KPMG Chemicals

CHEMICALS
The Future of the European Chemical Industry

K P M G I NT E R N AT I O N A L
About KPMGs Global Chemicals Practice

Through its member firms, KPMG has invested extensively in developing a highly experienced chemicals team.
KPMGs understanding of the industry comes from KPMG member firms global experience, knowledge sharing, industry training and the use of professionals with chemical industry experience as well as participation in a variety of industry forums. KPMG member firms work with many of the chemical industry market leaders, using their industry experience to understand the business priorities as well as the strategic challenges faced by these organizations. Our presence in many international markets enables our firms professionals to assist clients in recognizing and making the most of opportunities as well as advising on the implementation of the changes dictated by industry developments.
Executive summary
The European chemical industry is facing the dawn of a new reality. While the industry worldwide is still reeling from the current cyclical downturn and the recent global recession, chemical companies in Europe are faced with the ongoing rise of new competition in the Middle East and Asia (especially from China and India). These factors appear to be driving an inexorable shift eastward in the global chemical industry, particularly at the bulk / commodity end of the sector. Indeed, our research suggests that new global capacity being developed in the coming years will render 14 of 43 crackers in Europe uneconomic by 2015. The closure of these plants would correspond to the loss of 26 percent of total cracker capacity in Europe. At the same time, Middle Eastern chemical producers continue to seek expansion along the value chain into higher valueadd solutions. Their Chinese counterparts are attempting to fulfill a government directive to make the country self-sufficient in chemicals. These Middle Eastern and Chinese entities are often cash-rich and backed by government support. A rapid path to achieving these goals appears to be offered by acquisition of technology and intellectual property from a European chemical industry seemingly beset by structural problems. However, KPMG believes that the death knell of the European chemical industry has been sounded prematurely. This remains an industry that employs over 1.2 million people and contributed in 2007 to a European Union (EU) trade surplus in chemicals of EUR35.4 billion.1 There is no doubt that the shape of the global chemical industry is changing, but the industry in Europe can continue to play a significant role in this new reality if it can: Make hard choices now to rationalize unprofitable facilities that might not be able to compete with newer, more efficient plants being built outside of Europe Ruthlessly identify which chemical clusters will remain competitive on the global stage and focus resources and investment in these areas to ensure their long-term survival Capitalize on its historic advantage in innovation to stay ahead of the competition, especially in terms of sustainable solutions which will be increasingly in demand Leverage its long-standing customer relationships to develop more specialized, higher-performance solutions Actively seek beneficial joint ventures and strategic alliances that provide access to both cheap Middle Eastern feedstocks and growing Asian markets Many European companies are already recognizing the possible advantages and the necessity of repositioning themselves as solutions providers rather than just basic suppliers for their customers. This can include finding new ways to work with companies that have traditionally been perceived as major competitors. The companies that successfully achieve this transition should be better positioned to meet the global competitive challenges of the 21st century.
High Level Group on the Competitiveness of the European Chemicals Industry, Final Report, European Commission, July 2009
The European chemical
industry must capitalise on its historic advantage in innovation to stay ahead of the competition.
Chris Stirling Head of Chemicals, KPMG in Europe
2 T HE F UTURE O F T HE E UROPEAN CHEMICAL I NDUSTRY
2010 KPMG International Cooperative (KPMG International), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
T H E F U T U R E O F T HE E UR O P E A N C HE M I C A L I ND U S T R Y 3
Contents
1. Current state of the industry in Europe
1.1. Industry overview 1.2. Impact of the current downturn
4
4 8
2.
Challenges from the East

2.1. A global shift 2.2. Middle East 2.3. China
12
12 17 21
3.
Innovation: the key to survival

3.1. Evolving from commodities to specialties 3.2. Maintaining a technological advantage 3.3. Strengthening customer relationships 3.4. Developing joint venture relationships
24
25 26 28 28
4.
Case study Going green with Cognis a flexible strategy Case study BASF verbund manufacturing
30
5.
32
4 T HE FUTURE OF THE EUR OPEAN CHE MICAL IND USTRY
1
900 850 800 750 700 Chemicals shipments ( billion) 650 600 550 500
Current state of the industry in Europe

As with any crisis, the recent economic downturn presents both risks and opportunities for businesses. This is especially true for the European chemical industry. Long a powerhouse in the global economy, the industry now faces the need to make difficult choices about its future development and role in the face of increased competition from overseas. KPMG member firms believe that todays risks need to be clearly assessed, especially in the light of continued economic uncertainty. We also feel, however, that companies can respond with innovative solutions in terms of market focus, technology and business relationships. Properly developed and managed, these innovations can help companies to not only adapt and survive but even thrive in the 21st century.
1.1 Industry overview

Geographic breakdown of world chemicals shipments
2008
375
736
ASIA = 883
450 400 350 300 250 200 150 100 50 0
204 EU 27 = 537 529
304
157 113 109 Asia China Japan Rest of Asia Other* = Oceania and Africa Rest of Europe** = Switzerland, Norway and other Central & Eastern Europe. World chemical shipments*** = ACC uses as a proxy for sales EU 27 EU World chemicals shipments in 2008 were 2,257 billion*** The EU accounts for 29.1% of the total NAFTA Latin America Rest of Europe** Other*
Source: American Chemistry Council, 2009

T H E F U T U R E O F T HE E UR O P E A N C HE M I C A L I ND U S T R Y 5
EU chemical industry sales by country

Percentage share of European chemical sales
NL 10.2% 6.7% ES
UK
10.3%
5.8%
BE
IT
11.0%
4.5%
IE
FR
14.5%
11.7% PL SE AT FI CZ 2.3% 1.7% 1.3% 1.3% 0.9% HU PT RO
Other 0.7% 0.7% 0.6% 2.2%
DE
25.3%
Others
Big 8 = Germany, France, Italy, United Kingdom, Netherlands, Spain, Belgium and Iceland
Source: Cefic Chemdata International
Sector-wise breakdown of EU chemical industry sales

