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DSM Details Reach Response

Chemical firms across Europe and beyond are having to come to terms with Reach, the European Union's recently introduced environmental legislation. Multinationals and small companies alike will be affected by the legislation. Here's an uncut and candid detail from specialty chemicals firm DSM on how it is approaching Reach.

DSM's input is from Environment Manager Jan Berends and DSM Board Member Jan Zuidam.

As a company involved in both fine and industrial chemicals, what are the main challenges you face in preparing for the registration phase of REACH next year?
First of all we are working on a complete inventory of all substances that are in our products, raw materials and intermediate. All these substances have to be 'pre-registered' before the end of 2008. Our suppliers have to register the substances they produce or import, DSM has to register the substances in our intermediates and our products. We also collect all information that we have about the relevant substances that is needed for the registration.
In 2007/2008 we will have to assure that all essential raw materials will be (pre-) registered. We will ask our suppliers. In case suppliers are not wiling or not able we will have to act ourselves (register, change of suppliers, etc.)
We are also aligning our risk assessments, because our suppliers need to know the use and exposure of the substances they deliver to DSM. REACH requires that this is mentioned in the registration.
Main challenge is to do this 100% for over 500 products and over 5000 - 10.000 raw materials and thousands of suppliers.

How will the new regulation affect your activities in practice? (i.e.: which sectors of your activities and/or products will be affected first or most heavily?)
On short term extra work as indicated above. The largest impact we now expect is on sourcing of raw materials. E.g. additives (even non-hazardous) might be no longer available on the EU market because the importer/producer does not want to take the burden of registration. However we have to explore this better and not speculate. It should be taken into account that the period for registration for smaller volumes lasts until 2015 of even 2018. So we have to see and act accordingly.

How do you see REACH as an impediment to DSM’s activities? Conversely, how do you see the regulation as an opportunity for your company?
In first instance there will be uncertainty which is not good for the business in EU. There might be some opportunities, however as long as the EU is different from other parts of the world you can argue whether this might really turn into a benefit. Replacing hazardous substances by less hazardous has been a drive already for many products already for a long time. Companies already have the 'duty of care' It remains a question what the added value of REACH will be.

Do you expect your company’s results to improve or deteriorate as a result of REACH? Why? Are you planning to relocate some of your activities?
We now do not expect big impact relative to the trend. Probably we can benefit to some extend from our bio-based orientation (less hazardous substances used and produced) and our long history of responsible care activities (e.g. product stewardship, quality of product information, etc.)

If you were to introduce changes to the regulation what would they be? What would make REACH work better in your view?
I would look for simplification of the registration dossiers depending on the type and the use of a substance. You don't have to know 'everything about everything', but just what is relevant in the different uses. So a more risk based approach. This in fact is the approach as applied in the EOCD HPV-program. And rather than making it full proof in the EU I would spend some energy in global harmonization, since products are being produced and used worldwide.

--Alex Scott, Senior Associate Editor, Chemicalweek magazine

Credit Crunch May Freeze M&A

The global credit squeeze that has shaken debt and equity markets during the past few weeks may cool the feverish pace of industry M&A. Banks are left holding debt of about $400 billion in uncompleted management and leveraged buyouts worldwide, according to estimates compiled by Baring Asset Management (London). Several big chemical deals are in that pipeline, including Sabic-GE Plastics, Basell-Lyondell, Hexion-Huntsman, and Carlyle-PQ Corp. Industry deals with committed financing are likely to proceed, say M&A advisers that CW contacted earlier this month. However, the relationship between buyers and their lenders could become tense if banks are stuck with debt they cannot sell on the bond market. That will curtail further lending until banks are able to clear the backlog. Most bankers expect a recovery by early 2008, citing an overall strong economy. “This is a different situation than what has happened in the past,” says Richard Whitney, managing director/chemicals at Credit Suisse (New York). Lenders have clamped down despite low default rates and relatively strong earnings and valuations, Whitney says. “Credit supply and demand is out of balance right now. It is not just in chemicals. It is on a global scale. There are so many large transactions that need financing.” Borrowing costs will rise as lenders demand higher risk premiums, analysts say.
“We think this is more of a correction or pause,” says Ron Kahn, head of the debt private placements group at Lincoln International (Chicago). “If you go back to the last serious credit crunch, back in 2001, it was driven by defaults and bad credits.” But the drivers are different now as defaults are low and earnings strong. “This has nothing to do with the fundamentals. It’s purely a liquidity issue,” Kahn says. Deals already in process are progressing, says Chris Cerimele, senior v.p. at Lincoln International. However, sale processes that were planned or just starting are likely to be delayed until after Labor Day, as buyers and sellers wait for the situation to stabilize. Banks are likely to tighten lending terms going forward, analysts say.
“M&A could be a tale of two cities for each half of the year in 2007,” says Peter Young, president of Young & Partners (New York), an M&A advisory firm. “There are enough announced and completed first-half deals so that 2007 will still be a pretty active year. The second half is going to be tough, however.

