costs for new construction, low producer prices and weak market conditions are leading to delays in or even the abandonment of some projects.
Figure 239: Ammonia prices
$/tn
1100 900 700 500 300 100 19-Apr-07

Source: ICIS
11-Oct-07
03-Apr-08
18-Sep-08
05-Mar-09
20-Aug-09
11-Feb-10
Environmental Concerns The production, distribution and sale of ammonia pose a number of special problems related to handling, transportation and storage: For example, for storage at atmospheric pressure at sea level, ammonia must be cooled down to 33C. At higher altitudes, lower temperatures are required. Moreover, ammonia is very explosive, which requires specialized equipment and trained personnel. Also, increasing concerns about nitrate in groundwater are affecting nitrogen fertiliser application and use.
2. Urea
Introduction As opposed to ammonia with its specific, capital-intensive requirements for storage and delivery, urea is solid and, hence, relatively easy to store and handle. As a result, and due to its high nitrogen content (52%), urea is the nitrogen fertiliser of choice, accounting for 48% of global nitrogen consumption. It is particularly used in the developing regions of the world, and is traded widely in the international market. Most world output is in a solid form, either prills or granules, or crystalline for specialized small-volume uses. Since Urea production is highly vertically integrated, only 30% of global production is traded
Table 93: Urea at a glance
Growth rate (CAGR to 2012E) Current operating rate Key end-markets Key demand regions Key players Key Inputs Threats
3-4% 91% Fertiliser for Corn and Wheat China (35%), India (18%), Brazil (15%), US (8%) Yara, Agrium, PCS, Terra Ammonia, carbon dioxide New capacity in the Middle East
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Overview & Outlook We believe global demand for urea will continue to grow at 3-4% for at least the next three years and grow 2-3% driven by strong demand from India, Brazil, the US and Europe due to high grain prices. We expect capacity to grow at 3-4% leaving the market balanced. Production Process Once ammonia has been produced, urea is the next step in the production process. The carbon monoxide that results from the breakdown of natural gas is converted into carbon dioxide, which is then combined with ammonia to create urea. Typically, it takes 0.58 tonne ammonia for each tonne urea production.
Figure 240: Production of Urea Carbon Dioxide (CO2) Natural Gas Urea (CO(NH2)2) Ammonia (NH3)
Air
Source: J.P. Morgan
Demand Urea is used in the developing regions of the world and is widely traded on international fertiliser markets due to its relatively cheap transport costs.
Figure 241: Urea consumption by region
ROW 29% India 18% US 8% EU-15 5% Brazil 3% China 35%
Source: Fertecon and J.P. Morgan estimates
EU-10 2%
Supply/Key players Since 2005 Urea capacity has grown at an average annual rate of 5% (3.3% excluding China) versus average growth of 2% (-0.2% ex China) in the period 20022004. With the exception of China, all new capacity is expected in the Middle East or in other areas with low-cost gas. However, consumption increased even more, with an average growth of 5.5% over that period. (As outlined below, we exclude China on the assumption that its new fertiliser capacity will primarily be directed to the domestic market).
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Between 2008 and 2010, average urea capacity growth is likely to be 3-4%. According to Fertecon, average urea consumption growth has been 4.8% in last five years, 2.9% excluding China. Planned capacity growth is forecast to rise by 7.7% and 5.0% in 2011E and 2012E respectively. Excluding China capacity growth will be more moderate: 4.2% and 3.8% in 2011E and 2012E. However, we see most of Chinese production being retained for the own domestic market. Besides China, Pakistan, Qatar, Algeria and UAE are the other countries where new capacities are arriving.
Table 94: Urea capacity growth rate
2009 2010 2011 2012 2013
Source: Fertecon and Yara
World 5.0%(5.7%) 7.4%(7.7%) 7.7%(5.3%) 5.0%(3.9%) 3.4%(3.3%)
Excluding China 1.5%(2.3%) 4.2%(4.3%) 4.2%(3.2%) 3.8%(4.6%) 4.8%(4.9%)
Driving regions China (82%), Oman (8%) China (67%), Pakistan (5%) China (69%), Pakistan (7%) China (57%), Algeria (14%) China (22%), UAE (16%)
Exports of Urea from China have also provided a key source of supply onto the international market. The year 2007 saw significant Urea exports from China due to Government-imposed price ceilings, which meant that Chinese producers have turned to exports markets to benefit from higher prices. High international urea prices have allowed Chinese producers to absorb the export taxes and still generate a margin in excess of that available at Chinese domestic prices. However, export supply from China will likely remain limited due to the ongoing export tax regime.
Figure 242: Chinese Urea prices
RMB/kg
900
800
700
600
500
400
300
200 May -07
Sep-07
Jan-08
May -08
Sep-08
Jan-09
May -09
Sep-09
Jan-10
May -10
Urea : Domestic Made ($/tn)
Urea prilled bulk Yuzhny FOB ($/tn)
Source: CEIC
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Figure 243: China - Urea capacity growth

'000 tonnes
12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% 2005 2006 2007 2008E 2009E 2010E 2011E 2012E
Source: Fertecon, J.P. Morgan research
Pricing In line with strong price increases in ammonia, urea prices rose by 49% in 2007 and 244% until May 2008 before it collapsed in 2H 2008. Since ammonia is the key input for urea production, ammonia prices create the price floor for urea (ammonia price + upgrading cash costs) when the market is oversupplied. If the price for urea drops below this floor, swing producers will increase their ammonia production and less urea will be sold on the market. There are two main hubs in urea trade the Black Sea and Arab Gulf - which determine global Urea prices. The Black Sea normally supplies Europe and Latin America while the Arab Gulf supplies North America and Asia/Oceania.
Figure 244: Urea price history
Yuzhny FOB - USD/Tonne
900 800 700 600 500 400 300 200 100 0 19-Apr-07 11-Oct-07 03-Apr-08 18-Sep-08 05-Mar-09 Urea($/tn) 20-Aug-09 11-Feb-10
Source: ICIS
Environmental Concerns There are no serious environmental concerns around the use of urea as a fertiliser material. Unlike ammonium nitrate, urea is not explosive and does not contribute significantly to the problem of groundwater contamination by nitrates.
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Phosphate
Introduction After nitrogen, phosphorous ranks second in terms of volume as a crop nutrient and component of fertilisers. Phosphate comes from ore beds rich with fossils of ancient marine life. Phosphoric acid also has several non-agricultural applications, and some producers, including PotashCorp are focusing on these markets as more profitable outlets for their ores. Examples of non-agricultural applications include detergents, dentifrice, carbonated beverages, and food ingredients. Phosphate is important for root development and drought resistance. It is also key for plant growth and development, such as the ripening of seed and fruit.
Table 95: Phosphate at a glance
Growth rate (CAGR to 2012E) Key end-markets Key demand regions Key players Key Inputs Threats
3% Fertiliser Asia (52%), N America (14%), S America (12%) PotashCorp, Mosaic Phosphoric acid, Ammonia New global production capacities
Overview & Outlook During 2007 and early 2008 phosphate underpinned by rising demand and relatively tight supply. From mid 2008, prices then collapsed to a level reflecting the marginal cost of supply, but have firmed recently on improving demand. Production Process Phosphate rock is crushed and combined with acids to produce phosphoric acid (P2O5). When the concentrated phosphoric acid has reached commercial grade, it can either be combined with ammonia, resulting in monoammonium phosphate (MAP) or diammonium phosphate (DAP) or be combined with additional phosphate rock to convert it into triple superphosphate (TSP). These three products are the principal phosphate fertilisers. Gypsum (CaSO4) is a key by-product in the production of phosphoric acid.
Figure 245: Phosphate Production
Nitric Acid TSB
Phosphate rock
Phosphoric acid
MAP
DAP Sulphur Ammonia
Source: J.P. Morgan
In the U.S., Phosphate rock deposits are found primarily in Florida, North Carolina, Idaho, and Wyoming. Outside of the U.S., Tunisia, Algeria, and especially Morocco all have significant deposits. The U.S. has 8% of the economically viable world
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reserves of phosphate rock; North Africa has over 50%; the remaining 15-20% is found in Jordan, China, Russia, South Africa, Mexico, and Israel.
Figure 246: Phosphate reserves
MMT
10000 8000 6000 4000 2000 0 Africa

Asia
Middle East
North America C&S America
Others
The differences in costs for Phosphate rock from location to location are relatively small and these are mitigated to some degree by shipping costs. Compared with the U.S., Moroccos phosphate rock quality is modestly higher, but this advantage is largely offset by higher extraction costs. The recent rise in ocean freight rates has elevated the price of imported sulfur; this yellow element is required to make phosphate, (although Yara uses nitric feed) as the phosphate rock needs to be treated with sulfuric acid to generate H3PO4. The U.S., with its refinery-sourced sulfur, has about a $30 advantage on sulfur costs per tonne of phosphoric acid versus Morocco. Demand The International Fertiliser Association forecasts phosphate fertiliser demand to grow at c2-3% per year. Farmers may elect to not apply phosphorous fertilisers every year for the following two reasons. First, there is less risk of losing phosphate in the soil through leaching, unlike nitrogen. Second, plants tend to absorb at most 20% of the phosphorous latent in the soil, leaving sufficient amounts for the next growing season once cropping is complete.
Figure 247: World Phosphoric Acid Distribution
Food & Industrial 9% Feed 6% DAP 35% Other 19%
TSP 5% MAP 26%

Source: Fertecon, British Sulphur, PotashCorp
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Figure 248: Phosphate fertiliser consumption by region

Other 20% China 31% Western europe 6% Brazil 8%
Figure 249: Phosphate rock Demand-capacity* and Operating rate (%)

100000 80000 60000 40000 20000 0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2013E 80 75 70 65 60
US 11% Other Asia 8%

Source: Potash Corp, IFA, Fertecon and J.P. Morgan
India 16%
Total Capacity
Total Demand
Operating Rate, %
Source: SRI and J.P. Morgan * MT of phosphoric pentoxide (P2O5)
Supply/Key players Historically, DAP/MAP production was led by the U.S., which accounted for 53 percent of world total production More recently, production has shifted to China and India, which are now producing to meet their own demand. U.S. production has shrunk to 13 million tonnes or 29% of worldwide production. Pricing Historically, The DAP price had only covered the value of its two raw materials, phosphoric acid and ammonia, with no upgrading margin. This situation changed in 2007/08 with tightening supply/demand leading to significant production margins. Prices fell back to marginal production cost in late 2008, but are beginning once again to offer some modest upgrade margin following limited supply growth.
Figure 250: DAP-fertiliser prices
$/ton
1400 1200 1000 800 600 400 200 0 19-Apr-07 25-Oct-07 02-May -08 30-Oct-08 30-Apr-09 29-Oct-09 06-May -1
Figure 251: Sulphur prices ($/tn)

$/ton
180 160 140 120 100 80 60 40 20 0 Jan-09
Mar-09
May -09
Jul-09
Sep-09
Nov -09
Jan-10
Mar-10
May -10
Jul-10
Source: Fertecon, J.P. Morgan
Source: ICIS
Potash
Introduction The third-largest fertiliser in terms of consumption, potash (mostly in the form of potassium chloride-KCl) comes, like phosphate, from mineral reserves. Potash is mined from underground ore bodies that contain minerals left behind by evaporated seas. Therefore production costs are affected by geological conditions like ore depth, K2O content, ore thickness and other.
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Table 96: Potash at a glance

Growth rate (CAGR to 2012E) Key end-markets Key demand regions Key players Market structure Key Inputs Threats
3% Corn and Soybean Fertiliser Asia(38%), N America(19%), S America(16%) PotashCorp, Belaruskali, Mosaic Top 1 producer (PotashCorp) holds 75% of global capacity Ore from mine demand destruction through high prices
Production Process Potash is mined from ore bodies under the ground that contain mineral salts left behind by evaporated seas. Currently, only 12 countries have meaningful potash deposits (mainly Canada, Russia and Belarus), while potash is consumed in more than 150 countries, with Asia and North America being the largest consuming areas. Therefore, almost 80 percent of production is traded across borders.
Figure 252: Potash Production
Ore from mine Size reduction Remove Clay Floatation to Separate potash From salt Wet potash Concentrate Dewatering &Drying Dry concentrate
Sizing Crystallization Compaction
Soluble or industrial Solid/Liquid fertilizer Industrial

Source: PotashCorp
Granular Solid fertilizer
Standard Solid fertilizer
Figure 253: World Potash reserves

MT of K2O
5,000 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 -
N America
Former USSR
W Europe
S America
Middle East
Others
Demand The International Fertiliser Association forecasts potassium demand to grow at 3-4% per year.
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Potassium aids photosynthesis rates, fruit formation, and winter hardiness, and disease resistance, efficient uptake of nutrients, enzyme activation, protein formation, and respiration. Crops deficient in potassium exhibit weak stalks and wilted leaves. Such deficiency also occurs when the ratio of nitrogen to potassium is too high. Unlike phosphate or the varieties of nitrogen fertilisers, potash needs relatively limited treatment to make it suitable for soil application. The purity of the ore and extent of the presence of other materials such as salt, clay, or magnesium, help determine the relatively profitability of the ore bed.
Figure 254: Potash consumption by region
Rest of the World 13% West Europe 12%
North America 18% East Asia 29%
Latin America South Asia 12% 16%
Source: Potash Corp, IFA and J.P. Morgan
Supply/Key players Potash supply is extremely concentrated, with the top 13 global producers controlling almost 90% of global capacity. Supply is kept in line with demand and unproductive capacity is kept idled. Because PotashCorp, the worlds largest potash producer, has kept significant amounts of its capacity off-line, the effective supply/demand balance for potash is better than the 75% figure in 2010 would imply. However, demand has recovered less quickly from 2008/09 downturn than for the other nutrients as the producers have tried to maintain prices well above the cost of production.
Figure 255: World Potash Producers (Total: 39.5 Million Tons KCI 2009)
Million tons
Belaruskali 11% Others 25% ICL 11%
Agrium 2% APC 4% K+S 6% Uralkali 7% China 8%
Silv init 9%
Potas Corp 9% Mosaic 8%
Source: Potash corp, IFA and Food and Agriculture Organization of the United Nations
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According to SRI, Potash demand grew by 3% CAGR from 2002-2007. In the same period, capacity grew by 2%. SRI estimates Potash demand to grow by 3% CAGR until 2011, whereas capacity growth is estimated to be 2% CAGR. Pricing The more consolidated nature of the potash industry has led to a somewhat different pricing development versus the other nutrients. Following the 2007/08 spike, producers have battled to maintain prices at record highs (especially relative to other nutrients) with the result that demand declined significantly. Nevertheless, prices remain well above both historic levels and also above the marginal cost of production (J.P. Morgan Cazenove forecast $230/tn).
Figure 256: Potash prices (MOP)
$/tn
900 800 700 600 500 400 300 200 100 0 19-Apr-07
11-Oct-07
03-Apr-08
18-Sep-08
05-Mar-09
20-Aug-09
11-Feb-10
Source: ICIS
World potash deliveries declined by c50% in 2009 as buyers used up inventories and cut applications. An analysis of world supply/demand for 2010 indicates that the world market will remain well supplied for a number of years. Where ore deposits are developed, it may be possible to increase output by improving the mine efficiency utilizing tools such as debottlenecking equipment, adding work shifts, and reducing vacation periods. As potash profitability is improving, relative to history we expect companies to look for opportunities for incremental expansions, which would take about 12-18 months to put in place. Recently PotashCorp, which is expecting to boost output, announced that it had approved engineering design work for several alternative Saskatchewan projects. Agrium and Mosaic also have low-cost expansion projects under review.
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Agricultural Chemicals
Today's modern farming relies on agricultural chemicals to increase both the level of production and also to maintain the quality of the final product. The overall agricultural market can be divided into Agrochemicals and Seeds. Agrochemicals can then be divided into Crop Protection chemicals and Non Crop chemicals (not related to crop cultivation). The main agrochemicals are Herbicides, Insecticides and Fungicides. Seeds divide into conventional and biotech Seeds.
Figure 257: Agribusiness- Overview
Agribusiness
Agrochemicals Herbicides Insecticides Fungicides

Source: J.P. Morgan
Seeds Conventional Seeds Biotech Seeds
Crop Protection is by far the largest market within agrochemicals; while Agricultural Biotechnology has the highest growth rates (see below). The major long-term factors affecting the crop protection market are; commodity prices (maize, soybeans, wheat or rice), because of their direct impact on farm incomes and the uptake of biotechnology, predominantly in the Americas. According to Phillips McDougall estimates, during 2009, the global market for agrochemical products for crop protection sector decreased by 6.5% to reach $37,860 m, while the market for the use of products in non-crop situations and agricultural biotechnology increased by 3.6 % and 15.5% to $5860 m and $10,570 m, respectively. In many countries, access to and use of agrochemicals is highly regulated: Government-issued permits for the purchase and use of approved agrochemicals may be required, and significant penalties can result from misuse, including improper storage resulting in spillage or contamination.
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Table 97: Agrochemicals- Market Performance

Global sales in $ million Crop Protection Chemicals Non-Crop Agrochemicals Total Agrochemicals Agricultural Biotechnology Total market
Source: Philips McDougall
2008 40,475 5,655 46,130 9,150 55,280
2009 37,860 5,860 43,720 10,570 54,290
% change -6.5% 3.6% -5.2% 15.5% -1.8%
Table 98: Global agrochemical market share by product (2007)

US$ '000
Market Breakdown Herbicide Insecticide NAFTA USA Canada Mexico Other Total NAFTA LATAM Brazil Argentina Colombia Other Total LATAM Europe France Germany Italy Spain UK Poland Russia Hungary Netherlands Other Total Europe Asia Japan China India S Korea Australia Other Asia Total M East / Africa WORLD
Source: Philip McDougall
Fungicide
Other
Market size CCP Non-Crop 6077 1063 367 0 7507 4141 801 324 904 6170
Agchem 8007 1258 417 0 9682 4306 861 342 996 6505 2869 1848 1022 839 831 494 409 339 327 2575 11553 3347 1931 1016 673 604 1869 9440 1575 38755
Ag Biotech
Total 13005 1625 420 0 15050 4719 1663 343 1055 7780 2869 1848 1022 844 831 494 409 339 327 2577 11560 3347 2095 1401 673 627 1876 10019 1621 46030
3914 877 140 0 4931 1813 510 150 414 2887 1000 785 295 279 355 254 256 173 108 1385 4890 42% 822 620 275 146 310 723 2896
511 16115
1245 56 117 0 1418 1130 146 72 241 1589 274 120 260 239 80 40 31 47 57 250 1398 12% 982 645 416 222 109 596 2970
641 8016
632 118 100 0 850 1092 127 94 214 1527 1273 680 357 198 263 164 79 90 113 623 3840 33% 823 356 139 204 45 175 1742
146 8105
286 12 10 0 308 106 18 8 35 167 112 88 40 73 31 9 5 4 9 69 440 4% 85 35 6 21 15 45 207

32 1154
1930 195 50 0 2175 165 60 18 92 335 210 175 70 50 102 27 38 25 40 248 985 9% 635 275 180 80 125 330 1625
245 5365
4998 367 3 0 5368 413 802 1 59 1275
2659 1673 952 789 729 467 371 314 287 2327 10568 91% 2712 1656 836 593 479 1539 7815
1330 33390
2 7
164 385 23 7 579

46 7275
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Table 99: Global agrochemicals market share by company

Syngenta NAFTA USA Canada Mexico Other Total NAFTA LATAM Brazil Argentina Colombia Other Total LATAM Europe France Germany Italy Spain UK Poland Total Europe Asia Japan India S Korea Australia Asia Total M East / Africa WORLD
Source: Philip McDougall
Monsanto
Bayer
BASF
DuPont
Dow
NuFarm
MAI
Others
19% 19% 27% 23% 18% 18% 13% 22% 18% 18% 17% 19% 18% 11% 19% 6% 16% 9% 10% 11% 19% 18.8%
14% 17% 8% 17% 9% 34% 13% 15% 4% 4% 3% 4% 6% 3% 5% 0% 5% 0% 0% 5% 4% 9.7%
13% 19% 22% 16% 14% 9% 18% 18% 26% 19% 20% 23% 20% 22% 27% 9% 12% 9% 8% 13% 28% 19.2%
10% 8% 5% 11% 11% 6% 13% 13% 16% 23% 12% 13% 18% 17% 16% 0% 3% 0% 0% 4% 5% 11.1%
8% 7% 3% 9% 7% 3% 8% 8% 4% 7% 6% 5% 10% 12% 6% 0% 6% 0% 3% 4% 3% 6.2%
12% 7% 6% 13% 6% 6% 13% 12% 6% 3% 7% 9% 6% 6% 7% 0% 8% 0% 7% 6% 3% 8.8%
4% 7% 0% 5% 5% 0% 3% 4% 0% 3% 0% 2% 5% 0% 3% 0% 0% 0% 57% 7% 2% 4.7%
3% 4% 2% 4% 6% 3% 13% 8% 3% 6% 0% 6% 5% 9% 3% 0% 0% 0% 6% 2% 3% 3.9%
16% 13% 27% 1% 24% 22% 10% 1% 23% 17% 35% 19% 12% 20% 13% 85% 50% 82% 9% 49% 32% 18%
Amongst the major regions, only two countries reported a positive growth in the conventional agrochemical Market in 2009 in USD terms: Australia (+30.3%) and Japan (+8.2%). This is due to a favourable currency exchange impact combined with a higher rainfall in Australia and increased agrochemicals prices in Japan. However, in the other leading countries agrochemicals market was negatively affected by weak economic conditions worldwide, a decrease in crop commodity prices, reduced glyphosate prices mainly due to the Chinese oversupply- and a negative currency exchange impact. Brazil and Argentina suffered very dry weather conditions during crop season.
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Figure 258: Crop Protection Market by Region- 2009

Rest of the World 17% NAFTA 17%
Figure 259: Crop Protection Market Growth 2009-2014E CAGR

3.0% 2.5%
AME 3%
2.0% 1.5%
Latin America 17% Europe 26%
1.0% 0.5% 0.0% NAFTA Europe Asia Latin America AME
Asia 20%
Figure 260: Crop Protection Market by Application- 2009

Others 3% Insecticides 25% Herbicides 46%
Figure 261: Crop Protection Market by Crop- 2009

Sugarbeet 2% Cotton 5% Rape 3% Rice 9% Sugarcane 3% Sunflow er 1% Fruit and v egetables 27% Soy bean 10%
Others 10%
Fungicides 26%
Maize 12%
Cereals 18%
The key influencing factors in the crop protection market in 2009 were: lower crop commodity prices, a strong decrease in glyphosates prices the global economic crisis and bad weather conditions (except in Australia). These conditions impacted global crop planting; global wheat (+0.6%) and soybeans (+5.7%) areas enlarged while maize (-1.1%), rice (-2.1%) and cotton (-1.1%) declined. However, maize and sugarcane demand for biofuel production increased.
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Figure 262: Commodity Prices 2005-mid 2010

Rebased at100% on the 01/01/2005
400%
350%
300%
250%
200%
150%
100%
50%
0%
9 5 6 7 8 9 5 6 7 8 8 9 4 9 5 0 5 6 6 7 7 8 c-0 ar-0 un-0 ep-0 ec-0 ar-0 un-0 ep-0 ec-0 ar-0 un-0 ep-0 ec-0 ar-0 un-0 ep-0 ec-0 ar-0 un-0 ep-0 ec-0 ar-1 J J J J J De M M S M D M D S S D M M S D D S
CORN
SOYBEAN
WHEATH
Source: Datastream
Table 100: U.S. Grower's Planting Inventories

acres in million Feed Grain & Corn Wheat Rice Soybeans Cotton
Source: USDA
2008/09 101.8 63.2 3 75.7 9.47
2009/10 100.1 59.1 3.14 77.5 9.15
% Change -1.7% -6.5% 4.7% 2.4% -3.4%
Outlook Agrochemical consultant Phillips McDougall expect the conventional agrochemicals market to grow by 2%/ year in the next 5 years while the agricultural biotechnology market is expected to increase by 4%/ year, in 2009-2014E. The crop protection industry normalized in 2009 after exceptional growth in 2008. The growth of the crop commodity prices and the crop protection market value was constant through 2006, 2007 and 2009, if 2008s exceptional numbers are not considered. In 2010, market growth is expected to remain steady (1.5% in constant dollar terms), globally. In 2010, Latin American crop protection market will grow positively in spite of the pressures due to the glyphosate inventories issue and to the drought experienced in South Argentina. A crop prices improvement and a weak Real versus US dollar will contribute to this growth. The agricultural market in EU-15 will likely remain flat as an increase in crop prices is limited. However in Emerging Europe, thanks to better credit market conditions, the farm economy is expected to improve this year.
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In the USA we expect lower glyphosate prices, a decline in the corn fungicides sector inventories against wider demand increase. The combination of these factors will still likely to have a positive impact on the US crop protection market. Asia has proved resilient in 2009 despite difficult conditions (low prices, pest pressure, drought in Vietnam and Southern China, etc). Japanese agrochemicals market value will benefit from the 2009 price increase, while Australian exports may suffer unfavourable currency exchange rate.
Table 101: Agrochemicals- Company sales less GM, conventional seed and biotechnology (2007)
$ million Syngenta Monsanto MAI Du Pont Dow Bayer BASF
NAFTA Latin America 2695 2040 2233 1450 424 670 869 585 1485 895 1736 1511 1163 1103 Asia 1283 650 262 361 580 1337 464 Europe 2889 905 921 768 1060 3620 2166 AME 324 95 58 57 45 478 95 Total 9231 5333 2335 2640 4065 8682 4991 Herbicides Insecticides Fungicides 3881 1963 3142 5260 -18 1320 510 415 1420 502 607 2680 745 430 2717 3291 2501 1674 910 2287 Others 245 55 90 105 210 173 120 Bio-Tech yes yes
yes yes
Source: Philips Mc Dougall
Herbicides
Herbicides are by far the most important agrochemical, accounting for about 47% of the global agrochemicals market. They are used to prevent or inhibit weed growth and thus replace or reduce the need for manual and mechanical weeding. Weeds, when growing within a crop, compete for nutrients, water and light and interfere with growing and harvesting operations. Without weed control, crop yields can be significantly reduced or crops may even fail. Because they reduce the need for cultivation, herbicides can also help prevent soil erosion and water loss. Herbicides can be divided into two categories: Selective herbicides: Selective herbicides act on specific targeted plant species only, without damaging other species. Non-selective herbicides: Non-selective herbicides act on all vegetation with which they come into contact. The non-selective products have taken market share from the selective herbicide class as sales of seeds with engineered resistance to certain non-selective herbicides (especially Roundup) increased. Plants resistant to a certain type of non-selective herbicide spray therefore allow this herbicide to be sprayed even when the plant has emerged without damage to it. Future growth of selective herbicides will therefore be dependent on the acceptance of biotechnology outside of the Americas. GM herbicide-tolerant crops have a particular negative effect on the selective herbicide sector.
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However in recent years two major developments have negatively influenced the non selective herbicide market: I. Increasing weed resistance (tolerance) to non selective herbicide has meant that farmers are forced to selectives. II. Supply growth (majority in China) has placed significant downward pressure on pricing. The overall market for Herbicides was $17,527m in 2009, an 8.2% decrease versus 2008. Four major reasons drove this evolution. Firstly, a sharp decline in the glyphosate prices resulting from Chinese oversupply. Secondly, a fall in herbicides prices in Latin America and Asia. Thirdly bad weather conditions in Brazil and Argentina. And finally, a diminution in European cereal crops planted area. Herbicides are expected by Philips McDougall to grow by 2.2% per year until 2014.
Figure 263: Leading Herbicides by value- 2008 Figure 264: Herbicide Market by Crop- 2008
Maize 18%
Others
Others 44% Gly phosate 56%
41%
Soy beans 11%
Fruit and Vegetables Cereals 19%

Source: PhilippsMcDougall and J.P. Morgan estimates Source: Philips McDougall
11%
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Fungicides
Fungicides prevent and cure fungal plant diseases that affect crop yields and quality. They may have protectant activity, being applied before an attack and preventing infection. Others can have eradicant activity, being able to kill the pathogen a short time after infection has taken place, but before disease symptoms are seen. In some cases, both types of activity may be present. The main markets for fungicides are fruit and vegetables, cereals and rice. According to Philips McDougall, the market for Fungicides amounted to $9,726m in sales in 2009. They expect the market to grow by 1.1% until 2014. In 2009, it had experienced a decline of 6.5% on 2008, a reverse trend compared to the last ten years where fungicides were Agrochemicals growth leader. This decline is mainly due to a high distributors' inventories level, dry weather in key regions, and a drop in crop prices during the planting season. In 2010, fungicides demand is being supported by rainfalls in South of Brazil and in North Argentina (leading to high soybean disease, thus increased fungicides consumption).
Figure 265: Leading Fungicides- 2008
Azox y strobin 15%
Figure 266: Fungicide Market by Crop- 2008

Rice 6% Soy bean 8%
Others 42%
Py raclostrobin 11%
Others 53%
Non crop 11%
Mancozeb 9% Triflox y strobin Epox iconazole 7%

Cereals 22%
Tebuconazole 8%
8%
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Insecticides
Insecticides are used to control chewing pests (such as caterpillars or greenfly) and sucking pests (such as aphids), which, in common with diseases, reduce crop yields and quality. Insecticides help minimize this damage by controlling insect pests, many of which can be potentially devastating. Insecticides also play an important role in Public Health, targeting insects that spread debilitating diseases (such as mosquitoes, which carry malaria). The insecticide market was estimated at about US$9,411 in 2009 by Phillips McDougall. Insecticides declined by the smallest rate amongst the three agrochemicals. It took advantage from the seed treatment expansion (eg: Thiamethoxam, Clothianidin, etc where seed is coated directly with the chemical) and new products entering the market (eg: Spinetoram, Flubendiamide, etc). Bioengineered seeds that provide insect control using Bt genes have gained share at the expense of conventional insecticides (especially in crops). Further penetration of such genetically modified organisms is anticipated. Insecticides are expected to grow by 1.7% per annum until 2014.
Figure 267: Leading Insecticides- 2008
Imidacloprid 18%
Fruit & Others 23% Vegetables 29%
Figure 268: Insecticide Market by Crop- 2008
Others 45%
Thiamethox a m 13%
Maize 10%
Chlorpy rifos Fipronil 8% Clothianidin 7%

Source: Philips McDougall Source: Philips McDougall
9%
Rice 11% Cotton 11%
Non-crop 16%
Seeds and GMOs

See can be split into two categories: conventional and GMO (biotech). Agrochemical consultant Philips McDougal expects $16,160m of sales for the conventional seeds industry in 2009, which represents a 4.2% decline compared to 2009. The businesses supply seeds, tubers, or early-growth-stage plants to commercial and professional growers. Traditionally, improving seed characteristics have been achieved through cross-pollination or through selective breeding. More recently, genomics and biotechnology have led to the production of genetically modified seeds (GMOs), whose genetic structure has been altered to enhance the properties of the crop. The first GM field crops were introduced in 1996 and since then this market has seen rapid growth:
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The market increased by 15.5% to reach $10,570m in 2009. A combination of GM crop varieties market development, a geographical development of the technology and an increased consumption of premium priced stacked trait of Maize in North America contributed to the GM market improvement. The biggest growth has come from roundup (glyphosate herbicide tolerant)-ready varieties, which are mainly cultivated in the USA, Argentina and Brazil. Smaller markets are Paraguay, Canada, Mexico and Uruguay. The major crops affected by this technology are maize, soybeans, cotton and canola. However, although the Americas have a high adoption of GM crop varieties, it is apparent that there is room for significant expansion on the current GM crop varieties in a number of Countries. Europe in particular is still reluctant to adopt GM crops. Over the next five years, Phillips McDougall expects GM input market to evolve by 4% in real terms and commercially stacked trait varieties of maize and cotton to represent the most important share in the GM market.
Figure 269: Global production of Roundup-Ready Soybean
million acres
200 150 100 50 0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Figure 270: USA share of GM Maize in Maize Crop area