Soaps & detergents Perfumes & cosmetics
Pharmaceuticals Petrochemicals Other specialty chemical Paints & inks Crop protection Plastics & synthetic rubber Man-made fibres Other basic inorganics Industrial gases Fertilisers
Base chemicals 44.8%
Pharmaceuticals 27.4%
Specialty chemicals 17.0%
Consumer chemicals 10.8%
Source: Cefic Chemdata International and Eurostat
6 T HE FUTURE OF TH E EU ROPEAN CH EMICAL IN DUSTRY
The European chemical industry drives a significant part of the economy across the EU. Over 1.2 million workers are employed in the industry, manufacturing products, supporting research and providing supplies in many regions of the EU. The European chemical industry is based on the following four categories of products: Base chemicals that include petrochemicals, their derivatives and basic inorganics. Produced in large volumes, they are sold as commodities to manufacturers in the chemical industry or to other industries. Specialty chemicals that are for specialized use and produced in lower volumes than base chemicals. Examples include ingredients used in adhesives, additives, plastics, coatings, paints and inks, crop protection, dyes and pigments etc. Pharmaceuticals including both basic pharmaceutical products and pharmaceutical preparations. Consumer chemicals that are sold to end users and consumers in the form of soaps, detergents, perfumes and cosmetics. Large industrial customers represent 25.1 percent of chemical consumption in the EU. This category includes metals, mechanical and electrical industries, textiles and clothing, the automotive industry and paper and printing products. The remaining areas of chemical consumption can be divided into the following: 30.3 percent for end users in private households, government and non-profit organizations 16.4 percent for services 6.4 percent for agriculture 5.4 percent for construction 6.1 percent for manufacturing not listed above 10.3 percent for other industries2 Over the years, the European chemical industry has shown considerable resilience, strength and adaptability. In 2007 12 of the 30 leading chemical , companies in the world were headquartered in Europe, representing 10 percent of world chemical sales. Recent industry growth has been driven mainly by regional sales. From 1997 to 2007 sales more than doubled among EU partner countries.3 This growth has , been supported by the removal of trade and nontrade barriers among the EU countries and by the size of the internal market almost 500 million consumers across Europe. In 2008, 23 percent of European chemical sales were for customers outside of the EU, in particular to markets in North American Free Trade Agreement (NAFTA), neighboring countries (especially Turkey and Russia) and Asia.4
We see a
sustainable future for chemical companies in Europe based on specialties and better strategies to support the success of the customer.
2 3 4
Facts and Figures: The European chemical industry in a worldwide perspective: 2009, Cefic Ibid. Ibid.
THE FUTURE OF THE EUROPEAN CHEMICAL INDUSTRY 7
8 T HE FUTURE OF TH E EU ROPEAN CH EMICAL IN DUSTRY
1.2 Impact of the current downturn

European chemical industry output, July 2008 August 2009
4.00% 2.00% 0.00% % change on year earlier -2.00% -4.00% -6.00% -8.00% -10.00% -12.00% -14.00% August February March April October December January September November August 5.0 July May June July -6.6 -20.1 Basic Inorganics
Source: CIA Matters
EU chemicals production: sector outlook

15 Production (volume): growth rate (yoy) 10 5 0 -5 -10 -15 -20 -25 Consumer Chemicals 2008 2009 2010 Specialty Chemicals Petrochemicals Chemicals -1.9 -6.5 -9.3 -3.8 -4.6 -10.6 -4.5 2.6 5.5 6.0 5.3
4.7
-5.5 -12.4 -19.7 Polymers
Source: Cefic Economic Outlook Task Force (November 2009)
Like virtually every other industry worldwide, the European chemical industry has felt an enormous impact from the recent global recession. At its lowest point in March 2009, the industry saw a monthly year-on-year decline of 13.2 percent, a figure that if annualized would represent an output decline of approximately EUR56 billion.5 Describing the industry downturn, Graham vant Hoff, Global V.P . Base Chemicals at Shell said, There was a complete meltdown of demand in the fourth quarter of 2008, adding that, a double whammy is coming at us [as] we now face a supply-lead problem caused by the new Middle East capacity. 6
5 6
CIA Matters, July 2009 Can the European petrochemical industry compete against emerging producers based in the Middle East?, Chemical Week, September 21, 2009
T H E FU T U R E OF TH E EU R O P E A N CH E M I C A L IN D U S T R Y 9
In Europe, the chemical industry saw massive reductions in demand for plastics, paint and man-made fibers, especially in key markets such as automotive and construction. This fall in demand led to a severe destocking by many companies, with some companies (particularly in the base chemicals, polymers and specialty chemicals sectors) watching their own output decline by 30 to 60 percent.7 Tight credit continues to hold back recovery. Many large companies are finding major credit lines both difficult and expensive to obtain. Small and medium enterprises (SMEs) are experiencing even greater difficulties in obtaining guarantees and letters of credit for imports and exports. The credit ratings for a number of chemical companies have been downgraded, prompting banks to carefully re-evaluate the entire industry. However, the bond markets in Europe are currently relatively healthy, providing access to financing for those companies that retain an investment-grade credit rating.8
7 8
Reaction: KPMGs views on the economic outlook for the chemical industry, September 2009 Weathering the Storm: the Chemical & Pharmaceutical Sector, webcast conducted by Chris Stirling, KPMG
Large
companies are finding major credit lines both difficult and expensive to obtain.
1 0 T HE FUTURE OF TH E EU ROPEAN CH EMICAL INDUSTRY
Many analysts and industry observers predict a gradual though modest recovery, with demand not returning to 2007 levels until probably 2012 or even later. Cefic, European Chemical Industry Council expects a five percent increase in output growth in 2010 compared to 2009.9 Henrik Meinke, writing on behalf of the European Chemical Marketing and Strategy Association (ECMSA), also offers guarded optimism, suggesting that a significant global recovery should not be expected before 2011, although industry conditions should improve in 2010.10 In the meantime, the industry recognizes that hard decisions need to be made, and these have included downsizing and massive restructurings, which to date have resulted in the redundancy of approximately four percent of the prerecession chemical industry workforce in Europe. Clariant, for example, sought to shrink its workforce by a total of 3,220 positions in 2009 (equivalent to 17 percent of its global workforce).11 Akzo Nobel has announced plans to cut 20 percent of the workforce at its Amsterdam head office and Arnhem shared service centre.12 Even with recovery, the European petrochemical industry and its markets may continue to contract. Many end-user industries have started to move operations outside of Europe. The textile industry has offshored to the Middle East and Asia to be closer to high-growth markets and benefit from lower manufacturing and logistics costs. Parts of the automotive industry have moved to Eastern Europe, followed by their tier 1 and tier 2 suppliers to improve their competitiveness.
EU chemical industry expected to follow a modest and fragile recovery in 2010, press release, Cefic,17 November 2009 INSIGHT: Gathering signs of recovery for chems, ICIS, 11 March 2009 Clariant To Cut 570 Jobs, Chemical & Engineering News, 30 November 2009 12 Results fall on weak demand; economy begins to stabilize, Chemical Week, 2 November 2009
10 11
T H E FU T U R E OF T H E EU R O P E A N CH E M I C A L IN D U S T R Y 1 1
A key issue is how the European chemical industry and European governments seek to respond to these changing dynamics. Certainly recently, there has been a trend toward protectionism in the industry. China, the EU and India recently initiated anti-dumping measures against the Middle East.13 China has also imposed definitive anti-dumping duties of between 5.9 percent and 35.4 percent on imports of adipic acid from the EU, Korea and the US.14 With the scale of capacity expansion under way in the Middle East and Asia likely to result in significant overcapacity in the industry in the medium term, there is a real danger that individual countries or regions could resort to protectionist measures which is likely to harm the industry and hamper growth. Whilst new plants are typically in the lowest-cost position on the global cost curve and, as a result, can expect to be profitable in most market conditions, older plant in Europe is likely to become uneconomic. Global ethylene capacity and demand
180 170 160 (million tonnes) 150 140 130 120 110 100 90 80 2007 Global capacity 2008 2009 Global demand 2010 2011 2012 2013
Source: Bank of America Securities/Merrill Lynch
KPMG analysis shows that European petrochemical capacity may decline dramatically in the coming years. According to recent estimates, 40 out of 200 crackers worldwide are likely to become uneconomic by 2015, and approximately 14 out of these 40 will be in Europe. The closure of these plants would correspond to the loss of 26 percent of total cracker capacity in the EU. Similarly, 10 out of 17 European ethylene glycol plants may become uneconomic, corresponding to 65 percent of total European capacity.15 US chemical producers are likely to be similarly impacted. However, there is a sentiment within the industry that the US will be more ruthless in restructuring uneconomic plant as the industry there is less encumbered by political issues which can make restructuring difficult in Europe. The challenge for the European chemical industry is to resist the urge to hide behind protectionist barriers. Rather, there should be a process to identify and rationalize chemical plant and clusters made uneconomic by the new world order (principally, likely to be small, land-bound, non-integrated units). This should allow future investment to focus on those areas in which the European chemical industry remains competitive on the global stage (see verbund manufacturing, section 5).
13 14 15
Antidumping Cases Target Mideast Petchem Exports, Chemical Week, 30 November 2009 China Dumping Duties, Chemical Week, 16 November 2009 KPMG research and analysis
Clariant
sought to shrink its workforce by a total of 3,220 positions in 2009.
2
175 165 Production index (1997 = 100) 155 145 135 125 115 105 95
Challenge from the East