Rohm and Haas Loses Taste for Salt

Rohm and Haas (R&H) says it is considering “strategic options” for its salt business, which could include a divestment or spin-off. The company says it expects to make a decision by year-end. R&H’s salt business posted sales of $505 million in first-half 2007, an increase of 19% from the prior-year period. Earnings for the six-month period were $37 million, an increase of 85%, in line with improved sales performance, and offsetting higher operating costs, R&H says. Revenue increased on stronger pricing in the industrial and consumer markets, as well as increased demand for ice-control salt and other bulk products, R&H says. R&H’s salt business accounts for roughly 10% of its revenues and includes the Morton Salt name and trademark, including the image of the Morton Salt umbrella girl, a well-recognized consumer product symbol in North America. Also, R&H will no longer seek to maintain credit ratios consistent with an “A” rating, according to quarterly regulatory filings made late last month. “Rather, we intend to manage our debt levels in a manner consistent with maintaining investment-grade quality ratios,” R&H says in the filings. The company expects to maintain a debt ratio of 50% over the next several years, up from 35% at the end of the second quarter. R&H says it will use cash to: reinvest in core businesses; build new platforms to address growing needs in health, water, energy, and other areas; make selective acquisitions that add new technology or broaden geographic presence; continue to increase dividends; and to repurchase shares. R&H announced plans last month to repurchase up to $2 billion of its common stock, including $1 billion in shares through an accelerated buyback program this quarter that will be funded by the issuance of new debt.

Summer Pickup Game

So much for the dog days of summer. This is turning out to be an extraordinary season for the industry. Three deals have eclipsed the $10-billion mark so far, and there have been a scattering of billion-dollar transactions. Sabic, Apollo Management (New York), and Access Industries (New York)—industry’s emerging heavy hitters—have recently agreed to acquire GE Plastics, Huntsman, and Lyondell, respectively, in separate deals valued at more than $10 billion each. Akzo Nobel soon could join that once-exclusive club, if it decides to press ahead with a formal bid for ICI.
Could Sabic, Apollo, Access and perhaps others have designs on creating a chemical industry Champions League this summer, with plans to keep acquiring available industry assets until no one is left on the sidelines? More seriously, one wonders what will bring an end to this activity. Will activity moderate, or will there be some industry or macro mega-event—along the lines of a default that further spooks the bond markets, or something like the late-1990s Asian currency crisis—that shuts down activity.

Three Abiquim Officials Killed in Brazil Plane Crash

Three officials of Abiquim (São Paulo), the Brazilian chemical industry association, were among those killed in yesterday’s crash of a TAM Airlines flight in São Paulo, according to a post on Abiquim’s Web site (www.abiquim.org.br). “The members of Abiquim’s board of directors, and Abiquim officials, regret to inform that Abiquim’s executive vice president Guilherme Duque Estrada de Moraes, adjunct director for regulatory affairs Marta Maria Franco Laudares de Almeida, and the technical adviser Mirtes Suda were victims of the tragedy of TAM flight JJ 3054, on the evening of July 17,” according to a statement on Abiquim’s Web site. Abiquim offered its “deepest condolences to the families of Abiquim’s representatives and to all of the victims of the tragedy.” The flight was arriving in São Paulo from Porto Alegre, Brazil when the crash occurred.

Private Equity Takes Stake

Two recent deals demonstrate how private equity continues to reshape the industry’s landscape by assembling and building leading industry franchises. CVC Capital Partners’ (London) agreement to acquire Univar for about €1.52 billion ($2.1 billion) would further increase the number of top chemical distributors under private ownership (p. 6). Apollo Management’s (New York) agreement, through its Hexion Specialty Chemicals subsidiary, to acquire Huntsman for $10.6 billion, would create a $14-billion/year global differentiated and specialty chemical giant. A sale or merger of Huntsman was inevitable because the controlling shareholders were seeking to sell. Founder and chairman Jon Huntsman had publicly stated his intent to sell his stake in the company to fund his philanthropic efforts. Private equity firm MatlinPatterson (New York), which helped Huntsman avert bankruptcy in 2002 by agreeing to swap its Huntsman bond holdings for a big equity stake in the company, had also been looking to sell its stake, according to financial sources. The deal will likely face a lengthy antitrust review due to overlap in the epoxies businesses. Apollo appears determined to close the deal, betting $425 million that it can gain antitrust approvals. Apollo has agreed to pay Huntsman $325 million if the deal does not close due to the failure to obtain regulatory clearance or financing. It also agreed to pay half of the $200 million breakup fee to Basell. The process may be lengthy but Apollo appears confident that it can live with the conditions antitrust officials in Europe and the U.S. may impose.
Such deals contribute to the blurring of the distinction between “financial” and “strategic” buyers in the chemical industry. Some private equity firms are stepping beyond a simple “buy-and-flip” strategy, building scale, extending their geographic reach, and reducing cyclical risk by acquiring specialty and differentiated businesses. Such strategies previously were associated with industry buyers.

Basell to Buy Lyondell for $12 Billion

Basell has agreed to acquire Lyondell Chemical for $12.1 billion in an all cash transaction. Basell says it has offered Lyondell $48/share, a 20% premium to Lyondell’s July 16 closing price. The total value of the deal including debt is $19 billion, Basell says. Both companies say they have agreed to the deal. Lyondell is split into three businesses: ethylene, co-products, and derivatives; propylene oxide and related products; and refining. Those businesses will “complement and significantly strengthen Basell’s polyolefins business,” Basell says. Lyondell reported 2006 net income up 38%, to $735 million, on sales up 19%, to $22.2 billion. The combined company will have sales of about $34 billion. Access Industries, the parent company of Basell, expressed its interest in Lyondell in May 2007. Russian industrialist Leonard Blavatnik, who controls Access Industries, purchased the rights to buy an 8.3% stake in Lyondell in May. Lyondell is the latest company Basell has tried to buy. Basell offered to acquire General Electric’s GE Plastics business, but lost out to Sabic. Basell then offered to buy Huntsman, but was outbid by private equity firm Apollo Management earlier this month.