100% 80% 60% 40% 20% 0% 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Figure 271: Global GM Crop Market by traits- 2009

Stacked Gene 37.7% Herbicide Tolerant 51.3%
Figure 272: GM Crop Market by Crop (Total $10.6bn)

Canola 2.3% Others 0.5% Cotton 7.8%
Maize 47.9% Soy beans 41.5%
Insect Resistant 11%
Focus on Seeds R&D One of the key industry trends has been the increase in the proportion of the R&D budget that is devoted to the seeds sector. From 2000-2008 the overall level of R&D expenditure by the15 agrochemicals leaders has grown by about 5.4% per year to $5,118m, whereas expenditures for R&D in the seeds sector grew by 9.1%.
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Inventing new products is the key method of achieving growth above market share and to be able to gain pricing power and to gain from scale effects. Overall, about 7% of global sales are spent on R&D. Monsanto is currently the leading company in seeds and seeds technology, with more than 95% of the R&D budget spent only on seeds and traits. The company introduced Roundup-Ready (RR) varieties of cotton, soybean and maize and as well as insect resistant varieties of cotton and maize. The company is also licensing the use to derived traits. The second largest company both in R&D spending and in revenues is DuPont. GM seeds and traits share in Major players R&D expenditure is growing rapidly, compared to that of agrochemicals, as it represents a bigger potential growth both in volume and in value; In 2009-2014, Phillips McDougall expects conventional seeds market to grow at 1.8% versus Ag-Biotech at 4%. Within Ag-biotech, the companys technologies are the most widely used today, with emphasis on input traits those traits that bolster grower economics. Monsanto is the undisputed leader in glyphosate resistant (Roundup-Ready) and insect-resistant (Bt) crops.
Figure 273: Total R&D expenditure by Leading Agrochemical Companies
$ million
6,000 5,000 4,000 3,000 2,000 1,000 0 2000 2001 2002 2003 2004 2005
Seed and Traits
Figure 274:Leading Agrochemicals: Agrochemical and seeds R&D Expenditure 2008

$ million
1200 1000 800 600 400 200 0
2006
2007
2008
Bayer
Syngenta
BASF
Agrochemicals
Monsanto
Seed and Traits
Dow
DuPont
Agrochemicals
Source: Philips Mc Dougall
DuPont (rank #2) has strong focus on ag-biotech and molecular breeding. The firm is well behind Monsanto in commercializing input traits (and, in fact, must license certain traits from its rival in order to keep its corn and soybean seeds competitive). However, DuPont is also developing output traits, some of which are similar to those being developed by Monsanto. DuPont also continues to discover new crop protection chemicals and moves downstream into commercializing new soybeanbased food ingredients. BASF estimates the projected market value for biotech traits to be $50 bn in 2025, from around $7 bn in 2008, with yield as the major market. The company has a seeds R&D bundled in Seeds business in a joint venture with Monsanto with the first product launch, drought-tolerant corn, targeted for 2012.
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Figure 275: Global market for biotech traits in 2025

Market value in billion $
Figure 276: BASF Monsanto JV pipeline
Source: BASF
Source: BASF
Table 102: Corn Trait opportunity, according to Monsanto

in millions of acres
in millions of acres Glyphosate Tolerant 2007-2010 Corn Borer resistant 2007-2010 Corn Rootworm resistant 2007-2010 Stacked traits 2007-2012
United States Brazil Argentina India EU 27

Source: Monsanto
80 15-20 9 6 24 134-139
60-70 15-20 7 6 8 96-111
45-55 5 5 5 60-70
50-65 15-20 5-7 5-6 15-20 100-118
Table 103: Cotton and soybean traits opportunity according to Monsanto

in million of acres
in millions of acres United States Brazil Argentina India EU27 South Africa Australia
Source: Monsanto
Cotton Glyphosate Tolerant 8-11 3 0 15-20 0 15 0.5-0.8 29-39
Cotton Bollworm resistant 7-11 2 0 15-20 0 15 0.5-0.8 24-31
Soybeans Glyphosate Tolerant 65-70 50-60 40 0 1 2 0 156-171
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The industrial Gases industry

Introduction
The industrial gases industry supplies a variety of different gases to a broad range of industrial and consumer end markets. The largest end users are the steel, chemicals, electronics, and refining industries. The industry is exposed to a variety of strong structured growth drivers as the uses for these gases increases. Currently, the energy industry, the electronics industry and the healthcare industry all offer varying long term growth prospects. Since the early 1990s, consolidation has trimmed the number of global major industrial gas companies from ten to four, which today account for roughly 67% of the industrys sales. Recently, Taiyo Nippon acquired K- Air India gases for $50mn. There has been a some bolt on acquisitions by Air Liquide in recent past (H-Plus SGS for an undisclosed amount, AMCO-GAZ for an undisclosed amount, Medions Homecare for $6.3mn but deal is stil pending, DinnoSante for an undisclosed amount). However the bigger pending transaction is the Air Products- Airgas deal where Air Products is currently offering $6.6bn.
Table 104: Latest mergers in the Industrial Gases Industry
Year 2007 2007 2006 2004 2001 2000 1986 Acquirer Air Liquide Linde Linde Air Liquide Allianz/Goldman Sachs Linde Air Liquide Target Lurgi Engineering Malaysian Oxygen Bhd BOC Messer Griesheim Messer Griesheim AGA Big three Size in $bn 0.2 0.3 15.0 3.3 1.9 3.5 1.0
Source: Company reports, Bloomberg and J.P. Morgan estimates. Announced deals more than $100mn
Further significant moves seem unlikely, as they would almost certainly encounter anti-trust obstacles. The four major players hold relatively stable market shares, and recently demonstrated greater focus toward profitability and returns than towards market share gains.
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Figure 277: Global Industrial Gases MarketBreakdown by Revenue (2009)

Others 23% Air Liquide 21%
Messer 2% Airgas 4% TNSC 4% Air Products 13%

Source: Gasworld.
Linde 19%
Prax air 14%
Emerging markets are the key region for future growth, and all major industrial gas companies have made substantial investments in regions outside of North America, Western Europe and Japan over the past five years. Investment was particularly high in China, where all four big players have formed new joint ventures. Linde has announced joint ventures with China Petroleum, Flowserve Corporation in China in the recent past. For Air Liquide, 80% of new start ups are in emerging economies, particularly China, in 2010. The Chinese industrial gas market is expected to double in value in the next 5-7 years due to strong demand from the local chemicals and steel industry. India and the Republic of Korea show similar growth (also driven by strong steel demand) and are expected to double their consumption volume during this time as well.
Figure 278: Industrial Gases - Historical Sales
million (US-companies in )
14000 12000 10000 8000 6000 4000 2000 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Air Liquide Linde Prax air Air Products
Source: Company reports, J.P. Morgan estimates
Table 105: Industrial Gases portfolio split- 2009

Air Liquide, Linde in million, Praxair and Air Products in $ million Air Liquide Linde Praxair Air Products
Gases 10,180 8,932 8439 6184
in % 85% 80% 94% 75%
Engineering & others 1796 2.311 517 2072
in % 15% 20% 6% 25%
Total 11,976 11,211 8956 8,256
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Industrial Gas companies are treated as defensive

Despite the significant upcoming growth drivers, the industrial gases industry is still treated as defensive. The main reasons for that are: the on-site business with its long-term take or pay contracts Key product areas like food and beverages, healthcare and also environmental applications are less exposed to GDP. These end markets comprise approximately 40% of demand for gases. Raw material costs (up to 90% electricity) are contractually passed through in the on-site business. The strong consolidation in the industrial gases industry should allow higher levels of price discipline over the long term however, much depends on the particular structure in the regions and the relevant market leader. Because of its reliance on long-term contracts for a significant proportion of its revenues, the gases industry has always enjoyed relatively strong growth and lower cyclicality. On average, volumes have grown at around 1.5-2.0 times GDP globally, with more mature markets such as the United States and Western Europe averaging slightly lower growth. In addition, the improving capital discipline within the industry has led to improving utilization and consequently a relatively robust pricing environment in recent years than had been the case in the late 1990s.
Figure 279: Industrial gases - high and resilient EBIT margins
25% 20% 15% 10% 5% 0% 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Air Liquide
Linde
Air Products
Prax air
We estimate that global industrial gases volumes should grow by growth rate of 68% over the next few years. As well as the broadening base of applications, a key driver of growth in developed markets has been the desire of customers to "outsource" the production and supply of their industrial gases needs. This has allowed the customers to commit their capital in their core business. The steel industry was the first key end market to begin to outsource the provision of gas in the 1970s. This has been followed by the chemicals industry and more recently by the oil refining and energy industries.
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Still a significant proportion of the potential customer base has yet to adopt this "over-the-fence" model, especially in emerging markets, and this offers further growth opportunities.
Table 106: Industrial GasesMajor Participants End Markets- 2009
Healthcare Electronics Chemicals/ Hydrogen/ Energy Food & Beverages Metal Production Others Air Liquide 18% 9% 36% 4% 9% 25% Air Products 7% 15% 41% 3% 25% 9% Linde 11% 5% 22% 8% 37% 17% Praxair 12% 9% 23% 7% 37% 11% Average 12% 9% 31% 6% 27% 15%
Source: Company reports and J.P. Morgan estimates.
The main industrial gases are the principal ingredients of air (nitrogen, oxygen, and argon), along with the noble gases: neon, krypton, and xenon. All of these gases are produced using air separation units (ASUs). In addition, hydrogen, helium, and carbon dioxide also comprise significant markets, and while these gases are to be found in the atmosphere, commercial quantities of these gases are manufactured directly or produced as by-products from other chemical processes. Overall, Oxygen and Nitrogen dominate the market, generating around 50% of overall sales.
Figure 280: The principal components of Air Figure 281: Industrial gas market by product value
%
Argon
Oxygen 20.95% Argon 0.93% Other 0.0024% Nitrogen 78.09% Carbon Dioxide 0.03% Neon 0.0018% Helium 0.0005% Krypton 0.0001% Xenon 0.00001%
Carbon diox ide 9% Acty lene 8% Others 7% Hy drogen 6% Specialty Gases 6%
12% Nitrogen 21%
Ox y gen 29%
Source: SRI and J.P. Morgan Source: SRI
Helium 2%
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Air Separation Technology

Air separation plants produce the atmospheric industrial gases nitrogen, oxygen, carbon dioxide and argon using air and electrical power as raw materials. While there are variations in process details, reflecting desired product mix and other factors, all air separation plants employ one of two types of process technology: Cryogenic plants - Produce gas (and liquid) products using very low temperature distillation to separate air components and achieve desired product purities. Non-cryogenic plants - Produce gaseous products with near-ambient temperature and use differences in properties such as molecular structure, size and mass. Choosing the optimum industrial gas production system for a particular application requires consideration of many variables: Volume. Cryogenic methods are most economical for large-scale users. Purity. Non-cryogenic systems tend not to be able to produce high purities economically, although the companies are making significant headway in this area. Additionally, less pure products are suitable for many applications. Continuity. Fluctuating demand is best satisfied from liquid storage tanks filled by road tanker (or sometimes by an on-site plant). If a gas supply is an essential process requirement, as it usually is, an on-site plant would need to be backed up with liquid storage for emergency use. Location. Some places are too remote for delivery to be economical, or may be out of reach altogether (such as an offshore oil rig or on board a ship). Temperature. Only cryogenic systems are able to provide the liquefied gases that are essential for low-temperature applications such as food freezing. Irrespective of the distribution method, the gases industry is highly capital-intensive, even in comparison with the broader chemicals sector. For the atmospheric gases, since the raw material is free, the major costs are capital costs, power, and distribution. For other gases, the cost of the feedstock also must be taken into account at times. The cost of power varies by region, and is an important determinant of pricing. However, many long-term contracts now include clauses allowing for surcharges/rebates to reflect changing energy prices. This way, gases companies have managed to protect to a large extent their operating margin against this risk. Capital intensity on new projects varies significantly between the business lines: Production of air gases in large industries is highly capital-intensive due to high investments in pipeline networks and high capacity plants.
Table 107: Capital intensity of industrial gas businesses
Gas business Onsite Air gases Industrial Merchant Hydrogen and Cogeneration Electronics and Healthcare
Source: Air Liquide
Capital required to generate 1 of sales () 2-3 1.5-2 1-1.5 1.0
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Cryogenic Air Separation Cryogenic systems are used principally for medium- to large-scale production of the atmospheric gases nitrogen, oxygen, and argon. Production is either in liquid form for storage and transportation, or as a gas for piping direct to large-volume users. ASUs are complexes of compressors and heat exchangers with a tall column in which air is fractionally distilled at low temperatures. Cryogenic processes are the most cost-effective separation process for producing at high production rates and are capable of making the highest purity products
Figure 282: 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
The process begins with the intake of huge volumes of air from the atmosphere. The air is compressed and purified before entering the cryogenic equipment package. The air is cooled to about -300F (-185C) and then, relying on different boiling points, separated into its elemental components in the form of liquid oxygen, argon and nitrogen. Non-Cryogenic Air Separation Several types of non-cryogenic air separation processes have been commercialized over the past 25 years or so. Many relatively small volume users of oxygen or nitrogen find that non-cryogenic processes offer a convenient and economical alternative to purchasing gas in high pressure cylinders or buying bulk liquid products to be vaporized to meet demand. Non-cryogenic air separation processes are most likely to be a suitable and costeffective choice when high purity product is not required and/or when the required production rate is relatively small.
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Distribution
The supply of industrial gases typically takes place via one of three broad methods on-site/pipeline, merchant/bulk and cylinder deliveryeach attracting different margins and capital requirements. Onsite/Pipeline Long-term contracts typically involve a dedicated plant, high volume, and low prices. To offset much of the risk undertaken by the gas company in building the plant, the contract is generally constructed on a take-or-pay agreement over the depreciable life of the asset. Low variable costs (no distribution) mean that high operating margins are achievable, but the high capex requirements mean that return on capital measures is low. The age of a companys assets plays a part in the level of its returns, because although plants are typically depreciated over 15 years, they may be operational for longer. In such an instance, the operator will enjoy a period of high returns once the capital base has been fully depreciated. To improve returns, many on-site plants are overbuilt in terms of capacity. The plants are then connected to a pipeline network so that unused output can be sold to alternative customers also connected to that pipeline. A number of gas plants will typically supply a pipeline network, which can be hundreds of kilometers in length. Customers on this network can generally purchase their supply of gas either on a long-term contract, or on demand, which will typically be at a higher price. Bulk/liquid Smaller-scale users buy gas as liquid (to conserve space), normally supplied by road tanker, but also by ship and rail. Liquid prices are typically significantly higher than onsite prices because of the smaller volumes and addition of transport costs. In addition, these transport costs limit the market to around 200 kilometers from the plant. Cylinder Gas is also delivered to small-scale users in cylinder form. The higher variable costs of supplying much smaller volumes in this way render operating margins much lower. However, prices can be up to 100 times on-site levels, meaning that respectable returns are possible, particularly if cylinder rentals are included. The large integrated gas producers tend to reduce their direct involvement and independent distributors - who buy merchant gas in bulk liquid form from the producers and then package it - become more important for the industry. The cylinder segment is still the largest distribution channel, but producers are shifting more and more to pipeline distribution since that involves more stable and higher returns and has led the industry to be treated as defensive by investors.
192
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Figure 283: Industrial gas market by distribution channel

%
Onsite/Pipeline 22% Merchant 30% Specialty gas 10%
Cy linder 38%
Source: SRI, company data
Table 108: Industrial gases indicative contract length

On-site Bulk/merchant Cylinder
estimated contract length 15-20 years c. 1-5 years < 1 year Air Liquide 40% 25% 35% Linde 30% 30% 40% Praxair 28% 34% 37% Air Products 41% 59% -
Cost structure
Capital costs are significant within the industry because of the scale of plants and infrastructure needed (e.g. pipelines). Moreover, high operating costs are very dependent on power prices and transport costs. Power and gas costs are very high in the industry and can amount to up to 60% of overall production costs. In most cases, energy cost increases in the on-site business are passed through to customers via indices published by industry associations. Approximately 50% of bulk contracts are indexed as well, with the remainder priced in individual arrangements with customers. Standardization and better cost management have also led to improving returns.
Figure 284: Cost structure of a typical gas business
%
Capital costs 20% Logistics & Transport 30%
Labor costs 15%
Energy & Electricty 35%

Source: Air Liquide
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194
Figure 285: Capex/sales 1990-2009

25% 20% 15% 10% 5% 0% 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Air Liquide
Source: Company data, J.P. Morgan
Linde
Air Products
Prax air
Capital expenditure in the industry decreased again from their peaks in the mid 1990s when companies invested strongly in new (and less defensive) merchant technology (particularly in the US). However, in the recent years, there is not much increase in capital expenditure. This time, most of the investment can directly be linked to investments in the onsite business. We believe only about 5-10% of sales is dedicated to maintenance capex, the remainder is dedicated to growth.
Figure 286: ROIC 1990-2009
14% 12% 10% 8% 6% 4% 2% 0% 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Air Liquide
Source: Company data, J.P. Morgan
Linde
Air Products
Prax air
New opportunities
LNG (Liquefied Natural Gas) Natural gas is expected to replace petroleum as a cleaner and more economical energy carrier in the coming years. Also, with increasing energy prices and decreasing crude oil reserves, natural gas is becoming more important as an energy source as it has reserves should last longer than those of crude oil. LNG (liquefied natural gas) is natural gas that has been converted to liquid form. By cooling it to approximately -163 degrees Celsius, LNG shrinks to about 1/600th the volume of natural gas at standard temperature and pressure, making it more costefficient to transport over long distances and to places where no pipeline network exists.
194
195
The LNG industry has developed strongly in recent years, with about 50% CAGR in volumes during1999-2007. Gasification (gas-to-liquid, coal to liquid, chemicals-to-liquid) Converting low-cost gas into usable fuel/chemicals is an important market opportunity for industrial gas companies since natural gas is free of polluting agents, such as sulphur, and it complies easily with new legislation standards. A number of critical structural factors remain in place that we believe will make this opportunity both significant and sustainable. US desire for greater self-sufficiency in energy. China energy shortage and abundance of coal. Global - Environmental concerns and the demand for clean fuel technology
Technology not only reliant on a high oil price
We do not view this opportunity as entirely dependent on a continued high oil price. Although we would concede that, should the oil price fall significantly, some of the investments in this area (e.g. in the US) may be postponed. Currently, a number of chemicals/clean fuel projects are under discussion in China, which would each require between 2 and 4ktpd, and some more in the US of similar size. Furthermore, in China, the opportunities from the electricity industry could be even more significant. Studies are currently being undertaken to evaluate the possibility of gasification schemes to produce electricity. Each of these might require up to 25ktpd of oxygen. These studies are still at an early stage, and it is unclear at this point whether the opportunity for the industrial gases industry will be in the form of a long-term contract for the supply of gas or the (far less lucrative) sale of the plant itself. The first step in the production process is that natural gas needs to get partially oxidized at high temperature and pressure to produce synthetic gas (Syngas). Then, the second stage, called the Fischer-Tropsch synthesis step, is the heart of the process and converts gas into liquid hydrocarbons. Finally, for the hydro-cracking step, a reactor is used to fine-tune the product by selective cracking and fractionation to separate the desired middle distillate products. For CTL and CHTL, the same process is used as for GTL. The main end product from CTL is Diesel for the transportation industry. For CHTL it is Methanol.
First projects on the way
Production via Fischer-Tropsch
Figure 287: The gas-to-liquid (GTL) and coal-to-liquid (CTL) process

Natural Gas Reforming Coal Methane Oxygen Synthetic Gas Fischer -Tropsch Conversion Product upgrading (Cracking)
Air Separation
Chemicals (Methanol)
Diesel (low sulphur)
Source: J.P. Morgan
195
196
The process is expensive since it requires a huge amount of energy to convert these materials. Therefore, GTL has long been too expensive to compete with standard crude oil. Today, with crude oil currently between $70-80 per bbl, the price barrier is low and oil companies are pushing this technology hard. The process also requires a huge amount of oxygen (GTL 0.2-0.3 t/barrel and CTL about 0.3-0.4 t/barrel). The US Department of Energy estimates a world production of about 0.9 million barrels per day by 2015. This would imply an additional oxygen demand of 270.000 tpd, which is more than 50% of oxygen production at Linde and Air Liquide. The strategic logic of progressing CTL in coal-rich, oil-poor countries is undeniable.
Figure 288 World production of GTL/CTL 2004-2030E
million barrels/day
6 5 4 3 2 1 0 2004 2010 2015 2020 2025 2030 Coal-to-liquids Gas-to-liquids
Figure 289 Energy Reserves by country

Billion barrels oil equivalent
1200 1000 800 600 400 200 0
A s si a Ch ina Au st r a li a Ir a Sa n ud iA r ab ia In d ia
ta r
Gas
Coal
Source: US Department of Energy
Source: BP, J.P. Morgan
Because the main part of the production process for GTL and CTL lies in the business and the know-how of industrial gas companies (air separation, production of Oxygen and Syngas), they are increasingly featuring in the construction of new GTL and CTL refineries. Equipment for Syngas production accounts for about 50% of total costs of the plant. Therefore, Industrial gases companies can be awarded both an engineering contract and also an over-the-fence contract for the delivery of oxygen. Currently, Linde has significant share in the GTL/CTL business. However, Air Liquide is fast catching up with Lurgi which they acquired in 2007 to increase their GTL and CTL business. Cleaner power generation/Co2 sequestration The opportunity from the electricity industry could be even more significant than the LNG, GTL or CTL processes. Clean coal technology should be driven strongly by increasing environmental legislation. The technology uses high amounts of oxygen. The US Doe estimates that Energy Consumption will increase about 57% from 2004 to 2030, with strong growth coming from emerging markets. The biggest resource for growth will be coal, especially in China, India and Russia, with their abundant coal reserves. For example, coal-powered electricity accounts for 75-80% of demand in China and India compared to 30% in Europe and 50% in the U.S.
196
E Ir a Ve q ne zu ela Ku wa i N ig t eri a Ca na da
Oil
US
Ka
Ru
Qa
UA
197
Figure 290: World Marketed Energy Consumption by Region, 20042030E

Quadrillion Btu
800 700 600 500 400 300 200 100 0 2007 2015 2020 OECD 2025 Non-OECD 2030 2035
Figure 291: World Electricity Generation by Fuel, 2004-2030E

Trillion Kilowatt-hours
40 35 30 25 20 15 10 5 0 2007 2015 Liquids Coal 2020 Natural gas 2025 Renew ables 2030 Nuclear 2035
Source: EIA
Source: EIA
The biggest problem of coal-powered electricity is that it is unfriendly towards the environment because of its huge Co2 emissions. Increasing environmental regulation for Co2 reduction will strongly affect coal-powered plants. Co2 sequestration is the capture and sequestration and storage of carbon dioxide, rather than releasing it into the atmosphere, thereby contributing to global warming. CCS is expected to become the main technology to solve the problem of demand for continued reliance on fossil fuels in combination with necessary reductions in Co2 emissions. There are about four basic systems for capturing Co2 from use of fossil fuels and/or biomass: Capture from industrial process streams (mostly purification of natural gas and the production of hydrogen-containing synthesis gas for the manufacture of ammonia) Pre-combustion capture (reacting a fuel with oxygen or air and/or steam to give a synthesis gas (syngas) to remove Co2) Post-combustion capture (capture from flue gases before being discharged directly to the atmosphere and passed through equipment to separate Co2) Oxy-fuel combustion capture (nearly pure oxygen is used for combustion instead of air, resulting in a flue gas that is mainly Co2 and H2O).
197
198
Figure 292: Co2 capture systems
Source: Intergovernmental Panel of Climate Change
Air separation and Oxygen supply are the typical day-to-day business of industrial gas companies who can therefore offer the know-how and equipment to the Co2 sequestration industry. Their business model might include permanent oxygen supply, Co2 removal and parts of drying and compression. The technologies needed for CCS have therefore been used and developed in other industrial applications in the energy, chemical and fertilizer industry and do not need a high degree of enhancement. Most outlooks expect the CCS business to start substantially before 2015. However, the IPCC estimates that 20-40% of global emissions will be suitable for carbon capture and storage in 2040 and CCS has potential to account for 10bt of Co2 per year by 2050. The opportunities outlined above are likely to be significant. Furthermore, in China, the opportunity from the electricity industry could be even more significant. Studies are currently being undertaken to evaluate the possibility of number of gasification schemes to produce electricity. Each of these might require up to 25ktpd of oxygen. These studies are still at an early stage, and it is unclear at this point whether the opportunity for the industrial gases industry will be in the form of a long-term contract for the supply of gas or the (far less lucrative) sale of the plant itself.
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Atmospheric Gases
Nitrogen
Introduction Nitrogen is a colourless, odourless, tasteless and mostly inert diatomic gas which is used in many different areas. Overview & Outlook For the mature markets (including Western Europe and Japan), we expect 2-3% volume growth and 4-6% for developing markets in the next 4-5 years. Major components for growth will be the refining, chemicals and electronics industries. Production Process Nitrogen is separated from the other components of air, mostly by using cryogenic distillation (see introduction for industrial gases). It is distributed either in liquid or gaseous form. Applications Nitrogen is the lowest cost inert gas for use in the chemicals/oils and electronics industries. Both applications use it to provide inert atmosphere against oxidation
Figure 293: Nitrogen consumption by end market (W Europe)
Other 16% Glass 3% Food industry 11%
Chemicals 37%
Petroleum Refining 8% Oil & Gas ex traction 10%

Metals 15%
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200
Table 109: Nitrogen consumption

Area of usage Chemicals Primary metals & fabrication Description Expected growth rate
Oil and Gas Extraction
Petroleum Refining
Electronics
Food Industry
Nitrogen is utilized in the production of chemicals and petrochemicals, fats and oils, and elastomers. It is used primarily as an inserting agent to exclude oxygen and moisture Nitrogen is used primarily for inerting and blanketing applications in the steel industry and as an atmosphere in fabricated metal products manufacturing. Also, in aluminum processing, nitrogen is bubbled through the melt to remove hydrogen, which can create voids in finished castings. Numerous stages of oil and gas production involve the use of nitrogen. The largest use is for advanced oil recovery (AOR). This uses large amounts of gaseous nitrogen, which is usually supplied by on-site cryogenic plants, to maintain reservoir pressure. In well-drilling, nitrogen is used to replace air in order to reduce the risk ofdownhole fires or explosions. It is also pumped into the drilling fluid to reduce its pressure during under-balanced drilling. The major use for nitrogen in this industry is as an inerting, purging, and blanketing agent for reactor vessels, tanks, pipelines, and other equipment during start-up, shutdown, and cleaning operations. In addition, during normal petroleum production, processing, storage, and delivery nitrogen is widely used. Nitrogen is used primarily as a blanketing and purge gas in the manufacturing of semiconductors, integrated circuits, single crystals, vacuum tubes, and other devices. Strong growth is expected from the TFT and LCD industry. For semiconductor applications, strict purity requirements have meant that gas suppliers tend to offer not only the gas itself, but also the design and installation of the gas distribution system In its liquid form, nitrogen is commonly used to cryogenically freeze some foods. Its rapid freezing properties mean that the moisture content of the food is frozen rapidly into small ice crystals. Although liquid carbon dioxide freezes less quickly than nitrogen, liquid carbon dioxide competes with nitrogen for all stages in the cryogenic freezing of food because of its lower cost. The majority of nitrogen consumed in the glass industry is in gaseous form. It is used as a blanketing agent in float-glass production, to prevent the oxidization of the bed of molten tin onto which the molten glass is poured. This nitrogen is usually produced in small on-site plants.
2-3% 2-3%
8-12%.
2-4%
3-5%
3%.
Glass
3%.
Oxygen
Introduction In contrast to nitrogen, oxygen is widely used because of its reactivity. It also possesses two key properties that drive its use across a number of industries: it supports combustion and it supports life. Overview & Outlook The market for oxygen is strongly driven by environmental legislation and the steel industry in Asia should also show continued demand for oxygen. Key drivers are also coal gasification and oxygen in the Healthcare industry. Production Process Oxygen is mainly produced by cryogenic separation (see introduction section). Smaller volumes of oxygen are also produced by pressure swing adsorption (PSA) separation. Oxygen can be distributed either in liquid or gaseous form. Applications Oxygen has a huge variety of applications, with the biggest demand coming from Metal Production and the Chemicals industry.
200
201
Figure 294: Oxygen consumption by end market
Petroleum Other Refineries 8% Fabricated Metal 5% Products Primary Metals Production 39%
5% Puld and paper 5% Clay , Glass and Concrete 6% Health Serv ices 7% Coal Gasification 7%
Chemicals 18%
Area of usage Primary Metals Production
Description By far the greatest consumer of oxygen is the steel industry. It is used in both blast furnace stage and combustion furnace stage. In blast furnaces, oxygen is being increasingly used to enrich the air mixture in order to aid combustion and therefore increase efficiency. In the combustion furnace, oxygen is introduced to oxidize the impurities in the molten pig iron and thus purify the steel. Oxygen is also extensively used in the smelting of non-ferrous metals such as copper, zinc, and lead. Again, its primary use is to enrich the air to improve combustion and reduce energy consumption. In addition, oxygen is being used increasingly both at facilities that recycle aluminum and at those that recover gold from sulfide ores.
Expected growth rate 2-3% in Europe/U.S. and 4-5% in Emerging Markets
Chemicals
Oxygen is used in a number of large-volume chemical production processes, principally as a catalyst in oxidation reactions, although smaller quantities are used for oxychlorination processes. The advantages of using oxygen over air are that it generates improved reaction rates and eliminates inert nitrogen. Combined, these factors increase production capabilities and reduce pollution.
2-3%
Coal Gasification
This process uses oxygen to partially oxidize hydrocarbons (usually coal) to produce synthesis gas (Syngas), which is a mixture of hydrogen and carbon monoxide. This, in turn, is used to produce substitute natural gas (SNG) or other chemicals, or to generate power through combustion. The nitrogen that is used as a byproduct is usually used as a purge gas in the gasification process, but can also be used in the manufacturing of other chemicals such as ammonia. 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.
6-7%.
Health Services Fabricated Metal Products Petroleum Refineries
Oxygen has a significant number of uses within the medical industry (for example as a breathing gas, diagnostic and anesthesia). Hospitals account for 75-80% of demand, with the remainder coming from home treatment. The principal use of oxygen is for welding and cutting. Oxyfuel gas cutting (OGC), is still widely used for cutting thick sections of material, as it is fast, effective, and inexpensive. Oxygen has two key uses in the petrochemical industry. First is that Oxygen is able to regenerate the catalysts used within catalytic crackers, by oxidizing the carbon that builds up on the catalysts. The second major use is for the debottlenecking of sulfur recovery units by enriching the atmosphere in which the acid gas feed is combusted.
5-6% 2%. 2-3%.
Pulp and Paper
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.
2%
Clay, Gas, and Concrete Products