As European chemical companies recover from the recession, they will face even greater challenges from increased competition overseas. Although most of this competition will come from the Middle East and China, the relative importance of these regions can be best understood as part of a larger transition in economic strength from developed to emerging markets.
2.1 A global shift

International comparison of chemical production growth
1997 2007
Average growth p.a. Asia Pacific* Latin America NAFTA EU (1997-2007) 5.7% 3.2% 1.4% 1.3%
1997 EU
1998
1999 NAFTA
2000
2001
2002 Asia Pacific*
2003
2004
2005
2006
2007
Latin America
*Asia Pacific includes Japan, China, India, Korea, Malaysia, Philippines, Singapore, Taiwan, Thailand, Pakistan, Bangladesh and Austraila
Source: Cefic Chemdata International
Chemical demand (excluding pharma)

2008 EUR1,700 billion
Rest of world 10%
2020 EUR2,400 billion

11% Rest of world
South America
6%
6%
South America
Western Europe
25%
650 billion
+ 4.5 5.0%
p.a.
1,150 billion
19%
Western Europe
North America
21%
18%
North America
Asia Pacific
38%
46%
Asia Pacific
Source: BASF , 2008
World natural gas costs
$1.25 $0.75 $3.60 $2.00 $5.75 $0.80 $1.50 $6.75
Russia North Africa Ukraine Indonesia Canada Venezuela Argentina US
$7.60 West Europe $2.50 $0.75 Trinidad Middle East
Source: JP Morgans Chemical primer, June, 2008
Global ethylene trade

25 20 15 10 (million tonnes) 5 0 -5 -10 -15 -20 -25 2002 2003 2004 2005 2006 2007 West Europe Southeast Asia 2008 2009f 2010f 2011f 2012f Net imports Net exports
North America India Sub.
South America Northeast Asia
Middle East Others
Source: Jadwa Investments, GPCA Annual Forum, December 2009
T H E F U T U R E O F T H E E U RO P E A N C H EM I C A L I N D U S T R Y 1 5
New polyethylene plants planned for start-up, October 2009 12

Company Saudi Kayan Saudi Kayan Qatofin Borouge 2 Borouge 2 Ilam PC Kermanshah Lorestan Kordestan Mahabad Sinopec Tianjin Sinopec Tianjin Sinopec Zhenhai Baotou Shenhua PTT Chemical PTT Chemical Siam Cement Siam Cement Haldia PC GAIL GAIL GAIL Indian Oil Corp Indian Oil Corp BPCL ONGC ONGC ONGC Total
Source: Platts, GPCA Petrochemical Report, December 2009
Location Saudi Arabia Saudi Arabia Qatar UAE UAE Iran Iran Iran Iran Iran China China China China Thailand Thailand Thailand Thailand India India India India India India India India India India
Grade HDPE LLDPE LLDPE HDPE LLDPE HDPE HDPE HDPE LDPE HDPE HDPE LLDPE LLDPE PE LLDPE HDPE HDPE LLDPE PE HDPE HDPE HDPE HDPE HDPE HDPE HDPE HDPE HDPE
Capacity ('000 m.t./p.a.) 400 400 450 540 650 300 300 300 300 300 300 300 450 300 400 300 400 350 670 200 200 200 350 300 220 360 360 340 9,940
Startup Q1 2011 Q1 2011 End 2010 Mid 2010 Mid 2010 2010 2010 2010 2011 2011 Online 2009 Online 2009 Q2 2010 May 2010 Online 2009 Online 2009 Mar 2010 Mar 2010 Jan 2010 Apr 2010 Apr 2010 Apr 2010 2012 2012 After 2010 Dec 2012 Dec 2012 Dec 2012
Top 10 chemical producers (sales value), 2008

Rank 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.
Source: Chemical Week
Company BASF Exxon Mobil Dow Chemical Royal Dutch Shell Ineos SABIC Lyondell Basell Sinopec DuPont Total
Country Germany US US UK/Netherlands UK Saudi Arabia US/Netherlands China US France
1 6 T HE FUTURE OF THE E UROPEAN CHEMICAL INDUSTRY
Top 10 chemical producers, 2015?16