Apollo Trumps Basell with $10.4 Billion Huntsman Bid

Hexion Specialty Chemicals, owned by private equity firm Apollo Management, has launched a $10.4 billion, or $27.25/share, bid to acquire Huntsman, topping Basell’s previously announced $25.25/share agreement to acquire the company. Huntsman says that a committee of independent directors is evaluating the Hexion bid and “are engaged in discussions with Hexion regarding their proposal.” Basell is entitled to a $200 million payment if Huntsman accepts a higher bid, according to Huntsman. Hexion has agreed to fund $100 million of this payment, according to Huntsman. Hexion has leading positions in epoxy, phenolic, and formaldehyde-based resins as well as coatings and inks. There is overlap in the epoxies business. Hexion says it has a leading 34% global market share in epoxy resins. Huntsman currently ranks third in epoxies globally, and Hexion could be required to divest all or part of Huntsman’s epoxy business to gain antitrust approvals, analysts say. Dow Chemical is the other leading global epoxy producer, and the top-three producers account for about 75% of global capacity for epoxy resins, according to SRI Consulting (Menlo Park, CA). Hexion’s proposal includes a $325 million reverse break-up fee payable by Hexion to Huntsman “in the event the transaction does not close due to the failure to obtain regulatory clearance or requisite financing,” Huntsman says. The Huntsman family and investment firm MatlinPatterson together control a trust that owns 59% of Huntsman stock. MatlinPatterson owns about 55% of that trust, but the Huntsman family retains voting control of the trust, and, in effect, operating control of the company. Huntsman spurned offers from private equity buyers last year, including Apollo, that were in the low-$20/share range last year. Company founder and chairman Jon Huntsman told analysts at a Huntsman investor meeting earlier this year that the company was not for sale “unless I know I can get maximum dollar. I’m not going to give up what I’ve worked my entire life to build when someone comes in with an offer of $23-$24 /share.”

Washington Give and Take

Chemical makers have notched some key victories in Washington over the past two years, most notably on the plant security and natural gas fronts. However, activity in Washington last week, particularly concerning proposed energy legislation, demonstrates that a more challenging environment lies ahead.
Politicians are already gearing up for the 2008 presidential election in the U.S., which is likely to slow some legislative activity. Also, if a Democratic president is elected in 2008, industry could be put on the defensive on critical issues including natural gas and energy, security, and climate change legislations, the latter of which could look at hard carbon dioxide and greenhouse gas targets. Meanwhile, the European Union’s Reach legislation presents global challenges, particularly if it is exported to other countries.
Activity in the Senate over the energy bill last week shows how tough the environment has become for key industry issues. The Senate bill failed to do anything to increase domestic energy supply as efforts to allow natural gas exploration off the U.S. East Coast, a key goal for chemical and other manufacturers, were rejected. In the House, a bill sponsored by representatives John E. Peterson (R., PA) and Neil Abercrombie (D., HI) that would increase access to outer continental shelf resources was introduced last week. The bill’s prospects in the House, however, are doubtful, and its chances in the Senate are even slimmer. The Senate also rejected amendments that would have authorized incentives for coal-to-liquids fuel production. The bill passed by the Senate would require biofuel production to ramp up to 36 billion gals/year by 2022, a seven-fold increase over production last year. The package would also raise the corporate average fuel economy standards to 35 miles/gallon for passenger cars and light trucks produced by 2020. Meanwhile, EPA proposed a rule that would lower the current standard for ozone, a move that ACC says will further drive up already sky-high energy prices and reduce or restrict affordable energy choices for consumers and industrial users.
ACC president Jack Gerard acknowledged the challenges ahead at ACC’s annual membership meeting earlier this month. “The test for our organization will be to stay disciplined and focused and advocate on issues important to us,” he says.

ICI Rejects Takeover Bid From Akzo

The board of ICI has rejected a £7.2-billion ($14.2 billion) takeover bid by Akzo Nobel. Akzo approached ICI to discuss a possible cash offer for the company on June 4. ICI's board unanimously rejected the proposal "on the grounds that it significantly undervalues ICI," ICI says. "The Board is very confident in the group’s strategy and strong growth prospects," ICI says. Akzo says it "will continue to evaluate all strategic opportunities, including ICI, based on a disciplined and value-driven approach to earnings and returns over cost of capital." Akzo says, however, that there is "no certainty that any further proposal will be made to the board of ICI or that any offer or transaction will result."

ACC Members Upbeat Amid Favorable Industry Conditions

Favorable industry conditions and improved fortunes for ACC fostered an upbeat mood at the organization’s annual meeting, held late last week at the Greenbrier in White Sulphur Springs, WV. ACC has added more than 25 new members over the past two years, including Huntsman and Chevron Phillips Chemical, and has scored legislative victories on critical issues such as natural gas and chemical plant security. Companies are "more willing to invest precious CEO capital on issues that matter to industry," says Dow Chemical chairman and CEO Andrew Liveris, who also serves as ACC chairman. "Previously, the level of CEO turnout would not have been as robust." Senior industry executives say ACC has regained strength after turmoil and the defection of some key companies earlier this decade. "There is improved transparency, and better leadership and prioritization of issues," says Celanese chairman and CEO David Weidman, who also serves as ACC vice chairman. "There is greater confidence in the organization, which has increased involvement." U.S. Energy policy remains a critical priority, officials say. "You will see some changes in our natural gas advocacy in the coming months,” says ACC president and CEO Jack Gerard. "I’d expect some new fresh faces as co-sponsors [on upcoming legislation] who will surprise some people." Chemical makers need to stay focused on energy and climate change issues, Liveris says. "Energy is the issue of our time,” he says. "It’s not just a chemical industry issue. The challenge is finding ways to get higher value and lower emissions from energy resources, and our industry will be a key player."

