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BUSINESS
December 24, 2001
Volume 79, Number 52
CENEAR 79 52 pp. 13-21
ISSN 0009-2347
[Previous Story] [Next Story]

2001 CHEMICAL INDUSTRY REVIEW
Weak economy, terrorist attacks make 2001 one of the worst years for chemical industry

ANN M. THAYER, C&EN HOUSTON

To call 2001 merely a difficult year for the chemical industry downplays the severity of events that eventually influenced general economic, business, political, and social circumstances.

BASF PHOTO
The repercussions of terrorist attacks late in the year only made a tough situation worse. The industry was already in a downturn at its start. This spawned an increasing number of job reductions, production cutbacks, business divestitures, and company mergers in the days that followed. For the first time in several years, a handful of companies declared outright bankruptcy, failing to find a way to survive the hard times.

High energy and raw material prices were significant factors early on, only to come full circle and end the year at dramatically lower levels. Weakening international economies, slackening demand, overcapacity, the strong dollar, and a squeeze on prices and margins contributed to some of the poorest financial results in years. Chemical sales and earnings continued to decline.

Mergers and acquisitions created some entirely new companies and others with new focuses. In the end, the Top 50 global chemical producers got shuffled and mixed, with a few new behemoths emerging. The decisions of government regulators had considerable consequences in these transactions, as well as in environmental and trade policies.

The chemical industry has faced added challenges since the terrorist attacks on Sept. 11. Concerns about energy prices shifted to ones about production and supply security. Pharmaceutical producers were drawn into discussions about ensuring the supply of antibiotics and vaccines. And site security--long a key consideration for employee, community, and environmental safety--has been heightened as chemical plants and refineries are feared to be potential targets.

On a positive note, advances in sequencing the human genome brought excitement to pharmaceutical discovery. Chemical companies advanced new production technologies and planned to slightly increase their investment in R&D. They also moved ahead with expansion plans around the world, while shutting down older, less efficient plants. The Internet continued to bring changes in how the industry conducts business, with many companies asserting themselves in the online world.

 
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CHEMICAL ECONOMY. Even in a lackluster year, the state of the economy is news, but given the precipitous declines of 2001, this year it is big news. Declining growth rates and contraction of gross domestic product in the U.S., exacerbated by many other negative factors, put enormous pressure on the U.S. chemical industry. Similar circumstances played out around the world, especially in Europe and Asia.

"These actions are not about cutting costs for the sake of short-term earnings. ... One of the best times to boost our advantage versus the competition is during a downturn."
The strong dollar made U.S. chemicals less attractive to foreign customers. For the first nine months of 2001, the latest data available, U.S. producers exported $60.8 billion in chemicals, a slight increase of 2.7% over the same period last year. At the same time, the U.S. became the place for foreign producers to sell to, with chemical imports into the U.S. up 9.0% to $59.4 billion. This caused the chemical trade surplus, long a point of pride in the industry, to fall 70% to just $1.4 billion.

The trade situation also affected chemical shipments. Imports supplied some U.S. demand, but the U.S. recession had an even greater impact--shipments of chemicals through October contracted by about 3% to a total of $359.6 billion for the year to date, according to Commerce Department data.

Of even greater concern has been the increase in inventories relative to shipments as the economy slowed throughout this year. Although chemical inventories have actually declined somewhat, the sell-off has not kept pace with the drop in shipments and has produced a high inventories-to-shipments ratio of about 1.50, which represents 1.5 months of demand. In December of last year, the ratio was 1.39.

This inventory overhang has impacted both production and prices throughout the year, especially among commodity chemicals. After reaching an all-time high in February as producers tried to offset the high energy and feedstock costs, the government's producer price index for industrial chemicals has fallen 8.4%. Production of industrial chemicals and synthetics, based on government data, declined about 9% from last year.

The downward spiral of the chemical economy this year has of course put tremendous pressure on sales, earnings, and profitability. For the first nine months of 2001, aggregate results for the 25 chemical companies regularly tracked by C&EN show year-to-year declines of 6% in sales and 44% for earnings. The aggregate profit margin for the group fell to 4.6% from 7.9% in the first nine months of last year.