Rank 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Company SABIC BASF Reliance Exxon Mobil Sinopec Sinochem Dow Chemical Saudi Aramco Dupont ADNOC / IPIC Country Saudi Arabia Germany India US China China US Saudi Arabia US Abu Dhabi
Source: KPMG in the UK, December 2009
Even before the current recession, the European chemical industry saw a gradual but steady decline in global market dominance. This shift can be measured by a number of metrics. Between 1995 and 2005, world chemical production increased by almost 40 percent. However, over 95 percent of that growth was concentrated in developing countries.17 From 1997 to 2007 , global chemicals sales increased by 60 percent, but the portion of global EU sales declined by 2.7 percent.18 BASF estimates that global chemical demand from 2008 to 2020 will increase eight percent in the Asia-Pacific region but decrease six percent in Western Europe.19 Several factors can be cited to explain this shift in market leadership. For example, the cost of raw material feedstock is significantly higher in Western Europe than in most other regions of the world, and this cost difference will almost certainly continue in the future. In particular, it should be noted that chemical producers on the US Gulf coast have an advantage over Europe since they are primarily fed by lower-cost ethane rather than the more expensive heavy feeds that supply Europe. In addition, strong demand in Asian markets supports growth in production for domestic chemical companies in that region. Meanwhile, weakening consumer demand for end products in Europe has led to significant underutilization of capacity, plant shutdowns and margin erosions. As a result, most analysts and industry observers agree that the global chemical industry will continue in its steady shift to the East, with a greater portion of chemical majors headquartered outside the EU in the future. In 2008, 4 of the top 10 chemical producers were located in Europe, but KPMG suggests that by 2015, only 1 of the top 10 producers is likely to be still in Europe while six are likely to be based in the Middle East or Asia.
Between
1995 and 2005, 95 percent of world chemical production growth was in developing countries.
16 17
This assumes that the rate of growth in petrochemical companies continues at the current rate until 2015. The state of the European Chemicals Industry a thoughtstarter for the High Level Group on the competitiveness of the European Chemicals Industry, European Commission, 2007 18 Facts and Figures: The European chemical industry in a worldwide perspective: 2009, Cefic 19 BASF , 2008
T H E F U T U R E O F T HE E UR O P E A N C HE M I C A L I ND U S T R Y 1 7
This will mark the conclusion of the process to break up the majority of the historic, integrated European chemical giants (which began with the break up of the likes of Hoechst and ICI), with their 21st century equivalents being created in the Middle East and Asia. The opportunity for European chemical producers is to focus their remaining activities on emerging mega-trends and to retain a level of flexibility that enables them to rapidly adapt as these trends change.
2.2 Middle East

Middle East Major ethylene oxide producers
The Kuwait Olefins Co - (TKOC) Arak Petrochemical Co - (ARPC)
Equate Petrochemical Co
Marun Petrochemical Co
Iran
To Lebanon
Gachsaran Petrochemical - (Arvand)
Iraq
Zubair
Kuwait
Yanbu National Petrochemical Co - (YanSab)
Safaniya oil field Zuluf oil field Al Jubail
Ca. 60% of Saudi Arabias natural gas reserves consist of associated gas mainly from Ghawar Shaybah and Zuluf fields
Morvarid Petrochemical Co
Qaisumah
Farsa Chemical Co
Saudi Arabia
Rabigh Refining and Petrochemical Co - (Petro-Rabigh)
Riyadh
Ras Tanura
East West NGL Line East West Petroline

Yanbu
PS3
Ghawar oil field
Qatar
ExxonMobil Chemical/ Qatar Petroleum
UAE
Jubail United Petrochemical Co - (JUPC)
Riyadh Muajjiz Iraq Pipeline Across Saudi Arabia
Shaybah Shaybah oil field
ChemaWEyaat
Eastern Petrochemical Co - (Sharq)
Rabigh Jeddah
Mazalij Manjoura Shaden Waqr Tinat Niban gas fields
North & South Kidan gas fields
Oman
Duqm Refining & Petrochemical Complex - (DRPC)
Saudi Kayan Petrochemical Co
Arabian Petrochemical Co
Yemen
Major seaports Plants operating Plants under study/planned/construction/delayed
Ras Tanura Integrated Petrochemical Co
Source: BP statistical review the world energy 2007 and ICIS plant research as of October 2008. Updated by KPMG International, 2009
Operating margins, 2008

30% 28.4 25% 20% 15% 10% 5% 0 SABIC Source: Samba, September 2009 BASF Dow Chemical ExxonMobil DuPont Formosa Plastics 5.5 7.7 3.8 90 9.2 4.8
1 8 T HE FUTURE OF THE EUROPEAN CHEMICAL INDUSTRY
The availability
of these resources provides the chemical industry in the Middle East with both energy and feedstock at relatively low prices.
Middle East ethylene capacity

40 35 30 25 20 15 10 5 5 0 2007 Capacity Capacity as a percent of global capacity 2008 2009 2010 2011 2012 2013 0 10 20 25
(million tonnes)
15 (percent)
Source: Bank of America Securities/Merrill Lynch, 2009
Major Middle East sovereign wealth funds

Country UAE Saudi Arabia Kuwait Libya Qatar Iran Various Kuwait Investment Authority Reserve Fund Qatar Investment Authority Foreign Exchange Reserve Fund Funds Abu Dhabi Investment Authority Assets under management (US$ billion) 875 300 250 50 40 15
Source: CIA the Word Factbook, 2009
The Middle East has emerged as a major competitor for the European chemical industry, based mainly on ready access to cheap feedstocks, proximity to growing markets in Asia and support by governments and local authorities. The Middle East region has about 67 percent of the worlds oil reserves and 45 percent of all natural gas reserves, the largest such reserves found anywhere. The availability of these resources provides the chemical industry in the Middle East with both energy and feedstock at relatively low prices. Companies like Saudi Basic Industries Corporation (SABIC) pay only US$0.75 for one million British Thermal Units (BTU) of natural gas compared to the average market price of between US$7 8 in Western countries.20 Some analysts estimate that ethane-based Middle East producers have a cost advantage of up to US$350/mt over some of their naphtha-based competitors in Europe.21 Whilst the government-backed oil producers in Saudi Arabia have announced plans to increase the cost of natural gas to petrochemical producers from 2012 (initial estimates suggest US$1.25/m BTU) there will only be a marginal erosion of this massive cost advantage.
20 21
American Chemistry Council, October 2008 Can the European Petrochemical Industry Compete Against Emerging Producers Based in the Middle East?, Chemical Week, 21 September 2009
2 0 T HE FUTURE OF THE EUR OPEAN CHE MICAL IND USTRY
HDPE delivered costs to SE Asia