Reach Comes into Force but Program is in Disarray

By Alex Scott (ChemicalWeek)
The European Union’s Registration, Evaluation, and Authorisation of Chemicals (Reach) program came into force on June 1, but the legislation remains incomplete with large chunks of crucial guidance on how the chemical industry can implement Reach still missing, industry sources say. Iuclid 5, the European Commission’s long-promised online database that will enable direct uploading of Reach data via the internet, has also not yet been launched. “Frankly, it’s impossible to have everything in place because the commission doesn’t have everything in place,” says David Buckland, head of corporate regulatory affairs at Akzo Nobel. “As well as the absence of Iuclid 5, there are very few of the technical guidance documents available that are going to tell us how to apply Reach,” Buckland says. The commission has indicated that some of the less urgent guidance documents will not be available until November. “They are running behind by several months, that is absolutely clear,” he says. “We feel we have [done] everything we can without the full package from the commission.” Akzo says it has been preparing for Reach for five years and that much of its efforts so far have been geared toward identifying the group’s product portfolio for the purposes of Reach. Akzo estimates that its direct costs from Reach, including registration fees for its products, will total about €100 million ($135 million). BASF, meanwhile, has unveiled a new service, dubbed Success, available to chemical importers and manufacturers, that includes support for all aspects of Reach pre-registration, registration, and approval.” We have bundled our expertise in the field of product safety into customized services,” says Ernst Schwanhold, head of BASF’s center for environment, safety and energy.

M&A Madness! Did Dow Stalk DuPont Last Fall?

The New York Times reports this morning that Dow Chemical made a bid to acquire DuPont last fall. The gem is included in a report that discloses that the SEC has launched an inquiry into whether two senior executives at Dow Chemical secretly tried to put the company into play as well as into the unusual trading in its stock that may have resulted.

But the inquiry, still in the informal stage, may also look at a deal that the company actually pursued, the Times reports. Last fall, Dow made an overture to acquire DuPont in a deal worth more than $40 billion, according to people involved in the talks.

DuPont rebuffed the advance and never engaged in negotiations, the Times says. The article notes that Dow CEO Andrew Liveris, sits on the board of Citigroup with Alain J. P. Belda, the CEO of Alcoa, who at the time of the overture was also a director of DuPont. Belda stepped down from DuPont’s board in March.

UPDATE (12:10 p.m.):
Dow has declined comment on the possible SEC investigation, as well as whether it made an approach to DuPont last fall.

DuPont's statement is below:
"We have seen today’s New York Times article on Dow Chemical and have no comment," DuPont said. "We are fully focused on our strategic plan, which is showing strong results. DuPont recently completed an 8-year transformation into a science company focused on sustainable growth. More than 25 percent of the company is now in a leading position in high value-added, non-cyclical businesses in bio-sciences, agricultural and industrial biotechnology and biofuels. Our science-based products and services are targeted to global markets including agriculture, transportation, construction and safety and protection."

Making Green Pay Off

Chemical makers are ramping up green chemistry efforts, spurred by many factors, including regulation, a desire for renewable feedstocks and materials, and public demand for greener and more environmentally friendly products. One challenge for producers, however, is that customers demand products that cost the same as traditional materials. This makes it tough for producers to cover the cost of development. “Customers want a green product but say I’m not going to pay a penny extra,” Rohm and Haas v.p. and chief technology officer Gary Calabrese, told attendees at a Société de Chimie Industrielle meeting on innovation held in New York last month. “They will take it if it’s free.” Attitudes may be starting to shift, however, he adds. “Things may be changing, but it is still too early to tell how sustainable that really is,” Calabrese says. For now the green label serves as a “tie breaker.” Customers do lean toward green products all else being equal, but it is not clear that they are willing to pay more just yet.
Proponents of green chemistry argue that financial benefits will become clear as development progresses. “Companies realize that now the issues of environment and human health can add to innovation, profitability, and competitiveness rather than being a cost drain,” Paul Anastas, a green chemistry pioneer, and director at Yale University’s Center for Green Chemistry and Green Engineering tells CW in our cover story this week. Regulations have in the past driven companies to develop environmentally friendly products, but the driver is now changing, he says. “Green chemistry is trying to go far beyond, through innovation, to make these regulations less relevant.”

Sabic to Acquire GE Plastics

Sabic is very near a deal to acquire GE Plastics, sources tell CW. A formal announcement is expected by Monday, May 21. Bidding for the business was near $11 billion, according to financial sources. Other finalists in the bidding for GE Plastics included private equity firm Apollo Management (New York) and Basell. GE said last month that it expects to announce a definitive agreement on the sale of plastics in the second quarter, and hopes to close the transaction in the third quarter.

Comment: Where Have All the Students Gone?

By Jorge Buhler
As I was reading your “Where have all the students gone?” note I was thinking “What the industry needs to do is pay better”. Students as a whole are rational beings, pay counts. I am glad you bring it up too.Another factor, soft but an important one, is professional prestige. In the US, for whatever reasons, engineering in general is a low prestige profession (usually not even listed as a profession), where in other parts of the world is a prestigious profession, sometimes the most prestigious one.