Oxygen is used to enrich the atmosphere within the glass melt furnaces as well as brick and cement kilns, in order 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.
2%
201
202
Steel industry The steel industry is key driver for Oxygen demand. The International Iron and Steel Institute (IISI) is forecasting global steel consumption growth of 14.4%, excluding China in 2010. In 2010, most of the growth is coming from North America and Latin America. China steel consumption is expected to moderate to 2.8% in 2011 versus 24.8% in 2009.
Table 110: IISI forecasts strong global in global steel consumption
millions of tonnes, % Y/Y
Regions EU-27 Other Europe C.I.S. NAFTA Latin America Africa Middle East Asia China World World (ex. China) BRIC World (ex. BRIC)
Source: World Steel Association (WSA)
2009 118.4 23.9 35.8 80.9 33.6 26.4 40.7 761.5 542.4
% -35.2% -12.5% -28.2% -37.4% -24.1% 9.6% -8.0% 8.7% 24.8%
2010E 134.6 27.2 39.8 99.9 40.4 28.7 44.7 825.7 578.7
% 13.7% 13.5% 11.0% 23.5% 20.0% 8.6% 10.0% 8.4% 6.7%
2011E 145.2 30.4 43 107.1 43.1 31.3 48.4 857.7 594.9
% 7.9% 11.9% 8.0% 7.2% 6.7% 9.3% 8.2% 3.9% 2.8%
587.8 640.9 480.3
-24.5% 17.5% -26.8%
662.2 692 548.9
14.4% 8.0% 14.3%
711.3 720.7 585.6
7.4% 4.1% 6.7%
The importance of China to the global steel industry cannot be underestimated since China is not only the world's largest steel market but also the world's largest steel producer.
Figure 295: China crude steel production
000s tons
600,000 500,000 400,000 300,000 200,000 100,000 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Source: IISI
Since global raw material and production costs are strongly increasing in the steel industry, cost absorptions would have to be done through improved efficiencies of the processes. Therefore, a lot of small-scale capacity in China is expected to shut down and will be replaced by high capacity steel plants. This change is important for industrial gas companies as the new plants will require large air separation units for oxygen.
202
203
All industrial gas companies vie with each other in setting up new plants in the region. In this context, it is important to mention that the Chinese steel production and the other industrial production zones are in the same region (Chinas eastern belt). This situation is very suitable for industrial gas companies since they are able to serve not only the steel plant but also the production facilities (via trucks or cylinders) and gain scale effects. Healthcare In the Healthcare industry Industrial gas companies are providing gases to hospitals and ambulances in tanks or cylinders. Moreover, gases and equipment are directly provided to patients for home usages. Oxygen is the most important gas for the industry. It is used to increase blood oxygen levels and to aid breathing (during operations). Since the healthcare sector is facing cost reduction pressures, the industry sees a strong development to get patients out of the hospitals and into their homes (most of the patients dont need costintensive 24/7 treatment). Also, patients demand to stay in their surroundings and treat this method as the better solution for their everyday life. Emerging markets like Russia, Brazil and China spending a rising proportion of GDP on healthcare.
Argon
Introduction 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. Overview & Outlook In terms of worldwide volume sales Argon accounts for a relatively small proportion of only 1%, but with an average selling price of about 10-15x that of nitrogen or oxygen, it is the third-largest segment. The argon market in the US and Europe has been fairly tight in the past recent year before it went in slowdown in 2009, fueled by strong demand from the steel industry in the U.S., Western Europe and Asia. Future growth will come from Asia and the Middle East, where strong industrial production should drive growth in the steel industry. We forecast the global use of argon to grow at approximately 4-6% per annum over the long term. Production process As Oxygen and Nitrogen Argon is produced by cryogenic distillation, it is distributed either in liquid or gaseous form. Argon can be produced economically only as a byproduct 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, where argon is used to shroud the molten steel to protect it from oxygen as it is poured into molds.
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Applications Demand for Argon is mainly coming from the fabricated metals (protective gas for welding) and stainless steel (stirring for furnaces) industry, accounting for over 80% of total Argon usage. Applications in other industries such as glass (laser and filament lamps), electronics (protection for semiconductors) or the solar/photovoltaic industry are growing fast, but the volumes generated here are still quite small.
Figure 296: Argon consumption in US by end market
Electric Lighting Equipment 4% Electronics 10% Welding 42% Other 6%
Primary Metals 38%

Other Noble Gases

Other noble gases such as neon, xenon, and krypton together account for less than two thousandths of 1% of air. Like argon, they are truly inert and are used almost exclusively by the lighting industry. High-powered lights, such as lighthouses, use xenon and krypton, while fluorescent tubes use a mixture of argon and krypton. Neon is used in lighting tubes and signs. Bar code readers containing continuous lasers are also filled with neon, while lasers that use krypton have recently found a niche in corrective eye surgery.
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Non-atmospheric Gases
As the name implies, none of these gases is extracted from the atmosphere, despite the fact that some are present in very small quantities. Hydrogen and carbon dioxide are the main gases generated by chemical synthesis.
Hydrogen
Introduction Hydrogen is a colourless, odorless, tasteless, highly inflammable gas found at concentrations of about 0.00001% in the atmosphere. About 55-65% of Hydrogen production is used in the manufacture of ammonia for fertilizers and therefore most of the hydrogen is produced captively. Only 5-10% of the current hydrogen market is outsourced to the industrial gas industry. Overview& Outlook Environmental legislation and an increasing use of heavier crude will be the main driver for hydrogen demand in the mid-term. We expect a growth rate of over 8-10%. Currently Air Products is the key leader in the hydrogen industry, accounting for about 45-55% of the market and is very strong in the U.S. Linde (through the acquisition of BOCs strong position in this area) and Air Liquide (organic growth) both has a strong position in the European hydrogen market. Production Process Hydrogen is produced in large quantities through steam reforming of Hydrocarbons, which is the primary method of intentionally manufacturing large volumes of hydrogen. Methane (natural gas) is heated up with H2O (steam) to give Hydrogen and Carbon Dioxide (synthetic gas or Syngas), which can be used as it is, or separated into its component parts. The cost of manufacturing depends largely on the cost of the feedstock, and therefore of natural gas. Nearly 96% of all hydrogen is derived from fossil fuels, with natural gas being by far the most frequently used, with an estimated 49%. Applications Hydrogen is used for the production of ammonia, the production of methanol and the refining of petroleum (to reduce the amount of sulphur).
Figure 297: Hydrogen consumption by end market
Refineries 29% Methonol producers Ammonia producers 60% Others 1%
Source: SRI and J.P. Morgan Source: SRI and J.P. Morgan
Figure 298: Hydrogen consumption by region

N. America 20%
Europe 15% S America 7% Japan 2%
10%
AME 25% Other 31%
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Fertilizer industry Ammonia production is the single-largest consumer of hydrogen in the chemicals industry, although many other chemical products also consume hydrogen during their manufacturing. 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 rather than hydrogen. Therefore, industrial gas companies do not participate in this segment. Other chemicals industry Syngas, a mixture of hydrogen and carbon monoxide, is also used in the production of a wide variety of chemicals. The biggest application is the production of Methanol. Petroleum Refining The most important end use for hydrogen produced by industrial gas companies is therefore the refining industry. Within the oil industry, Hydrogen is used to reduce the sulphur content in products such as reformulated gasoline and low sulphur diesel. Environmental legislation in both the US and Europe is seeking to reduce the level of sulphur dramatically. In the future, "clean fuel" legislation is also expected for locomotive, marine fuels and off-road diesel.
Figure 299: US Sulphur emissions legislation
Sulphur content (in PPM) 600 500 400 300 200 100 0 Gasoline 2001 2010 Diesel
Figure 300: EU Sulphur emissions legislation

Sulphur content (in PPM) 400 300 200 100 0 Gasoline 2001 2010 Diesel
Source: Company reports.
Growth in Europe is supported by Eastern Europe, as these countries will soon have to be in line with EU standards. Moreover, since crude oil prices have been increasing dramatically in the last three years, it became more economically effective to buy cheaper, high sulphur oil and improve it (by using hydrogen). Therefore, High Sulphur regions such as the Persian Gulf will increase their market share in crude oil. Oil companies are beginning to outsource the production of hydrogen towards the industrial gas industry because of their better cost structure (lower raw material costs, economies of scale) and the offer of technical and physical back-up.
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Table 111: Additional Hydrogen applications

Industry Food Electronics Glass Space Food Laboratory Heat Treatment Glass Glass
Application Starch
Optical fibre Rocket fuel Hydrogenation of fats and oils Cylinders Float Glass Polishing
Delivery method Pipeline Bulk Liquid Bulk Liquid Bulk Liquid Bulk Liquid Cylinders
Cylinders Cylinders
Potential future applications for Hydrogen Hydrogen has the potential to be used in a number of additional applications in the future. Oil sands Oil sands are the largest potential source of oil, with an estimated 300 bn barrels globally and Canada as the main region. Since production of oil from oil sands is very expensive, it is only viable above a $40/bbl price for crude oil. The process requires significant quantities of hydrogen (to break bitumen into lighter components) and involves therefore a future potential for hydrogen. However, we believe significant usage of oil sands is not expected in the next few years. Hydrogen for fuel-cells Hydrogen is considered as the cleanest fuel available because the only by-product when burned - is water. Moreover, Hydrogen fuel cells are able to achieve higher efficiencies than commonly used internal combustion engines. The largest potential is therefore expected to come from the automobile industry. Logistics of hydrogen filling stations and of the safe on-board storage of this fuel is still in its infancy and hydrogen fuel will therefore not generate significant revenues in the next 7-10 years, in our view.
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Helium
Helium is extracted from helium-rich natural gas deposits. Only a few sources in the world contain a sufficient proportion of helium (at least 0.3% helium) to justify its separation. About 80% of world production is in the United States, with the majority of the remainder located in Algeria, Russia, and Poland. Natural gas companies tend to recover crude helium during their processing of natural gas. The prime objective is to remove impurities (including helium, carbon dioxide and nitrogen), which reduce the value of the natural gas. A small number of these companies also refine the helium, but most send it to an industrial gas company for further refining. Because of its high value, helium is the only major industrial gas to be traded internationally. The largest use for helium is in welding, where it provides an inert gas shield to protect the weld zone from the atmosphere. The susceptibility of many metals to oxidation means that many metals cannot be joined without such a shield. It is also used for lifting weather balloons as well as for filling blimps and decorative balloons (minor usage). Because it remains gaseous under normal operating conditions, is chemically inert, and has a high thermal conductivity, helium is a useful heat-transfer medium, and is therefore used in gas-cooled nuclear reactors.
Carbon Dioxide
Introduction Carbon dioxide is a colourless, odorless and inert gas. Depending on temperature conditions and pressure, it can be liquid or solid. According to SRI, Liquid carbon dioxide consumption is likely to grow at an average annual rate of about 1.5% in the United States, 1.7% in Western Europe and 0.5% in Japan through 2009-14. Most carbon dioxide is recovered from plants that produce hydrogen or syngas through steam reforming of natural gas. These plants are typically used in the production of ammonia and other chemicals for hydrogenation (see Hydrogen section). Syngas is composed mainly of hydrogen and carbon monoxide, with a small proportion of carbon dioxide. However, if more hydrogen is desired, the carbon monoxide is catalytically oxidized, also creating more carbon dioxide. Rather than being manufactured, carbon dioxide tends to be a by product of other processes, both industrial and natural (for example the production of ethanol and ammonia). The majority of carbon dioxide is recovered from industrial processes, although some is also recovered from natural deposits.
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Figure 301: Carbon Dioxide World Consumption of by end market- 2009

Other 25%
Food Industry 43% Welding 6%
Bev erage Carbonation 26%

Enhanced oil recovery: Producers have attempted several enhanced oil recovery (EOR) techniques that offer prospects for ultimately producing 30 to 60 percent, or more, of the reservoir's original oil in place. The recovery of crude oil takes place in three different phases:
Figure 302: Enhanced oil recovery
Primary oil recovery

Natural pressure of oil and pumps is used to bring oil to surface
Secondary oil recovery
Tertiary oil recovery

Thermal recovery is used to bring oil to surface
Water or gas is used to bring oil to surface
Source: J.P. Morgan
Gas injection uses gases such as natural gas, nitrogen, or carbon dioxide that expand in a reservoir to push additional oil to a production wellbore, or other gases that dissolve in the oil to lower its viscosity and improve its flow rate. Gas injection accounts for nearly 50 percent of EOR production. Food industry. Liquid and solid carbon dioxide is used in the preparation, packaging and preservation of a wide variety of food products. In a number of areas, it competes directly with nitrogen and holds an advantage in some situations because of its lower cost. A large proportion is used in chilling to keep food cool while it is being handled, processed (such as dough mixing) or transported. Chemicals/ Fertilizer production. Gaseous carbon dioxide is used in the fertilizer industry to convert ammonia into urea (see Fertilizer section). Other uses are for the production of sodium carbonate, calcium carbonate and bicarbonate. Beverage carbonation. Carbon dioxides primary use in the beverage market is for soft drinks. Not only does it generate fizz, but it also inhibits the growth of mold and bacteria. This is a mature market, and we do not expect growth to significantly exceed the historical average growth rate of around 3.5%. In addition, the beer-brewing industry consumes significant amounts of carbon dioxide, principally for carbonation, to prevent oxygen coming into contact with the beer or as a purge gas.
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Specialty Chemicals
Introduction
What are Specialty Chemicals? Specialty chemicals is a loosely defined term. The companies within this sub sector are defined by the general characteristics of the products that they manufacture, rather than their molecular structure. It is these broad features that distinguish specialty chemicals companies from the more commodity-oriented operations. It is possible, however, to bracket specialty chemicals companies into a number of broad categories based on the end use of their products.
Figure 303: Specialty chemicals consumption by region by value Figure 304 Specialty chemicals production volume growth rate CAGR Total consumption (2008) $472.6bn (2008-2013E)
Rest of the World 24% North America 26%
China World Japan
China 11%
North America Western Europe
Japan 14%
Western Europe 25%
0.00%
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4.00%
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Overview
Over the past decade, the global chemicals sector has seen a number of major diversified players trimming their portfolios, focusing operations on specialty products and consolidating to gain scale. Clariant was formed in 1995 from an IPO of the chemical operations of Sandoz, and acquired the specialty chemical businesses of Hoechst in 1996. American Cyanamid spun off its specialty chemical operations into Cytec Industries in 1997. Rhodia was created from the chemicals, fibres and polymers businesses of Rhne-Poulenc in 1998. Lonza (1999), Givaudan (2000) and Degussa (now Evonik) (2001) have all emerged as prominent players on the specialty scene. At the start of 2005, Bayer demerged a number of its downstream chemicals businesses to create Lanxess. And, Arkema spun-off from Total in 2004. In 2007 Akzo Nobel acquired ICI after it spun off its pharmaceutical business to concentrate on coatings and chemicals completely. Solvay sold off its Pharma business in 2009. As the revenues and market capitalizations of these groups have grown, so have their importance as investment vehicles within the chemicals industry. Historically this segment of the industry has been represented by a large number of small- to midsized producers. However, more recently consolidation and restructuring within the industry has produced a league of larger manufacturers, 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 and the majority of the European sector.
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One of the defining features of these companies is the immensely broad range of activities included within their portfolios. However, there are a number of key drivers, both positive and negative, behind the industry that are worth highlighting.
Table 112: History of key European Specialty Chemicals companies
Company Akzo Nobel Altana Arkema Ciba [sold to BASF] Clariant Croda DSM Givaudan Lanxess Rhodia Solvay Symrise Syngenta Umicore Wacker Yara
Source: J.P. Morgan
Key sectors/products Paints, pulp & paper chemicals Coatings, additives, pigments Vinyl products, industrial chemicals, performance additives Plastic additives, coating effects, water&paper treatment Pigments & additives, leather & paper chemicals Home & personal care ingredients, polymer additives Vitamins, antibiotics, performance plastics Flavours and fragrances Synthetic rubber, engineering plastics, intermediates Engineering plastics, surfactants, silica-based products, CERs Vinyl products, plastics, specialty polymers, electrochemicals Flavours and Fragrances Agrochemicals Precious Metal products and catalysts Silicones, polymers, polysilicon, silicon Nitrogen fertilisers
Created out of Akzo and Nobel Privately held Total Novartis Sandoz-Chemicals Privately held Dutch State Mines Roche Bayer Aventis (Rhne Poulenc) Privately held Privately held Novartis/Zeneca Union Minire Mining Family owned Norsk Hydro
Type Merger Public listing Spinoff Spinoff Spinoff Public listing Public listing Spinoff Spinoff Spinoff Public listing Public listing Spinoff Public listing Public listing Spinoff
Year 1994 1977 2004 1997 1995 1964 1989 2000 2005 1998 1968 2006 2000 1989 2006 2004
Effect More Important than Price Traditionally, the essential difference between commodity and specialty chemicals has been that the former are sold on price, while the latter are sold on effect, however, the distinction between the two categories is increasingly blurred. In general terms, 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). They provide important characteristics that enhance products with such elements as texture and colour or provide key product qualities, such as high absorbency or anti-icing properties, to name just two. Competition within the industry is based upon product differentiation, innovation and, increasingly, customer service as well as certain logistical issues such as distribution capacity.
Figure 305: Specialty Chemicals value drivers
External to the Chemical Industry Downsizing
Focus Benchmarking Outsourcing Supplier Concentration Reduced Competitive Advantage Volume Growth Slowdown Deflationary Price Pressure
Internal to the Chemical Industry Search for Value-Added

Supplier Relationships Higher Service Levels Pricing Pressures Focussed Core Competencies Hunting for Growth Risk/Reward Increasing commoditisation
Strategic Drivers
Geographic
Regional vs Global
Structural European Weakness Globalized Customers Globalized Suppliers Globalized Competitors Global Positions Key
Source: J.P. Morgan
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Greater Profit Stability Pricing trends for specialty chemical companies tend to be more stable than for commodities, although that is not to say that specialty chemicals companies are not cyclical, and that they necessarily enjoy pricing power. The high price elasticity of a commodity chemical often leads to significant levels of volatility across the cycle. This tends to be less pronounced in specialty chemicals, which tend to be further down the chemical processing chain (and thus further away from inputs such as crude oil), 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, growth rates tend to be at or slightly above prevailing GDP growth, boosted by new applications and new product development. Although these factors do not mean that specialties will necessarily command higher selling prices or generate higher margins than commodities across the cycle, they create an environment in which both margins and prices display comparatively higher levels of stability across the business cycle. 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, stemming from a less volatile earnings stream. However, this varies strongly between the sectors and market positions. Historically, Clariant has not had sufficient pricing power to offset rising input costs whereas Croda, Victrex and Air liquide have shown greater earnings stability. Demand, Not Supply-Drivena Stable Pricing Environment Prices for specialty chemicals tend to be more stable than for commodities. The comparatively limited number of competitors within each product area of the specialty chemical sector, on the whole, reduces the cyclical overcapacity problems that characterize the commodity chemical industry. As incremental additions to capacity have tended to reflect increases in demand, the fundamental imbalance between supply and demand that exists within the commodity chemical industry has been less of a feature of the specialty chemical industry. However, the features of the specialty industry that we have just outlined have attracted increasing numbers of participants (especially in emerging markets) in recent years. As a result, many specialty categories now suffer from oversupply and price deflation as well as commoditisation. Moreover, consolidation among customers has in many cases increased their bargaining power, leading to further downward pressure on prices. 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. Specialties tend to include a higher level of intellectual property content, and some will be sold under patent (although these patents are more often than not superseded by advances in technology). In some end markets, once a strong relationship is established with a customer, the need for an assured supply of product of a consistently high quality means that customers are less likely to switch supplier. (Good examples of such relationships are Givaudan, Symrise and Croda in the consumer ingredients industry and DSM in premixes.) Commodities, on the other hand, have very few comparable barriers to entrycustomers will buy from the producer who can meet their requirements at the lowest cost.
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General Portfolio Shifts and Downstream Consolidation Over the past few years 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. The high cost of doing business globally is more suited to production of goods that carry higher levels of intellectual content and service. As a result, specialty chemicals often have lower levels of capital investment than are typically found in commodity chemicals. Currently, the industry faces a shift in capacity increases to the Middle East and Asia. Western producers have, therefore, changed the balance of their portfolios downstream, where they can compete on areas other than cost alone. Meanwhile, much of the worlds commodity chemical production resides within oil and gas companies. Commoditisation Increasingly high levels of competition within certain product areas have, perhaps inevitably, brought with them a degree of commoditisation. Some product lines, which were once true specialties, are now only semi-specialties at best, and some, such as textile dyes and some plastic additives, would certainly now better be described as commodities. The commoditization of a product line implies that pricing declines will intensify over time. While this price deflation may put returns under pressure in the short term, increasingly this is driving out weaker competitors, leaving those who remain with prospects for improved profitability. The extent to which this is an issue for any given company depends entirely on the business portfolio and, hence, overall business trends between two different specialty producers could be completely different. Due to their complex production processes, specialty chemicals tend to be labour and R&D-intensive. Therefore, countries with a cheap and highly qualified labour force like China or India- generate strong cost advantages compared to their western competitors. This has led to strong competition in specialty chemicals in recent years. Customer Consolidation If consolidation was a defining feature of the specialty chemical industry in the 1990s, then the same is true, to an even greater extent, of the industries that it services. Consolidation within the customer base has, to a certain extent, driven further consolidation activity within the chemicals industryglobal customers want to be serviced by global suppliers. As the power of the customer has increased, so too have the pricing pressures faced by chemical producers. When combined with the trend toward commoditization that we have outlined, the pricing power that was once firmly in the hands of the chemical manufacturers is, in many areas, now shifting in favor of the customer. Price deflation within the industry looks set to remain a defining feature of the specialty chemical landscape from this point onward. From this point of view, we believe it is absolutely key for specialty chemical companies to pare their cost structure to the bone wherever possible, to find critical mass in their area of core competency, and to locate production assets in areas of lower production cost.
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Specialty Chemicals Product Categories

The definition of what composes a specialty chemical is a loose one and the line between specialty and commodity is sometimes blurred, as we have outlined above. However, we have attempted to bracket the vast array of operations of the companies within this subsector into a number of broad categories. In addition to the categories outlined below, we examine the agricultural chemicals and industrial gases industries, which are sometimes considered specialty chemicals industries, as separate sections earlier in this report. Specialty chemicals can be categorized either as market-oriented or functional product-oriented. Market-oriented products are groups of chemicals that are utilized by a specific industry or market such as oil field chemicals. Functional specialty chemicals are groups of products that serve the same defined function, such as adhesives, antioxidants or biocides. Naturally therefore, there is considerable overlap in this categorization.
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Figure 306: Specialty product categories annual growth rate (2008-2013E)
em ic c M a ls at e Nu r ia tra E n ls ce zy uti me ca l In s gre d ie n C a ts Sp tal ec ys ia l ts ty C F o oatin F la od g v W Ad s ate ors a d it rM nd an Fra ives ag em gra n c e C o nt C e s sm he mi Se etic c C h a ls pa em ra t io n ic a ls M Sp ec emb i al ra n ty C h es em ic a W ate Pe ls r-S s ti o lu c id I nd bl es us t r ia S p e e P o c ia lym la lty nd S u er s Ins rf a tit u ct a tio n na C o l C ts r r o le a Ad he sion ners s iv Inh es ib i t an Ru d S o rs bb ea e rl an Pr ts oc Bio es c id sin es E le g C c tr hem on ic Co i n s c C h a ls t ru em ct i ic a on ls C Pla h e s ti mic cs a ls F l a A dd itiv me Re es Te t xt i arda le C h nts em ic A n a ls Oi l F t ioxi d ie l Lu d C a nt br i s ca he tin mi gO ca ls Sy il nth Add Sp i t iv et i ec cL i al e ty ub s Pa ri c pe an r ts Sp Che ec mi ia l ca ty l Pi s Sy g m e nth n et i ts cD P r y es M i in t in n in g g C I nks Im he ag ing mic a ls Ch em ica ls
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Figure 307: Specialty product categories market value/ percentage share (2008)
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ic ns ty C als t ru h ct i emic nc on al ed Ce C h e s mi ra m ca S p ic e c Ma l s ia l t e F la vo ty Su rials rs a n rf a c I nd d F t an us t r ia Sp ragr ts ec an la ia l c e nd ty Ins Co s tit u ati tio ng na s lC F o le a W od n e ate A rs r-S o lu d d it i ve b le s Po Sp lym ec P r er ia l in t s ty Pa in g pe I nk rC s P la h e mi s ti c s cals Ad d it iv Oi C a es lF tal ie l Ad ys d h ts W ate es ive Che rM s a m ic a ls an nd ag em Sea la n C o en t t sm Che s eti m Lu c C ica bri ca h e ls tin g O mic a l T e il A d s xt i dit le C h ives S y e mic nth als Na et i no cD sc a le y C h es em ic a Se pa B io ls rat c id io Nu es tra n M em ce uti b ra ca n Sp l I ng es e c re d ie ia l I m ty P i nts g ag in g m e n Ch ts F la e me m ic Ru Re als bb t ar erA n dants Pr oc t io es xid sin an gC ts he mi ca Sy l nth E nz s ym et i es c C o Lub rro r ic sio an n I ts Mi n n in h ib i g C t or he s mi ca ls
0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%
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Paints and Coatings

Introduction Paints and coatings are used to create a decorative and/or protective layer. The substances from which they are made include resins, solvents, additives, pigments, and in some products, dilutants.
Table 113: Paints and Coatings at a glance
Growth rate (CAGR to 2012E) Key end market Key demand region Key players Market structure Key inputs
3-3.5% Decorative (45%), Performance (30%) Asia (31%), W Europe (28%), North America (25%) Akzo Nobel, PPG, Sherwin Williams, Du Pont, Tikkurila Top 10 producers amount to up to 60% market share Titanium dioxide, acrylic resins, toluene, dyes, solvents
Overview&Outlook The coatings market is expected to grow c.3-3.5% p.a. However, growth rates within the sub-sectors vary widely, with decorative/industrial coatings growing largely in line with GDP, and marine & protective growing at high single-digit rates, driven by strong demand from Asia and a variety of structural drivers (e.g. high energy costs). A major issue which has been facing the coatings industry has been the increase in raw material costs. In addition, increasing environmental regulations and recent litigation (Rhode Island lead in paints case) have driven demand for products which comply with legislations on volatile organic compounds (VOCs) or solvents. Production process Paints and coatings are typically manufactured by a batch process, mainly due to the large number of raw materials (c.600 different chemicals) involved. Key raw materials include titanium dioxide, resins (acrylic, decreasingly alkyd), toluene, dyes and solvents. The production of conventional coatings is a series of unit operations including mixing, dispersing, adjusting and filling. In the final stages the mixture is adjusted or thinned and is then tested for viscosity, colour and other properties, before being strained and put into containers. Paint manufacture is relatively capital unintensive, with capex/sales usually in the area of c.2%. The largest cost is the sourcing of raw materials, which accounts for some 50-60% of sales. Demand The total market for paints and coatings is estimated by Euromonitor to be about $85bn. About 45% of the coatings produced globally are Decorative (also known as Architectural) paints, used to decorate and protect new construction as well as to maintain existing structures, including residential homes and apartments, public buildings, plants and factories. Decorative coatings are used in both the professional and do-it-yourself (DIY) markets. Other paints and coatings include industrial paints (e.g. for automotive OEM, wood, coil, packaging), Marine & Protective and Car Refinish.
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Figure 308: Paints and Coatings Consumption by Major Country (2007) Figure 309 Coatings market - value split by type- 2009
Thousand metric tons (Total: 25514 Thousand metric tons)
USA 21% Brazil 5% Canada 2%
Global market around 78 billion

Special purposes 24%
United Kingdom 4% Taiw an 2% Spain 4% Russia 5%
China 23%
Decorativ e 44%
France 3%
Mex ico 2% Germany 6% Republic of Korea India 6% Japan 8% Italy 4% 5%
Industrial 32%
Source: Akzo Nobel and J.P. Morgan
Figure 310: Projected industry growth (2006-2020E)

Average range (%) 10%
8% 6% 4% 2% 0% Americas Aerospace Marine EMEA Automotive Refinish Metal Packaging Industrial Wood Protective Asia Pacific Coil T otal
Source: Irfab Global Industrial Coatings Report, 2006-2020, Akzo Nobel
The paints and coatings industry breaks down into four main categories: Decorative/Architectural Coatings This segment accounts for c.45% of the market and is used on residential, commercial and industrial buildings, and sold through wholesalers and retailers. Due to recent environmental legislations, there has been a shift from solvent-based to water-based formulations, with the latter type now accounting for c.80% of the market. The market is considered mature, and we expect long-term growth to remain in line with GDP in developed markets, but likely above GDP in developing markets as penetration increases. Short-term swings in sales growth tend to reflect the level of home redecorating and therefore are driven by general activity in the housing market. The usage ratio is approximately 60:40 interior to exterior use.
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Figure 311: Decorative market breakdown by channel
Figure 312: Decorative market breakdown by application

New build 30%
Retail 50%
Trade 50%
Maintenance 70%
Source: Euromonitor basis, Akzo Nobel Source: Euromonitor basis, Akzo Nobel
OEM Coatings Original equipment manufacturer (OEM) coatings are applied to equipment and objects during manufacturing. Such objects include cars and trucks, appliances, furniture and building products, and machinery. We expect demand growth to be in the range of 2-3% in the next three years. The coatings are manufactured to each customers specifications and include powder coatings, which are dry solventless coatings, usually applied using heat. Car Refinish Car refinish differs from automotive OEM in that the former services the car maintenance market. Passenger cars account for c.75% of the market, although the refinishes (mainly lacquers to enamels) can be used in light trucks, heavy trucks, delivery vans, buses and motorcycles. The sub-sector tends to be less cyclical and more resilient to fluctuations in GDP, as demand stems from the need for repairs (eg from accidents). Special-Purpose Coatings These products are formulated for special conditions such as extreme temperatures or corrosive conditions. Major markets include industrial construction and maintenance and machinery refinishing, road markings and traffic signs, roof coatings and marine applications. An estimated 70-75% of protective coatings demand is for maintenance applications, with the remainder of demand accounted for by new construction. Demand for these products is closely tied to the level of industrial activity. Marine and protective paint demand has soared in recent years due to increased shipbuilding and maintenance in Asia. Other This final category includes products such as paint thinners and removers, wood fillers and sealants such as putty and other glazing compounds as well as solvent cleaners. Demand for these products follows the fortunes of the architectural coatings market closely, as they are also used during decoration. Supply/Key players The paints sector in Europe and North America has seen a significant level of consolidation in recent years, with the top 10 players now accounting for c.60% of the market (vs 20% in 1980). However, in Asia Pacific, the sector remains more fragmented, with c.60% of the market serviced by small to medium-sized producers.
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Akzo Nobel has slowly cemented its position as a leader in paints and coatings, having acquired over 36 companies since 1985. Its acquisition of ICI (2007) marked a significant step in its transformation, positioning it as the undisputed world leader in the paints and coatings sector.
Figure 313: Top global players by sales (2009)
billion 9
6 3 0 Akzo Nobel
Source: Company reports, SRI.
PPG
Sherw in Williams
DuPontCoating
BASF Coatings
Valspar
Nippon Paints
Kansai Paints
Jotun
Table 114: Paints & coatings overview of key players

Sales by product type 2009A coatings sales (bn) Automotive Decorative Packaging
Country
Marine & protective
Car refinishes
Industrial
Akzo Nobel PPG Sherwin Williams DuPont- Coating BASF - Coatings Valspar Nippon Paints Kansai Paints Jotun
Netherlands US US US Germany US Japan Japan Norway
8.7 6.4 5.0 2.4 2.2 2.0 1.5 1.7 1.3
53% 15% 85% 15% 31% 21% 18% 33%
8% 20% 4% 14% 20% 31% 18% 22% 5%
10% 25% 8% 48% 25% 3% 11% 23%
15%
28% 28% 40%
7%
7% 12% 3% 10% 11% 6% 9% 4%
11% 5% 58%
33% 23%
24%
Source: J.P. Morgan estimates, SRI, Company data.
Figure 314: Major Paint Raw Materials

Additives 13% Additives 13% Titanium Titanium Dioxide 18% Dioxide 18%
Other 12% Other 12%
Solvents && Solvents Diluents 7% Diluents 7%
Resins && Resins Packaging Packaging Materials 28% Materials 28% Binders 22% Binders 22%
Source: Akzo Nobel, 2007
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Adhesives & Sealants