1200
1000
800
600
400
200
0.0 ME Freight to SEA Overhead USGC Fixed Costs Utilities S. Korea Raw Materials NWE
Source: ChemSystems, 2009
Of more concern to Middle Eastern producers is continued access to cheap ethane allocations as alternative LPG and naphtha feeds have a significantly lower cost advantage. Whilst reports have suggested that additional ethane allocations were likely to be limited, His Excellency Ali Al-Naimi, Minister of Petroleum and Natural Resources, Kingdom of Saudi Arabia recently announce that Saudi Arabias proven gas reserves, which stood at 263 trillion standard cubic feet (SCF) at the end of 2008, will increase by 5 trillion SCF in 2010. The Kingdoms gas production is expected to increase from 8.8 billion SCF a day now to 13 billion SCF a day in 2020, allowing it to, stay ahead of demand for natural gas [for] chemical feedstock. 22 Backed by a dependable supply of resources as well as significant cash reserves, Middle Eastern countries are making huge investments to increase capacity in both upstream and downstream production facilities (principally in the form of world-scale, integrated complexes). More than 19 million mt/year of ethylene capacity will come onstream in the Mideast by 2015, according to SRI Consulting in a recent analysis.23 Some development projects have been delayed by financing constraints. The global downturn has led to questions about the ability of worldwide markets to absorb capacity from the Middle East and other regions. China, the EU and India have each begun antidumping procedures this year against petrochemical exports from the Mideast.24 Nevertheless, the region is still expected to become a leading producer for a range of petrochemicals and plastics, including ethylene glycol (EG), polyethylene (PE), and polypropylene (PP). EG capacity will increase in the region from 6.2 million mt/ year in 2009, to 8.8 million mt/year in 2014, raising its share of the global total from 28 percent to 32 percent over the five-year period.25 Forecasts until the year 2020 predict that the region will continue to grow at an average of over 9.5 percent per year, more than twice the global rate.26
22 23 24
GPCA Annual Forum, 9 December 2009 Quoted in Reinforcing Leadership in Petrochemicals, Chemical Week, 23 November 2009 GPCA 2009: Mideast Influence Continues to Grow, Chemical Week, 7 November 2009 25 Ibid. 26 World chemicals market: Asia gaining ground, Deutsche Bank Research, July 2008
Whilst a recent survey suggests that 85 percent of product that is sold from plant currently being built will specifically target China, the rest of Asia and the Middle East itself, Tom Crotty, CEO of Ineos Olefins and Polymers Europe said, whatever is left over will have to find a home and the next obvious place is Europe, adding that, some of the new capacity will wash back into Europe but the unknown is how much. 27 In addition, recent transactions such as SABICs acquisition of GE plastics and the acquisition of Nova Chemicals Corp. by International Petroleum Investment Co. indicate a long-term strategy by major players in the Middle East to expand globally into downstream areas. This explosive growth and expansion in the Middle East has helped to drive significant changes in the European commodity chemicals market. Ten years ago, North America was the primary exporter and supplier of products such as PE and PP to the world. Europe was well balanced between supply and demand. However, trade flow patterns have changed dramatically, and the Middle East is now the dominant inter-regional exporter of polyolefins. Older European commodity-based plants will likely be less competitive in the years ahead. Many European customers have already turned to the Middle East for supplies of raw materials such as PE, and Europe is expected to become a net importer of polyolefins by 2010.28 The same cost advantages that help chemical companies in the Middle East to enter European markets will also help to increase their success in Asia. Although more port facilities, tankers and pipelines need to be developed, it is still cheaper to transport raw materials and products from the Middle East to Asia than from Europe. This geographical advantage will enable the Middle East to further expand into Asian markets, gain new customers and even displace European companies from markets where they have traditionally dominated.
is left over will have to find a home and the next obvious place is Europe.
Tom Crotty
CEO of Ineos Olefins and Polymers Europe
Whatever
2.3 China
10 9 8 7 (million tonnes) 6 5 4 3 2 1 0 1997 1998 1999 2000 2001 2002 2003 Consumption 2004 Output 2005 2006 2007
Dependency to foreign countries
Growth of demand
Source: www.chemhello.com. Cited in Chemicals in China: Responding to new challenges, 2009
27 28
Quoted in Reinforcing Leadership in Petrochemicals, Chemical Week, 23 November 2009 Analysis by KPMG International 2008
2 2 T HE FUTURE OF THE EUR OPEAN CHE MICAL IND USTRY
Chemicals sales growth rates of selected countries and regions

20 Average annual sales growth rate (%)
19972007
15
16.5
10 8.7 5 World sales growth 4.8% p.a. 5.4 4.0 0 EU-27 China Mexico India Taiwan Korea, Republic Brazil Russia Switzerland Canada Africa 3.9 3.4 2.9 2.1 USA
7.6
7.6
7.3
6.8
0.1 Japan 1,946 2008
Source: Cefic Chemdata International, 2008
China Foreign Exchange reserves (US$billion)