A Call to Step Up Process Safety

The American Section of the Société de Chimie Industrielle awarded its Palladium Medal last week to Nova Chemicals president and CEO Jeff Lipton, a deserving honor for one of industry’s most passionate, tireless, and effective advocates. During his acceptance speech, Lipton called on industry to focus more attention on the critical issue of process safety, urging companies to measure and publicly report uncontrolled process fires as well as loss of process containment incidents.
Citing the catastrophic explosion at BP’s Texas City, TX refinery two years ago, Lipton said: “I would bet that there isn’t a management team, CEO, or board of directors of a refining or chemical company that hasn’t studied the reports and then said, in one way or another, ‘That, but for the grace of God, could have been our facility or our employees.’”
Lipton also recounted experiences at Nova. Soon after joining the company from DuPont in 1993, he visited each site and “came away quite shaken from one.” The plant, using a process that involves a flammable solvent under high temperature and pressure conditions, had suffered process fires every few weeks. “In my mind the leaders of that plant had been lucky-—very lucky—that they hadn’t yet had a time when they had a fire, and the conditions in and around the plant had, because of some other accident or mistake, become susceptible to an explosion.” Lipton took action, measuring each incident across the company and tying incentive compensation to improvement.
One “leading indicator” for fire safety was “loss of process containment. It became pretty obvious—if we keep all materials from leaking out of pipes, pumps, valves, process vessels, and storage tanks—there will be no uncontrolled process fires even in the most dangerous operation,” Lipton says. “That plant that had a fire every few weeks for many years, last had one in 2003,” he says. “Process safety improvement will reduce the number of catastrophic explosions, reduce environmental risk, and also make our operations more energy efficient. Not a bad result for paying attention to one new set of data.”
Quick action on the issue would befit Lipton’s legacy as one of industry’s leading statesmen. “I will feel fully deserving of the International Palladium Medal when we are successful in getting the ACC, and then related associations around the world, to begin to require members, as part of our tremendously successful Responsible Care program, to measure and publicly report loss of process containment and uncontrolled process fires.”

Will Basell Owner Put Lyondell in Play?

Russian industrialist Leonard Blavatnik, who controls Access Industries, the owner of Basell, has purchased the right to acquire an 8.3% stake in Lyondell Chemical. Blavatnik signed a forward contract with Merrill Lynch that grants him the option of purchasing about 21 million Lyondell shares at $32.11/share, or $674 million. Merrill Lynch has hedged its exposure by agreeing to acquire Occidental Petroleum’s 8.3% stake in Lyondell, in a deal that closed on May 9. Blavatnik says that he “may seek to engage in discussions with [Lyondell] concerning, among other possible scenarios, the merits of an offer to acquire all of [Lyondell] and the merits of a merger, combination or similar transaction between the [Lyondell] and affiliates… , including Access Industries or Basell.” Access Industries had not had formal discussions on this investment with Lyondell prior to the agreements, according to sources close to Access Industries. Blavatnik is expected to attempt to call Lyondell CEO Dan Smith later today, according to those sources. Access is also a leading candidates to acquire GE Plastics, financial sources tell CW. Could Blavatnik be assembling an integrated chemicals giant? Lyondell would provide Basell's operations with propylene and ethylene, and GE Plastics with benzene and styrene.

Dow: Kreinberg says Liveris Viewed Him as "Threat"

A lawsuit filed by former Dow Chemical executive v.p. Romeo Kreinberg today charges that Dow chairman and CEO Andrew Liveris threatened to fire Kreinberg if he did not adjust his “negative body language” and “attitude,” just three weeks before Dow canned Kreinberg and former CFO Pedro Reinhard charging that both “were involved in unauthorized discussions with third parties about the potential acquisition of the company.” Kreinberg’s suit alleges that Liveris viewed Kreinberg as a “threat,” and “manufactured a more expedient basis to follow through on his threat” by claiming that Kreinberg and Reinhard were in unauthorized discussions to sell the company. Reinhard has also filed suit today, charging Dow with libel.

Where Have All the Students Gone?

By LYN TATTUM (Publisher and group v.p., Chemical Week)
It is no secret that the chemical industry fears skilled labor shortages in the coming years, as students shrink away from studying science, and those that do graduate in chemistry or chemical engineering lean towards more glamorous sectors such as IT, biotechnology, or finance. This trend has often been attributed to the continuing poor image of the chemical industry, which wrestles with environmental, security and other “green” issues. As a recent cover story by Esther D’Amico discusses, Talent Management is increasing in vogue among chemicals companies. At the other end of the scale, the baby boomers who found the new chemical industry of the 1970s and 1980s so exciting are facing retirement. They cannot be easily replaced.
In the U.K., the number of secondary school students taking chemistry has fallen by 37% in the last ten years. This means that almost 15,000 fewer students have taken the subject.
At university level, the number of undergraduates taking chemistry has fallen 25% - a decline of about 1,000 students. Even more shocking, over the last seven years almost 70 university science departments have closed, according to recent data from the Confederation of British Industries (CBI). Over the next seven years, the UK needs to double the number of graduates with science, engineering, and technology degrees, or sectors such as pharmaceuticals, biotechnology – let alone the diminished UK chemical industry – will be in peril.
Many companies are now reaching out to students on an individual level. Nance Dicciani, President and CEO at Honeywell Specialty Materials, says her message is: “It’s possible for someone to come to the chemical industry and have an impact.”
The ability to affect our future via chemistry ought to be a huge attraction for young people, not a turn off. At Chemical Week, we are focusing on efforts to educate people about the benefits of a career in science, and its role in our global economy. If you have particular examples, please post your comments or email them to letters@chemweek.com.

Where Have U.S. Volumes Gone?

One of the more notable features of first-quarter results has been the ability of producers to maintain earnings strength despite poor U.S. markets. The primary cause of U.S. weakness is sluggish housing and automotive markets, which have hurt demand across key sectors such as coatings and plastics.
Dow Chemical, for instance, reported a 7% first-quarter volume decline in the U.S., compared to the same year-ago quarter. DuPont reported a 1% decline in U.S. volumes. PPG Industries says that volumes in the U.S. and Canada grew only 1%.
U.S. indicators are showing positive signs, which bodes well for the rest of the year. Railcar loadings, an important indicator of current industry activity, have turned positive again with the 13-week average through late April up 3.4% from the year-ago period. “Year-over-year gains in railcar loadings are encouraging, as were the 3,600 production workers added to chemical industry payrolls during April,” ACC says. Several key resins, with the notable exception of polyvinyl chloride, which is tied to housing, reported strong growth in March as well, ACC adds.
Producers remain optimistic despite sluggish U.S. markets, noting that the overall global economy remains sound. PPG CFO William Hernandez said as much last month to analysts after first-quarter earnings: “Our current expectation of stable economic conditions gives us continued optimism regarding the prospects for our businesses.” Dow Chemical sounded a similar note on global conditions in quarterly regulatory filings last week. “Global GDP growth is expected to be quite healthy in 2007, above 3%,” Dow says. “The U.S. is expected to show slower growth than in 2006, principally because of weakness in residential construction and the automotive industry, although growth may improve later in the year as these industries stabilize.”