Adhesives and sealants are used to attach two materials together, or to fill gaps between two surfaces to prevent the passage of air, water and/or chemicals. The distinction between the two categories is often blurred, but they are extremely versatile products, utilized in the majority of industrial sub-sectors. Leading endmarkets include paper, packaging, construction, assembly/manufacturing, woodwork and consumer products. Specialty adhesives and sealants producers compete more on performance than price, although major producers have a comprehensive product offering, and therefore also produce general purpose or commodity products. Products are often branded, which enable the producer to command a premium. The industry is highly fragmented, with the top 8 accounting for c.42% of global sales. The remainder is estimated to be made up of over 1,000 companies.
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1) Adhesives
Introduction Adhesives are materials used to attach or bond two solids together. They can be used in a variety of forms - water-based, solvent-based, solids, films and powders. Some modern adhesives are extremely strong, and are becoming increasingly important in modern construction and industry. The polymer dispersion/emulsion adhesives category is the largest because of their versatility and comparatively moderate price. The consumption of solvent-based adhesives has been declining in developed countries due to VOC emissions regulations.
Table 115: Adhesives at a glance
3.5-4.0% Packaging, construction, furniture/woodworking, electrical/electronic China (42%), N America (21%), W Europe (14%) Henkel, Bostik, HB Fuller, Fragmented Vinyl acetates, acrylic derivatives, phenol, resins, solvents, polyols
Production process The most important component of an adhesive is the binder, which is typically a polymer. This acts to hold the system together and is a major determinant of adhesive performance. Other components which can be added to alter the properties in the final adhesive formulation include antioxidants, extenders, plasticizers, preservatives and thickeners. An appropriate balance is achived between performance requirements and raw material costs for each specific application. Key raw materials include vinyl acetates, acrylate derivatives, polybutadiene, resins and solvents.
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Demand The overall market for adhesives is about $32bn. Demand is expected to grow on average by c.1% above GDP. Emerging markets such as Asia, Eastern Europe and Latin America are set to grow at levels significantly higher than global GDP (c.10%). Demand is strongly driven by product innovation, and having a differentiated technology platform and effective customer service are critical to success.
Figure 315: Adhesive consumption by type in volumes (2008)
Assembly / Manufacturing/ Other 16% Footw ear/ Leather 3% Consumer Adhesiv es 5% Transport 7% Woodw ork 12% Construction 21%
Figure 316 Adhesive consumption by region in volumes- (2008)

Rest of the World Rest of Asia 5% 6% North America 21%
Paper & Packaging 36%

C&S America 1% Western Europe China 42% 14% Rest of Europe Japan 6% 5%
Figure 317: Adhesives market by technology (2008)

Water-Soluble Solv ant Based 12% Reactiv e 10% Hot Melt 10% Natural Poly mers 4% Poly mers 1% Formaldehy de Based 18%
Figure 318: Adhesives - consumption per capita

Use per capita (Kg)
8
6.5
5.5 5 4.8 3.9
Other 5% Poly mer Dispersion/ Emulsion 40%

Source: ICI (Akzo Nobel) Source: Industrieverband Klebstoffe e.V., Henkel, 2006
0 Germany Japan USA France UK
0.9 0.3 0.2
Brazil
China
India
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There are two main types of adhesives: Natural Adhesives Animal Glues These are made from animal bone, fish products or milk derivatives. 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. Despite this, milk-derived glues are still widely used for woodworking and in the manufacturing of paper cups. Starch Adhesives These adhesives are manufactured from a variety of natural starches including potato starch, cornstarch, tapioca flour and wheat flour. The main uses for starch adhesives are in woodworking for veneers and plywoods, as well as for postage stamps. They have the advantage of being cheap to produce, but their relatively low strength and poor resistance to water mean that they are being replaced by synthetics. Synthetic Adhesives Synthetic adhesives use a broad range of raw materials, but many are derived from ethylene, formaldehyde and urea. Their continuing substitution for natural adhesives means that they now account for over 70% of the adhesives market. The use of solvent provides the adhesive with excellent wetting properties and thereby gives very good penetration of the adhesive. However, the use of solventbased adhesives is declining at approximately 2% per year. Other types of synthetic adhesives are reactive, hotmelt, and water soluble. On a chemical basis, adhesives are broadly defined by the following categories: Natural Polymersplant- and animal-derived adhesives such as casein, dextrin and starches Water-Soluble Polymerscellulose ethers (carboxymethylcellulose, methyl cellulose, etc.), polyvinyl alcohol, polyvinyl pyrrolidone and other Solvent Basedpolychloroprene, polyurethane, natural and synthetic rubber, and other Hotmeltpolyethylene, polypropylene, ethylenevinyl acetate, polyamide, polyester, styrene, polyurethane and other Reactiveepoxies, polyurethanes, polyesters, cyanoacrylate and other acrylics, phenolic, urea, melamine, resorcinol, and others such as radiation curable Polymer Dispersion/Emulsionvinyl acetate, ethylvinyl acetate, acrylics, natural and synthetic rubber, polyurethane, and other Adhesives can also be categorized by their form, chemical binder or end market:
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Table 116: Adhesive categories and applications

Adhesive Form General Contact Types of Binder Used Phenolic Amino Natural rubber SBR Polyvinyl acetate Major applications Consumer Construction Wood furniture General industrial Textiles Transportation Bookbinding Packaging Diapers Furniture Footwear Transportation
Hotmelt
Ethylenevinyl acetate Styrene block copolymer Polyvinyl butyral Polyamide Polyester Polyurethane Acrylic Natural rubber Styrene block copolymer Epoxy Urethane Modified acrylic Anaerobic Radiation curable Cyanoacrylate
Pressure Sensitive
High Performance, Reactive
Tapes Labels Decals Transfer films Automotive Electronic Aerospace Consumer Appliances Textiles
Source: SRI
Supply/key players The industry has undergone a significant level of restructuring and consolidation in recent years, as players strive to gain economies of scale. The most recent transactions are Akzos sale of ICIs Adhesives and Electronic Materials businesses to Henkel, which cemented Henkels position as the #1 player, as well as Dows acquisition of Rohm & Haas..
Figure 319: Adhesives market by competitor- 2008
Henkel 25%
Bostik 5% Others 67% HB Fuller 3%
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Table 117: Adhesives - product portfolio of key players- 2008

Electronics Engineered wood Footwear Non-woven Consumer Flexible packaging Production assembly Tapes & labels Transportation Packaging Construction Paper converting Woodbond
Source: ICI (Akzo Nobel)
Henkel xxxx xxxx xxxx xxxx xxxx xxxx xxxx xx xxxx xxxx xx xxxx xxxx
HB Fuller
Bostik
x xxx x xx xx xxxx xx xxx x
xx xxx xxx xx x xxxx x xx x x
Other key players include 3M, Dow/Rohm & Haas, Momentive and Hexion.
2) Sealants
Introduction Sealants are materials used to fill the gap between two materials and prevent the passage of liquids and gases between them. They are thick, non-pourable materials and are often used for their adhesive properties.
Table 118: Sealants at a glance
3.5-4.0% Construction, Transport, Furniture/ Woodworking, Electrical/Electronic W Europe (26%), N America (18%), China (15%), Japan (15%) Henkel, HB Fuller, Bostik Fragmented Ethylene, Formaldehyde, Urea
Production process As with adhesives, sealants are produced through a process of mixing a wide range of raw materials, according to the formulation. As with the paints and adhesives sectors, it is a relatively low capital-intensive business. Demand Today, silicone is the key product used as a sealant (generating 37% of sales). Another important product is polyurethane (18%). Polysulfides have been losing market share to silicone and polyurethane products and to more commoditised sealant products. The major source of demand comes from the construction and transport equipment markets. Manufacturing assembly and consumer use comprise other important markets. Synthetic sealants continue to replace natural materials, which now make up a very small proportion of the market. As in the adhesives markets, synthetic materials continue to replace natural ones and there is a strong move to reduce VOCs (Volatile organic compounds) within the industry.
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Figure 320: Sealants consumption by type in value- 2008

Other 13% Poly v iny l Acetate 2% Buty l Rubber 4% Sily -Modified Poly ethers 7% Poly sulfides 9% Oil-Based Latex and Solv ent Acry lic 10%
Figure 321: Sealants consumption growth by region

China
AME
Silicone 37%
C/E Europe
S America
W Europe
Japan
N America
Utrethanes 18%
0%
2%
4%
6%
8%
10%
12%
14%
Figure 322: Sealants consumption by region- 2008

Rest of the World 9% Rest of Asia 9% C&S America 4% China 15% North America 18%
Figure 323: Sealants consumption by end-market- 2008

Assembly / Other 13%
Consumer 10%
Construction 56% Transport 21%
Western Europe Japan 15% Rest of Europe 4% 26%
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Supply/Key players Consolidation has helped broaden the product lines of the major sealant manufacturers, yet the industry remains highly fragmented, with a lot of medium and small-sized companies.
Table 119: Sealants key players
ADCO Bostik Cemedine Dow Dow Corning Henkel Hutchinson Kommerling PCI Augsburg PPG Rhodia RPM Ruetgers Shin-Etsu Sika Sunstar Engineering 3M Wacker Yokohama Rubber
Source: SRI consulting
Polysulfide x
X x x x x x x x x x
Polyurethane x x x x x x x x x x
Silicone x x x
x x x x x x x x x x x
x x x x x
Colourants
Introduction Colourants are pigments and dyes that are used to give colour to certain products, mostly within the textile industry. They include dyestuffs, pigments and masterbatches. The main players are Dystar (owned by Platinum Investors), BASF/Ciba and Clariant which all hold significant colourant operations.
Figure 324: Different types of colourants
Colourants
Dyestuffs
Pigments
Masterbatches
The traditional colourants industry was an important activity in Europe until the end of the 20th century. It suffers now displacement by the developing world due to increasing production-related environmental costs as well as high labour costs in Europe. Customer industries (e.g. textiles) have also migrated to lower cost regions.
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1) Dyestuffs
Dyes are used principally on textiles, but also on paper, plastics, inks, leather, detergents 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.
Table 120: Dyestuffs at a glance
Growth rate (CAGR to 2012E) Key end market Key demand region Key players Market structure Threats Key inputs
1% Textile (48%), Paper (19%), Detergents (14%) China, India Dystar, BASF (Ciba), Clariant, BASF Highly fragmented New capacity in Asia Aromatic hydrocarbons (Benzene, Toluene, Naphthalene)
Overview Growth rates of dyes are directly linked to the demand for the fibre on which they are used. As a result, growth of synthetic fibre dyes (especially for polyester) is the strongest, with 2% expected annual growth (according to SRI). In addition, fashion plays an important role in demand for pigments, as darker colours require significantly more dye. Production process Aromatic hydrocarbons (Benzene, Toluene, Napthalene and Anthracene) are the main raw materials for the dyestuff production. These raw materials are at first converted into dye intermediates, which are then synthsised into dyes. New investments are required within the dyestuff production industry as effluent treatment plants do not meet environmental legislation. Demand Demand for dyes is highly dependent on the demand for textiles, leather and coloured papers. Textile is by far the largest end market, with a share of 48%, followed by paper (19%). Besides population growth and GDP trends, textile demand is highly dependent on short-term 'fashion': For example, dark colours consume more dyes in comparison to light colours.
Figure 325: Dyestuff consumption by end market
Paper 19% Detergent 14% Ink 6% Others 6% Plastics Tex tile 48%
4% Leather 3%
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Figure 326: Dyestuff consumption by region (2007)

China 38% C & E Europe 3% ROW 3% W Europe 6% S America 6%
Figure 327: Dyestuff demand growth by region (2007-2012E)

ROW China S America Av erage Rest of Asia C & E Europe N America W Europe -2% -1% 0% 1% 2% 3% 4%
Rest of Asia 25%

N America 19%
Source: SRI
Table 121: Different Types of Dyes and their applications

Dye type Acid Dyes Azoic Dyes Basic Dyes Direct Dyes Disperse Dyes Reactive Dyes Sulfur Dyes
Source: J.P. Morgan
Characteristics Insoluble in acid baths. Made using ice to keep the chemicals at low temperature Soluble in acid, insoluble once alkali is added. Soluble in water, used on paper, cotton, rayon and linen. Hardly soluble in water. React to form chemical link between dye and fibre. Very fade resistant Large low-cost category
Uses Used for dyeing protein fibres, wool, silk, leather, paper, nylon. Long-lasting, bright and very versatile, used principally on cotton. Used for duplicator inks (carbon paper, typewriter ribbons) Used to dye cotton and mixed cotton, wool and silk Used to dye synthetics, mainly polyester Used for dyeing cellulose fibres and some nylons Used for 'natural' shades on cotton.
Supply/key players 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 (BASF/Cognis). Mostly, the Dyestuffs industry is fragmented, with many small and medium players. Overall we do not expect demand growth much ahead of 1%, with pricing trends remaining under pressure for the foreseeable future under a normalized environment. In the US, DyStar, Clariant, Huntsman and M. Dohmen control an estimated 61% of the market. The remainder is being supplied by distributors located in Charlotte, North Carolina, selling Chinese and Indian material. In Western Europe, DyStar, BASF/Ciba and Clariant control the majority of dyestuff production. In Asia, China and India are the main producers and consumers.
2) Pigments
Pigments consist of small molecules that are practically insoluble in those media in which they are applied. They have to be attached to a substrate by means of additional compounds, e.g . by polymers in paints, plastics, or melts. Pigments can be divided into organic and inorganic pigments. The two types differ in terms of manufacturing process, volumes (organic pigment market segments are typically smaller), end-markets and prices (organic pigments typically command higher prices).
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Table 122: Pigments at a glance

3.0-3.5% Printing Inks, Paints & Coatings, Plastic industry W Europe (29%), N America (27%), China (15%), Japan (12%), India (6%) BASF/Ciba, Clariant, Lanxess, Rockwood TOP 5 producers amount to up to 60% of the market Metal ore
Overview The global specialty pigment market is valued at c.$5bn, half of which is organic and the remainder inorganic. Pigments are classified based on their composition, with azo pigments being the most common organic pigment, and iron oxide the most common inorganic pigment. Titanium dioxide and carbon black are also often classified as pigments, but they are more commoditised in nature and are sold on the basis of price rather than performance. The sector has been threatened by commoditization and low-cost competition, with the majority of inorganic pigments (and an increasing level of organic pigments) now sourced from Asia. Western producers have thus focused more on higher-value segments, including pearlescent and metallic effect pigments. Production process Specialty pigments are typically produced by a batch process. This is in contrast to commodity pigments (eg titanium dioxide), which are produced by a continuous process. The production process utilized varies depending on the pigment type and end application. Natural inorganic pigments, such as iron oxide, are produced through a four-step process (i) grinding of iron ore to reduce particle size and remove impurities, (ii) drying, (iii) calcination and (iv) further grinding. Synthetic iron oxide, on the other hand, is made by either precipitation reactions, thermal decomposition of iron compounds or organic reduction processes utilizing iron as the reducing agent. Organic pigments, on the other hand, are typically produced in two steps chemical synthesis, followed by finishing or conditioning. Demand The US and Europe account for the majority of global pigments demand, with key applications being inks, paints & coatings and plastics. Inks comprise the largest enduse, which are used in publishing, packaging and printing. Although the market is relatively mature, and the use of ink in publishing has been on the decline due to their replacement with digital media, there has been a healthy level of growth in high-value applications including security printing (eg to prevent currency fraud). The global market is expected to grow about 3-3.5%, with China and India growing at 5-6%, driven by demand for the pigmentation of plastics, printing inks, surface coatings and textile printing.
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Figure 328: Pigments consumption by product type

Other inorganic 5% Chromes 8% Complex inorganic 13% Azo 28%
Iron oxides 21% Phthalocyanine 11%

Source: J.P. Morgan and SRI
High performance 14%
Figure 329:Pigments consumption by region

AME LatAm 2% 3% China 5% Japan 13% Other 8%
Figure 330 Pigments consumption growth by region

China
NAFTA 36%
AME
LatAM
Europe
NAFTA
Other
Japan
Europe 33%
0%
1%
2%
3%
4%
5%
Source: SRI
Inorganic pigments Synthetic iron oxide is the largest segment of the global inorganic colour pigment market, accounting for c.75% in volume terms. The product has suffered from low cost competition and commoditisation, with production now dominated by China (54%), followed by Europe (28%) and North America (8%). Demand, however, remains dominated by Europe and North America (c.50% combined). Inorganic pigments have been losing market share to organic pigments due to the latter groups greater level of brightness and tinctorial strength.
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Figure 331: Inorganic colour pigment consumption by type

Other 10%
Figure 332: Iron oxide pigments - consumption by end-market

Paper 3% Plastics 5% Other 6%
Complex inorganic 28%
Iron oxides 45%
Inks, paints, coatings 25%
Building materials 61%
Chromes 17%
Source: SRI
Source: SRI
Organic pigments The majority of the organic pigments market is made up of classical organic pigments (azo and phthalocyanine), which have suffered from price competition from low-cost producers. Although competition has not been as intense as in the inorganic pigments market, China currently accounts for 28% of the market. This is followed by the US (21%) and Europe (16%). The focus in recent years has been on high-performance pigments, which typically enjoy higher margins.
Figure 333: Organic colour pigment consumption by type
Phthalocyanine 20%
Figure 334: Organic pigments consumption by end market

Paints & coatings, 22% Plastics, 13%
Tex tile printing, 12%
Azo 53% High performance 27%
Pigmented fibres, 8% Printing Inks, 29% Paper, 8% Other, 8%
Source: J.P. Morgan, SRI
Source: J.P. Morgan, SRI
Supply/key players The largest players in the pigments market are BASF/Ciba, Clariant and Sun Chemicals. The majority of pigments producers are specialized in either inorganic or organic pigments, with only a few companies (e.g. BASF), manufacturing both pigment types. The largest producers of organic pigments are BASF, Clariant, Dainichiseika, Dainippon and Toyo Ink. The largest producers of inorganic pigments are Lanxess (c50% share of synthetic iron oxide) and Rockwood Pigments (which recently acquired Elementis pigments), followed Toda Kogyo and a number of Chinese competitors (e.g. Cathay Pigments, Deqing Huayuan Pigment).
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Regulatory concerns around carcinogenicity and neurological damage have triggered a shift in product portfolio among the major suppliers. Pigments receiving the most regulatory attention in recent years have been those containing lead, chromium and cadmium.
3) Masterbatches
Masterbatches are the pelletized colourants and additives that plastics producers combine with resins to colour plastics.
Table 123: Masterbatches at a glance
3-4% Packaging (42%), Building (32%), Auto (7%), Electronic (5%) US (30%), Europe (30%), Asia (15%) Chemtura, Clariant, PolyOne Top 2 players amount to 35%, Rest of the market is very fragmented Pigments, Antistatic agents
Overview The overall market for masterbatches is expected by SRI to be worth over $5-6bn in 2008. The largest end markets are packaging and building. Due to strong demand in Asia in these end markets, we expect growth slightly above GDP at 3-4% in the next five years. Production process Masterbatches are blended at a pre-agreed formulation according to customer requirements. Ingredients may include pigments, titanium dioxide, UV blockers, antistatic agents and agents for effects such as pearlescence. Demand The end market for masterbatches includes larger auto and consumer companies, but also a huge variety of smaller plastic producers. Therefore masterbatches are mostly custom-made and are characterised by many different individual specifications. This tends to lead to above-average working capital demands.
Figure 335: Masterbatches consumption by end market
Others 10% Auto 7% Electronic 5% Durable goods 4%
Europe 30% US 30%
Figure 336: Masterbatches consumption by region

Row 25% Asia 15%
Building 32%
Packaging 42%
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Selling to large customers, pricing power is limited in the masterbatch industry. Therefore, continous restructuring and low-cost production, combined with a local presence to customers, is the key to success. Supply/key players The biggest players in the industry are Clariant (c.10%) and PolyOne, with an estimated combined global market share of 20-30%. There has been intense competition and further restructuring in the industry, as witnessed by Clariants CHF 30 million purchase of Cibas masterbatch business in Europe in December 2006.
Plastic Additives
Introduction Plastic additives, as the name suggests, are chemicals that are added to plastics to provide them with certain qualities that improve their functionality or processability. Examples include antioxidants, UV resistance and thermo resistance.
Table 124: Plastic Additives at a glance
2% Packaging, Automotive, Construction N America (24%), W Europe (22%), China (19%), Japan (8%) BASF, Chemtura, Arkema, Dow/Rohm & Haas Fragmented (Top 5 producers 33% share) Phenol derrivatives
Overview&Outlook The plastic additives industry is estimated to be worth $16.5bn. Market growth is strongly tied to the demand for plastics, which in turn is dependent on demand from its main end uses - including automotive, construction and packaging. Overall, demand growth is estimated to be c.2% p.a. through to 2013e (SRI). Plastic additives have suffered rapid commoditization, and thus the focus in the industry has been on restructuring, as well as consolidation. Soaring input costs have placed significant margin pressures on even the larger players, including Chemtura and BASF/Ciba. Production process The production of plastic additives is a capital-intensive process. Most plastic additives in Europe are manufactured by a batch process, with the majority of larger players being back-integrated into their raw materials. The key raw materials are phenol derivatives. Although the majority of Western European producers tend to have multipurpose plants, in North America, each manufacturer tends to produce a given product at only one plant, and thus products are frequently shipped over great distances.
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Figure 337: Typical cost structure of Plastic additives

Administration 7% Manufacturing 84% Sales & Adv ertising 6% R&D and Technical serv ices 3%
Source: SRI
Demand Almost all plastics additives are sold to manufacturers of plastics products. As the majority of plastics consumption is in Asia Pacific, the majority of additives are also consumed in this region. PVC production generates the majority of demand for polymer additives, particularly modifiers and processing aids, followed by PE, PP and PS.
Figure 338: Plastic additives demand by region- 2008
AME 9% Western Europe 21% 3% Central and Eastern Europe 5% Others 1% China 20% North America 21% The Rest of Asia 20%
South America
Figure 339: Plastic additive demand growth by region 2008-2013E CAGR

China India AME Others South America Western Europe North America The Rest of Asia Japan Central and Eastern Europe -3% -2% -1% 0% 1% 2% 3% 4% 5% 6% 7% 8%
Figure 340: Plastic additive consumption by type- 2008

Antistatic Agents 1% Anti-ox idents 6% Lubricants 14% Light Stabilizers 1% Impact Flame Retardants 39% Chemical Blow ing Heat Stabilizers 18% Agents 4% Modifiers 17%
Figure 341: Plastic additive consumption by polymer type- 2008

Other 12% Thermosets PVC 40% 15%
Poly olefins/ PS 33%
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The range of additives is broad, as summarized below.

Table 125: Key plastic additives and their uses
Type Antioxidant Key use * Prevent or delay oxidization * Greatest demand comes from polyolefins (polyethylene, polypropylene, and polystyrene), while the major types of antioxidants are alkylated phenols, amines, phosphates, and esters. * Major end-use industries include rubber, plastics, food and feed, and petroleum fuel industries in decreasing order. * Eliminates or reduces static electricity. Acts by permitting the body or surface of the material to be slightly conductive, preventing the formation of static charges and hindering the fixation of dust. * Examples of antistatic additives include long-chain aliphatic amines and amides, phosphate esters, quaternary ammonium salts, polyethylene glycols, polyethylene glycol esters, and ethoxylated long-chained aliphatic amines. * Produces a cellular structure in a plastic. * Range from simple salts such as ammonium or sodium bicarbonate to complex nitrogen-releasing agents. * Resists combustion when exposed to extreme temperatures. Also widely used in furniture and textile manufacturing. * Main end-markets are construction, electronics and transport markets. * Non-halogen type replacing chlorinates/bromine type given heightened medical/environmental concerns. * Increase durability of plastics resins * Most significant demand comes from PVC manufacturing, as resins are processed at high temperatures. * Alter the physical properties of the plastic resin. * Greatest demand is for plasticizers, which increase a materials flexibility. * Demand largely driven by demand for flexible PVC resins, for which the most common plasticizer is phthalate. Rubber-based impact modifiers are used to improve a plastics resistance to stress by absorbing force. * Assist resin flow during production and enhance mold release by compensating for any imperfections in machinery/materials * Include metallic stearates, hydrocarbons, fatty acids and alcohols. * Absorb/deflect UV light to mitigate degradation * Used in plastics as well as paints.
Antistatic agents
Chemical blowing agent Flame retardants Heat Stabilizers Impact modifiers/ Processing agents Lubricants Light stabilisers
Supply/Key players The plastic additive industry is highly fragmented, although there has been some level of consolidation in recent years. The most recent transformational move was the merger of Great Lakes and Crompton to form Chemtura. Companies have also increasingly shifted their production to high growth areas a recent example being Cibas intention to construct a new antioxidant plant in Singapore.
Figure 342: Top producers of plastic additives (2008)
Songw on 2% 4% Arkema
BASF/ Ciba 10% Albermarle 2% Chemtura 9% Dow 4% Kaneka
Others 67%
Source: SRI
2%
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Table 126: Plastic additives producers in Western Europe

Anti oxidants x Anti-static Agents x x x x x x x x Chemical blowing agents x x x x x x x x x x x x Flame retardants x Heat stabilisers x x x Impact modifiers x x x x UV light stabilizers
Company Akcros Akzo Nobel Arkema Baerlocher BASF Chemson Polymer Chemtura Clariant Emery Oleochemicals Lanxess Rohm and Haas (UK)
Lubricants x x x x x x x x x
x x x x
x x x
The additive market is service-intensive, with the capability to provide adequate technical support being a key success factor. Of increasing importance has been the recyclability of polymers containing a given suppliers additives, as well as green polymers. Compliance with environmental/health legislation has also been a key topic, given increased concerns over potentially toxic lead and cadmium-based products, as well as chlorinated and brominated compounds.
Water management chemicals

Introduction Water management service companies provide the overall water treatment package, including monitoring, metering and dosing equipment and sensing devices, as well as bulk and specialty chemicals, as required by the specific customer. There are five main types of specialty water management chemicals - ion exchange resins, organic polymers (coagulants & flocculants), corrosion inhibitors, scale inhibitors and biocides.
Table 127: Water Management Chemicals at a glance
Growth rate (CAGR 2007- 2012E) Key end market Key demand region Key players Market structure Key inputs
3.1% Pulp & Paper, Chemical processing, Petroleum refining United Stated (38%),Europe(18%) Nalco, GE infra, SNF Floerger, Ashland, Ciba, Fragmented Organic polymer coagulants and formulated products
Overview&Outlook The broad definition of water treatment and the consequent wide range of applications mean that a wide range of factors drive demand. Environmental regulations have been a key factor, as are industrial and consumer health and population growth. Industrial markets consume approximately 75% of water treatment chemicals, with cooling water the largest application and pulp and paper the largest market.
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We expect the industry to grow c.3% per annum. China is one of the biggest consumers of water management chemicals, with a global share of close to 10%. The water management business should grow faster in regions where water is scarce such as the Middle East. Production process Specialty chemicals consumed in the water management industry have a wide range of alternative end-uses, and are therefore produced in large quantities by large, wellestablished chemical companies with multiple plant sites, often located around the world. The majority of players are back integrated into their raw materials. Demand The major industrial consumers of these chemicals are the pulp and paper, chemical processing, petroleum refining, metal finishing electronics and paint industries. Water softening and purification chemicals are widely used commercially in food and beverages manufacturing, while treatment chemicals for swimming pools also generate significant demand. Municipal applications consist of treatments for drinking and for waste water.
Figure 343: Water management chemicals consumption by type-2007 Figure 344: Water management chemicals consumption by region2007
Scale Inhibitors 20% Others 20%
Rest of the World 25%
United States 38%
China 10%
Organic Corrosion Inhibitors 32%
Poly mers 28%
Japan 9% Europe 18%
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Table 128: Water management chemicals and applications

Water-management chemicals Corrosion inhibitors Applications 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. They account for the largest category of water treatment chemicals by volume. Growth in demand for corrosion inhibitors is closely tied to the level of industrial activity. Used principally in the municipal water treatment industry These chemicals help to separate suspended matter and contaminants, including solid waste, from water. Main chemicals used include water-soluble polymers, such as polyacrylamides and acrylic acid polymers, and aluminum compounds. Demand growth for the most part is allied to population growth and is therefore unlikely to exceed 1-2% per annum in developed economies. However, the developing economies of Latin America and Asia, with their improving living standards offer the greatest potential for growth, in our view. This category of chemicals includes the bulk commodity chemicals of chlorine and hydrogen peroxide as well as their derivatives. They are used as disinfectants in a wide variety of industrial and commercial applications. Smaller volume specialty products in this category include biocides and bromine compounds, which combat bacteria in water. As specialty applications comprise a very small proportion of the demand for these major chemicals, demand growth is driven by alternative applications such as the health of the pulp and paper industry. They are used to maintain PH levels in both industrial and household water, by eliminating the effects of calcium and magnesium. The chemicals used themselves include lime, sodium derivatives, and sulfuric and hydrochloric acid. Main application of ion exchange resins are water treatment (more than 60% of total dollar value), food purification, adsorbents, metal recovery and remediation Manufacturing is capital-intensive with precursor resin is chemically modified in suspension polymerisation process to obtain the desired ionic characterstics. Arsenic removal from drinking water is a growth opportunity for ion resins after stringent regulations by the US Government Defoamers and sequestering agents. Filter media and adsorbents, which provide another means of separating suspended matter and contaminants from water.
Coagulants and Flocculants
Oxidizers and Biocides
PH Adjusters and Water Softeners Ion Exchange resins
Other Uses
Source: SRI and J.P. Morganand SRI
Supply/key players Recently, the industry has seen a number of consolidation moves. Nalco Company and GEs infrastructure, water and process division share about 36% of the US market for water management and have a significant global market share. Ciba aquired Allied Colloids for 1.42bn in 1998. The other acquisition was Ashlands purchase of Degussa (Evonik)s water treatment subsidy, Stockhausen in 2006.
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Leather chemicals
Introduction Leather chemicals form a small sector within the chemicals industry. They are used for tanning, re-tanning and finishing in the leather industry.
Table 129: Leather Chemicals at a glance
2% Shoes (50%), Furniture (22%), Automotive (18%) Asia-Pacific (51%), EMEA (28%), Americas (21%) Lanxess, Clariant, BASF, Stahl Consolidation expected Chrome ore
Overview The leather chemicals market is estimated to be worth 3-3.3bn according to SRI. Asia Pacific and China in particular are the largest sources of demand, accounting for more than 50% of the global market. The market is estimated by SRI to be growing at c.2% p.a., driven by meat consumption and cattle slaughter rates. The industry has suffered rapid commoditization in recent years, and high input costs have resulted in margin pressure for the majority of Western players. Production process The leather production process involves 3 major steps. At first, hides and skins have to be cleaned in order to remove the ingredients that are not suitable for further processing e.g. hairs and fat cells etc. Then, the hides and skins get tanned using chromium tanning materials or vegetable extracts. Finally, the subsequent wet finishing process is required to provide the leather with some appointed properties, like softness, colour and handle. Demand Leather chemicals are mainly used in the production of leather shoes (c.50% of market), although in recent years we have seen an increasing level of demand from the automotive end market (eg leather seats in passenger cars). Furniture is an additional important end market. The European and NAFTA markets have declined in recent years, although Asia and South America have shown healthy growth.
Figure 345: Leather chemicals consumption by end market
Furniture 22% Automotiv e 18%
Americas 21%
Figure 346: Leather chemicals consumption by region

EMEA 28%
Shoes 50%
Others 10%
Asia pacific 51%
Source: Lanxess
Source: Lanxess
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Supply/key players The main players in the leather chemicals industry are BASF, Clariant, Lanxess, Stahl and TFL, who all focus on high quality innovative leather chemicals. Although the majority of players offer a full range of products used in the processing of leather, Lanxess is currently the only producer benefiting from its back-integration into chrome ore.
Table 130: Leather chemicals - product offering
Chrome ore
BASF Clariant Lanxess Stahl TFL

Source: Lanxess
Tanning x x x
Re-tanning x x x x x
Finishing x x x x x
Consumer chemicals
Introduction Consumer chemicals is a broad term used to classify chemical ingredients which are used in the home, personal care and food end-markets. They include nutritional ingredients, cosmetic ingredients as well as flavours & fragrances. A key characteristic of these chemicals is that they tend to account for a small proportion of its customer's total cost, while being a key differentiator of the end product. Players in this industry tend to enjoy relatively defensive demand, as well as above-average returns and margins.
Figure 347: Key segments within the consumer chemicals sub-sector
Consumer Chemicals
Flavors & Fragrances