Economic conditions forced Borden Chemicals & Plastics to file for bankruptcy in April and Sterling Chemicals to file in July. Penn Specialty Chemicals also filed in July, and its assets were sold off in December. During the year, W.R. Grace also filed for bankruptcy, but to protect itself from asbestos liability litigation. However, Pioneer Cos., which filed in August, has reorganized and expects to emerge from bankruptcy by the end of December. After selling and closing some its businesses, LaRoche Industries emerged from bankruptcy in October.

With earnings and profitability declines, one might think that Wall Street would be less than keen on chemical company stocks. However, stocks of chemical companies, as well as those in many other "old economy" industries, have actually benefited this year from the highly publicized technology meltdown as investors looked for safer havens for their money.

Despite the ups and downs of the stock market throughout the year, by mid-December C&EN's stock index--based on the same 25 companies used for earnings--was down just 3% from where it closed in 2000. At the same time, the Dow Jones industrial average was off 8%.

In contrast to chemicals, pharmaceutical producers and biotechnology companies on average continued to enjoy double-digit sales and earnings growth quarter after quarter. For the first nine months of 2001, sales and earnings for 13 global drug producers were up a combined 10% and 14%, respectively. For 30 leading biotechnology companies surveyed by C&EN, the increases were 19% and 29%.

However, biotechnology stocks experienced the volatility of other tech sectors, ending the third quarter down 39% compared with the end of 2000. By mid-December, the sector had rebounded nearly 18%. Pharmaceutical stocks, relatively recession-resistant, have remained flat.

 
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CONSOLIDATION GROWS. To keep their heads above water in the turbulent chemical economy, companies sought safety in refocusing their businesses through divestitures, mergers, and acquisitions. Companies proposed or completed at least three dozen deals during the year, ranging from selling businesses worth a few million dollars to others valued at tens of billions. Rather than diversify, companies tended to specialize in either commodities or specialties.

On the mergers front, 2001 was the year of the big merger that finally happened--Dow Chemical and Union Carbide, and the one that failed to happen--Honeywell and General Electric. In the first case, regulatory scrutiny prolonged the merger process, first announced in August 1999, while regulators more quickly scuttled the Honeywell and GE deal.

Honeywell and GE faced regulatory hurdles not so much in the U.S. but rather overseas. The European Commission voted in the summer to prohibit the $43 billion merger that would have created a new $12 billion chemical and polymers operation. Chemicals weren't the issue, however; competition in aerospace was.

7952_7907notw9
AT LAST Former Carbide CEO Joyce (left) and Dow's Parker are all smiles as the firms' merger is finalized.
Dow and Carbide eventually created the world's largest chemical producer in a $7.4 billion deal. The two companies had faced a seemingly endless number of delays as they negotiated intensely with U.S. regulators over 18 months. In the end, Dow essentially got the assets it wanted, but it had to sell ethanolamine and ethyleneamine businesses and rejigger polyethylene licensing assets.

"None of the remedies surprised us, and none changed the long-term value of the merger," said Michael D. Parker, Dow's president and chief executive officer, on completing the deal in February.

What did come as a bit of a surprise was Dow's subsequent announcement that it would cut at least 8%, not the originally announced 4%, of the combined workforce of about 50,000. It raised cost-savings estimates from $500 million to $1.1 billion, with as much as $650 million to come in the first 12 months, largely from employment cuts. Dow's plans were to eliminate the equivalent of about 80% of administrative, 45% of sales and marketing, 35% of R&D, and 25% of manufacturing positions gained from Carbide.

Other large deals also occurred this year, including Sasol buying Condea and Sunoco purchasing Aristech. Beyond Union Carbide, Dow was involved in other significant deals as well, but bucked the specialization trend and opted instead for diversification.