Some Forward-looking Statements

By ROB WESTERVELT (Editor, Chemical Week)
Chemical makers delivered first-quarter earnings that were in line with expectations, with a few exceptions, as robust growth in Asia and Europe offset U.S. housing and automotive weakness
(p. 7). Results strengthened, however, as the first quarter progressed and executives presented upbeat outlooks in discussions with investors.
“We continue to expect global GDP growth to be healthy in 2007, above 3%, but with North America slower this year than last year, principally the consequence of weakness in residential construction and the auto industry, and some weakening consumer spending,” Dow Chemical executive v.p. and CFO Geoffery E. Merszei said last week. “Europe should be strong, particularly in the emerging countries of Eastern Europe. Japan should continue to see steady growth, and growth in China is expected to once again be very strong,” Merszei says. Supply/demand balances should remain healthy, notably in the ethylene chain, although capacity start-ups in chlor-alkali will begin to impact those margins later in the year, Dow says. “Strong demand and good pricing momentum have continued through April, reinforcing our view that 2007 will be another solid year for the company,” Merszei adds.
DuPont said last week it was expecting “modest volume gains as growth outside the U.S. and strong agricultural seed markets outweigh lower demand from the U.S. housing and automotive markets.” Overall, energy and raw material costs in 2007 will continue to be about equal to 2006, it adds.
It appears that ethylene/polyethylene profitability turned the corner in March prompting bullish outlooks from petrochemical makers. “Fundamentals for ethylene and propylene oxide are as strong as they have been over the past couple of years, particularly for ethylene,” Lyondell president and CEO Dan Smith said last week. Weak first-quarter petchem margins resulted from a transition between falling fourth-quarter 2006 prices and the price recovery now under way. “Margins seemed destined to continue to be volatile, but in a good zone,” Smith says.
Inventory build-ups at the end of the fourth quarter hurt early 2007 results, but volumes and margins rebounded late in the quarter, says Nova Chemical president and CEO Jeff Lipton. “March was spectacular compared to January and February. We had a March that would be equivalent to the kind of numbers that we saw in the strong months last summer. Very strong Ebitda generation, and very strong sales.”
Overall trends are still strong despite U.S. weakness, an indication that, in this case at least, future industry results should not differ materially from what is forecast.

Sensient Takes Offense (and Prudential Quickly to the Defense)

By ROB WESTERVELT (Editor, Chemical Week)
Sensient Technologies singled out buy-side equity analyst John McMillin--who covers materials, food, and agribusiness for Prudential Equity—saying in a press release issued this morning that an incorrect statement related to historical calculations of Sensient's stock price was “an attempt to minimize the company’s recent success.”

“McMillin…. incorrectly stated that Sensient’s common stock reached a price of $30 per share in April 1997. In fact, when properly adjusted for splits, the Company’s stock price during April 1997 never exceeded $17.69. Furthermore, at no time prior to April 20, 2007 has the price of Sensient’s stock, when properly adjusted for splits, ever exceeded $27.75 until this past Friday, when the stock reached an intra-day high of $30.34.
Sensient believes Mr. McMillin made the incorrect statement about Sensient’s stock price in an attempt to minimize the Company’s recent success.”

That old saying about never picking a fight with people who buy ink by the barrel comes to mind, but with a slight twist for the digital era. Never pick a fight with someone who can blast out .pdf’s by the dozens in a matter of seconds.

Prudential responded within a couple of hours, acknowledging the error but also taking the opportunity to again re-emphasize a few points.
The Prudential report headline sums it all up: “We apologize for our mistake, but it was not done intentionally—bottom line the stock has done nothing for 9 years and we stated 10 years.”
“In our 20 plus years following food stocks, we have made a mistake or two in our numbers calculations, but never have we seen a company issue a press release on it,” McMillin said in a note to Prudential clients.

"Using Yahoo finance and failing to look at the last number, which adjusts for stock splits, we stated that Sensient (SXT) hit $30 in April 1997, which was wrong. We are sorry for the mistake, but strongly deny the company's claim in a press release that it was done intentionally.
Correct numbers are that SXT is up 67.8% over the last 10 years versus the market's 93.7% gain. We have written on SXT since December 1999 and wish the company had at least called us before issuing its press release. A year earlier on December 31, 1998 the stock hit $27.43. What we remember more than everything is the stock doing nothing since we began studying it, which was about a year before we started writing on the stock. Bottom line, SXT has not really moved in 9 years and while our report on Friday suggested 10 years."

The Future is in Bio-Plastics

Cargill's efforts to develop a chemical business based on renewable resources such as corn and soybeans get page 1 treatment in today's U.S. edition of the Wall Street Journal. (A Bio-Plastics Revival
Makes Gains at Cargill; WSJ.com is subscription required).

"High oil prices have bolstered the economic rationale for making plastics, foam and lubricants from plants. With a growing focus on bio-products, consumers could soon see 'vegetarian' car seats, sofas and surfboards," according to the WSJ.

Although most petroleum-based chemicals remain substantially cheaper, high oil prices have bolstered the economic rationale for making plastics, foam and lubricants from plants grown in the Midwest.