Food Ingredients
Cosmetic Ingredients
The industry has seen significant consolidation in recent years, with recent moves including BASFs acquisition of Cognis (2010), Givaudans acquisition of ICIs Quest (2006) and Crodas acquisition of Uniqema (2006).
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1) Flavours and Fragrances

Introduction What's behind the foods people love? Great taste (Givaudan). The production and use of flavours and fragrances has a long history and goes back to the Middle Ages. Production on a larger scale started in the nineteenth century with the extraction of single chemicals that are responsible for the characteristic aroma of natural products. Nowadays, flavour and fragrance ingredients are one of the most numerous, and highest-value additives utilized by the food and personal care industries. Although flavours and fragrances are two quite distinct product groups, using different chemical reactions and techniques and have different market dynamics, most major players in the industry are involved in the production of both flavours and fragrances.
Table 131: Flavours and Fragrances at a glance
2-3% Flavours: Beverages, Sweets, Dairy Fragrances: Home & personal care, fine fragrances (perfumes) N America, APAC, W Europe Givaudan, IFF, Firmenich, Symrise,Takasago Top 4 players have 70-75% market share Essential oils and natural extracts (vegetables, fruit, herbs), aroma chemicals
Overview&Outlook The global flavours and fragrances industry was, according to SRI, worth US$18.6 billion by consumption in 2006. With a share of 46%, Flavour composition has the biggest market share of the F&F market. SRI estimates the growth rate for flavours and fragrances industry in the range of 34% per year through 2011, with the larger players tending to show above average growth, as they take share from the smaller players. Flavours are used in small quantities to enhance the taste and texture of all manner of processed food and beverages. Fragrance products are sold principally to manufacturers of perfumes, cosmetics, detergents, and other personal and household care products. According to Givaudan, most Flavours and Fragrances comprise less than 3% of input costs for their clients (c.5% for fragrances) while being the key differentiating ingredient, and therefore tend to enjoy better pricing resilience than many other specialty chemicals producers.
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Figure 348: FMCG customer costs

Admin 10% Distribution/selling 19% Consumer Care input 1-5%
Other COGS 67%

Figure 349: Key drivers of consumer repurchase decisions - food

Packaging 10% Price 15% Smell/taste 45%
Figure 350: Key drivers of consumer repurchase decisions fine fragrances

Fragrance image 3% Other 6% Brand 5% Ov erall ex perience 8%
Brand image 30%

Source: AC Nielsen Source: AC Nielsen.
Scent 78%
Demand The flavours & fragrances sector was estimated to be c.11bn in size in 2009.
Figure 351: Flavours & fragrances sector (11bn)
Aroma chemicals 15% Flav ours 45%
Fragrances 40%
In the field of flavours, products such as convenience foods, soft drinks, and lowcholesterol, low-fat foods have all boomed in popularity, while new markets are constantly emerging.
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Figure 352: Flavours - sales by geography

S America E Europe 6% 6% M East/Africa 7%
Figure 353: Fragrances - sales by end-market

Other N America 31% Sav oury 23% 12% Bev erages 33%
W Europe 24% APAC 26%

Source: IAL Consultants. Source: IAL Consultants.
Sw eet
The key characteristics and drivers of the flavours market include: Demand for healthy products, without compromising on taste (e.g. low-fat and low-sodium) Demand for natural flavours Increased use of functional foods (i.e. food products with an additional benefit e.g. energy boosting, slimming) Trend towards snacking; convenience without sacrificing taste Emergence of new target groups with unique tastes (e.g. ethnic food) Increasing requirements for labeling and food safety Demand for unique delivery systems (e.g. encapsulation, delayed flavour delivery) In the fragrances market, demand for products such as male toiletries and deodorants have grown significantly, as has the market for designer fragrances. Meanwhile the industry continues to find new and innovative uses for fragrances, such as aromatherapy.
Figure 354: Fragrances sector - sales by geography
M East E Europe 2% 6% S America 6% APAC 24% W Europe 28%
Source: IAL Consultants. Source: IAL Consultants.
Figure 355: Fragrances sector - sales by end-market

Other 5% Fine fragrances 21%
N America 34% Household 49%
Personal care 25%
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Key trends in the fragrances sector include Increased demand for natural ingredients Increasing performance requirements (e.g. controlled release systems, reduced fragrance loss, prolonged top notes, increased stability) Aromachology (e.g. use of fragrances for reduction of stress) Increased use of environmental fragrances (e.g. air fresheners and scented candles) Globalising and consolidating customer base, favouring larger-scale players Increasing legislation on quality standards and labelling Emergence of new target groups e.g. men, children Shortening end product life cycles Typically, the major F&F houses have dual market research capabilities that focus on customers industries (e.g. detergent manufacture) as well as on consumers market trends (e.g. changes in lifestyle, demographics, social attitudes, health and nutrition trends). Anecdotal evidence from the tier 1 F&F companies (Givaudan, Symrise, IFF) suggests that organic growth in the F&F markets is largely volume-driven, with limited pricing. The one exception was in 2009 a period of unprecedented raw material price inflation at which point a number of players have commented on initiating exceptional price increases through cost-push inflation. Supply/ Key players There are three types of chemical companies that produce flavours and fragrance chemicals: The traditional flavour and fragrance houses produce chemicals as needed for their own compounding and also for sale in the open market. Their competitive advantage being a very specialized technical know-how for manufacturing certain classes of chemical (Givaudan, IFF, Firmenich, Symrise). Large chemical companies participate in these markets by upgrading small portions of their large-scale chemical production to flavour and fragrance specification (such as Rhodia, BASF/Cognis, Eastman). The influence of such companies is dwindling as purified chemicals shift to less-profitable commodity status. Small- to medium-sized custom synthesis houses with a specialized technical know-how.
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Figure 356: Flavours - global market shares

Other 28% Giv audan 28%
Figure 357: Fragrances - global market shares

Other 33% Giv audan 23%
Sy mrise 14% Firmenich 14%

Firmenich IFF 16% Sy mrise 9% IFF 16%

19%
The industry has seen considerable consolidation in recent years still most in the industry believe that there is more to come. Givaudan is the biggest player with a c.25% market share after its $2.4bn acquisition of Quest International in 2007. Symrise was publicly listed in 2006. The F&F industry is characterized by high barriers to entry and limited risks of substitutes. This enables high levels of profitability, with Givaudan enjoying EBITDA margin of >20%. The industry relies on technological expertise of thousands of ingredients (some of which are patented) and their compounding. The industry continues to consolidate and favors those with larger R&D budgets (7~10% of sales). The change in ownership of two key players in the flavours and fragrances industry has put the spotlight back on the highly profitable sub-segment of the ingredients industry. Raw materials for the F&F industry can be divided into three main categories: Essential oils and natural extracts, which are derived from a multitude of botanical sources. Many of the suppliers of these products are from developing countries, relatively small-scale and often privately owned. Aroma chemicals, which are produced by the synthesis of naturally occurring essential oils for direct use in compounding and for chemical conversion to other aroma compounds. Flavour and fragrance compounds, which are a reasonably complex mix of aromatic materials. These are composed of a blend of the first two groupings. Biotechnology is playing an increasingly important role in the aroma chemicals industry, despite well-publicized fears over GMOs in Europe. However, since the process is more costly than synthesis, it remains restricted to a relatively limited range of aroma chemicals at present, with organic synthesis remaining the primary production method for aroma chemicals.
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Figure 358: Structure of the Flavours and Fragrances Industry
Natural
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)

Source: SRI
Soaps and Detergents
Cosmetics and Toiletries
Foodstuff, Beverages Tobacco, Pharmaceuticals
Industrial Uses
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2) Food ingredients
Food ingredients and nutraceutical ingredients are generic terms used to classify a wide range of specialty chemicals that are added to foodstuffs for the purpose of: preservation, fermentation, sweetening, and/or to add health benefits. Some of the major food additive product categories include: thickeners and stabilisers, alternative sweeteners, colours, enzymes, shelf life extenders (including antioxidants and preservatives) and emulsifiers. One of the fastest growing areas of the market is the nutraceutical ingredients market products focused on enhancing the nutritional value of food. Introduction Food ingredients are chemicals used to add value to food, for example to aid preservation, fermentation or add colour. The major drivers of this product category include consumer demand for food and beverage products that offer: greater convenience, higher quality and increased safety, as well as an attractive appearance. Increased interest in health & wellness, as well as changing demographics (e.g. ageing population) are also key drivers.
Table 132: Food ingredients at a glance
Growth rate (CAGR to 2012E) Key end market Key demand region Key players Market structure
c.3%; but varies widely by sub-area (e.g. nutraceuticals c.7%) Food & beverage industry US, Europe, Japan, China Danisco, DSM, BASF/Cognis, ABF, Chr Hansen Fragmented overall, with consolidation in selected niches
Overview & outlook The food ingredients industry is made up of a wide range of additives, all aimed at improving the appearance, quality or nutritional value of food and beverages. Innovation is key across much of the sector, resulting in the continued emergence of new niches. Estimates on market size have therefore varied significantly, with DSM estimating the global food ingredients market to be c.32bn+. Growth forecasts also vary widely, with SRI estimating the food ingredients industry in aggregate to grow at c.3% per annum (of which China c.6%). Individual subsectors can however vary markedly, with some areas (eg food enzymes) enjoying much higher growth rates (up to c.10%). A recent trend (particularly among the larger players) has been the application of food ingredients-based technologies to industrial applications (eg technical enzymes, green polymers), opening up further growth opportunities. The food additives sector is overall fairly fragmented, with a wide range of generalist and specialist producers. Consolidation has been a key theme, and is expected to continue medium-term. Production process Manufacturing processes for food ingredients vary widely. Some of the production techniques include: chemical synthesis, microbial fermentation, extraction of biologically active compounds, concentration and stabilization, compounding, and tableting. Typically, chemical additives made by synthesis, extraction or fermentation require a high level of capital investment.
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The majority of these processes require technical know-how, as well as access to dedicated facilities with high hygiene standards. All products must be made to a high degree of purity and quality, and plants are subject to periodic inspection by local authorities (e.g. the FDA) as well as customers. Recent food scares (e.g. melaminetainted baby milk in China) have also increased demand for quality, as well as traceability. Raw materials are equally as varied - ranging from natural (plant) extracts and oils to sugars and petrochemicals. Demand The food additives industry encompasses a broad spectrum of food (& feed ingredients. With the sub-sector made up of a large number of niches, estimates on market size have varied considerably. According to DSM, the global food ingredients market was worth c.32 billion in 2009, of which nutritional ingredients and texturants accounted for c.50%. Danisco, in contrast, estimates the global food ingredients market to be c.U$24 billion in scale.
Figure 359: Global food ingredients market (32 bn)
Preserv ation Proc. Aids Colour Taste
Figure 360: Nutritional ingredients for food (8 bn)

Carotenoids Amino acids 3% Phy to chemicals 5% Peptides 8% 3% Probiotics 2% Other 5% Vitamins 26% Minerals 20% Nutritional lipids 11%
Nutritional ingredients Tex ture
Herbal ex tracts 8% Dietary fibres 9%

Source: DSM, 2009
Source: DSM, 2009
Application areas vary widely, with savoury foods, beverages and supplements being the largest end-markets, according to DSM estimates.
Figure 361: Golobal food ingredients - key applications
Preserv es Oils/fats Other 1% 1% 11% Confectionery 6% Meat/fish 6% Functional food 9% Dairy 9%
Source: DSM, 2009
Sav oury 18%
Bev erages 16%
Bakery 11%
Supplements 12%
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In addition to human food, a number of players in the ingredient space service the feed ingredients market. According to DSM, this market was worth c.16 billion in 2009, of which c.7 billion was accounted for by nutritional additives.
Figure 362: Feed additives market (16bn) Figure 363: Nutritional additives for feed (7bn)
Other 15% Carotenoids 3% Pharma v eterinary Nutritional additiv es Feed enzy mes 5% Vitamins 27% Amino acids 50%
Source: DSM, 2009
Source: DSM, 2007
In addition to the food and feed markets, we also highlight the enzymes and cultures markets, which we estimate to be c.U$1-2 billion in scale. Market sizing has becoming increasingly complex in recent years, given the introduction of new products and the increasing application of ingredients-based technologies to industrial applications (eg technical enzymes, green polymers). Demand for food ingredients is driven by increasing consumer demand for foods which are: convenient, appetizing, appealing in appearance as well as nutritious. Increased media coverage of health & wellness trends, as well as changing demographics (e.g. ageing population) are also key drivers. Growth forecasts for the sector vary widely, with SRI estimating c.3% per annum (of which China c.6%). Relatively well-established food additives such as texturants and emulsifiers are expected to grow at close to GDP rates, whereas new growth areas such as nutraceutrical ingredients foods and ingredients with a proven health benefit - are expected to enjoy growth of c.7%. In addition, innovative sub-sectors including food enzymes and cultures are expected to enjoy annual growth rates in the high single digits.
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Figure 364: Food ingredients - expected growth

China US W Europe Japan 0%
Source: SRI
Figure 365: Global nutraceuticals - expected growth

China C/E Europe US RoW W Europe Japan
1%
2%
3%
4%
5%
6%
7%
0%
2%
4%
6%
8%
10%
12%
14%
Source: SRI * based on retail level figures
Nutraceutical ingredients, an emerging sub-sector within the food ingredients market, consists of substances within food which provide medical or health benefits, such as the prevention or treatment of disease. Key product examples include isolated nutrients, dietary supplements, and processed foods and beverages such as vitamin or mineral-fortified cereals, soups, soyfood, and fortified juices. Nutraceuticals are currently classified as foods and not drugs. Therefore any medical claim of prevention, treatment or cure of disease cannot be made for nutraceutical products. However, health claims are permitted.
Table 133: Food ingredients and their functional properties
Nutritional value X X Preservation/ protection X X Process improvement X X Appeal modification X X X X X X
Thickeners and Stabilizers Sweeteners Colours Enzymes Vitamins Antioxidants Preservatives Emulsifiers Nutraceutical Ingredients
X X X X
X X X X
Supply/key players The food additives industry is overall very fragmented, with participants ranging from chemicals companies (e.g. BASF, DSM), pharma companies (e.g. Lonza) to pureplay food ingredients companies (e.g. Danisco). Among these players, some choose to offer a wide product range (e.g. DSM, BASF/Cognis), whereas others specialise in selected niches (e.g. Novozymes, Croda).
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Table 134: Major products by ingredient category

Product Category Acidulants Antioxidants Colours Emulsifiers Enzymes Nutraceuticalingredients Preservatives Sweeteners/bulking agents Thickeners and gums Vitamins/minerals
Examples Citric, malic, tartaric, phosphoric acids Vitamin C and E, TBHQ, BHA, BHT, erythorbates, sulphites, tocopherols Synthetic and natural food colours Mono- and diglycerides, lecithin, polysorbates Rennets, proteases, lactase, amylase and pectic enzymes Omega 3, xylitol, vitamins, lutein, phytosterols Benzoates, sorbates, propionates, parabens Aspartame, acesulfame-K, sucralose, polyols, polydextrose Casein, starches, xanthan gum, alginates, pectin, guar gum Vitamins (e.g. A, B, C, D, E, K), carotenoids, calcium, iron
Market participants DSM, Danisco DSM, Lonza, Danisco Chr Hansen, Sensient, Danisco Danisco, CSM, Cargill, Kerry, ADM Novozymes, Danisco, DSM, Chr Hansen BASF/Cognis, Croda, Danisco, DSM Celanese (Nutrinova), Danisco Tate & Lyle, Celanese (Nutrinova), Danisco ADM, Cargill, Corn Products, Danisco, FMC, Tate & Lyle DSM, BASF, Lonza, Chinese players (e.g. NHU)
In some cases (e.g. vitamins), formulators operate between the producers of the ingredients and the food industry. The one exception being DSM, who prides itself in offering the full value chain: from bulk products to premixes. Formulators very often have specialist know-how about the interaction of the various compounds used in the premixes. With innovation being a key success factor, R&D costs can be costly, with expenditure as a proportion of sales as high as c.10% in some product areas. These costs, coupled with the time and money needed to gain approval and market a new product have served as entry barriers for new comers. Increasing regulatory pressures have also in recent years added further pressures, favouring larger players. The food additives industry has therefore seen significant consolidation. Recent large scale moves include Corn Products U$1.3bn acquisition of Akzos National Starch (2010), BASFs 3.1bn acquisition of Cognis (2010), Cargills acquisition of Degussa Bioactives (2005) and Daniscos acquisition of Genencor (2005). We expect consolidation to remain a key trend in the medium-term.
3) Cosmetic ingredients
Cosmetic ingredients encompass a wide range of chemicals for the home & personal care sector for the purpose of cleaning, anti-ageing and moisturizing to name a few. Demand is generally defensive, due to its key driver being consumer vanity.
Table 135: Cosmetic ingredients at a glance
c.3.5%; but varies by niche (e.g. mens grooming c.6%) Personal care industry Europe, US, Japan, China Croda, BASF/Cognis, Symrise, Rhodia Fragmented; consolidation within niches
Introduction The segment which we define as cosmetic ingredients encompass a wide range of chemicals, including: surfactants, emollients, fixative polymers, active ingredients and UV filters. With the home & personal care sectors being the end-market, key functionalities range from cleaning, anti-ageing, moisturizing and cooling to hair conditioning. Ingredients from plant and vegetable origins are playing an increasingly important role, and demand tends to be fairly defensive, driven by vanity trends, changing demographics (e.g. aging population) and a growing affluent customer base in the emerging markets.
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Overview & outlook The cosmetic ingredients industry is expected to grow c.3-4% per annum, although innovation-intensive niches (e.g. anti-ageing) enjoy much higher growth prospects. An emphasis on R&D, combined with quality and consumer know-how have served as barriers to entry, enabling those within this defensive sector to enjoy aboveaverage returns. Consolidation has been a key trend, which we expect will continue in the medium-term. Demand The cosmetic ingredients industry is expected to enjoy above-average growth, benefiting from defensive growth characteristics of the home & personal care markets. Although SRI estimates assume a growth rate of c.3.5% for the sector as a whole, we highlight that growth rates vary widely by product - ranging from 1% to 10% - with the highest rates enjoyed by those with a strong focus on R&D. The mature markets of Western Europe and North America account for over half of global demand, with the emerging markets of Asia and Latin America gaining increasing importance. This has been largely due to the increasing affluent customer base in these markets, and an increasing interest in western vanity trends.
Figure 366:Cosmetic chemicals consumption by region
RoW Latin America 7% 10% China 11% Japan 12% N America 28%
Source: SRI Source: SRI
Figure 367: Cosmetic chemicals expected growth by region

China
W Europe 32%
Latin America RoW W Europe N America Japan 0% 4% 8% 12% 16%
Figure 368: Chinese sales of cosmetics - by type

Toiletries 11% Fragrances/ perfumes 25% Skin care 35%
Figure 369: Chinese sales of cosmetics - expected growth

Frag/perfumes Skin care Toiletries Hair care
Hair care 29%

Source: SRI Source: SRI
0%
5%
10%
15%
20%
25%
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Other key health & wellness trends, which we view as drivers include growing consumer interest in personal hygiene products with added extras (e.g. shampoos with hair lightening properties) appearance enhancement (e.g. lip plumpers) protection against harmful effects (e.g. sunscreens) anti-ageing (e.g. anti-wrinkle creams) slimming (e.g. cellulite treatment) We also highlight the emergence of new target groups (e.g. men, children). Supply/Key players The industry is fairly fragmented, with concentration within selected niches. Croda and Cognis (now part of BASF) are estimated to have a share of c.10% in its relevant consumer care markets, closely followed by ISP (c.5%). Other players including Rhodia and Akzo Nobel tend to compete in comparatively less R&D-intensive product areas (surfactants), and therefore have lower margins. The sector is overall fairly fragmented, with a handful of global players and a large number of small. regional players with an expertise in selected product lines. Yet with the customer base seeking to become increasingly global, consolidation has been a key theme in the sector. Recent deals include BASFs acquisition of Cognis (2010) and Crodas acquisition of Uniqema (2006).
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Fine Chemicals
Introduction The term fine chemical is used almost exclusively in reference to life science intermediates/molecules. Fine chemicals are manufactured to an exact chemical specification and utilized for their medicinal or agricultural effect. The broad categories within this definition are pharmaceutical intermediates, bulk medicinal and pesticides, biocides (antibacterial or disinfectant agents that are added to a wide range of products and processes) and laboratory chemicals. They are sold on the basis of their composition and generally are interchangeable with other products of the same composition.
Table 136: Fine Chemicals at a glance
Around 3%-6% Pharmaceutical Industry, Agrochemical, Biotechnology Asia, Western Europe, North America Lonza, Clariant, Avecia, Solutia, BASF, DSM, Lanxess Still fragmented
Overview&Outlook According to SRI, the fine chemicals industry should deliver top-line growth of around 3-5% in the long term. Growth rates for fine chemicals ought to grow in line with their end markets (7-10% for pharmaceuticals and 2-3% for agrochemicals, on our estimates). Much of the future growth is coming from emerging markets. Whether European or U.S. listed players within the chemicals sector are able to meaningfully compete with the numerous Asian competitors over the long term remains less certain in our view. In recent years life sciences companies tended to reverse the late 1990s production outsourcing of key intermediates and favoured in-house solutions as dwindling pipelines have left in-house production vacant. Demand After the pharmaceutical manufacturers, fine chemicals producers are the largest suppliers to the pharmaceutical industry (creating more than 50% of demand).
Figure 370: End uses of fine chemicals
Agricultural Application 25% Pharmaceutical 55% Others 12%
Dy es 8%
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Production process In the production of (chemical-based) fine chemicals, chemical companies operate in one or more steps of production. At first they produce base chemicals and intermediates to create the advanced intermediates (through advanced refinery, see Petrochemical section). Then, these products are further manufactured for the specific requirements of the customer, giving them higher value-added.
Figure 371: Fine Chemicals - Production Chain Oil/ Gas Base Chemicals Intermediates
Advanced Intermediates
Finished Molecules
Final Products
Source: J.P. Morgan
In the early stage of production, pricing appears the primary driver because of the commodity character of the products. Then, in the further steps of the process, barriers of entry become higher, with more technology and regulation requirements. For example, Producers need regulatory approval (eg FDA) of their facilities. Key players The market for fine chemicals is highly fragmented. The main players in the industry are DSM, Lonza and Evonik. In the past few years companies have increasingly reduced their involvement in the first steps of production due to the commodity structure of products used and additional capacity in the Middle East and Asia. Instead, their focus is on the production of finished molecules and even final products. Furthermore, many western producers of fine chemicals have found themselves increasingly subject to significant cost competition from Asian (particularly Indian and Chinese) producers. Because of the high proportion of personnel costs involved in the production of these chemicals, many Asian competitors have been able to offer the products at a greatly reduced cost. In the early to mid-1990s, the trend within life sciences was toward outsourcing of key functions such as drug discovery, clinical trials and manufacturing. In particular, pharmaceutical majors were increasingly relying on third parties to produce and supply active ingredients and bulk intermediates, rather than on in-house manufacturing capabilities. Outsourcing allowed life sciences companies to focus their resources on core competencies such as drug development and marketing, while freeing up capital and consequently improving returns.
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The consequence of this trend towards outsourcing was that operating margins and growth rates were generally higher than those experienced elsewhere in the specialty chemical industry. This trend attracted many of the more traditional broad-based specialty chemical companies to expand into the fine chemicals area. The consequence was that much of the industry became rapidly over-supplied at the same time as demand was waning. (Dwindling pipelines at large pharmaceutical houses, increased challenges from generic producers and increased FDA scrutiny meant that in recent years a reversal in the outsourcing trend has taken place).
Fine chemicals have high capital intensity
Fine chemicals businesses tend to have comparatively high capital intensity and R&D requirements. While the outsourcing argument has clear cash-flow benefits for the pharmaceutical and agrochemicals industries, the burden of investment inevitably falls on the contract manufacturers. Significant R&D expenditure needs to be directed towards the development of new products and processes, as well as on improving existing processes. Production of active ingredients for pharmaceuticals must take place in highly sterile, FDA-certified plants designed to current good manufacturing process (cGMP) standards. Furthermore, customers must be convinced that the manufacturer is capable of providing a consistent, high-quality product in a reliable manner. As a result, 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). In recent years, costs of drug production have risen significantly, pushed up by more stringent regulatory requirements and more complex R&D proceduresthe 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. It has become essential to minimize time to market for new drugs or agrochemicals to keep down costs to maintain or improve margins, particularly given increasing levels of generic competition and intensification in the overall competitive environment. Fine chemical companies, as a result, tend to be highly operationally geared, with high levels of fixed costs. It is therefore increasingly important to run plants as close to maximum capacity as possible, and this has become increasingly difficult for many of the leading listed fine chemical producers. However, the rewards can be significant if capacity utilization rates remain healthy.
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Catalysts
Introduction Catalysts are substances that alter the rate at which other chemicals react, while they undergo no reaction themselves. They enable economic efficiency by speeding up the rate of a chemical reaction. Catalyst steps are required for about 90% of chemical manufacturing processes and 20% of industrial products. In theory, catalysts can be recovered in their original form following the reaction, but in practice, they have a useful life that varies according to the application.
Table 137: Catalysts at a glance
4-5% Autos, Chemical processing, Petroleum refining US (34%), Europe (28%), Japan (14%) BASF, Johnson Matthey, Umicore, WR Grace, Albermarle Fragmented Precious metals
Overview Catalysts can be split into petroleum catalysts, chemical catalysts and environmental catalysts (see detailed explanation below). Due to strong demand from the gasoline and petrochemical industry, we believe petroleum catalysts ahould enjoy healthy growth of 8-10% CAGR until 2012. Demand for chemical catalysts reflects a wide range of drivers, but broadly follows overall industrial activity. We estimate longterm demand in this area of approximately 2-3% per year. For environmental catalysts we expect tightening emissions legislation to lead to growth of around 1012% CAGR over the next four years, falling to 6% beyond this period.
Figure 372:Catalyst consumption by region
Total consumption(2006) $13.4bn
Other 13% North America 38%
Figure 373: Catalyst market by type- 2006

Total consumption(2006) $13.4bn
Chemical Processing Cataly sts 42%
Emission control cataly sts 36%
China 11%
Japan 11%
W Europe 27%
Petroleum Refining Cataly sts 22%
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Figure 374: Catalysts average annual growth rate (2006-2011E CAGR))

5.0% 4.5% 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% US Eur ope Japan ROW
Petroleum Catalysts Petroleum refining, which is the source of by far the largest share of industrial products, consists almost entirely of catalytic processes. Used principally for the production of fuels and other petroleum derivatives, 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. Engelhard, which is part of BASF AG now, is one of the major manufacturers of FCC catalysts in the world. Hydroprocessing catalysts are used for the removal of impurities from crude oil prior to its distillation. Johnson Matthey-owned Synetix is Europes principal producer of hydroprocessing catalysts. Reforming catalysts are used to further refine and enhance petroleum components to create gasoline and petrochemical feedstocks. Demand for these chemicals relies largely upon the health of the oil refining industry. Environment laws are getting stricter, with the mandate of production of cleaner fuels. Refineries are feeling pressure because of stringent guidelines for emissions of NOx, Sox, CO, and CO2, which fuels the demand for catalysts. We expect longer-term growth rates to be in the region of 8-10% per annum, although upside to this growth rate could be driven by a major expansion in gas to liquid (GTL) technology. Chemical Catalysts Used in a variety of different industries including chemicals, pharmaceuticals, polymers and food. The vast majority of chemical processes involve a catalyst of some sort. The greatest demand comes from manufacturers of polymers. Major market segments include polyethylene, polypropylene, polyethylene terephthalate, polyvinyl chloride and polystyrene. Polyolefin catalysts are the largest single market sector with about 55% market share of total polymerisation market in 2006. Other large markets are for oxidisation (in the production of ethylene oxide)/ammoxidation/oxychlorination, organic synthesis, hydrogenation and dehydrogenation, and gas synthesis (used in the manufacturing of hydrogen, ammonia, and methanol). Recently, polymer catalysts have been developed that not only affect the rate of polymerisation, but also increase the output of a polymer of a certain molecular weight, with certain properties and advantages.
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Environmental Catalysts Environment catalysts are based on platinum group metals (PGMs) that convert vapor into carbon dioxide and water. Environment catalysts are used to control pollutant emissions from a number of sources such as auto engines (in catalytic converters), power stations and other industrial plants. They reduce the levels of substances such as carbon monoxide and volatile organic compounds (VOCs) and sulfurous substances within waste gases. The autos market is the key driver of the environmental catalysts industry. As a result, tougher emissions legislation around the world has driven demand growth in recent years, and is likely to continue to do so. Demand stems from both OEM manufacturers and also from retrospective fitting of catalysts to vehicles already in circulation. In addition, industrialisation of developing economies offers further potential for growth, as emissions from industrial plants and other non auto-related industries (construction vehicles, lawn care, snow mobiles etc) come under scrutiny. Growth in the industry has historically been in the region of 3% but is strongly increasing. In recent months, the German cabinet announced plans to cut greenhouse gas emissions by 40% by 2020, and President Sarkozy in France unveiled a plan to correlate car fuel efficiency with taxes, and intends to invest 1bn into research into clean engine and fuel technology. Over the past decade, the combination of tightening legislation and a more favorable mix (increasing proportion of larger vehicles, namely SUVs) has meant that demand for auto catalysts has exceeded autos production growth by c.10% each year. Although rising fuel prices have led to a shift to smaller vehicles, we expect impending legislation to be sufficient to enable the autocatalysts market to continue to grow c.400 bps above the autos market, at c.6% per annum. In addition, the legislative umbrella is covering an increasingly wide selection of vehicles such as trucks and buses, as well as farm and construction machinery. All of which will add to future growth.
Figure 375: HDD - On Road regulation development
0.2 0.18 0.16 0.14 PM (g/kW -hr) 0.12 0.1 0.08 0.06 0.04 0.02 0 0 0.5 US 2007 1 US 2010 Japan 2005 EU V 1.5 2 2.5 EU IV 3 3.5 4 4.5 5 5.5 6 US 2002 3/4 EU III Japan 2003
New Models
All Models
NOx (g/kW hr)
Europe Euro IV Euro V United States US2007 US2010 Japan New Short Term 2.5-12t 12t + New Long Term 2.5t+ China Euro III selected cities India Euro III selected cities Euro III nationwide
Oct 05 Oct 08 Jan 07 Jan 10 Oct 03 Oct 04 Oct 05 2008? Apr 05 2010
Oct 06 Oct 09 Jan 07 Jan 10 Oct 03 Oct 04 Oct 05
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Figure 376: 'Non-road' emissions legislation

0.3 0.28 0.26 0.24 0.22 0.2 EU IIIA US 3
Table 138: 'Non-road' emissions legislation

Europe Stage IIIB Stage IV United States Tier 4a Tier 4b New Models Jan 2011 Oct 2013 All Models Jan 2012 Oct 2014
Jan 2011 Jan 2014
Jan 2012 Dec 2014
PM (g/kW-hr)
0.18 0.16 0.14 0.12 0.1 0.08 0.06 0.04 EU IIIB 0.02 0 0 0.5 1 1.5 2 2.5 3 3.5 4 4.5 5 5.5 6 US 4a US 4b EU IV
NOx (g/kW-hr)
Table 139: HDD - World Diesel Fuel Standards

Sulphur content in PPM
Country European Union USA Australia China Hong Kong China India (11 Major Cities) India Japan Korea Year 95 96 97 98 99 2000 350 01 02 03 04 05 50 06 07 08 09E 10 10E
500 500 2000 (Ave 800) 50 500 2500 2000 2000 500 130 50
15 50 350 for Beijing 10 350 500 10 50 30
50
Over 1000 pp m < 500 pp m 50 pp m Less than 30 pp m