Dow purchased Rohm and Haas's agrochemical business for about $1 billion, spent $444 million for British fine chemicals producer Ascot, and paid $370 million for EniChem's polyurethanes business. In smaller deals, it bought a Basell polypropylene plant, Reichhold's carpet and paper latex business, and biopharmaceutical manufacturer Collaborative BioAlliance.

"Vertical integration is a key mind-set of the folks who built the modern Dow, the modern BASF," Parker commented to C&EN in June. "We feel there are great strengths to that integration, but it needs to be managed well."

While stalwarts such as BASF and Dow endured, mergers and acquisitions created some new industry players in 2001. Degussa--formed from the combination of Degussa-Hüls, SKW, and Laporte--emerged among the Top 10 chemical producers and began selling smaller pieces, including catalysts, phenol, plasticizers, and health care units.

Another company to enter the ranks of the global Top 50 chemical producers was U.K.-based Ineos. The $5 billion firm was pulled together from many sources, including pieces from Inspec, ICI, Dow, European Vinyls Corp., and Degussa.

Investment firm Industri Kapital united Neste Chemicals and Dyno Industrier's chemical operations to create the new Nordic specialty chemicals firm Dynea. Industri Kapital also acquired Perstorp with the plan to eventually merge it with Dynea. However, Dynea's bid to buy Finland's Kemira fell apart after labor, farm, environmental, and government groups opposed it.

Sumitomo Chemical and Mitsui Chemicals--already number 12 and 14, respectively, among global producers--announced their intent to merge in 2004. As a first step, they were to have combined their $1.8 billion polyolefins operations on Oct. 1. However, they delayed this step, but not the overall merger, while awaiting Japanese Fair Trade Commission review.

Besides GE and Honeywell, some other notable deals fell apart: Suez Lyonnaise dropped its pursuit of Air Liquide, regulators blocked Acordis owner CVC Capital Partners' bid for Lenzing, and Borealis lost interest in Hyundai Petrochemical after 18 months of talking.

Another surprise was Eastman Chemical's decision to postpone its split into two companies--specialties producer Eastman Co. and polymer commodities firm Voridian. Since February, Eastman had been publicizing and preparing for the year-end split. Adverse market conditions, a weak economy, and deterioration in its main business lines were among the reasons for putting it off until at least the middle of 2002.

Despite the activity, the overall pace of mergers and acquisitions has been slowing, reported Peter Young, president of New York City-based investment banking firm Young & Partners, earlier this year. Increasing regulatory pressure brought on by past consolidation has helped put on the brakes. Consolidation over the past 10 years, Young believes, has led to fewer players in respective markets, making it tougher to find acquisitions that will pass muster.


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Drug firms join forces in major transactions
COMPANY TARGET BENEFITS/TECHNOLOGY VALUE ($ MILLIONS)
ACQUISITIONS
Amgen Immunex Products 16,000
Johnson & Johnson Alza Delivery 10,500
Bristol-Myers Squibb DuPont Pharmaceuticals Producer/sales 7,800
Abbott Laboratories Knoll Pharmaceuticals Producer/sales 6,900
Millennium Pharmaceuticals Cor Therapeutics Products 2,000
Roche Chugai Pharmaceuticals Producer/sales 1,600a
MedImmune Aviron Vaccines 1,500
Merck Rosetta Inpharmatics Genomics 620
Vertex Pharmaceuticals Aurora Biosciences Screening 592
Cephalon Group Lafon Products 450
Pharmacopeia Eos Biotechnology Development 197
Akzo Nobel Covance Manufacturing 190
Celera Genomics Axys Pharmaceuticals Development 175
Cambrex Production Bio Science Contract Manufacturing 120
R&D ALLIANCES
Bayer Curagen Genomics 1,340
Abbott Laboratories Millennium Pharmaceuticals Genomics 250
Roche DeCode Genetics Diagnostics na
a Roche to get 50.1% stake. na = not available.