2500
2000
US $ billion
1500 1,066 1000 610 500 166 0 2000 2001 2002 2003 2004 2005 2006 212 286 403 819
1,528
2007
Source: China State Administration of Foreign Exchange, 2009
The current economic downturn has reduced industry growth in China and limited further capital investment over the short and medium term. According to the China Petroleum and Chemical Industry Association, consumption of finished oil products (a key indicator of their chemical industry) dropped 8.6 percent in December of 2008.29 Despite the recession, chemicals output from China in 2009 may grow by over four percent.30 Part of this growth can be attributed to Chinas massive stimulus programs, but questions remain whether the stimulus will have long-lasting benefits. Nevertheless, the Chinese chemical industry continues to grow in strength. By 2015, China is expected to overtake the US as the largest chemical producer in the world.31 Self-sufficiency for the industry is an expressly stated policy of the government. China has, in fact, been close to self-sufficient in base chemicals since the 1980s. The countrys self-sufficiency index for basic chemicals, resins and fibers is now approximately 80 percent, according to estimates from Chemical Market Associates Inc. (CMAI), but significant additional capacity will be required to
29
30 31
Chinas petrochemical industry reverses 10-y high growth, www.chinamining.org,18 February 2009 Global chemicals output could fall 6% in 09 Oxford Economic Forecasting (Source ICIS news), 24 February 2009 World chemicals market: Asia gaining ground
satisfy the expected growth in demand in the coming years.32 China also imported more than US$84.5 billion worth of chemicals in 2008, much of it in specialties, and the country currently lacks sufficient domestic manufacturing capabilities to completely satisfy domestic demand.33 To meet their growing demand for specialties, China is constructing its own chemical plants and has been using joint ventures with European players to increase capacity. Before the economic downturn, almost all major multinational chemical companies established a presence in China. However, the financial crisis has caused many international chemical firms to reassess much of their investment plans and cut staff worldwide. BASF is reconsidering the opening of a major methylene diphenyl isocyanate (MDI) chemical plant in southwestern China, because of weakened global demand. The plant was scheduled to begin production in 2010. The company, however, is moving ahead with plans for a major petrochemical complex in Nanjing with Sinopec. The two companies have invested US$2.9 billion in the Nanjing venture. Other European chemical companies will also continue to develop their partnerships and market presence in China, attracted by a low-cost base and expanding markets. For example, Clariant opened its first plant in Guangzhou in 1995, making masterbatches, or plastic dye pellets. The company now has numerous plants in other provinces as well. The plants operate through a local entity but are overseen by Clariant for all management, governance and investment issues. Fully-owned or joint venture operations with full trading licenses have been established. As in the Middle East, the Chinese chemical majors have ready access to massive funding through their government, thus removing the credit barrier faced by companies in the West. At the same time, Chinese companies face critical challenges in terms of poor logistics, tight raw material supply and the lack of experienced management. Accordingly, the industry will continue to need access to Western technologies and resources, particularly at the specialty end of the chemicals value chain. We believe that we will increasingly see Chinese chemical majors as bidders in M&A auction processes as their focus turns from attracting inbound Western investment to establishing themselves on the global stage through outbound acquisitions. In the first instance, this is likely to focus on distressed Western assets which provide access to the technologies they require to reach their development goals.
32 33
Chemicals in China: Responding to New Challenges, KPMG 2009 Emerging Markets Information Service, 3 April 2009
3
35 30 Share of Country (%) 25 20 15 10 5 0 United States of America Japan Germany 20.0 17.4 10.9 11.5 4.9 29.3 32.5 Jan. Aug. 2009 Annualized Growth Rate based tender Line 20 15 10 5 0 -5 -10 -15 United States of America Japan Germany -11.7 -2.8 10.9
Innovation a key to survival

Share of country in total PCT filings, January 2008 August 2009
4.8
4.6
3.6
4.4
4.1
3.4
3.4
2.9
2.6
2.4
2.3
2.3
2.5
1.7
1.8 Italy
1.6
1.8
Republic of Korea
China
France
United Kingdom
Netherlands
Switzerland
Sweden
Canada
Jan. Aug. 2008
Source: WIPO Statistics Database, 2009
Annualized growth rate of PCT Filings, August 2008 August 2009

15.7
5.7 -4.3 -4.5 2.3 -0.6 -4.2 -6.9 -7.6
Total PCT Fillings Growth Rate(-2.7%) Republic of Korea China France United Kingdom Netherlands Switzerland Sweden Italy Canada
Note : 2009 data are provisional and incomplete. The growth rate is the annualized growth rate between August 2008 and August 2009. Counts are based on the international filling date and the country of residence of the first name applicant.
Source: WIPO Statistics Database, 2009
We believe that a key to survival for European chemical companies is based on innovation at three different levels moving from bulk chemical production to the specialty end of the value chain, leveraging their traditional advantage in technology and establishing closer customer and competitor relationships through joint development agreements, acquisitions, value add services and other strategic initiatives.
3.1 Evolving from commodities to specialties

In its final report in February 2009, the European Commissions High Level Group (HLG) on the Competitiveness of the European Chemicals Industry recognized that abandoning petchems and focusing on specialty chemicals is a clear necessity.34 In many ways, this move to specialties is a matter of both push and pull. As noted above, European companies are being pushed out of commodities because of the cheap feedstocks available to producers in the Middle East. In addition, the last 15 to 20 years have seen relatively little investment in the EU in the basic chemical sub-sectors; the last cracker was built in the early 1990s. This has led to a significant loss in competitive advantage. The average cracker size in the EU is currently about 450,000 tons/year while the new, world-scale crackers being built in Asia and the Middle East reach a capacity of more than 1,000,000 tons/year. European companies that continue focusing on commodities will have to make massive investment simply to survive. In terms of pull, European companies are attracted both by strong specialty markets and the fact that value-added, specialty manufacturing requires a high level of technical capability found more often in the EU than in developing countries. Because of this, the European petrochemical industry is a natural choice for complex specialties for biotechnology and nanotechnology, as well as for emissionabatement products such as insulation materials for residential and industrial buildings.
34
Final Report of the High Level Group on the Competitiveness of the European chemicals industry
2 6 T HE FUTURE OF THE EUROPEAN CHEMICAL INDUSTRY
Obviously, this move up the value chain by European companies will require strategic investment in the face of tight credit, rising costs and other business pressures. European companies also need to maintain sources for commodity chemicals through clustering of crackers with downstream manufacturing, even though this strategy will become more challenging as commodity production increases in the Middle East, China and other areas. Despite these challenges, specialty chemicals remains a highly attractive global market worth more than US$680 billion. Established European companies have the resources and experience in this market to help them compete as major players worldwide.
3.2 Maintaining a technological advantage

The overall technological advantage of one region over another can be estimated in various ways, including the rate of patent filings and the number of patents in force. China is now the third largest patent application jurisdiction in the world and may soon overtake the U.S. in total patent applications. The State Intellectual Property Office (SIPO) received a total of 828,328 patent applications in 2008, a year-on-year increase of 19.4 percent.35 However, EU countries also enjoy a leadership position in patented technology, accounting for 28 percent of Patent Cooperation Treaty (PTC) filings from January 2008 to August 2009. During the same period, China accounted for only 4.6 percent of PCT filings. To protect their technological advantage, European companies should review their R&D plans and extend corporate research programs to medium and long term objectives. The public sector should also provide effective support for these efforts, in particular for SMEs. In addition, intellectual property should be protected by appropriate and cost-effective rules regarding intellectual property rights (IPR). The European Commission supports the development of a more coherent IPR policy, with a more centralized and coordinated approach.36 This includes a common jurisdictional framework and greater alignment of international patent law through the World Intellectual Property Organization (WIPO) and initiatives such as the Transatlantic Economic Council (TEC). Sustainable development is another opportunity for innovation by European chemical companies. Using their technological advantage to stay ahead of the market, these companies are uniquely positioned as leaders in the development of new energy-efficient products, efficient manufacturing processes and alternative feedstocks based on natural materials such as sugar, vegetable oils and plant extracts. (See Going green with Cognis a flexible strategy, section 4).
35
36
Firms get upper hand in application process, China Business Weekly, 23 February 2009 Final Report of the High Level Group on the Competitiveness of the European chemicals industry
Despite the lack of concrete commitments resulting from the recent Copenhagen Climate Conference, the green agenda is increasingly being driven by the chemical industrys end customers who are demanding sustainable products and solutions. There is a clear opportunity for the chemical industry in Europe to capitalize on its historical technological advantage and provide global leadership in the realm of sustainable development. For the chemical industry, another metric is especially important the number of graduates in chemical engineering and related fields. Highly qualified human resources are vital to European chemical companies: an average of 32 percent of their employees have attained third-level education as compared to an average of 26 percent for other industries.37 However, the last decade has seen a serious drop in the number of European students taking chemistry at the third level. Chemistry currently scores last among the most preferred subjects studied at secondary school.38 During the same period, surveys have shown a dramatic rise in the number of chemistry and engineering graduates in Asia.39 European companies recognize the consequences if these trends continue. Fortunately, the EU has one of the most well developed and successful educational systems in the world. Chemical companies should take the opportunity to join with governments and private organizations to encourage more students to enter fields that support the chemical industry.
37
Source: Eurostat The state of the European Chemicals Industry a thoughtstarter for the High Level Group on the competitiveness of the European Chemicals Industry, European Commission, 2007 39 Higher Education Statistics Agency Limited 2009
38
3.3 Strengthening customer relationships