Key players The top 3 key players in the catalysts industry are BASF (following its acquisition of Engelhard), Johnson Matthey and Umicore.
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European Chemicals: Companies at a glance
European Chemicals: Companies at a glance

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Air Liquide
Figure 377: Sales by division (2009)
Industrial Merchant 36% Others 5% Electronics 7% Engineering & Construction 10% Large Industries 27% Healthcare 15%
Figure 378: EBIT by division, mn (2009)

1000 800 600 400 200 0 Large Industries Industrial Merchant Healthcare Electronics Engineering & Construction Others
Source: Company data
Figure 379: Sales by destination (2009)

North America 22% 27.0% 25.0% 23.0% 21.0% 19.0% 17.0% 15.0% 13.0% ROW 2% 2005A
Figure 380: EBITDA margin development
Europe 57%
Asia 19%
2006A
2007A
2008A
2009A
Source: Company data, J.P. Morgan estimates
COMPANY DESCRIPTION:
The world's leading supplier of industrial gases, with around 21% global market share. Gases and Services (85% of group sales in 2009) are used in a variety of end-markets. Key end markets are the refinery, steel, automotive and healthcare industry. Air Liquide also provides other gas-related businesses (15% of group sales), including Engineering and Construction. The acquisition of Lurgi in April 2007 for a 500m equity value doubled the size of Air Liquides engineering business and enlarged its technology portfolio, particularly in hydrogen and synthetic gas production processes, in biofuels and in the developing Coal to liquid (CTL) and Coal to Chemicals (CTC) markets.
STRENGTHS: WEAKNESSES:
Truly global player with significant market share in each of the major industrial regions. Established strong infrastructure in N. Europe and the US. High % of on-site business provides earnings stability. Surcharge clauses allow pass-through of energy costs in on-site business (and some merchant business).
OPPORTUNITIES:
Limited gearing to early stages of economic recovery. US healthcare gases business has struggled to compete. Lower exposure to emerging markets than Linde. Sheer size may limit growth.
THREATS:
Expanding use of gases in healthcare. Market leader in healthcare gases in S. Europe. Increasing energy opportunity driven by high oil prices and energy security concerns (CTL, GTL, CTL) and environmental concerns
264
Merger of Airgas & Air Products can be potential threat to its market share. Though transaction is still pending. Rising energy costs can prove tough to pass through in smaller-scale gases operations.
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Table 140: Air Liquide: Divisions and products

2009 Sales (m) 4,276 % sales 36%
Division Gases and Services 85% sales
Business units Industrial Merchant
Large Industries Healthcare Electronics Engineering & Construction 10% sales Other activities 5% sales
Total
3,218 1,825 872 1,226 559

11,976
27% 15% 7% 10% 5%

100%
Key products Bulk & cylinder deliveries (Oxygen, Nitrogen, Hydrogen, Cryogenic & non-cyrogenic gases) Air gases and hydrogen
Key end-markets Food & pharma, automobiles and manufacturing, materials & energy
Key market positions Globally #2 in bulk and cylinder business
Key competitors Linde, Praxair, Air Products, Airgas, Taiyo Nippon
Therapeutic gases, mainly Oxygen Specialty gases, Equipment, services Design, installation, construction of plants Chemical, Diving
Refineries, chemicals, energy, metal manufacturers, steel Hospitals, homecare, research institutes, hygiene industry Computers, flat screen, digital music players, mobile phones Healthcare, chemical, construction, food & beverages, metal production Chemical, pharma, aerospace, auto, microelectronics, transportation
Globally #1 in Large industries #1 in Healthcare gases
Linde, Praxair, Air Products, Airgas, Taiyo Nippon Linde, Praxair, Air Products, Airgas, Taiyo Nippon Linde, Praxair, Air Products, Airgas, Taiyo Nippon
Engineering & Construction Other activities
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266
Akzo Nobel
Decorativ e Specialty Chemicals 37% Paints 34%

600 500 400 300 200 100 0
Performance Coatings 29%
Decorative Paints
Performance Coatings
Specialty Chemicals

Asia Pacific 20% Other 4% North America 21%

16% 14% 12% 10% 8% 6% 4% 2% 0% 2005 2006 2007 2008 2009
Emerging Europe 7%
Latin America 9%
Western Europe 39%
Akzo Nobel is a specialty chemicals company with three main divisions: Decorative Paints, Performance Coatings and Specialty Chemicals. Akzo Nobel is the global number 1 company in paints and coatings. Recently, Akzo Nobel announced the sale of National Starch for 1.1bn.
Global leader in paints and coatings. Strong presence in the high-growth emerging markets of Eastern Europe and Asia. Strong balance sheet and successful restructuring post ICI.
OPPORTUNITIES:
End markets have significant exposure to GDP trends. Profitability remains below peer group. Pension deficit, legacy cash costs .
THREATS:
Further organic and acquisition led growth.
Further restructuring potential of chemicals and coatings Raw material/input cost pressures may impact margins. businesses. Potential asset disposal ?
Lack of recovery in housing/construction markets to further reduce demand.
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Table 141: Akzo Nobel: Divisions and products

2009 Sales (m) 2,531 % sales 18%
Division Decorative Paints 34% sales
Business units Decorative Europe
Decorative Americas Decorative Asia Industrial Coatings Marine & Protective Coatings Car Refinishes
1,413 632 725 1,260 872
10% 5% 5% 9% 6%
Performance Coatings
29% sales
Key products Internal and external wall paints and lacquers Internal and external wall paints and lacquers Internal and external wall paints and lacquers Coil and extrusion coatings, Specialty plastics coatings and Packaging coatings Marine coating, protective coating, yacht paints, aerospace coatings
Key end-markets Professional & DIY
Key market positions #1 Europe
Key competitors PPG (SigmaKalon), Tikkurila
Professional & DIY Professional & DIY Appliances, architecture, automotives, cosmetic packaging, flooring, furniture, general industry, general trade coaters, IT, metal building products, sports goods Abrasion/corrosion/chemical resistance, fouling control ,high performance cosmetics, fire protection, tank lining systems Car body refinishing, recoating, car repair, commercial vehicles, automotive plastics, bus, truck, specialty vehicle OEMs, fleet owners and operators Appliances, architecture, automotives, cosmetic packaging, flooring, furniture, general industry, general trade coaters, IT, metal building products, sports goods Food & beverages, packaging industry Pulp and paper Detergent, Pulp and paper, Plastic industries, Chemical, Construction and Food Detergents, Personal care, Crop protection, Micronutrients, Building materials, Paints, Pharmaceutical and Food
Top 3 in US, #1 Canada #2 in Latin America Top 2 in Asia #1 in coil & extrusion, #1 in specialty plastics, #2 in packaging coating #1 in marine, protective #1 in yacht paints #2 in aerospace Top 3 in vehicles refinish & OEM commercial vehicle #1 finished #3 adhesives #1 in powder coating #1 in bleaching chemicals #1 in caustic/chlorine (merchant) in Europe, #1 in MCA #1 in chelates, #1 in sulphur derivates #1 cross linking & thermosat peroxides and additives, high polymer specialties #1 in industrial, agriculture #3 in HPC
Sherwin-Williams, PPG, Valspar, Benjamin Moore Nippon Paints, Kansai Paints DuPont, Valspar, BASF, PPG, Nippon Paints, Kansai Paints Ameron, Chugoku, Hempel, Jotun, PPG (sigmaKalon), Nippon Paints BASF, DuPont, PPG, Kansai Paints, Nippon Paints BASF, DuPont, PPG, Kansai Paints, Nippon Paints BASF, DuPont, PPG, Kansai Paints, Nippon Paints Kemira, , Hercules, Nalco Arkema, BASF, Dow, PPG, Solvay Albemarle, Arkema, BASF, Bayer, Chemtura, , Clariant, Dow
Wood Finishes and adhesives Powder Coatings

Specialty Chemicals 37% sales
684 597 935 949 1,479
5% 4% 7% 7% 11%
Primers, basecoats, topcoats and clearcoats for vehicle refinishes, Automotive plastic coatings and customer service technology Wood coatings, Wood adhesives and broad resins Internal and external coatings and inks for food, beverage, aerosol and general line cans Pulp and paper chemicals, Energy, salt, chlorine, Caustic lye and Monochloroacetic acid (MCA) Cellulosic additives, Chelates, Additives for the mortar industry, Ethylene amines, Salt specialties, and Sulphur derivatives Surfactants and Synthetic and natural polymers Polyester fiber, Soda ash, Life sciences, Chemicals and Paints
Pulp & Paper Industrial Chemicals Functional Chemicals
Surface Chemistry Chemicals Pakistan

Total
701 405
13,893
5% 3%
100%
Agriculture, Asphalt, Personal care, Petroleum, Water treatment, Household cleaning and Mining Consumer products, electronics, engineering, extractive industries, food & beverages, pharma, textiles
Clariant, BASF, Croda, Huntsman (Hexion), Rhodia, Stepan Local players
Source: Company reports and J.P. Morgan estimate
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Arkema
Viny l Products Performance Products 30% 23%
200 150 100 50 0 -50
Industrial Chemicals 47%

-100 Industrial Chemicals Performance Products Viny l Products

Asia and Middle East 18% Rest of the World 4%

10% 8% 6% 4%
Europe 54% North America 24%

2% 0% 2005 2006 2007 2008 2009
Arkema was formed in October 2004 from the reorganization of Totals Chemicals business, and listed in Paris in May 2006. The business is focused on three key areas Vinyl Products, Industrial Chemicals and Performance Products, encompassing 13 business units. After a period of extensive rationalization since the spin-off, the business holds top 3 position in c75% of its portfolio. Managements strategy going forward is to i) grow through new product innovation, ii) increase the pace of development in Asia and iii) improve its competitive position helped by ongoing cost cutting. At some stage a total or partial exit from the volatile Vinyls area is possible given the drag on investor sentiment this unit creates.
Leadership in specialty portfolio (more than c75% of sales top 3) Relative pricing strength (excluding Vinyls)
OPPORTUNITIES:
Vinyl products dilutes group margins Significant dependency on mature markets

THREATS:
Expansion opportunity in Asia Margin upside through restructuring Balance sheet health provides strategic flexibility
Over-capacity in PVC Fluctuations in raw material and energy prices Legislative changes eg in fluorocarbons, chlor-alkali (mercury technology)
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Table 142: Arkema: Divisions and products

Division Vinyl Products 2009 Sales, m 1,005 Business units Chlorine/Caustic soda Key products Chemicals, aluminum, pulp and paper, detergents and soaps, solvents and raw materials for fluorinated products Construction, pipes, profiles, packaging, cabling, automobiles Key end-markets Construction, Chemicals, Automotive, electronics and home appliance industry Key market positions #6 in chlorine (Europe) Key competitors Caustic(Dow, Oxy,PPG, OLIN, FPC), Chlorine(Dow, Oxy, Olin, PPG, Bayer) Shintech, Formosa, Occidental, Ineos, Solvay,Georgia Gulf Shintech,Oxy Vinyl,FPC,Ineos,Georgia Gulf
23% sales
PVC Vinyl Compounds Pipes & Profiles (Alphacan) Acrylics PMMA Thiochemicals Fluorochemicals Hydrogen Peroxide Specialty acrylic polymers (Coatex) Technical Polymers Specialty Chemicals (CECA) Functional Additives
Construction, Chemicals, Automotive, electronics and home appliance industry Construction, Chemicals, Automotive, electronics and home appliance industry Construction and home building Coating, Plastic additives,Water treatment, Paper & adhesives Construction, automotive ,plumbing, store sign, electronics and home appliance industry Animal Feed,Polymers, Pharma,Cosmetics,solvents & Petrochemicals Refrigeration & Foam industry Pulp, chemical (including organic peroxides), textile, Electronics Industry Paper, Paint, Water treatment, Cosmetics and Textile Industry Plastics, Construction, Automotive Industry Detergent, Oil & Gas, Fertilizer Industry, Pharma, Building, Agrifood,Personal care,Cosmetics Automotive, Construction, Chemicals
#3 in Europe in PVC Top 4 #6 in pipes & profiles (Europe) #3 #1/2 globally #1 I hydrogen sulphide derivatives #2 globally #3 in hydrogen peroxide
Cables, bottles, automobiles, medical Pipes and profiles Paints and coatings, super-absorbents, Plastics additives, Water treatment, Paper and Adhesives PMMA granules and cast or extruded sheets Sulphur chemicals, Amines, Oxygenated solvents, Rubber additives Hydrochlorofluorocarbons, Hydroflouorocarbons Hydrogen peroxide, chlorate,sodium perchlorate, and hydrazine hydrate Acrylic polymer used as dispersants and thickeners Polyamides 11 and 12, specialty polyamides, PVDF and functional polyolefins Surfactants/Interfaces, Adsorbtion/ Filtration (Molecular sieves, Diatomite, Activated carbon and perlite) Polymerization Initiators, PVC additives, Coating additives and catalysts
Industrial Chemicals
2,109 47% sales
Dow, StoHaas,BASF, Nippon Shokubai Mitsubushi, Evonik, Dow, Sumitomo Chemicals Atofina, Ineous, DuPont, Honeywell,Daikin,Asahi Glass,Solvay Solvay, Degussa, Arkema,FMC,EKA Akzo-, Kemira,
Performance Products
1,318 30% sales
#1 Polyamides 11 #3 Polyamide 12 Co-leader in PVDF #2 Molecular sieves #2 tin-based heat stabilizers for PVC
BASF, DSM, DuPont, EMS, Evonik, Lanxess, Rhodia, Solutia Albemarle, UOP, Cosmo Industries, WR Grace, PQ
Other Total
12 4,444
Source: Company reports, J.P. Morgan estimates.
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BASF
Functional products 14% Other 9% Agricultural solution 7% Plastics 14% Oil & Gas 23% Chemicals 15% Performance Products 18%

2500 2000 1500 1000 500 0 Agricultural solution Chemicals Plastics Performance Products Functional products Oil & Gas

North America 19% Asia 17%

25% 20% 15%
Latam 3% ROW
10% 5% 0% 2003A 2004A 2005A 2006A 2007A 2008A 2009A
Europe 56%
5%
BASF is the worlds largest chemical company in terms of revenues. The group has six main divisions, encompassing oil & gas and agrochemicals, as well as a wide variety of chemicals, plastics, performance and functional products. The company holds a cost advantage due to its vertically integrated 'Verbund' production sites. BASFs oil & gas activities are pooled in the Wintershall Group and include several joint ventures with Gazprom to bring Russian Gas to the European markets. In May 2010 BASF acquired Cognis for 3.1bn, reflecting another strategic move towards creating a portfolio that over time aims to offer reduced traditional industrial cyclicality and higher through-the-cycle returns (following on from previous acquisitions of Engelhard, Degussa Construction and Ciba S.C.).
Cognis acquisition is one more step forward in reducing portfolio cyclicality. Verbund production sites provide significant cost advantages. Oil & Gas E&P business provides a significant earnings hedge against rising chemicals input costs.
OPPORTUNITIES:
Majority of earnings still reliant on industrial end markets, and hence exposed to economic slowdown. Agricultural Products division has limited biotech franchise. Oil & Gas business holds low reserves to production ratio.
THREATS:
Expansion of E&P business through Gazprom JV should Accelerating capacity growth in the petrochemical improve reserves ratio. industry principally from the Middle East. Significant R&D into high growth areas such as bioplastics and ag-biotech (Monsanto JV). Input cost pressures. Double dip or European slowdown would affect earnings.
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Table 143: BASF: Divisions and products

Division Chemicals Business units Inorganics 2009 Sales (m) 983 4,664 % Sales Key products 2% Inorganic specialties, Electronic materials, Inorganic chemicals, Glues & resins, Carbonyl iron powder and metal systems 9% Cracker products, Alkylenes oxides and glycols, Solvents, Plasticizers & its raw materials, Acrylic monomers Key market Key end-markets positions Automotive, Construction, Medical sector, Electronic & #1 in inorganic salts electrical, Chemical in Europe, #1 in glues in Europe Coating, Pharma, Cosmetics, Plastics Oxo alcohols: #1 Plasticizers: #2, Solvents: #2 in Europe, Ethylene oxide and ethylene glycols: #2 in Europe Acrylic monomers: #1 4% Amines, Butanedoil and its derivatives, Polyalcohols & Detergent & hygiene, Process industry, Ag products, Top 3 in amines its derivatives, Acids & specialty intermediates Pharma, Coating, Feed & food, Textile and leather Key competitors Arkema, Yara, DSM, Evonik, Airproducts Cracker products: Dow, ExxonMobil Chemical, Sabic, Shell Chemicals, LyondellBasell Alcohols and solvents: Dow, Eastman, Exxon, Oxea, Sinopec Plasticizers: ExxonMobil Chemical, Eastman, Evonik, UPC, Aekyung Alkylene oxides and glycols: Dow, Sabic, Shell Chemicals Acrylic monomers: Dow, Nippon Shokubai, Arkema
15% of sales Petrochemicals
Intermediates
1,868
Plastics
Performance polymers
3,005
6% Nylon & its intermediates, PBT,POM, PES, Specialty plastics and foam
Automotive, Electronic & electrical, Textile, Food packaging
14% of sales Polyurethanes
4,123
8% MDI, TDI, Polyesters Polyols, Polyurethanes system, TPU, Cellular elastomers
Automotive, Furniture, Shoe, Car, Cables & wires
Polyamide film: #1 Engineering plastics: #2 Expandable polystyrene: #1 Biopolymers: #1 MDI: among top 2 TDI: among top 2 PEOL: among top 3, PU Specialties: #1
Amines: Taminco, Dow, Huntsman Butanediol and derivatives: ISP, LyondellBasell, Dairen, Mitsubishi, Meizhouwan, Shianhua, Yunwei Polyalcohols and specialties: Eastman, Perstorp, Ube Acids and specialty intermediates: Kemira, Perstorp, Eastman Engineering plastics: DuPont, Lanxess, Rhodia, Sabic, Ticona Caprolactam: CPDC, DSM, Ube Ultramid (fiber polymers): Honeywell, LiPeng, Zig Shen Ultramid (film polymers): DSM, Lanxess, Ube EPS: Loyal, Taita, Xingda
Performance Paper Chemicals Products
1,326
3% Process chemicals, Functional chemicals, Coating chemicals, Kaolin
Paper industry, Construction
18% of sales Care Chemicals
3,405
7% Aroma chemicals, vitamins and carotenoids, Pharmaceutical ingredients and services, Watersoluble polymers, Superabsorbents, UV filters, Nonionic surfactants, Chelating agents
Human & animal nutrition industry, cosmetic industry, to colour foods, beverage industry, pharma industry, feed industry, personal care
Performance Chemicals
2,180
4% Plastic additives, Oilfield and mining chemicals, Water Automotive, construction, decorative paints industry, solutions, Chemicals for the automotive and refinery plastics, hygiene industry, textile industry industries, Textile chemicals, Leather chemicals
MDI: Bayer Material Science, Huntsman Polyurethanes, Dow, Yantai TDI: Bayer Material Science, Dow, Borsodchem, Mitsui PO/PEOL: Dow, Bayer Material Science, Shell Specialties: Bayer Material Science, Dow, Huntsman, Polyurethanes, Lubrizo Coating chemicals: Process chemicals: Nalco, Ashland (Hercules), Kemira, Eka global #1, Process Chemicals chemicals: #1 Functional chemicals: Ashland (Hercules), Clariant, Kemira position for retention Coating chemicals: Dow, Polymer Latex, Omnova business Among top three Aroma chemicals: DSM, IFF, LyondellBasell, NHU, Innospec players in all Vitamins and carotenoids: DSM, several Chinese players important product Personal care ingredients: ISP, DSM, Symrise groups Pharma ingredients & services: Lonza, Evonik, Shasun, ISP Superabsorbents: Evonik, Nippon Shokubai Care Chemicals for detergents and formulators: Shell, Sasol,Dow, Akzo Plastic Additives: Plastic additives: Songwon, Chemtura, Clariant global #1 Oilfield and mining chemicals: Nalco, Baker Sytec, SNF Water solutions: SNF, Ashland, Kemira Automotive and refinery chemicals: Infinium, Petrochem, Chemtura, Arteco, Lubrizol Textile chemicals: Clariant, Huntsman, CHT, Leather chemicals: Clariant, Lanxess, TFL
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272
Division
Business units Dispersions & Pigment Catalysts
2009 Sales (m) 2,445
% Sales Key products 5% Dispersions, Pigments, Resins, Additives
Key end-markets Construction, Automotive, chemicals, paints
Functional Solutions
2,961
6% Mobile Emissions Catalysts, Process Catalysts & Technologies, Precious and Base Metal Services
Car/bus/truck industry, Power generation industry, Process industry
14% of sales Construction chemicals
1,991
4% Admixture systems, construction systems
Construction
Coatings
2,163
4% Automotive coating solutions, industrial coating solutions, decorative paints
Automobile, construction
Agricultural Solutions 7% of sales Oil & Gas
Crop protection
3,646
7% Herbicides, pesticides, fungicides, insecticides
Agriculture industry
Key market positions Leading position in dispersions, pigments, resins and additives Mobile emissions catalysts: #1 Refinery catalysts: #3, Chemical catalysts: #1 Admixture systems: global #1 Construction systems: globally among top three Sports flooring: global #1 OEM automotive coatings: #2 Automotive refinish coatings: #3, Coil coatings: #3 in Europe Decorative paints: #1 in South America Fungicides: #2 Herbicides: #6 Insecticides: #3
Key competitors Dispersions: Dow, Celanese, Wacker Pigments: Clariant, Altana, DIC Resins: Cytec, Dow, Bayer Additives: Altana, Evonik, Everlight Mobile emissions catalysts: Johnson Matthey, Umicore Refinery catalysts: Grace, Albemarle Chemical catalysts: Sd-Chemie, Haldor Topse, LyondellBasell, UOP Admixture systems: Sika, W.R. Grace, Mapei Construction systems: RPM, Mapei, Bostik, Sika
Automotive OEM coatings: DuPont, PPG, Kansai Paint Automotive refinish coatings: DuPont, PPG, Akzo Industrial coatings: Akzo, PPG Decorative paints South America: Akzo, Sherwin Williams
Exploration and production 23% of sales Natural gas trading Other Total
3,847 7,509 4,577 50,693
8% Exploration & Production 15% Natural gas trading 9% Includes Styrenics (to be disposed), sale of raw material, fertilizer business, engineering services, rental income and leases 100%
Oil& gas industry Oil& gas industry
Fungicides: Syngenta, Bayer Herbicides: Monsanto, Syngenta, Bayer, Dow, Nufarm Insecticides: Bayer, Syngenta Shell, BP, Statoil, ENI, Saipem, Exxon Mobil, Chevron, Total E.on Ruhrgas, Verbundnetz Gas AG, Gaz de France, Centrica
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Bayer
Figure 393: Sales by division (2009).
Crop Science 22%
3500 3000 2500 2000 1500 1000 500 0 -500 Healthcare Crop Science Material Sciences
Healthcare 53% Material Sciences 25%


North America 25%
Asia 18%

22% 21% 20% 19%
LaTAm/AME Europe 42%

18% 17% 16% 2005 2006 2007 2008 2009
15%
Bayer has undergone a period of portfolio reshuffling, having spun out Lanxess in 2005 and disposed of HC Starck and Wolff Walsrode in 2006. The HealthCare business acquired Schering in 2006 and has a wide product offering for pharmaceutical and consumer applications. CropScience is a market leader in crop protection and seed treatment. MaterialScience is a global leader in polycarbonates and polyurethanes, primarily used in the automotive, building/construction and electronics/electric end-markets.
Significant scale in Polycarbonates and Polyurethanes. Leading player in Crop Protection. Limited patent expiries in Pharma franchise.
OPPORTUNITIES:
Margin pressure in MaterialScience due to rising raw material costs. Limited presence in seeds/biotech.
THREATS:
Well-positioned to benefit from emerging market growth. Potential overcapacity in MDI and TDI . Strong pipeline in CropScience. Rivaroxaban one of the most significant pipeline assets in EU pharma. Further penetration of GM technology cannibalizing agchem growth.
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Table 144: Bayer: Divisions and products

Division Material Science 25% of sales Business units Materials Key products Furniture, electrical goods (insulation), sportswear (soles for shoes), automotive, adhesives, colorants Sub-division Polycarbonates (6%) polyurethanes (12%) Coating, specialties, adhesives 2009 Sales (m) 7,520 % sales 25% Key market positions Top 3 in polycarbonates, thermoplastic polyurethanes, polyurethanes Key competitors SABIC, BASF, Dow, DuPont Teijin, Chimei, Idemitsu, Mitsubishi and LG
(4%) Industrial operations (2%) Herbicides (6%) Fungicides (5%) Insecticides (4%) Seed treatment (2%) Environmental Science (2%) BioScience (2%) General medicine (11%) Specialty medicine (10%) Womens healthcare (9%) Diagmostic imaging (3%) Consumer Care (10%) Medical Care (5%) Animal Health (3%) 5,424 17% Top 3 globally in crop protection Syngenta, BASF, Dow, DuPont, Monsanto
Crop Science 22% of sales
Crop Protection
Agriculture
Environmental Science, BioScience

Healthcare 53% of sales
Non-crop pest control for agriculture, gardening, household, golf courses, municipal; plant technology
1,086
3%
Syngenta, BASF, Dow, DuPont, Monsanto, Scotts
Pharmaceuticals
10,467
34%
Astrazeneca, Genentech, GSK, Johnson & Johnson, Merck, Novartis, Pfizer, Roche, SanofiAventis GSK, Johnson & Johnson, P&G, Schering-Plough, Wyeth
Consumer Health
5,521
18%
Total
31,168
100%
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275
Clariant
Tex tile Chemicals 12% Pigments 16% Oil & Mining Serv ices 9% Leather Serv ices 4% Industrial & Consumer Specialties Masterbatches 17% Performance Chemicals
Source: Company data Source: Company data
140 120 100 80 60 40 20 0 Industrial & Masterbatches Performance Specialties Oil & Mining Pigments Chemicals Chemicals Consumer Services Services Leather Textile
Figure 398: EBIT by division, CHFmn (2009)
21%

Asia 23%
Latam 18% ROW 4%

12% 10% 8% 6% 4% 2%
North America 11% Europe 44%

0% 2005A 2006A 2007A 2008A 2009A
Clariant is a diversified specialty chemicals company. It recently restructured its business into 10 business units from 4 business units under its new strategic initiative. Textile, Leather & Paper Chemicals was formed into 4 business units (Paper Specialties, Leather Services, Textile Chemicals, and Emulsions). Pigments and Additives were also separated out. Functional Chemicals formed 3 business units (Industrial & Consumer Specialties, Detergents & Intermediates, Oil & Mining Services). The Company has also been undergoing a major restructuring programme since the start of 2004, although the benefits have been largely consumed by raw material cost inflation.
Market leader in Textile Chemicals, Leather Chemicals and Masterbatches.

OPPORTUNITIES:
Still largely reliant on European and US production base. Significantly exposed to industrial end markets.
THREATS:
New management team has the opportunity to provide new impetus to restructuring and may provide strategic surprise. Introduction of new pricing and business management model more focused on margin than volume growth.
Ongoing structural pressures. Raw material cost inflation. Further restructuring costs.
275
276
Table 145: Clariant: Divisions and products

Division Industrial & Consumer Specialties 2009 Sales (mSFr) 1,424 % sales 21% Key products Ethylene oxide derivatives and specialty chemicals for a large variety of applications in the consumer and industrial markets Key end markets Key market positions Global leader in ethylene Automotive, biocides, coatings, construction, crop protection, defoamers, oxide derivatives engineering & aviation, industrial & home care, metal working nutrition, personal care, deicing Key competitors BASF, Croda, Evonik
Performance Chemicals Masterbatches Pigments
1,360 1,122 1,072
21% 17% 16%
Performance chemicals, Process chemicals(refinery chemicals, functional fluids, metal working, laundry detergents and household cleaning products Colourants and masterbatches Organic pigments, pigment preparations and dyes used in coatings, printing, plastics, and other specialty applications) Chemicals for pretreatement, dyeing, printing and finishing of textiles Products and services to the oil, refinery and mining industries Leather chemicals and services, Technical solutions for the complete leather manufacturing process
Chemicals, pharmaceuticals and agrochemicals, household and cleaning, paints, construction, paper Automotive, consumer goods, electrical, medical, packaging,textiles and fibers Automotive, industrial, powder, wood/coil coatings, decorative paints, printing technology, masterbatch producers, compounders, processors, resin- and fiber manufacturers, consumer industries Casual wear, sportswear, denim, business, and work wear, home textiles, medical wear Exploration additives, upstream, production markets, pipeline, refinery Additives, mineral processing, dust control Automotive, shoe & fancy goods, furniture, garment, fur
BASF, Dow, Ashland, Kemira, Organik Kimya Top 3 in Masterbatches Ampacet, PolyOne, Schulman BASF, DIC/SUN
Textile Chemicals Oil & Mining Services
777 579
12% 9%
BASF, Dystar, Huntsman, Long Shen Baker Petrolite, Champion, Cytec, Nalco BASF, Lanxess, Stahl, TFL
Leather Services Total
279
8,533
4%
100%
276
277
Croda
Figure 401: Sales by division (2009) Figure 402: EBIT by division, mn (2009)
Mn
120
Industrial Specialties 49% Consumer Care 51%
90 60 30 0 Consumer Care Industrial Specialties

North America 26% Asia 16% Latam 3% ROW 8%

25% 20% 15% 10% 5%
Europe 47%
0% 2005 2006 2007 2008 2009

Croda is a specialty chemicals company with two divisions Consumer Care and Industrial Specialities. The Company specialises in producing naturally-derived products for a wide range of end-markets including personal care, pharmaceuticals, crop care, home care and industrial uses. Following its successful reverse takeover of ICI's Uniqema business in 2006, the company has gained significant scale in terms of product offering and R&D expertise, while implementing a wide range of cost cutting measures within the combined businesses. Growth arises from continued consumer demand for creams and personal care products such as anti-aging and skin creams which use Crodas additives.
Significant exposure to high-growth personal care market. Limited presence in the emerging markets. State-of-the-art R&D. Pricing power helped by Croda products representing a low % of cost of end price of products (less than 3%).
OPPORTUNITIES:
Uncertainty over the impact of BASFs recent acquisition of Cognis on the competitive landscape.
THREATS:
Further growth through the removal of lower margin Significant slowdown in Industrial and Consumer end products and the repositioning of Uniqema. markets not offset by consumers trading down. Continued growth in end markets as consumer preference Raw material pricing pressures threatening margins in for vanity creams such as anti-aging products increases. commoditized product areas. Possible disruption created by Cognis integration into BASF providing a competitive advantage to Croda.
277
278
Table 146: Croda: Divisions and products

2009 Sales (m) 468 % sales 51% Customer segment
Division Consumer Care
Key products
Key end markets
Key competitors
Personal care Healthcare Crop care
Alkoxylates, esters, plant extracts Fish oil concentrates, medical grade lanolin, high purity fatty acids, super refined oils, pharamaecutical emulsifiers carrier Formulation aid and adjuvants Additives for lubricant Resin, paint, coating Mining Chemicals, oil field chemicals, water treatment Organic slip and anti-block additives, variety of amides Sarcocinates, fatty acid amides, proprietary surfactants, emollient blends
Hair care, skin care, colour cosmetics Nutraceuticals, pharmaceuticals, animal health Agrochemicals Automotive, machinery industry Paint industry, Construciton, Housing
Cognis, ISP, Seppic Ocean Nutrition, Pronova BASF Lubrizol, BASF, Clariant Akzo Nobel, BASF, Clariant, DSM
Industrial Specialities
448
49%
Lubricant additives Coating and polymer Geo Tech Polymer additives Home care
Total 916 100%
Polyethylene and polypropylene resin producers, PET, PS, rubber Household products, fabric care, tissue care
Chemtura, Fine Organics Cognis
278
279
DSM
Base Materials 15% Poly mer Intermediates 11% Performance Materials 24%