The article highlights a sofa made with soy-based foam.

Hickory Springs Manufacturing Co. is replacing some of the petrochemicals it uses to manufacture polyurethane foam with a Cargill soybean compound. The Hickory, N.C., foam maker turned to Cargill after its chemicals suppliers boosted prices about 50% in the wake of Hurricane Katrina. "We now realize that in everyday life we have to not depend on petrochemicals," says Bobby W. Bush, a Hickory Springs vice president. A sofa stuffed with soy-foam Retailer Crate & Barrel is beginning to sell a sofa stuffed with Hickory Springs' foam. The Lockport sofa, which is aimed at "green" consumers, has a prize location on its store floors.

Dow Dismissals

By HILFRA TANDY (Editor, Chemical Matters)
Dow dismissals - To lose one may be regarded as a misfortune, to lose two looks like carelessness (apologies to Oscar Wilde).
What is it with Dow Chemical and high profile dismissals? Should the latest jaw-dropper force a root and branch overhaul of board governance?
Dow is unique. It is the only chemical major that has sacked two CEOs/chairmen in the last 25 years. The mercurial Zoltan Merszei – father of the company’s current CFO Geoffrey Merszei – generated enough antagonism among fellow board members to guarantee his ejection back in 1980. And Mike Parker fell on a sword, readily provided by colleagues, in 2002.
And now – exit stage right two career-long old Dow hands accused of plotting behind the boss’s back.
Not that long ago, Dow Chemical was a meritorious-based class apart from competitors hide-bound by either hierarchy, nationality or class, or all three. Happy days.
What has been disturbing about Dow for over a decade now is the absence of team spirit at the highest level. Board members passed over for the top spot have failed to conceal their enmity towards successive victors.
Even from the perspective (read distance) of a European-based sector journalist, intra-board jealousies at Dow Chemical have been allowed to fester. Just how corrosive they have become is now becoming a little clearer.
Was the ‘independent’ Board of Directors unaware, unable or unwilling to tackle the issue?
And what happened to effective corporate governance when one person - currently Andrew Liveris - embodies the triumvirate of CEO, President and chairman
Just taking Stern Stewart’s economic value added (EVA) measure – Dow was failing to added value during Bill Stavropoulos’ first stint at the top during the 1990s. And last March was rated at ‘par’ (ie defined as a company earning near its cost of capital and generating essentially zero EVA, regardless of growth rate).
This alone may not be enough to support the argument that private equity check out Dow. The 2005 10-K and stockholder summary was entitled ‘greater than the sum of its parts’ and yes Dow has an outstanding portfolio. It also has a low market valuation, which can only be justified if leadership and strategy simultaneously fails to convince. Regrettably, convincing the closest colleagues appears to have been the toughest job.

(Can’t) Vote for Pedro

By ROB WESTERVELT (Editor, Chemical Week)
Dow Chemical's board has authorized a revised slate of board nominees for election at its annual meeting next month, dropping the nomination of former CFO Pedro Reinhard. Dow last week charged that Reinhard and Romeo Kreinberg, executive v.p./performance plastics and chemicals, “were involved in unauthorized discussions with third parties about the potential acquisition of the company.” Both were fired April 12. Dow says it board has also reduced the size of its board by one, to 11 directors, eliminating Reinhard’s seat on the board. The action takes effect at the company’s annual meeting, is scheduled for May 10 in Midland, MI. “The board acted on the recommendation of the governance committee of the board of directors,” Dow says. Dow’s annual meeting Dow’s shareholder proxy materials have already been prepared and include Reinhard as a candidate, but votes for Reinhard will not be counted, according to Dow. “[Proxies] will be voted for the directors nominated by the board of directors as instructed on the proxy, except that votes will not be cast for Mr. Reinhard in light of his no longer being a nominee of the board of directors,” Dow says. Reinhard remains on the Dow board through the annual meeting unless he resigns.

Reinhard, meanwhile, refuted Dow’s charges in a written statement yesterday:

"I categorically deny that I have been part of any secret effort to take over or acquire Dow Chemical," J. Pedro Reinhard said in a written statement Monday. "It is regrettable that the company has rushed to publicly condemn me in the face of my complete denial of wrongdoing."

A New Age of Substitution?

By JOHN PEARSON (President and CEO, Chemical Business Group; Access Intelligence)
The fact that our industry faces new challenges caused by persistently high feedstock prices has electrified many a conference for the past year or more. But there is another much smaller, but potentially potent challenge to achieving the forecast growth rates for some chemicals.
It comes from the demand side. Consumers, and local governments, are starting to stir environmental concerns into their buying choices. There are many examples of this phenomenon. Individually they are small, but they could add up into a phenomenon that would be significant in the industry’s image and prospects.
Whether you believe they are based on sound science, there are many examples of this burgeoning consumer awareness. European airline passengers are leading the way in buying offsets (translation: are arranging for trees to be planted) to counter the greenhouse gases their travel produces. Several cities and even some countries (Ireland, Australia) are cracking down on the use of the plastic grocery bag and either taxing its use or encouraging/requiring its replacement with cloth or paper bags. In the thought-leading San Francisco Bay Area, one of the best restaurants, Chez Panisse, has taken still bottled waters off its menu, citing as its reasons the transportation costs and greenhouse gas effects of moving a commodity like water from the source to the consumer, and the business of disposing of plastic bottles in landfills.
Are these the first heralds of an age of demand-driven substitution of plastics by paper, maybe to be accompanied by a replacement of man-made fibers by cotton and wool? The answer may lie in our own hands. It is noticeable that the pending San Francisco plastic grocery bag ban gives the retailers the option of switching to paper or corn-based plastics that degrade quickly. Substitution need not be plastics for other materials, but plastics for other plastics. The public’s love affair with the convenience of plastics is not at an end, but it may require much more communication with consumers and a concentration on the virtues and sustainability of the industry to keep that love alive.
Can an industry that is driven by production concerns and the drive to be the lowest cost producer respond to a concerted change in consumer behavior? That is a key question in the years ahead. It’s time for marketing to become as important as production in our large chemical companies.