European chemical companies should seek to expand beyond just trading, supplying commodities or competing on price. Now is the time to focus on the success of their customers. This can involve strategic partnerships and joint initiatives with engineers, researchers and other professionals from different companies, working together on R&D projects and providing value add services. The benefits of these initiatives are clear, but they also require new strategies and attitudes on the part of companies. As Peter Linder of Clariant in China stated, We have to keep our sales force focused on adding value through strong customer relationships, rather than simply getting drawn into competition with lower-cost rival producers. 40
3.4 Developing joint venture relationships

European companies can develop joint ventures and strategic alliances with competitors in the Middle East to gain access to feedstocks and in China to develop a local market presence. The most successful European chemical companies in the coming years are likely to be those that embrace the changing dynamics in the global industry and position themselves to take advantage. Inevitably, joint relationships involve an element of trade-off and a challenge for European chemical companies will be to establish agreements that allow them to enjoy the benefits, without giving away too much of their technological advantage, so as to preserve their long-term competitiveness.
40
Chemicals in China: Responding to New Challenges, KPMG, 2009.
THE FUTURE OF THE EUROPEAN CHEMICAL INDUSTRY 29
European
chemical companies should seek to expand beyond just trading, supplying commodities or competing on prices.
Case study Going green with Cognis a flexible strategy

Raw material basis of Cognis in terms of volume in 2008*
Naturals
(Natural oils, fats and derivatives, glucose, plants and extracts) 50%
Inorganics
(Inorganic acids and bases, salts) 8%
Inorganics
(Silicates) 17%
Petrochemicals
*Core businessess CC, N&H, FP
25%
Source: Cognis, 2009
Headquartered in Monheim, Germany, Cognis is one of the worlds leaders in specialty chemicals, providing raw materials and ingredients for products for personal and home care, nutrition and health, and for a number of other industries such as coatings and inks, lubricants, agriculture and manufacturing. Cognis is one of the leaders in green solutions for the chemical industry, dedicating its activities to a high level of sustainability and the use of natural source raw materials and ingredients. As a European chemical company, the strategies adopted by Cognis offer several advantages. For example, the use of natural raw materials such as fats and plant extracts has significantly reduced its dependence on petrochemical feedstocks from the Middle East. In addition, its raw materials are gathered from a number of countries across Asia, the Pacific and South America, further reducing its dependence on any particular region. Cognis has also taken care to establish a local presence in emerging markets such as China, enabling it to target rapidly moving markets for specialty chemicals and consumer goods. The company recognizes that the time and cost required to manufacture products in Europe and then ship them to Asia would hurt their competitive position. As a result, Cognis has focused on expanding their presence in Asia through plant expansions and joint ventures with local companies.
In its European plants, Cognis continues to develop more efficient manufacturing processes to reduce costs and improve their regulatory position. This emphasis on innovation applies to its focus on product performance. As with other European chemical companies, it can leverage a strong background in R&D to help ensure that its products remain competitive in global markets. Richard Ridinger, Executive Vice President Care Chemicals, recently summed up the situation facing many of todays European chemical companies. In Europe, we have unique challenges but also unique advantages in terms of technology, innovation and flexibility. Those chemical companies that work hard to balance sustainability with performance and price will succeed.
is also recognized as a leader in green solutions for the chemical industry.
Cognis
5
Rockall
(U.K.)
Case study BASF verbund manufacturing

ORKNEY ISLANDS HEBRIDES Bergen
Major Chemical Cluster in Europe

Oslo Stockholm
ALAND ISLANDS
EST ONIA
Tallinn
RUSSIA
North Atlantic Ocean
Stavanger Aberdeen Glasgow Edinbur gh Gteborg Gotland
Rig a
LAT VIA
Vits yebsk Smolensk
Belfast
UNITED
Isle of Man (U.K.)
North Sea
DENMARK
Copenha gen
Malm
land Barents
LITHUANIA
Sea Kaliningr ad
Vilnius
Dublin
IREL AND
Irish Sea
KINGDOM
Cardiff
Leeds Manchester Liverpool
Bornholm Gdansk Hambur g emen Leipzig
RUSSIA
Minsk
Mahily ow
NORTH SEA
GREAT BRITAIN
Brunsbuttel Wilhelmshaven
Hamburg Bremerhaven
Hrodna
BELARUS
Homyel'
Berlin
Poznan
War sa w
Brest Kyiv Rivne L'viv Chernivtsi
Eemshaven Amsterdam Rotterdam Zeebrugge Dunkirk
POLAND
Ldz Wr ocla w
NETHERLANDS
Chemsite
Celtic Sea
Guernse y (U.K.) Jersey (U.K.)
London
London
Myk
GERMANY
Fr ankfurt am Main g Stuttgart Munich
LIEC H.
Pr a gue
UKRAINE
Chisin au
Kr ak w
CZEC H REPUBLIC SL OVAKIA Brno
Nantes
Strasbour g Z rich
Bratisl a va
Vienn a
AUSTRIA
Ljublj an a
Bud apest
HUNG ARY
ClujNapoca
Iasi MOLDOVA
CHANNEL
Le Havre
Ghent Antwerp
GERMANY
Chem Cologne
Bay of Biscay
FRANCE
MASSIF
Vaduz Bern GenevaSWITZ.
ROMANIA
Buchar est
Danube
Lyon
Bordeaux CENTRAL Bilbao Porto

PYR ENE
Turin
Milan Genoa
Venice
SL OVENIA
Z a gr eb
BOSNIA AND HERZEGO VIN A
BELGIUM L.
Toulouse
ES
Andorr a l a V ell a Marseille