 
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EMPLOYMENT WOES. A desire to save money drove many companies to announce job cuts during 2001. Companies that had undergone major mergers or acquisitions were among the first to find redundancies--for example, 6,800 at DuPont, 5,800 at Bayer, nearly 5,000 at Dow, 1,200 at Rohm and Haas, 3,000 at Honeywell, and 3,000 at Bristol-Myers Squibb. Others were trying to shore up their lagging performance, such as Crompton, Great Lakes Chemical, Huntsman, and Hercules.

Overall, more than 30 companies announced reductions that totaled more than 75,000 employees by the end of the year. Geography seemed to make little difference, with as many U.S.-based companies making cuts as those in Europe. Production workers are being particularly hard hit by the many shutdowns that were announced during 2001.

Through the first 11 months of the year, U.S. chemical employment was off about 16,000, according to Labor Department data. Production workers bore the brunt of the cuts, falling by 15,000. And the government's index of aggregate hours of production--a product of the number of workers and the hours they worked--by November had fallen to an annual low of 96.2 (1982 = 100).

In sheer size, the most dramatic announcement was China Petroleum & Chemical Corp.'s (Sinopec) planned reduction of 100,000 employees over the next five years. About 5% of its workforce, or 27,000 workers, were to be cut in 2001 alone through retirements, voluntary resignations, and layoffs. Largely state-owned, Sinopec's move reflects China's desire to boost the efficiency and competitiveness of its chemical sector as it enters the World Trade Organization.

DuPont, which is making job cuts largely in the U.S., is hoping to save at least $400 million in payroll costs by the end of 2002. It is closing noncompetitive assets, such as some nylon and polyester fiber operations, and shifting resources to expanding regions and long-term growth markets--as in Asia and Latin America, and in electronics and biobased materials.

"The actions we announced today are not about cutting costs for the sake of short-term earnings," said DuPont Chairman and CEO Charles O. Holliday Jr. in April. Instead, he added, "one of the best times to boost our advantage versus the competition is during a downturn."

Honeywell planned even deeper cuts--at a level of about 20%--in its specialty materials business. The company expects sales to fall about 17% for this year, and earnings to be negligible. This contributed to the decision to shut nine plants and cut employment to just over 12,000. Unlike DuPont, Chairman and CEO Lawrence A. Bossidy wants to sell Honeywell's electronic materials segments but also envisions changes in nylon operations and shedding drug-related fine chemicals.

DuPont sold its drug unit to Bristol-Myers on Oct. 1 for $7.8 billion. Bristol-Myers planned on cutting about 2,000 of 5,000 former DuPont Pharmaceuticals employees and another 1,000 of its own after merging. Roche said in June that it would lay off 3,000, but it was the only other major drug producer to announce such large plans.

The two companies were exceptions to the overall trend in drug industry employment, which actually helped to inflate government figures. Employment numbers for the chemical and allied products category seemed to be holding up throughout the year because the drug industry--the largest employer in the category--continued to grow. Pharmaceutical employment, 57% of which is nonproduction workers, rose 4.1% in 2001, while total chemical employment fell 1.5%.

 
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TEXAS SIZED Eight cracking furnaces at BASF Fina's Port Arthur, Texas, olefins complex will convert naphtha to basic petrochemicals.
PRODUCTION SHIFTS. Tough times can compel producers to curtail production, postpone or scale back new projects, or even shut down facilities. Companies made more than 40 such determinations in 2001, with most shutdowns occurring in the U.S. and Europe. Commodities were the hardest hit, and plants making olefins, polymers, methanol, ammonia, fertilizers, and acrylic acid were among the notable closures. Despite the closures, industry capacity utilization fell to 73.4% by October, down from 76.4% in October 2000.

Petrochemicals have been in a trough since 2000. The sector had already undergone consolidation, with companies trying to create the critical mass and economies of scale to compete. Expansions throughout 2000 and 2001, especially in ethylene, contributed to serious overcapacity. High feedstock costs demolished profit margins. The slowing economy, which became more recessionary as the year progressed, contributed to falling consumer demand.