“Unauthorized” Talks

By ROB WESTERVELT (Editor, Chemical Week)
Those rumors of a planned leveraged buyout of Dow Chemical may not have been all that exaggerated after all. Dow today fired Pedro Reinhard, a senior advisor, former CFO, and current member of its board, and Romeo Kreinberg, executive v.p/performance plastics and chemicals, charging that both “were involved in unauthorized discussions with third parties about the potential acquisition of the company.” Dow declined to identify the source of the information, but added that it was a highly regarded source. “The action they were taking was without the knowledge of the company,” a spokesman says.
In an interview with Bloomberg News, Kreinberg said Dow accused him of conspiring with banks and foreign governments to acquire the company, a charge he denied. “This is unsubstantiated, unfounded and highly damaging to my reputation after 30 years with Dow Chemical,'' Kreinberg told Bloomberg. “I have never done anything to damage the company.'' Reinhard remains on Dow’s board and will stay until he either resigns or is voted off by Dow shareholders, says a Dow spokesperson.
It’s clear that private equity is interested in at least discussing an acquisition of Dow, but the company does not appear to be entertaining “discussions” right now. This is sure to become more interesting over the next few days. Stay tuned.

The Rumor(s) That Won’t Go Away

By ROB WESTERVELT (Editor, Chemical Week)
Dow Chemical is the subject of speculative frenzy again after the British tabloid Sunday Express reported yesterday that a group of Middle East investors and U.S. buyout firms was preparing a $50-billion takeover bid for the company. The same paper reported two months ago that a buyout bid for Dow Chemical was imminent.
Dow chairman and CEO Andrew Liveris tried to squelch such reports last month at the BB&T Manufacturing & Materials Conference in New York, asking investors to reject fantastical reports emanating from the “third-rate press.” CW could fill an issue with the rumors and speculation that we’ve picked up about Dow Chemical in the past three months. Reports of an imminent leveraged buyout (LBO) or basic chemical sale or jv have come and gone in recent weeks. The speculation is being fueled by Dow’s low stock price and the amount of cash it generates. Those figures have caught the attention of any investor with the wherewithal to pull off a deal in the $50-billion range. Private equity may be knocking but Dow hasn’t answered yet. And it doesn’t appear likely that Dow management is willing to put the company in play for a bid in the 50's/share range.

Creative Destruction

By HILFRA TANDY (Editor, Chemical Matters)
The unbearable transience of everything.

McKinsey’s Richard Foster and Sarah Kaplan in Creative Destruction (1) note that US companies established and entering the S&P 90 in the 1920s and 1930s could expect to remain on the list for over 65 years. By the late 1990s, the turnover rate of the S&P 500 was around 10% implying an average lifetime on the list of just 10 years.

Foster and Kaplan - writing in 2001 - forecast, “no more than a third of today’s major corporations will survive in an economically important way over the next twenty-five years.”

About a third of the chemical industry’s top 30 revenue generators have gone submarine since 1980; essentially taken-out in what economist Joseph Schumpeter dubbed “the perennial gale of creative destruction” in his seminal 1942 Capitalism Socialism and Democracy (2).

Few have surpassed either the articulate verve or insight that Schumpeter brings to a strategic issue that - 65 years on - preoccupies the corridors of corporate America and Europe. Industrial mutation, the process that “incessantly revolutionizes the economic structure from within (Schumpeter’s italics), incessantly destroying the old ones, incessantly creating a new one. This process of Creative Destruction is the essential fact about capitalism. It is what capitalism consists in and what every capitalist concern has got to live in.”

If you accept that sustained corporate success is the exception, the fact that five of 1980’s top chemical industry revenue generators still dominate the top 10 league is in itself pretty exceptional. Half of 1980’s top 10 -Dow (founded 1897), BASF (1865), Shell (1927), Du Pont (1802) and Bayer (1865) - retain their position in today’s top 10. Exxon forebear Standard Oil (New Jersey) pioneered early petrochemical production in the late 1920s and the 1999 merger with Mobil added 25% to chemical sales underpinning its ascent into the top five chemical revenue-spinners.

Some of these organisations appear to have the knack for developing business models and organisational skills (in BASF’s case across a broad - almost sprawling - portfolio), of nurturing businesses that - at first blush - undermine the very businesses on which their success was built.

Consider this. “But in capitalist reality as distinguished from its textbook picture, it is not (price) competition which counts but the competition from the new commodity, the new technology, the new source of supply, the new type of organization - competition which commands a decisive cost or quality advantage which strikes not at the margins of the profits and the outputs of the existing firms but at their foundations and their very lives.”

Schumpeter has, albeit by default, perfectly characterised the dilemma facing established chemical companies. His analysis is apposite to the whole panoply of chemical businesses — commodity or speciality producers. Embracing creative destruction, pro-active portfolio management, creating and breaking paradigms rather than tenaciously hanging on to existing ones is the too often ignored responsibility of management.

Sources:

Creative Destruction - Why companies that are built to last underperform the market — and how to successfully transform them by Richard Foster and Sarah Kaplan, published 2001 by Doubleday.

Capitalism Socialism and Democracy, J.A. Schumpeter (first published in Britain in 1943), Unwin University Books. Chapter V11 The Process of Creative Destruction in Part 11 Can Capitalism Survive?