ANDORRA
MONAC O
SAN MARINO
CROATIA
Belgr ade
SERBIA Pristina
KOS.
Varna
Ludwigshafen
Ligurian Flor ence Sea
Sar aje vo
Adriatic Podgorica Sea MONT.
Z ar agoz a
ITALY
Rome
Naples
BULG ARIA Sofi a
FRANCE
Istanbul Bur
Corsica
Skopje
T hessalon ki
MACEDONIA
PORTUG AL
Lisbon
Madrid
Tagus
Barcelona Valencia Balearic Sea BALEARIC ISLANDS Sardinia Cagliari
VATIC AN CIT Y
Tir an a
ALB.
EY TURKEY GREECE
Athens
Aegean Sea Izmir
SPAIN
Tyrrhenian Sea Ionian Sea Sicily
Sevilla
Gibralt ar M laga
(U.K.)
Mediterranean Sea
Algier s
Palermo
Rhodes
Strait of Gibraltar
(SPAIN)
Ceut a Alboran
Sea
Source: European Chemical Site Promotion Platform, 2009
Headquartered in Ludwigshafen, Germany, BASF is one of the worlds leading chemical companies with production and sales facilities in many economic regions. The BASF portfolio comprises chemicals, plastics, performance products, functional solutions, agricultural solutions and oil and gas. BASF is widely recognized as the founder of the verbund manufacturing concept. Worldwide, BASF operates six Verbund sites and about 330 production sites. In Verbund, they link production plants intelligently to save resources and energy. The largest Verbund site in BASF Group is located in Ludwigshafen, Germany. This was
41
where the Verbund concept was developed and optimized before it was applied to other sites around the world. BASF estimates that it saves more than EUR500 million each year at its Ludwigshafen site alone. By linking plants in a Production Verbund, they are able to create efficient value-adding chains starting with basic chemicals and extending to higher value products like coatings and crop protection products. In addition, by-products from one plant can be used as raw materials elsewhere. Production plants are connected by an intricate network of pipes that provides an environmentfriendly method of transporting raw materials and energy quickly and safely.
The Verbund principle also applies to energy. In the Energy Verbund, the excess heat given off in chemical reactions is immediately converted into steam and is fed into the steam network so that it can be made available to other plants.41 Speaking about the importance of the verbund concept, Dr. Albert Heuser, Head of BASFs Petrochemicals Division stated, strengthened cooperation between companies and efficient Verbund structures within each company, as well as optimization of logistics and infrastructure, will play a major role in the European petrochemical industrys future. 42
42
basf.com, 2009 Sustainable Manufacturing of Petrochemicals in Europe, Chemical Week, September 21, 2009
kpmg.com
Contacts:
In Europe Chris Stirling KPMG in the UK Tel: +44 (0)20 7311 8512 e-mail: chris.stirling@kpmg.co.uk In Asia Norbert Meyring KPMG in China Tel: +86 (21) 6288 2298 e-mail: norbert.meyring@kpmg.com.cn In USA Mike Shannon KPMG in the US Tel: +1 973 912 6312 e-mail: mshannon@kpmg.com Author Paul Harnick KPMG in the UK Tel: +44 (0)15 1473 5226 e-mail: paul.harnick@kpmg.co.uk
The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.
2010 KPMG International Cooperative (KPMG International), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis--vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International Cooperative (KPMG International), a Swiss entity. Publication name: The Future of the European Chemical Industry Publication number: 1001503 Publication date: January 2010

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CHEMICALS

The Future of the European Chemical Industry

About KPMGs Global Chemicals Practice

The European chemical

Chris Stirling Head of Chemicals, KPMG in Europe

2 T HE F UTURE O F T HE E UROPEAN CHEMICAL I NDUSTRY

Challenges from the East

Innovation: the key to survival

4 T HE FUTURE OF THE EUR OPEAN CHE MICAL IND USTRY

Current state of the industry in Europe

1.1 Industry overview

450 400 350 300 250 200 150 100 50 0

204 EU 27 = 537 529

Source: American Chemistry Council, 2009

EU chemical industry sales by country

11.7% PL SE AT FI CZ 2.3% 1.7% 1.3% 1.3% 0.9% HU PT RO

Other 0.7% 0.7% 0.6% 2.2%

Source: Cefic Chemdata International

Sector-wise breakdown of EU chemical industry sales

Base chemicals 44.8%

Specialty chemicals 17.0%

Consumer chemicals 10.8%

Source: Cefic Chemdata International and Eurostat

6 T HE FUTURE OF TH E EU ROPEAN CH EMICAL IN DUSTRY

THE FUTURE OF THE EUROPEAN CHEMICAL INDUSTRY 7

8 T HE FUTURE OF TH E EU ROPEAN CH EMICAL IN DUSTRY

1.2 Impact of the current downturn

Source: CIA Matters

EU chemicals production: sector outlook

-5.5 -12.4 -19.7 Polymers

Source: Cefic Economic Outlook Task Force (November 2009)

1 0 T HE FUTURE OF TH E EU ROPEAN CH EMICAL INDUSTRY

Source: Bank of America Securities/Merrill Lynch

sought to shrink its workforce by a total of 3,220 positions in 2009.

1 2 T HE FUTURE OF TH E EU ROPEAN CH EMICAL INDUSTRY

Challenge from the East

2.1 A global shift

2002 Asia Pacific*

Source: Cefic Chemdata International

Chemical demand (excluding pharma)

2020 EUR2,400 billion

Source: BASF , 2008

World natural gas costs

$1.25 $0.75 $3.60 $2.00 $5.75 $0.80 $1.50 $6.75

Russia North Africa Ukraine Indonesia Canada Venezuela Argentina US

$7.60 West Europe $2.50 $0.75 Trinidad Middle East

Source: JP Morgans Chemical primer, June, 2008

1 4 T HE FUTURE OF TH E EU ROPEAN CH EMICAL INDUSTRY

Global ethylene trade

North America India Sub.

South America Northeast Asia

Middle East Others

Source: Jadwa Investments, GPCA Annual Forum, December 2009

New polyethylene plants planned for start-up, October 2009 12

Top 10 chemical producers (sales value), 2008

Country Germany US US UK/Netherlands UK Saudi Arabia US/Netherlands China US France

1 6 T HE FUTURE OF THE E UROPEAN CHEMICAL INDUSTRY

Top 10 chemical producers, 2015?16

Source: KPMG in the UK, December 2009

2.2 Middle East

Gachsaran Petrochemical - (Arvand)

Safaniya oil field Zuluf oil field Al Jubail

East West NGL Line East West Petroline