Still, scheduled ethylene expansions moved ahead. Two ventures between ExxonMobil and SABIC started crackers in Yanbu and Al Jubail, Saudi Arabia. ExxonMobil eventually got its Singapore cracker going, and Sinopec Beijing Yanhua Petrochemical expected to get its expanded cracker operating by year-end. BASF Fina began commissioning its new Gulf Coast cracker, heading toward a fourth-quarter start-up, while Formosa Plastics brought its Point Comfort, Texas, plant onstream in July.

Looking ahead, Fina Antwerp Olefins announced that it will expand a cracker in Belgium in 2002, as will ExxonMobil in Baytown, Texas. Dow said it may replace smaller former Union Carbide crackers in Texas with a new world-scale unit sometime in the future. Shell Chemical also said it will upgrade an idle cracker in Deer Park, Texas, by late 2003. But Chevron Phillips Chemical has decided to close part of its Sweeny, Texas, plant.

Downstream markets fared no better, with polymer producers seeing negligible margins for most of the year. Polyethylene has been at the bottom of its business cycle, with poor demand, high costs, and overcapacity. Union Carbide--now Dow--and Nova Chemicals started new polyethylene units in the first half; Formosa added capacity as well. Equistar Chemical, however, took a 400-million-lb plant off-line in Port Arthur, Texas, and BP shut a small unit in Wilton, England, and will shut another in Grangemouth, Scotland.

Polypropylene remained in a slump as well, a victim of high-demand-growth forecasts that led to overbuilding. As a result, Basell and Huntsman shut major plants, while BP suspended some production pending a review. Assets also changed hands: Basell sold plants in Europe to both ExxonMobil and Dow, whereas BP bought Solvay's business while selling Solvay its engineering polymers business.

Solvay's takeover of the BP business was one of the biggest events to hit the engineering polymers industry in recent years. Fierce competition and the challenge of globalization are leading some producers to push into new markets and higher value polymers. The economic downturn has hurt many product areas, but polycarbonate has been doing better.

Although commodities struggled, other chemical sectors continued to see some growth. Producers made dozens of announcements for planned expansions, including ones in specialty resins, elastomers, alcohols, surfactants, and other specialty chemicals.

A quick survey of major production projects announced in 2001 reveals that much of the activity is taking place in Asia and the Middle East, while Latin America continues to have growing pains. Although the outlook for Asian petrochemicals is not any brighter--particularly in Japan, Taiwan, and South Korea--than elsewhere in the world, multinational companies are involved in upgrading the region's petrochemical operations, most notably in China.

After many years of delays, some projects in China advanced in 2001, including major petrochemical complexes in Nanjing, Shanghai, and Guangdong provinces. Even Formosa Plastics said it is considering a $6 billion plan in China, as Taiwan has been considering easing its rules for investing there. However, Chevron Phillips canceled plans for an integrated chemical complex in Lanzhou with PetroChina.

In some instances, the partners only submitted feasibility studies or signed joint-venture papers, but BASF and Sinopec actually put shovels in the ground in Nanjing. Along with BASF and Sinopec, partners among the various projects include BP, ExxonMobil, China National Offshore Oil Corp., Bayer, Yangzi Petrochemical, Shanghai Petrochemical, and Fujian Petrochemical.

In the Middle East, new projects moved ahead. Along with new crackers, the Yanbu and Al Jubail sites both started polyethylene plants, while Yanbu added ethylene glycol and polypropylene capacity as well. Chevron Phillips, Atofina, Qatar Petroleum, and Qatar Petrochemical became partners in a venture to build a cracker in Qatar by 2006.

The biggest project announced was the $40 billion planned development of Saudi Arabian natural gas fields. The Saudi government opened investment to foreign firms, naming Shell as leader of one and ExxonMobil of two projects involving a total of eight Western oil companies. The projects, not yet finalized, are expected to include major petrochemical facilities.

However, chemical production was not without its setbacks. Deaths were reported in explosions at BP Chemicals' Augusta, Ga., engineering polymers plant in March; Wacker-Chemie's Kempten Germany, boron carbide unit; and Atofina Chemicals' Riverview, Mich., site, connected with a methyl mercaptan tank car.