Nutrition 36% 600 500 400 300 200 100 0 -100
Other
Chemicals & 5%
Intermediates
Nutrition
Performance
Pharma
Materials
9%

RoW 10% North America 18% Europe 47%

20% 15% 10% 5%
Asia Pacific 14% China 11%

0% 2005A 2006A 2007A 2008A 2009A
DSM has undergone significant change in the past decade. Following the sale of its petrochemicals operations in 2000, DSM acquired the Vitamin and Fine chemicals business of Roche in 2004. The company has also made a number of other alterations to the portfolio, and now consists of five main clusters Nutrition, Pharma, Performance Materials, Polymer Intermediates and Base Chemicals & Materials. Base Chemicals & Materials was formed in 2008 and consists of a number of non-core assets which have been earmarked for disposal. DSM's 'Vision 2010' strategy is dominated by the goal of focusing on product areas (Life Sciences & Performance Materials), which create value for customers. (Update?)
Market leadership (vitamin-based nutritional ingredients, Weak pharma business, with limited pricing power in Dyneema, Food Specialties, #2 in polyamide 6). Anti-infectives and limited contracts in Pharma Products. Well-established presence in China. Strong balance sheet and cash generation.
OPPORTUNITIES:
Polymer Intermediates highly cyclical and commoditised. ROIC below peer group.
THREATS:
Quality differentiation versus low cost competition. Continued focus on innovation. Accelerate growth through M&A; disposal of non-core assets (BC&M).
Product commoditisation. Low-cost competition (esp. China). Raw material price increases.
Materials
279
Polymer
Base
Pharma
Chemicals &
280
Table 147: DSM: Divisions and products

Division Nutrition 36% of sales Business units Nutritional Products 2009 sales (m) 2,463 % total Key products 32% Vitamins, carotenoids, nutritional ingredients, UV filters, .premixes. 5% Food enzymes, cultures, yeast 5% Custom manufacturing & development services 4% Active APIs (betalactams, cephalosporins & intermediates) Key end-markets Food/feed, nutritional supplements, cosmetics Food & beverages Pharmaceuticals Pharmaceuticals Key market positions Key competitors
Market leader in nutritional ingredients; vitamins Vitamins & carotenoids: BASF, Adisseo, NEPG, (c.35-40%), carotenoids (c.75%) NHU, NCPC, XP and Shijiazhuang Weishen Enzymes: Danisco, Chr Hansen #1/2 in chosen segments Global #4 in contract manufacturing (2007A) #1 in SSCs, SSPs & 7-ADCA, #3 in Penicillin and 6-APA #1 in high temperature polyamides, #2 in polyamide 6, #2 in thermoplastic copolyesters, #3 overall in engineering plastics Danisco, Chr Hansen, Novozymes, LeSaffre Lonza, BASF, Siegfried, Evonik, Rentschler, Boehrimnger Ingelheim, CMC, Patheon, Catalent Chinese/Indian peers (eg United Laboratories, CSPC, Aurobindo) as well as Antibioticos, Sandoz PA6: BASF, Lanxess, UBE High temperature PA; DuPont, Kuraray, Solvay, Mitsui Thermoplastic copolyesters: Dupont, Ticona
Food Specialties Pharma 9% of sales Pharmaceutial Products Anti-Infectives
361 395 326
Performance Materials 24% of sales
Engineering Plastics
648
8% Polyamide 6 (some 66), polycarbonates, Automotive, electrical & heat resistant resins, polyesters, POMs, electronics, (food) packaging, thermoplastic copolymers optical & glazing, consumer/industrial 3% Dyneema - the worlds strongest fibre Life protection, marine, sports, medical, high performance textiles Building & architecture, automotive, metal (can & coil), marine, optical fibre CPL: textiles, floor coverings, industrial yarns, autos, electronics, films, building & construction EPDM rubber, thermoplastic elastomers (TPVs)
Dyneema
222
Market leader in UHMwPE (ultra high molecular Honeywell (Spectra UHMwPE), DuPont weight polyethylene) (Kevlar aramid), steel & polyester producers European market leader in unsaturated polyester Coating resins: BASF, Dow, Cytec, Hexion, 3D resins (c.30%) Systems Composite resins: Cray Valley, Reichhold, Ashland Largest merchant CPL producer globally CPL: Capro Corp, CPDC, Ube, Honeywell, (c.20%), major European player in ACN (c.25%) BASF, Sumitomo, Sinopec ACN: Ineos, Asahi, Solutia/Ascend, Secco, FPC, Taekwang, Jilin One of the global leaders (c.16%) in EPDM, #2 in TPVs Dow, Lanxess
Resins
953
12% Coating and composite resins
Polymer Intermediates 11% of sales Base Chemicals & Materials 15% of sales
Fibre Intermediates
849
11% Caprolactam, acrylonitrile
Elastomers
387
5% Elastomers
Other Agro [SOLD] Melamine [SOLD] Other 5% of sales Total

258 338 151 381 7,732
3% Citric acid, maleic anhydride, Special Products 4% Ammonia and other nitrogen fertilisers 2% Melamine 5% Innovation Centre, Venturing, insurance services 100% Agriculture Wood-based panels, laminates for furniture/flooring, car paints Market leader in Netherlands Leading global brand (c.15%)
Polynt, ADM, Jungbunzlauer Yara Borealis, Pulawy
280
281
Elementis
Chromium 33% Specialty Products 53%

25 20 15 10 5 0
Surfactans 14%
Specialty Products
Surfactans
Chromium

North America 30%

Rest of the World 33%

18% 16% 14% 12% 10% 8% 6% 4% 2% 0% 2005* 2006 2007 2008 2009
United Kingdom 5% Rest of Europe 32%
Source: Company data, J.P. Morgan estimates * 2005 numbers including Pigments business sold in 2007
Elementis is a chemicals company manufacturing specialty chemicals and chromium chemicals for a range of industries globally. The group is comprised of three businesses: Elementis Specialty Products which manufactures rheological additives, compounded products and colorants; Elementis Surfactants which manufactures surface active ingredients used primarily in the formulation of detergents, and Elementis Chronium which is the worlds largest producer of chromium chemicals, manufacturing products for leather tanning, aerospace, timber preservation and refractories. The Groups corporate headquarters are in London, and its operational headquarters are based in Hightstown, New Jersey, US. Each division of the group is managed on a global basis with operations at over 20 locations in 6 countries. The Company switched to US$ reporting in 2010, although the shares retain a London Stock Exchange listing.
Relatively high margin Specialty business supplying additives to the coatings market. Largest Chrome producer worldwide. Closure of UK chrome site allows more efficient manufacture in the US and reduces global capacity.
OPPORTUNITIES:
Above average exposure to Industrial end markets. Vulnerable to slowdown in main markets such as coatings. Potential failure of coatings end market to recover strongly due to continued weak housing and construction markets.
THREATS:
Further upside through additional restructuring. Margin recovery faster than expected. Further expansion in Asian region for Specialties.
Raw material price inflation. Downturn in chromium market with volumes falling sharply.
281
282
Table 148: Elementis: Divisions and products

2009 Sales (m) 194.6 % sales 53%
Division Specialty Products
Key products Rheological additives/ modifiers, organoclays, colourants, high performance dispersing agents, defoamers, coalescing agents, flow and leveling additives, wetting and slip agents, other specialty additives and resins, and lanolin and other natural oil derivatives
Key end-markets Industrial coatings, Architectural coatings, construction, Oilfield chemicals, Personal care
Surfactants
49.2
14%
Range of surface active ingredients
Chromium
119.9
33%
Sodium dichromate, chromic acid, chromic oxide and liquid chrome sulphate
Oilfield, Textile and leather, Pulp and paper, Plastics and resins, Chemicals and construction, Household and Agrochemical and feed markets Leather tanning, Timber treatment, Metal finishing, Chrome metal alloys, Chrome pigments and Ceramics/refractory
Key applications Homes, offices & similar environments. Protective applications in automotive, Containers, Furniture, White goods, Flooring, Marine, Plastics, Construction, Oil & Gas, Concrete, Plasters, Mortars, Renderings, Stuccos, Building adhesives, Make- up, Skincare products Household/ domestic detergents, industrial cleaning, oilfield chemicals, leather and textiles, and pulp and paper
Competitors DSM, Clariant, Rhodia, BASF, Dow, Eastman Chemicals
DSM, Clariant, Rhodia, BASF, Dow, Eastman Chemicals
Metal finishing, Organic products, Pigments, Ceramics, Textiles, Tanning animal hides, Timber treatment, Chromium plating, Automobile, Medical application, Aerospace, Power generation industries, Paints, Coatings, Plastics, Enamels, Concrete, Other construction materials, Ceramics, Production of refractory bricks
Total
363.7
100%
282
283
Johnson Matthey
Fine Chemicals Div ision Precious Metal Products 71% Env ironmental Technologies 26% 3%

140 120 100 80 60 40 20 0 Env ironmental Technologies Precious Metal Products Fine Chemicals Div ision

Asia 22% ROW 8%

20.0% 15.0% 10.0%
North America 25%
5.0% Europe 45% 0.0% 2006A 2007A 2008A 2009A 2010A
Johnson Matthey has three main divisions that are centered to varying degrees on the key competency of precious metals. The divisions are: 1) Environmental Technologies, which supplies both automotive and industrial catalysts; 2) Precious Metals Products which has a manufacturing arm as well as acting as a marketer and distributor for precious metals producers principally AngloPlatinum; 3) Fine Chemicals which manufactures a variety of APIs (advanced pharmaceutical intermediates) principally based either on platinum technology, or on opiate technology, as well as some other chemical catalysts.
Leading player (around 30% market share) in a highly consolidated autocatalyst market driven by legislation.
Exposure to precious metals price volatility through the PMP division.
Little exposure to raw materials costs due to pass-through Influenced by fortunes of global automotive market where clauses where customers are invoiced separately. recovery remains volatile. Long-term marketing contracts with AngloPlatinum.
OPPORTUNITIES: THREATS:
Further tightening of emissions legislation (light duty for Role of catalysts in electric cars and changing technology cars and HDD for trucks, and off-road) will provide requirements. longer term growth. General automotive downturn if global economy stalls Uses for catalysts in areas such as coal fired power would affect volume growth in autocatalysts. stations in China, and in energy such as syngas development, should provide further uses for catalyst technology.
283
284
Table 149: Johnson Matthey: Divisions and products

2010 Sales (m) 2,056 % sales 26%
Division Environmental Technologies
Business units Emission Control Technologies
Key products Heavy duty diesel catalyst, Pollution control systems
Key end markets Automobile Industry, Power industry, Process industry, Chemical industry (Light duty applications, Heavy duty diesel applications, stationary source emissions control)
Process Technologies Fuel Cells

Precious Metal Products
Process catalyst for syngas, methanol, ammonia, hydrogen, gas/coal to products, oil refineries Components for fuel cells Platinum marketing and distribution activities Colours, Black obscuration enamels, Silver conductive materials for automotive glass Wide range of precious metals and other fabricated products Precious and base metal catalysts, electrochemical product, gold & silver refining and bullion mfg. operations API and intermediate products for Pharma and Fine chemical industry APIs for controlled drugs and for platinum based anticancer treatments Specialty organic and inorganic chemicals
Chemical industry, Oil & Gas industry, Petrochemical industry, Automobile Industry, Power industry, Process industry (Syngas and gas to liquid, Refinery and gas processing) Fuel cell Electronic & Electrical industry, Jewellery industry, High tech industry, Automobile industry Glass industry, Chemical industry, Automotive industry Medical, Industrial Chemicals, autos, refinery, mining
Key market positions Top 3 in vehicle exhaust emission control and catalyst systems for VOC for industrial processes Top 3 in specialist technology for diagnostic
Competitors BASF, Umicore, Argillion,Frauenthal, Haldor Topsoe, Tokyo Roki BASF, Umicore, Argillion,Frauenthal, Haldor Topsoe, Tokyo Roki
5,562
71%
Platinum Marketing & Distribution Colour Technologies Noble Metals Catalysts, Chemicals and Refining
Top 3 in catalyst components for fuel cell #1/2 distributor of platinum group metals, sole marketing agent for AngloPlatinum(#1 Platinum producer)
Evonik, N E Chemcat corporation, Anglo American, Lonmin, Rio Tinto
BASF, DSM, Lonza, Clariant
Fine Chemicals and Catalysts
221
3%
Macfarlan Smith
Fine chemicals and Pharmaceutical industry
Top 3 in opiate alkaloids
Pharmaceutical Materials and Services Research Chemicals

Total 7,839 100%
Generic and branded pharmaceutical companies Chemicals, healthcare, pharma
Rhodia, Lonza, Dow, Clariant, Cambrex, Avecia, Aventis, BASF, Bayer, DSM, Evonik Lonza, Rhodia, DSM Lonza, Rhodia, DSM, Lanxess
284
285
Kemira
Oil & Mining 11% Others 15%

70.0 60.0 50.0 40.0
Municipal & Industrial 29% Paper 45%

Source: Company data *Including E.G. Chemsolutions
30.0 20.0 10.0 0.0 Municipal & Industrial Paper Oil & Mining

ROW 33%

16% 14% 12% 10% 8% 6% 4% 2% 0% 2005 2006 2007 2008 2009
Europe 37% North America 30%

Source: Company data ** APAC & South America
Kemira is a Finnish chemical company that focuses on water and paper treatment chemicals. The Company has operations in 40 countries, occupying strong regional and niche positions. Kemira operates out of three primary business units: Paper, Municipal & Industrial (water treatment), and Oil & Mining. In early 2010, Kemira spun out its paints division Tikkurila as a separate unit. The Companys main goal is to become a leading water treatment company.
STRENGTHS:
WEAKNESSES:
The Tikkurila spin off will help Kemira to focus resources Exposure to low growth industrial markets (paper & on its core business and their goal of becoming a leading pulp). water chemistry company. European focused with less Asia and US than some Well-positioned to benefit from growth in demand for companies. clean water and treatment of domestic and industrial effluent.
Water treatment business remains a growth area.
Benefits from recent significant restructuring programme Volatility of pulp and paper market. still to be felt.
Raw material and input cost pressures may impact margins.
285
286
Table 150: Kemira: Divisions and products

2009 Sales (m) 906 % sales 45%
Division Paper
Business units - Pulp Chemicals - Paper Chemicals - Additives
Municipalities & Industrial
608
29%
-Municipal -Industrials -TIO2 pigments -Chemidet
Key products -Pulp chemicals for de-inking, chemical and mechanical pulping -Paper chemicals for deposit control, defoaming, sizing retention, colorants an coating pigments paper industry -Inorganic coagulants -Water treatment polymers
Key end markets -Pulp -Printing & writing -Packaging & board
Key market positions Top 3 Worldwide
Competitors Eka, BASF, Hercules and Dow
Oil & Mining
235
11%
Others
314
15%
Specialty Chemicals & Others
-Titanium dioxide pigments for packaging inks -Organic acids and acid derivatives for food, chemicals and pharmaceuticals, de-icers, feed acidification and preservation -Bleaching agents for detergent industries. specialty chemicals such as organic salts and acids, airport runway deicing
-Municipalities -Private water treatment plants -Industrial wastewater treatment by chemical, metals & mining, oil, food & beverage, construction industries -Cosmetics, packaging inks, food, feed and detergents industries.
Top 3 in coagulants
Feralco, Kronos, Ashland, SNF, and Nalco DuPont, Huntsman, Tronox, Cristal
Top 3 coagulants Top 3 in Titanium dioxide pigment
Food Industry, feed industry, Pharma industry
Total
2,063*
100%
Source: Company reports and J.P. Morgan estimates, * excluding Tikkurila.
286
287
K+S (Kali und Salz)

Others 3% Potash and Magnesium Products 41%

300 200 100 0 -100 -200
Salt 28%
Nitrogen Fertilizers 28%

Potash and Magnesium Products
Nitrogen Fertilizers
Salt
Others
Germany 18%

40% 30%
Ov erseas 47%
20% 10%
Rest of Europe 35%

0% 2005
2006
2007
2008
2009
K+S is a leading potash and specialty fertiliser producer. The business is divided into fertiliser and plant care, and also salt and complementary businesses. In 2009, K+S merged the activities of fertiva with parts of COMPOs professional business in the Companys Nitrogen division to achieve an even stronger position in its core Fertilizers business sector. In April 2009, K+S acquired Morton Salt for $1.675bn to become a leading salt producer.
STRENGTHS:
WEAKNESSES:
Leading position in Europe in potash and magnesium products. World leading Salt producer. Leading cost effective salt producer. Partnership with BASF for distribution of Nitrogen fertiliser/ Agricultural products.
OPPORTUNITIES:
Strong focus on Europe. High production cost per potash relative to peers. Resource-constrained production leaves very little scope for volume expansion in the Potash business. Leading position in Potash but insignificant presence in Nitrogen and phosphate fertilizers.
THREATS:
Expansion opportunity outside Europe - particularly India and China. Decreasing arable farm land. Increasing use of Genetically Modified crops will increase fertilizer application.
Little visibility over the strategic intentions of major private shareholder (10%). Normalization of agricultural growth to lower levels. High energy prices and environmental restriction cost.
287
288
Table 151: K+S: Divisions and products

2009 Sales (m) 664 % sales 40%
Division Potash and Magnesium Products
Business units Potassium Chloride
Key products Potassium Chloride
Key end-markets Fertiliser and Agriculture Industry
Key market positions Leading position in potash and magnesium sulphate globally
Key competitors Potashcorp, Uralkali, Agrium, Mosaic, Yara, CF Industries, ICL
Nitrogen Fertilizers
Salt
Complementa ry business segment
Fertilizer Specialties Industrial products Consumer Business Professional/ Industrial Business Complex fertilizer Straight nitrogen fertilizers Ammonium sulphate Food grade salt Industrial salt Salt for chemical transformation De-icing salt Other Waste management and recycling logistics Animal hygiene products Trading business
461 297 207 271 161 242 135 151 239 63 497 64 67 12 33 8
3,574 100%
Industrial products Potting salts, Plant care products, Garden fertilisers, Plant fertiliser product Special complex fertiliser for horticulture and agricultural special products Nitrogen fertiliser distributor Nitrogen fertiliser distributor Nitrogen fertiliser distributor
Fertiliser and Agriculture Industry Fertiliser and Agriculture Industry Fertiliser, Home care and Agriculture Industry Fertiliser, Home care and Agriculture Industry Fertiliser and Agriculture Industry Fertiliser and Agriculture Industry Fertiliser and Agriculture Industry Leader in Europe with COMPO Leader in Europe with COMPO
28%
Potashcorp , Uralkali, Agrium, Mosaic, Yara, CF Industries, ICL Potashcorp , Uralkali, Agrium, Mosaic, Yara, CF Industries, ICL Potashcorp, Agrium, Yara, CF Industries, Potashcorp, Agrium, Yara, CF Industries Potashcorp, Agrium, Yara, CF Industries Potashcorp, Agrium,Yara, CF Industries Potashcorp, Agrium, Yara, CF Industries.
28%
Table salt Industrial salt Salt for chemical transformation De-icing salt Waste management and recycling Logistics Granulation trading business
Food and Flavour Industry Chemical and heavy industries Chemical and heavy industries Chemical and heavy industries Metals and Mining Fertiliser and Agriculture Industry Fertiliser and Agriculture Industry Fertiliser and Agriculture Industry
#1 salt supplier globally #1 salt supplier globally #1 salt supplier globally #1 salt supplier globally Leading provider of underground waste management
Akzo, Wacker Akzo, Wacker Akzo, Wacker Akzo, Wacker Akzo, Wacker
3%
Total
288
289
Lanxess
Figure 425: Sales by division (2009A)
Performance Chemicals 30% Reconciliation 1% Performance Poly mers 47% 50 0 Performance Poly mers
Figure 426: EBIT by division, mn (2009A)

150 100
Adv anced Intermediates 22%

Adv anced Intermediates
Performance Chemicals
Figure 427: Sales by destination (2009A)

Germany Asia Pacific 23% 21%

12% 9% 6%
Latin America 10% EMEA North America 15%

3% 0% 2005A 2006A 2007A 2008A 2009A
31%
Lanxess is a diversified specialty chemicals player which was spun out of Bayer in January 2005. The business has undergone an extensive restructuring programme post listing, involving the re-alignment of cost structures and the sale of 1.5bn of sales worth of non-core assets. The company is now made up of 3 divisions Performance Polymers, Advanced Intermediates and Performance Chemicals. Lanxess core strategy remains to reduce volatility and cyclicality through ongoing structural improvement as well as increasing its exposure to areas of growth.
Top 3 players in most segments (#1 in PBR). Above-average pricing power; proven culture of price before volume. Proactive management team.
OPPORTUNITIES:
Cyclical, given significant exposure to GDP linked end markets (eg autos). Profitability below sector average. Cash flow currently limited (large scale capex programme).
THREATS:
Accelerate growth through further bolt-ons / enhancing exposure to growth markets. Product differentiation through R&D (eg Nd-PBR) Scope for further restructuring / disposals?
Low cost competition / increasing global supply. Potential raw material price pressures. Reversal of current FX benefit (U$/).
289
290
Table 152: Lanxess: Divisions and products

2009s sales (m) 597 836 358 597 22% Basic chemicals Saltigo Performance Chemicals Functional chemicals 230 773 331 30% Plastic additives, flame retardants, water chemicals, specialty dyes, colourants Iron oxide, chromiun oxides Plastics, construction, chemistry, life sciences, electronics Supplier to a broad range of markets Leaders in iron oxide & chromium oxide; Leading global supplier Albemarle, BASF/Ciba, Chemtura, Clariant, Ferro, Lonza, Sun Chemical, ICL/Supresta Rockwood, Chinese playes (Cathay Pigments, Deqing Huayuan Pigment, Hunan Three-Ring Pigments, Yixing Yuxing) Dow, Mitsubishi, Purolite, Rohm & Haas BASF, Clariant, Stahl,TFL Arch, Dow, Lonza, Rohm & Haas, Thor BASF, Clariant Flexsys, Chemtura Chlorobenzenes, chlorotoluenes, nitrotoluenes and their derivatives, inorganic acids Custom manufacturing of APIs Agrochemicals, polymers, construction, coatings, autos/transportation Agro, Pharma, Specialties Leading positions in all business lines Among the leading global players Jiangsu Yangnong, Aarti, Kureha, Merisol, Perstorp, BASF Tessenderlo DSM, Lonza, Weylchem, Albemarle % sales 47%
Division Performance Polymers
Business units Butyl rubber Polybutadine rubber Technical rubber products Semi crystalline products
Key products Butyl rubber, Halobutyl rubber Polybutadiene rubber (PBR) Solution SBR NBR (nitrile butadiene rubber), E-SBR, CR (chloroprene rubber), EPDM, EPDM, HNBR, EVM Polyamide (6)-based thermoplastics, plastic intermediates, thermoplastic polyesters, monofilaments
Key end-markets Automotive,adhesive,chewing gum, construction, pharma Automotive/ tyre,plastics,golf balls Automotive, footwear, mechanical engineering, plastics, construction, electronics Automotive, transportation, chemistry, packaging, electronics, life sciences
Key market positions #1/2 in butyl rubber #1 in SSBR #1 in NBR, ESBR Strong positions
Key competitors ExxonMobil, Sinopec, Sibur holding Sinopec, Michelin, Goodyear, Firestone Nippon Zeon, Polimeri Europa, DSM, JSR BASF, DSM, DuPont, Rhodia
Advanced Intermediates
Inorganic pigments
306
Construction, paints & coatings, plastics
Ion exchange resins
153
Ion exchange resins, water treatment solutions Tanning agents, preservatives, finishing auxilliaries, dye products Biocides and specialities for beverage stabilization, preservatives, sterilization Rubber, polyurethanes, plastics, lubrication oil additives Antidegradants, accelerators, specialties 1% 100%
Water & energy, nutrition, chemistry
Leather Material protection products Rhein Chemie Rubber chemicals Reconciliation Total
306 153 184 199 35 5,057
Shoes, furniture, automotive, garments Construction/paimts, disinfection/consumer, water treatment Automotive, transportation, construction, footwear Tyre, technical rubbber products, chemicals, latex, mineral oil applications
#2 in ion exchange resins; Leading position in technologically advanced monodisperse ion exchange resins Leading global supplier Leading positions Leading position in additive formulations Leading market position
290
291
Linde
Cy linder 33% Healthcare 9%
1,400
Tonnage 18%
1,200 1,000 800 600 400 200 0 Gas Engineering
Engineering 21%
Bulk 19%
North America 18%

25.0% 20.0%
Europe 47%
Asia 15%
15.0% 10.0% 5.0% 0.0%
Latam ROW
2005A
2006A
2007A
2008A
2009A
6%
Following its acquisition of BOC (closed Sept 2006), Linde is the largest Industrial gas company in the world. The company also has a significant plant engineering business that sells to a wide range of industries including chemicals and energy, as well as industrial gases.
STRENGTHS:
WEAKNESSES:
Leading industrial gases company by sales following the Legacy business has greater exposure to more 'cyclical' BOC acquisition. Defensive long term gases contracts. end of industrial gases market. World-leading engineering technology. Strong franchise in fast-growing regions of E. Europe and Asia.
Less exposure to longer-term on-site distribution.
Significant sales synergies from BOC acquisition. Continued strength of industrial capex cycle. Greater leverage of Linde's engineering technology.
Slowdown in industrial economy. Weak order book in Engineering.
291
292
Table 153: Linde: Divisions and products

Business units Tonnage 2009 Sales (m) 2,075 % sales 18%
Division Gases division 77% of sales
Key products Air gases and hydrogen
Key end markets Refineries, chemicals, energy, metal manufacturers, steel
World market position Global #2 behind Air Liquide
Competitors Air Liquide, Praxair, Air Products, Airgas, Taiyo Nippon
Bulk
2,192
19%
Bulk deliveries (Oxygen, Nitrogen, Hydrogen, Cryogenic & non cyrogenic gases Main gases: Nitrogen, Oxygen, Argon, Hydrogen, Helium, Carbon dioxide, inert gases, medical gases Therapeutic gases, mainly Oxygen Air separation plants, gas synthesis plants, olefin plants, LNG plants
electronics & electrical, chemicals, food processing, glass processing, metal production, oil & gas Electronic Producers (Computers, flat screen, digital music players, mobile phones), small customers Hospitals, homecare, research institutes, hygiene industry Healthcare, chemical, construction, food & beverages, metal production
Cylinder
3,635
32%
#1 Global, #1 in 4 out of 5 emerging regions ( #1 in greater China, #1 in SE Asia, #1 in Eastern Europe and Middle East, #2 in South America) #1 in cylinders,
Air Liquide, Praxair, Air Products, Airgas, Taiyo Nippon Air Liquide, Praxair, Air Products, Airgas, Taiyo Nippon Air Liquide, Praxair, Air Products, Airgas, Taiyo Nippon Air Liquide, Technip, Haldor Topsoe, Uhde, ABB lummus, Stone & webstar, KBR, Technimont, Toyo, Chiyoda, Bechtal, JGC, KBR, Air Products
Healthcare
Engineering 23% of sales
1,030 2,311
9% 21%
#2 in healthcare (global mkt. sh.1520%) #1 in Air separation plants (Oxygen, nitrogen, air gases), Top 2 in hydrogen and synthesis gas plants (H2, ammonia, gas removal, gas purification), Top 2 in olefin plants (ethylene, propylene, butadiene, aromatics, polymers), Top 3 in natural gas plants (LNG, NGL, LPG, helium)
Total
11,211
100%
292
293
Rhodia
Acetow 14% Eco Serv ices 5% Energy Serv ices 5% Silcea 16% Nov ecare 20%
Figure 434: EBITDA by division, mn (2009A)

Other 4% Poly amide 36% 100 50 0 Poly amide Nov ecare Silcea Acetow Energy Serv ices
200 150
Eco Serv ices

Latin America 17% Europe 35% North America 20%

18% 15% 12% 9% 6% 3% 0%
Asia Pacific 28%

2005A
2006A
2007A
2008A
2009A
Rhodia is a diversified specialty chemicals company specialised in polyamide (66) derivatives, with also a significant presence in surfactants, acetate tow, high performance silica, rare earths for automotive catalysts and sulphuric acid regeneration. The business is also involved in the sale of carbon emission credits (CERs) through its abatement of N2O, a by-product of adipic acid. The group's strategy has been to focus its portfolio around high-growth, high-margin businesses with clear leadership positions.
Market leadership in chosen segments (global #2 in Above-average cyclicality in polyamide polyamide 6,6, #1 in acetow and high performance silica, Significant pension liability (1.5bn) vanillin) Significant cash flow dependency on sale of emission Solid presence in the emerging markets (c.45% sales) credits (CER) Improved cash management; low WC/sales
Accelerated growth through bolt-ons Potential uplift in CER pricing/volumes
Input cost fluctuation (butadiene/benzene-derivatives/gas) Uncertainty over CER cashflows in phase III
293
294
Table 154: Rhodia: Divisions and products

2009 sales (m) 1,476 % sales 37%
Division Polyamide
Acetow
549
14%
Key products Polyamide 6,6 intermediates & derivatives: Engineering plastics, adipic acid, ADN, HMD, textile & industrial yarns Acetate filter tow, cellulose acetate flakes
Key end-markets Automotive, clothing/textiles, construction, electronics
Key market positions #2 in Polyamide 6.6 #3 in polyamide based Eng. Plastics
Key competitors Invista, DuPont, Ascend, BASF, Asahi, Radici, Kordsa, CSM, Liao Hua, Toray
Cigarette industry
Novecare Silcea Eco Services Energy Services Other Total
827 635 211 189 144 4,031
21% 16% 5% 5% 4% 100%
Surfactants and polymers, phosphorus derivatives Silica, Electronics & catalysis, diphenols Sulfuric acid production and regeneration Energy (gas, electricity) purchases, management of greenhouse gas emissions
Home & personal care, detergents, home & institutional cleaning, coatings, agrochemicals, food, textiles, oilfield Tyres, footwear, rubber parts, paper, nutrition, flavours & fragrances, detergents, cosmetics, oral/dental hygiene, electronics, catalysis Oil refining, chemical/petrochemical manufacturing, nylon, specialised mining, agricultural additives Greenhouse gas emission credits
#1 in W Europe (39% share), #1 in CIS (49% share in Russia), #1 in Latin America (68% share) Global market share of 17% #1 in specialty surfactants (NA and China); #1 in oilfield biocides and guar for fracturing #1 in high performance silica (>50% share), #1 in vanillin (c.50% share) #1 in US merchant sulphuric acid, #1 in sulphuric regeneration #2 gas purchaser in France; 14% market share in CER market (2008A)
Celanese, Eastman, Daicel, Mitsubishi
Akzo Nobel, BASF/Cognis, Clariant, Huntsman, Dow, Aqualon, Arkema Evonik, Huber, PPG, OSC, Borregard, Chinese suppliers DuPont, Marsulex, General Chemical, Chemtrade, Marsulex, PVS
294
295
Solvay
Figure 437: Sales by division (2009A) Figure 438: REBIT by division, mn (2009A)
300
200 Plastics 52% Chemicals 48% 100
0 Chemicals
Source: Company data * Ex-Pharma Source: Company data.
Plastics

Mercosur 11% APAC/other 13%
Figure 440: REBITDA margin development

18% 15% 12% 9% 6% Europe 59%
NAFTA 17%
3% 0% 2005A 2006A 2007A 2008A 2009A

Source: Company data * 2009A excludes Pharma.
Source: Company data * Ex-Pharma
Solvay is a Belgian chemicals company with two core divisions - Chemicals and Plastics following its recent disposal of Pharma (completed Feb 2010). The key products in the Chemicals business are soda ash, caustic soda and hydrogen peroxide, while the Plastics business produces PVC and a range of Specialty Polymers (including PEEK). The companys ambition is to reduce cyclicality and accelerate growth through the reinvestment of its Pharma proceeds (4.5bn) in high growth/high margin, environmentally friendly product areas with exposure to the emerging markets.
#1/2 scale leader in majority of segments. Strong balance sheet post Pharma disposal. Attractive, secure dividend.
OPPORTUNITIES:
Above-average cyclicality. Structural overcapacity in PVC. Mature market focussed