The most severe incident was the huge explosion at TotalFinaElf's Toulouse, France, ammonium nitrate facility that killed at least 29 people. It destroyed the plant and damaged a neighboring SNPE plant and other buildings in the populated industrial area. It appears unlikely that TotalFinaElf will rebuild, but the jury is still out on the fate of the SNPE plant.


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REGULATORY CLIMATE. Interactions between chemical companies and regulators became, if anything, stronger and friendlier in 2001. The U.S. industry found itself dealing with a new Administration in 2001, but it was the Republican one it had backed in the elections. New appointees--such as former Republican governor of New Jersey Christine Todd Whitman to head the Environmental Protection Agency--were also well received. The industry was so positive about its ability to impact legislation this year that it even seemed unconcerned about power shifts in the Senate midyear.

The industry strongly supported a push for a new energy policy, joining a coalition of 17 trade associations working to enact one similar to that promoted by the Bush Administration. The Bush-Cheney plan calls for new electric power plants; more natural gas pipelines; tax credits; and support for clean coal, nuclear power, and oil drilling.

Yet energy policy issues all but took a backseat to site and energy security concerns after Sept. 11. The industry, largely through the American Chemistry Council (ACC), has been drawn into frequent and intense discussions with regulators, legislators, and law enforcement agencies over antiterrorism plans. Still, no consensus has been reached in the complicated debate over antiterrorism activities, including those at the plant level.

"Our industry is a critical and indispensable part of the nation's infrastructure," ACC President and CEO Frederick L. Webber told a Senate subcommittee last month. Emphasizing the industry's "culture of safety" and accelerated efforts to strengthen security after Sept. 11, he urged the government to assess existing industry programs and practices and to build upon these. ACC and other trade associations have been creating transportation and site security guidelines.

On the positive side, chemical testing initiatives progressed. As of July, more than 35 companies had volunteered to test 20 chemicals under EPA's Voluntary Children's Chemical Evaluation Program. The agency's high-production volume (HPV) testing program also started up in August. The goal is to collect health and environmental effects information on 2,800 substances made in or imported into the U.S. in amounts exceeding 1 million lb per year.

As of mid-November, 469 companies and 187 consortia had agreed to sponsor 2,155 HPV compounds. Companies have begun contracting with labs to provide data. Others are summarizing and releasing large amounts of existing published and unpublished data. Because these data have been found to fill 94% of the identified gaps, EPA concluded that less testing than originally thought will be needed.

The events of Sept. 11 stalled many legislative initiatives and shifted thinking elsewhere. The Administration had been heading toward proposing a national comprehensive air pollution strategy that industry was watching closely. However, the focus had been on utilities and refineries, so the exact impact of any new plan on the chemical industry remains uncertain.

Court decisions sent clearer messages. A federal appeals court threw out hazardous waste incinerator emissions requirements almost 10 years in the making and caused turmoil among chemical producers that had been installing new equipment. And the Supreme Court rejected industry arguments in March, ruling that health issues, not costs, are the only concern that must be addressed in setting clean air standards.

Coincidentally, a report from the Pew Center on Global Climate Change offered case studies on how greenhouse gas reduction targets help improve companies' financial performance. This idea is not anathema to the industry, which continues its pursuit of sustainable business practices. It has been organizing both regionally and internationally--through the International Council of Chemical Associations meeting in August--to prepare for the World Summit on Sustainable Development to be held in September 2002 in Johannesburg.

The industry had real data to show as well. Toxics Release Inventory (TRI) data for 1999 published this year showed that releases from chemical makers dropped about 2.4%, or 18.4 million lb, compared with 1998. These releases have been falling steadily, while overall TRI figures for all reporting industries have risen in the U.S.

On a global scale, the debate surrounding climate policy continued. But after four years, talks ended in 2001 with agreed-upon rules for carrying out the Kyoto protocol on climate change. The U.S., however, rejected the pact for economic reasons and because it exempts developing countries. Without U.S. participation, the pact's ratification, and thus its ultimate ramifications around the world, hinge on Japan's support.