THREATS:
Accelerate growth through (scale) M&A. New Business Development to fuel innovation-driven medium to long-term growth. Likely industry restructuring in PVC.
Low cost competition. Input cost pressures. Currency fluctuations.
295
296
Table 155: Solvay: Divisions and products

Business units (clusters) Minerals 2009 sales (m) 1,275 % sales 22%
Division Chemicals
Key products Soda ash, advanced functional minerals
Key end-markets Glass, construction, chemicals, automotive, paper, detergents
Key market positions #1 in soda ash and sodium bicarbonate #2 in caustic soda (Europe), #2 in fluorinated products
Key competitors Soda ash (Tata, FMC, Oriental Chemical, Nirma) Caustic (Dow, Oxy, Formosa, Olin, PPG, Ineos, Arlema, Akzo) Fluorocarbons (Arkema, Ineos, DuPont, Honeywell, Daikin, Asahi Glass) Hydrogen peroxide (Evonik, Arkema, FMC, Eka chemicals (Akzo), Kemira) Detergents (BASF/Cognis, Clariant, Huntsman, Akzo)
48% of sales
Electrochemistry & fluorinated products
977
17%
Electrochemicals (caustic soda), fluorinated products
Chemicals, water & environment, detergents, cleaning and hygiene products, paper
Oxygen
434
8%
Hydrogen peroxide, persalts
Paper, detergents, cleaning, hygiene and cleaning products, propylene oxide (HPPO)
#1 in hydrogen peroxide
Organic Plastics 52% of sales Specialties Vinyls
27 1,252 1,730
<1% 22% 30%
Peptides and oligonucleotides Specialty polymers (eg PEEK), 50% stake in Inergy Automotive Systems* Vinyls (PVC), 50% stake in Pipelife (pipes & fittings)
Pharmaceuticals Construction & Architecture, Automotive, Chemical, Electronics Water & environment Construction & Architecture, Automotive, Chemical, Glass, Water & environment #1 in fuel systems, leader in Specialty polymers #3 in Fluorinated polymers, #2 in PVC (Europe), #3 in PVC (world), leader in Pipelife Specialty polymers (Daikin, DuPont, Dyneon, Ticona, Victrex) Shin-Etsu, Formosa, Ineos, Oxy, Georgia Gulf, Arkema, Tessenderlo
New Business Development Total

5,695
100%
Innovation centre focused on solutions tackling: climate change, limited resources, new consumers (e.g. Asia)
Renweable energy, printable organic electronics, nanotechnologies, renewable chemistry
296
297
Symrise
Figure 441: Sales by division (2009A) Figure 442: EBIT by division, mn (2009A)
110 100 Scent & Care 50% Flav our & Nutrition 50% 90 80 70 Flav our & Nutrition
Scent & Care

Africa/Middle East S America 8% E Europe 10% N America 22% 7% Asia (mature) 4% W Europe 33%

22% 21% 20% 19% 18% 2006
Asia (EM) 16%

2007
2008
2009
Symrise was created by a merger between Haarmann & Reimer and Dragoco in 2003, and subsequently listed in 2006. Symrises roots date back to 1874 and 1919, when the two companies were founded. The company is organised around two divisions: Scent & Care with exposure to (i) fragrances, (ii) cosmetic ingredients/UV filters (Life Essentials), (iii) aroma chemicals and oral care (mint), as well as Flavour & Nutrition which produces innovative flavours for sweet and savoury food, beverage and pharmaceutical applications, with an increasing presence in functional food (Consumer Health).
Tier 1 player in flavours & fragrances (#4) Above-avg growth in Life Essentials/Consumer Health Sector-leading FCF yield and ROIC
OPPORTUNITIES:
Smallest in scale within tier 1 F&F universe. Mid-sized customer focus; top 10 exposure still limited. Limited track record as public entity.
THREATS:
Increase exposure to large-scale FMCG customers. Potential pricing power through Life Essentials exposure.
Loss of core list positions, investments not turning into contracts. Fluctuations in FX (mainly /US$).
297
298
Table 156: Symrise - portfolio overview

Divisions Scent & Care Subdivisions Fragrances % 09 sales 25% Product areas Home & personal care, fine fragrances End-products Air fresheners, detergents, perfumes Competitors Givaudan, IFF, Firmenich Key market positions #4 globally (9% share)
50% of sales
Life Essentials Aroma molecules Oral care
12% 7% 8% 17% 20% 13%
UV protection, botanicals, active ingredients, functionals Special F&F ingredients, fine aroma chems & sensates (menthol) Mint aromas - e.g. for toothpaste Non-alcoholic, alcoholic, dry Culinary, snack food, tobacco Bakery, confectionery, dairy
Cosmetics, sunscreen Flavours & fragrances Toothpaste Blossom tea, Superfruits, Brewtopia, flavoured vodka, Beer mix, flavoured coffee Meat flavourings, vegetable concentrates, seasonings, flavoured tobacco Chocolate, candy, chewing gum, ice cream, OTC drugs
Croda, Cognis, ISP, Evonik, BASF, Pentapharm, Cosmetochem IFF, Givaudan, Firmenich, Rhodia, DSM, Borregaard, BASF Takasago, Givaudan, IFF, Firmenich Givaudan, IFF, Firmenich Givaudan, IFF, Firmenich Givaudan, IFF, Firmenich
Leader in selected niches; #1 in UV protection Leader in selected niches #1 globally #4 globally in flavours (c.14% share)
Flavor & Nutrition
Beverages Savoury Sweet
50% of sales
Leader in vanilla aromas
298
299
Syngenta
Seeds 23%
Figure 446: EBIT by division, $mn (2009)

2000 1500 1000 500 0
Crop protection 77%
-500 Crop protection

Seeds
Business development

Asia Pacific 14% Europe, Middle East and Africa 33% Latin America 19%

25% 20% 15% 10% 5% 0% 2005 2006 2007 2008 2009
NAFTA 34%
Source: Company data, J.P. Morgan estimates.
Syngenta is the world's leading agrochemical producer by sales. The group was formed via the merger of Novartis and AstraZeneca agrochemicals in 2000, and is the only European pure play agrochemical company. Syngenta is based in Basel, Switzerland, but has operations around the world.
High market shares in each of the major crop protection categories. Strong balance sheet and significant cash generation.
OPPORTUNITIES:
Lower margin and profit expectations at Monsanto may generate downward pressure among competitors. GM offering is some way behind market leader Monsanto.
THREATS:
Demographics should continue to drive demand for yield improvements. GMO technology platform should allow roll-out of stacked trait technology offering. Crop price developments should support switch in favour of Syngenta's products. Improving health of agro economy should support healthier pricing.
Perennial threat from unfavourable weather conditions. Slowing growth in traditional crop protection. Further reform to subsidy regimes in either Europe or US. European approval to grow GM products would damage traditional crop protection market. Strength of Real may further impact Brazilian demand. Chinese Glyphosate oversupply.
299
300
Table 157: Syngenta: Divisions and products

Division Crop protection 77% of sales Business units Selective herbicide Non-selective herbicide Fungicides 2009 Sales ($m) 2,221 % sales 20% Key products Selective herbicide Key end markets Selective herbicides control grasses and broad-leaved weeds Non-selective herbicides reduce or halt the growth of all vegetation with which they come into contact Fungicides prevent and cure fungal plant diseases that affect crop yield and quality Insecticides control chewing pests such as caterpillars and sucking pests such as aphids, which reduce crop yields and quality World market position Competitors BASF, Bayer, Dow, DuPont
1141 2,442 1,312 821 458
10% 22% 12% 7% 4%
Non-selective herbicide Fungicides Insecticides
BASF, Bayer, Dow, DuPont and Monsanto BASF, Bayer, Dow, DuPont BASF, Bayer, Dow, DuPont
Insecticides Seed Care Professional products Others Corn and soyabeans Diverse field crops Vegetables Flowers
Total
Professional products
To protect the seedling and the young plant against diseases and pests during the period when they are most vulnerable, specialized products for use in turf, ornamentals, vegetation management Corn and soyabeans seeds Sugarbeets,cereals,oilseeds seeds Vegetables seeds for tomatoes, peppers, melon, squash etc seeds for bedding plants, pot plants #2 in vegetables seeds #1 in flower seeds.
BASF, Dow, DuPont and Monsanto
Seeds 23% of sales
96 1,210 429 594 331

10,992
1% 11% 4% 5% 3%
100%
Corn and soyabeans Diverse field crops Vegetables Flowers
BASF, Dow, DuPont and Monsanto BASF, Dow, DuPont and Monsanto BASF, Dow, DuPont and Monsanto BASF, Dow, DuPont and Monsanto
300
301
Umicore
Zinc Specialties 8% Adv anced Materials 7%

140 120 100 80 60 40 20 0
Precious Metals Products & Cataly sts 32% Precious Metals Serv ices 53%
Precious Metals Serv ices
Zinc Specialties
Precious Metals Products & Cataly sts
Adv anced Materials
Asia 18%

30% 25% 20%
North America Europe 57% ROW Latam 9% 6%

15% 10% 5% 0% 2005A 2006A 2007A 2008A 2009A
10%
Umicore is a Belgian materials technology group which has repositioned itself over the last ten years from a metals refining company to an Advanced Materials company. Umicore demerged its Copper business (Cumerio) in 2005, and completed the IPO of its stake in Zinc smelting JV Nyrstar, further reducing its direct exposure to pure commodity metals. The company now produces semi-finished compounds for a variety of metals-related applications including catalysts, electronics, solar panels, optics and tools. The group is also a world leader in the refining and recycling of precious metals found in industrial waste and end-of-life materials.
Joint global market leader in high-growth autocatalysts market following Delphi acquisition. Strong presence in Asian autocatalysts market (Korea & China) and in Latin America.
OPPORTUNITIES:
Limited presence in Heavy Duty Diesel (HDD) where emissions legislation is tightening. Limited pricing power in some product areas (eg Tool Materials).
THREATS:
Strengthening emissions legislation. Tighter recycling legislation (scarcity of metals) driving demand for recycling capacity. Greater acceptance of photovoltaics, and fuel cells, in consumer applications.
Competition from BASF and Johnson Matthey. Volatile metal prices. Competition from low-cost Asian producers in some product areas.
301
302
Table 158: Umicore: Divisions and products

Division Advanced Materials Sales
Key metals: Ge, Co, Ni, Mn, Li, C Ceramics & Chemicals Recycling/ pigments Germanium blanks for fibre optics, thermal imaging Germanium substrates for high-efficiency solar cells evaporation materials, , Wear and Decorative Coatings, Optical Data Storage, Displays and Solar Cells Diamond grit Diesel catalysts, gasoline catalyst, particulate filters Catalysts for life sciences, chemicals (Nonautomotive catalysts) Catalysts for fuel cells Membrane Electrode Assembly for fuel cells Semi-finished products for construction/electronic equipment/heating Alloy pastes hermetic sealing materials, spheres for the lighting industry, high-purity evaporation materials, and soft solder ribbons Semi-finished products for jewellery/coins/decorations/teeth Decorative/industrial materials/PCBs Pigments/catalysts /paints Medical/defense/ surveillance/ automotive Photovoltaic /LEDs/space applications Night vision (auto), fire fighting, surveillance, Electronics #1 in Ge-based photovoltaics
2009 Sales (m) 320
% sales Sub-division 18% Cobalt & Specialty Materials
Business Lines
Rechargeable Battery Materials
Key products
Li- and Ni-based batteries
Key end-markets
Portable electronics
Key market positions
Electro-Optic Materials
Optics Substrates
Thin Film Products
Element Six Precious Metal Products & Catalysts 821 47% Automotive Catalysts Catalyst Technologies
Key metals: Au, Ag, Pt, Pd, Rh, In, Ru
Microelectronics, data storage, Optics & ophthalmic, wear protection, decorative coating, displays, photovoltaic, technical data download Synthetic diamonds
Drilling/cutting tools Automotive Industry/petchem /pharma Automotive/portable electronics Automotive Construction /electronics Automotive Electronics Consumer #1 globally (=BASF/JMat), #1 in Asia
Precious Metals Chemistry
Technical Materials
Heterogeneous Catalysts SolviCore (JV) Contact Materials BrazeTec Power technology materials
Jewellery & Electroplating
Jewellery & Industrial Metals Electroplating
Platinum engineered materials
Construction /electronics Used in high quality special glass for high end High-end LCD glass applications - eg molten glass applications like LCDs and platinum gauzes and systems for the abatement of nitrous oxide Refining & recycling of a wide range of metals Sale/lease of metals recycling End-of-Life Batteries, HEVs batteries and GTL catalysts Zinc powders, zinc oxide Zinc sheets (finished products) Electronics (end-of-life scrap) Automotive, electronics, Electronics Construction/shipping Construction Top 3 in zinc specialties/recycling #1 in precious metals recycling, #4 PGM refining
Precious Metals Services

Key metals: Ag, AU, Pt, Pd, Rh, Ru, Ir, In, Se, Te, Sn, Bi, Cu, Pb, Ni, Sb, As
361
21%
Precious Metals Refining Precious Metals Management Battery recycling
Zinc Specialties
Key metals: Zn
252
14%
Zinc Chemicals Building Products
Total
1,755
100%
302
303
Victrex
Figure 453: Sales development (mn)
160 140 120 100 80 60 40 20 0 2005 2006 2007 2008 2009
Figure 454: EBIT, mn development

60 50 40 30 20 10 0 2005 2006 2007 2008 2009

Asia North America 44% 11%

50% 40% 30% 20% 10% 0% 2005 2006 2007 2008 2009
Europe 45%
Source: Company data Source: Company data, J.P. Morgan estimates
Victrex is a leading producer of polyaryletheretherketone (PEEK), a high performance thermoplastic. PEEK is light weight, chemically inert and exhibits mould ability, high hydrolysis and temperature resistance, dimensional stability and durability. This combination makes it attractive for wide range of commercial applications, with a number of critical end uses, and over 90% of PEEK production is for export. Victrex also has a medical device materials business, Invibio, manufacturing premium grades of PEEK, for use in medical implants in areas such as spinal implants and cranial caps.
Presence in high growth businesses where PEEK is used in critical end uses and also in medical (eg spine). Above average EBIT margins (35% plus).
OPPORTUNITIES:
Exposure to cyclical end markets such as automotive and electronics. Occasional currency volatility given 98% exports from UK.
THREATS:
Increase presence in Asia and other emerging markets
Volumes contract as end markets weaken.
Significant opportunity for product application in further Competition from Solvay as well as from other high uses for arthroscopy and orthopaedic market. performance plastics.
303
304
Table 159: Victrex: Divisions and products

Division Victrex Polymer Solutions 2009 Sales ( m) 69.6 % sales 67% Key products The VICTREX PEEK polymer product range includes several different types of polyaryletheretherketones - a wide range of blends, compounds, high flow, high purity, films and coatings grades Range of biocompatible PEEK-based polymers Key end-markets Automotive, Transportation, Electronics, Industrial, aviation, construction Key competitors BASF, Clariant, Kemira, Lanxess, Elementis, DSM
Invibio Biomaterial Solutions

Total
34.2
103.8
33%
100%
Medical device industry
Spolvay, Evonik, DSM, Lonza,
304
305
Wacker Chemie
Other Poly silicon 28% Fine Chemicals 3% Silicones 31% Poly mers 18%
Figure 458: EBIT by division, mn (2009A)

Siltronic 16% 500 250 0 -250 -500 Siltronic Silicones Poly mers Poly silicon Fine Chemicals
Source: Company data * reported
4%

Other 3% Asia 34% Germany 21%

30%
20%
10% Europe 25% Americas 17%

0% 2005A 2006A 2007A 2008A 2009A
Source: Company data * pre-exceptional
Wacker Chemie was listed in 2006 and offers a wide range of products and technologies including silicone and polymer chemistry, specialty and fine chemistry, polysilicon and semiconductor technologies. The group services a wide range of end-markets, including semiconductors, solar energy, construction and automotive. The majority of profits come from its Polysilicon business, which services the solar and semiconductor end-markets.
STRENGTHS:
WEAKNESSES:
Market leadership (within top 3) in chosen segments Cost and quality leadership in Polysilicon.
Exposed to deep cyclicality of semiconductor end-market. Lacks scale in 300mm wafers (price taker)
High entry barriers given capital intensity and technology Limited freefloat implies above-average share price requirements. volatility.
Expore to fast-growing solar market. Further expansion of polysilicon capacity
Oversupply in polysilicon and 300mm wafers. Input cost pressures.
305
306
Table 160: Wacker Chemie: Divisions and products

2009 Sales (m) 1,239 % sales 31%
Division Silicones
Key products Performance materials, elastomers, basic materials, silica, construction sealants
Key end-markets Construction, chemicals, health & wellness, automotive, plastics, energy & electronics
Key market positions #3 in silicon worldwide; #1 in building preservation, #2 in elastomers for transportation and energy, #2 in fumed silica for merchant market
Key competitors Dow Coming, Momentive, Shin-Etsu, Evonik, Bluestar
Polymers
744
18%
Construction polymers, dispersions, coatings & resins
Construction, automotive, eng. fabrics, adhesives, food
Fine Chemicals Polysilicon
105 1,121
3% 28%
Cyclodextrins, cysteine, ketene, biologics Polysilicon, pyrogenic silica, salt
Food & flavours, Personal & home care, Life sciences, Biopharma Solar panels, semiconductors (Siltronic)
#1 in dispersable polymer powders; Leading global supplier of VAE dispersions for adhesives, coating & engineered fabrics application #1 in cyclodextrins (share >50%) and cysteines #2 in polysilicon
Elotex, Chinese players
DSM, Lanxess, Lonza Hemlock, REC, Tokuyama, MEMC, OCI, Chinese players Shin-Etsu, SUMCO, MEMC, LG Siltron
Siltronic
638
16%
Electronic wafers (76 - 300mm)
Semiconductors
#3 in 300mm wafers
Other Total
181 3,719
4% 100%
Source: Company reports. * total excludes consolidation of -307.7
306
307
Yara
Upstream 13% Industrial 14% Dow nstream 73%
Figure 462: EBIT by division, NOKmn (2009)

1000 800 600 400 200 0 Downstream Industrial Upstream

South and Central America 17%

North America Australia and 13% New Zealand 1% Asia Pacific 9% Africa 9%

30% 20% 10% 0% 2005 2006 2007 2008 2009
EU 51%
Yara is a global chemical company that converts energy and nitrogen from the air into essential products for farmers and industrial customers. It builds its business strategy on nitrogen fertilizer leadership, based on strong ammonia production and trade activity, and a comprehensive downstream product offering. It is an integrated company with upstream, industrial and downstream products, with a global presence.
Leading market position in nitrates in Europe and strong ammonia trading network. European low-cost leader. Global marketing and distribution with economies of scale. Vertical integration reduces cyclicality.
OPPORTUNITIES:
Limited exposure to faster growing demand regions. Lack of potash and limited phosphate production. Limited access to low-cost natural gas (but growing). Exchange rates (reliance on US$ prices products). Dependency on weather for good crop productivity and fertiliser sales.
THREATS:
Long-term population growth/improving dietary standards. Energy/Natural gas shortages in China. Upward pressure on wheat, corn and soybean prices improves fertiliser demand. Acquisition in low-cost gas regions. EU expansion long-term increase in Russian gas price.
Capacity growth in exporting regions (Middle East). Slowing growth in agriculture industry. High energy prices. Strengthening of NOK against USD.
307
308
Table 161: Yara: Divisions and products

2009 Sales (NOK m) % sales
Division Downstream
Key products
Key end-markets
Key market positions
Key competitors
45,061
73%
Urea, UAN,Nitrates, NPK,MDP, MOS,Other value added fertiliser products Chemical products, industrial gases, Nitrogen chemicals(urea,ammonia) Ammonia, urea, Nitrates,NPK,CN,UAN, Ammonia trading Upstream products used as inputs in Downstream
Fertiliser industry
#1 Fertilisers
Mosaic, Potash,K+S, Agrium, ICL, CF industries
Industrial
8,465
14%
Chemical industry, Food & Beverage Industry, industrial explosive industry Industrial & downstream divisions, different industry who needs ammonia or Nitrogen products
#1 Nitrogen applications (Europe) #1 Ammonia #1 Nitrates #1 NPK
ICL, Linde, Air liquide, CF industries
Upstream
7,884
13%
Mosaic, Potash, Agrium, ICL, CF Industries,
Eliminations
Total (after elimin.)
8
61,418
<1%
100%
308
309
Yule Catto
Pharma 12% Poly mer Chemicals 84% Impact Chemicals 4%

60 50 40 30 20 10 0 Poly mer Chemicals Pharma Impact Chemicals

ROW 21%
14% 12% 10% 8% 6% 4% 2% 0%
Europe 50%
Asia 29%
2005
2006
2007
2008
2009
Yule Catto specializes in manufacturing specialty chemicals for a wide range of end markets from industrial to personal care. The company has radically restructured the Group profile, and reduced previously high levels of debt through disposals. In addition the Company has created a non core division for potential disposal called Impact Chemicals, alongside its main Polymer Chemicals unit, and the smaller Pharma division. Yule Catto is based in the UK, with a significant part of its asset base in UK and other EU countries, with expansion occurring in the Far East and emerging markets.
A market leader in specialized polyvinyl alcohol and nitrile latex for thin wall gloves. Growing revenues from Asia (2006: 23%, 2009:30%) with emerging markets now comprising around 44%.
OPPORTUNITIES:
May be vulnerable to short term rising input costs with lag before pass through achieved. Relatively small size of asset base limits growth opportunities.
THREATS:
Pharma operations are sold or joint ventured, reducing companys exposure to a relatively low growth, generic area Radical restructuring and disposal programme has created a stronger business profile.
Raw material cost inflation. End markets slow with volume growth stalling.
309
310
Table 162: Yule Catto: Divisions and products

2009 Sales (m) 455 % sales
Division Polymer Chemicals
84%
Pharma Impact Chemicals (William Blythe)

Total
65 23
543
12% 4%
100%
Key products Water based polymers, Specialty chemicals including lithenes and polyvinyl alcohol, Latex Pharmaceutical Ingredients for both generic and ethical drug manufacture Range of metal salts
Key end-markets Paints, coating, construction, textile, automotive
Key market positions #1 in specialized polyvinyl alcohol, #1 in nitrile latex for thin wall gloves
Key competitors DSM, Rhodia, Elementis, lanxess, Clariant, Eastman, Croda
Healthcare, biotechnology Catalysts, electronic circuit boards and construction products
Lonza, DSM
310
311
311
312
312
313
Analyst Certification: The research analyst(s) denoted by an AC on the cover of this report certifies (or, where multiple research analysts are primarily responsible for this report, the research analyst denoted by an AC on the cover or within the document individually certifies, with respect to each security or issuer that the research analyst covers in this research) that: (1) all of the views expressed in this report accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of any of the research analysts compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report.
Important Disclosures
Important Disclosures for Equity Research Compendium Reports: Important disclosures, including price charts for all companies under coverage for at least one year, are available through the search function on J.P. Morgans website https://mm.jpmorgan.com/disclosures/company or by calling this U.S. toll-free number (1-800-477-0406) Explanation of Equity Research Ratings and Analyst(s) Coverage Universe: J.P. Morgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform the average total return of the stocks in the analysts (or the analysts teams) coverage universe.] Neutral [Over the next six to twelve months, we expect this stock will perform in line with the average total return of the stocks in the analysts (or the analysts teams) coverage universe.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return of the stocks in the analysts (or the analysts teams) coverage universe.] J.P. Morgan Cazenoves UK Small/Mid-Cap dedicated research analysts use the same rating categories; however, each stocks expected total return is compared to the expected total return of the FTSE All Share Index, not to those analysts coverage universe. A list of these analysts is available on request. The analyst or analysts teams coverage universe is the sector and/or country shown on the cover of each publication. See below for the specific stocks in the certifying analyst(s) coverage universe.
Coverage Universe: Neil C Tyler: Air Liquide (AIRP.PA), Akzo Nobel (AKZO.AS), BASF (BASF.DE), Clariant (CLN.VX), K+S (SDFG.DE), Linde (LING.DE), Syngenta (SYNN.VX), Yara (YAR.OL)
J.P. Morgan Equity Research Ratings Distribution, as of June 30, 2010 Overweight (buy) 46% 49% 44% 68% Neutral (hold) 42% 46% 48% 61% Underweight (sell) 12% 31% 9% 53%
JPM Global Equity Research Coverage IB clients* JPMSI Equity Research Coverage IB clients*
*Percentage of investment banking clients in each rating category. For purposes only of NASD/NYSE ratings distribution rules, our Overweight rating falls into a buy rating category; our Neutral rating falls into a hold rating category; and our Underweight rating falls into a sell rating category.
Valuation and Risks: Please see the most recent company-specific research report for an analysis of valuation methodology and risks on any securities recommended herein. Research is available at http://www.morganmarkets.com , or you can contact the analyst named on the front of this note or your J.P. Morgan representative. Analysts Compensation: The equity research analysts responsible for the preparation of this report receive compensation based upon various factors, including the quality and accuracy of research, client feedback, competitive factors, and overall firm revenues, which include revenues from, among other business units, Institutional Equities and Investment Banking. Registration of non-US Analysts: Unless otherwise noted, the non-US analysts listed on the front of this report are employees of non-US affiliates of JPMSI, are not registered/qualified as research analysts under NASD/NYSE rules, may not be associated persons of JPMSI, and may not be subject to NASD Rule 2711 and NYSE Rule 472 restrictions on communications with covered companies, public appearances, and trading securities held by a research analyst account.
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Other Disclosures
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J.P. Morgan Cazenove Chemical contacts

Europe Neil C Tyler Martin Evans Heidi Vesterinen Neeraj Kumar Hella Zouiten Yuriy A Vlasov Valentin A Stollyar North America Jeffrey J. Zekauskas Silke Kueck Ben Richardson Olga Guteneva Asia Pacific Brynjar Eirik Bustnes Jasmine Bai Keith Chau Marcus Shin Nick Lai Nobuhito Owaki Pinakin Parekh, CFA Samuel Lee, CFA Scott YH Seo Sukit Chawalitakul Latin America Sergio Torres Brian P Chase Debbie Bobovnikova MENA Alex Comer European Credit Stephanie Renegar Danielle Ward Soft Commodities Lewis Hagedorn
(44-20) 7325-9935 (44-20) 7155 6169 (44-20) 7325-4537 (91-22) 6157 3289 (44 20) 7155 6408 (7-495) 967-7033 (7-495) 967-7009
neil.c.tyler@jpmorgan.com martin.evans@jpmorgan.com heidi.m.vesterinen@jpmorgan.com neeraj.z.kumar@jpmorgan.com hella.zouiten@jpmorgan.com yuriy.a.vlasov@jpmorgan.com valentin.a.stollyar@jpmorgan.com
(1-212) 622-6644 (1-212) 622-6503 (1-212) 622-6455 (1-212) 622-6488
jeffrey.zekauskas@jpmorgan.com silke.x.kueck@jpmorgan.com ben.richardson@jpmorgan.com olga.v.guteneva@jpmorgan.com
(852) 2800-8578 (852) 2800-8559 (61-2) 9220-1582 (822) 758-5712 (886-2) 2725-9864 (81-3) 6736-8677 (91-22) 6157-3588 (852) 2800-8536 (82-2) 758 5759 (66-2) 684-2679
brynjar.e.bustnes@jpmorgan.com jasmine.d.bai@jpmorgan.com keith.chau@jpmorgan.com marcus.j.shin@jpmorgan.com nick.yc.lai@jpmorgan.com nobuhito.c.owaki@jpmorgan.com pinakin.m.parekh@jpmchase.com samuel.sw.lee@jpmorgan.com scott.seo@jpmorgan.com chawalitakul.sukit@jpmorgan.com
(1-212) 622-3378 56 2 425 5245 (1-212) 622-3489
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(44-20) 7325-1964
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(44-20) 7325-3686 (44-20) 7742-7344
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(1-212) 834-8046
lewis.a.hagedorn@jpmorgan.com
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Chemicals Neil C Tyler

(44-20) 7325-9935 neil.c.tyler@jpmorgan.com J.P. Morgan Securities Ltd.

(44-20) 7155 6169 martin.evans@jpmorgan.com J.P. Morgan Securities Ltd.

(44-20) 7325-4537 heidi.m.vesterinen@jpmorgan.com J.P. Morgan Securities Ltd.

Neil C Tyler (44-20) 7325-9935 neil.c.tyler@jpmorgan.com

Europe Equity Research 26 July 2010

Investing in chemicals ...........................................................18

Mergers and Acquisitions......................................................31

Commodity Chemicals...........................................................44 Inorganic Chemicals ..............................................................44

Neil C Tyler (44-20) 7325-9935 neil.c.tyler@jpmorgan.com

Europe Equity Research 26 July 2010

Aromatics (primary) ...............................................................77

Other monomers (intermediates) ..........................................87

Plastics (or Polymers)..........................................................106

Agricultural Chemicals ........................................................174

Neil C Tyler (44-20) 7325-9935 neil.c.tyler@jpmorgan.com

Europe Equity Research 26 July 2010

The industrial Gases industry .............................................186

Non-atmospheric Gases ......................................................205

Neil C Tyler (44-20) 7325-9935 neil.c.tyler@jpmorgan.com

Europe Equity Research 26 July 2010

Neil C Tyler (44-20) 7325-9935 neil.c.tyler@jpmorgan.com

Europe Equity Research 26 July 2010

Chemicals primer An investors reference guide

Neil C Tyler (44-20) 7325-9935 neil.c.tyler@jpmorgan.com

Europe Equity Research 26 July 2010

Chemicals is one of the most heterogeneous sectors in which to invest

Five main subsectors

Neil C Tyler (44-20) 7325-9935 neil.c.tyler@jpmorgan.com

Europe Equity Research 26 July 2010

Neil C Tyler (44-20) 7325-9935 neil.c.tyler@jpmorgan.com

Europe Equity Research 26 July 2010

Figure 1: Main Types of Commodity chemicals

Organic chemicals (Petrochemicals)

Neil C Tyler (44-20) 7325-9935 neil.c.tyler@jpmorgan.com

Europe Equity Research 26 July 2010

The global chemical industry in numbers

Neil C Tyler (44-20) 7325-9935 neil.c.tyler@jpmorgan.com

Europe Equity Research 26 July 2010

Figure 2: Geographical distribution of world chemical sales (2010E)

Others* Japan 7% 2% Latin America 5%

Rest of Europe** 3% NAFTA 22%

Neil C Tyler (44-20) 7325-9935 neil.c.tyler@jpmorgan.com

Europe Equity Research 26 July 2010

Figure 4: Chemicals demand (excluding pharma) 2009

Figure 5: Chemicals demand, expected CAGR (2009-2020E)

Figure 6: Chemicals sales growth rate in % (2000-2010E CAGR)

Source: CEFIC and J.P. Morgan estimates

Neil C Tyler (44-20) 7325-9935 neil.c.tyler@jpmorgan.com

Europe Equity Research 26 July 2010

Figure 7: Chemical production growth rate by sector in %

-0.9% -2.3% Polymers

Source: CEFIC and J.P. Morgan estimates.

Figure 9: End market breakdown (2010E)

Paper & Printing 5% Automotive 5%

Rest of Manufac. 6% Construction 5%

Neil C Tyler (44-20) 7325-9935 neil.c.tyler@jpmorgan.com

Europe Equity Research 26 July 2010

80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0

Neil C Tyler (44-20) 7325-9935 neil.c.tyler@jpmorgan.com

Figure 11: Top 34 chemicals producer by market cap (2009)

Europe Equity Research 26 July 2010