Although coming out of just one region, the proposed pan-European Union (EU) program for regulating chemicals is expected to have global implications. It will cover all chemicals imported into the region, regardless of where they are produced. The chemical industry was somewhat taken aback at how quickly plans moved ahead and what little influence it had in the process; the European Parliament accepted the proposed white paper largely unchanged in November. A draft of the new policy is expected next summer, with adoption probably in early 2004.

Although the industry may not support all the specifics, it does like the prospect of having a single policy across the EU. Whatever the form of the final regulations, significantly more testing of chemicals will be required. This is expected to bring serious attendant costs, as much as $2.5 billion by 2012, to EU chemical suppliers--the world's largest chemicals block, with annual sales of nearly $400 billion--and their customers.

 
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INDUSTRY INTERACTIONS. Chemical trade associations found themselves needing to reorganize and refocus their activities to meet industry needs. The moves they made reflected a changing world for running an industry association--one that requires updating and cost cutting, representing new entities created by corporate mergers, altering perspectives to match geographical market shifts, and following new agendas.

Early in the year, the Soap & Detergent Association entered its 75th year with many changes in place--such as a new headquarters in Washington, D.C., where it moved to from New York City--and an issues-focused, rather than product-focused approach. Separately, the Synthetic Organic Chemical Manufacturers Association created strategic initiatives--including ones on laws and regulations, public confidence, and member opportunities--to help navigate through a softening economy and highly competitive marketplace.

7952_7844bus20x.ce 7952_7926.bus3.ceficlogo 7952Am.Plastics.LogoVBl
CEFIC

Likewise, the European Chemical Industry Council (CEFIC) approved a new structure to help its members better compete. A new director general has reexamined the group's structure and hopes to increase its effectiveness. The organization has also stepped ahead of the political arena by reaching out to several countries in Central and Eastern Europe and extending membership to their chemical industry federations.

ACC and the American Plastics Council (APC), known for a campaign that succeeded in shaping positive public attitudes toward plastics, agreed to merge. The two associations are looking for integration synergies, improved efficiency, and greater effectiveness. Common issues and an overlapping membership were also factors. The new group will keep the ACC name, with APC operating as a division.

Trade associations around the world faced the continuing challenge of representing, supporting, and wanting to improve the chemical industry's image. Bill Moyers' late-March public television documentary, "Trade Secrets: A Moyers Report," dealt the industry a severe blow. The report brought up 50-year-old issues about worker and public safety related to vinyl chloride exposure and the industry's history of providing information.

While environmental activists praised the report, chemical producers were highly critical. Industry representatives, not included in the program itself, attempted to address the issues raised in a less-than-successful roundtable broadcast afterward. In all, the program damaged the chemical industry's reputation, and its effect reverberated in the following months.

Partly in response, the industry continued to spread its messages about Responsible Care, public right to know, product stewardship, community outreach, and sustainable development. In May, ACC, known as the Chemical Manufacturers Association until June 2000, began testing a new $1.5 million advertising campaign designed to transform the industry's image.

By early June of this year, ACC deemed its "Good Chemistry Makes It Possible" pilot program a success. The council reported a definite shift in perception--with the number of individuals over age 25 having a favorable opinion rising from 14% to 38% in just a few months. ACC said it might expand the campaign nationally.


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TECHNOLOGY ADVANCES. Just as ACC focused on chemistry, rather than chemicals, the industry highlighted process, product, and materials innovations during 2001. Producers continued to look for novel ways to make products, whether by "green" chemical routes, which was the focus of this year's CHEMRAWN meeting, or through biological pathways. Industrial winners of Presidential Green Chemistry Challenge Awards this year included PPG Industries, Bayer, Novozymes, and Eden Biosciences.

Chemical makers, such as Degussa, BASF, and Celanese, linked with biotech and enzyme-producing firms to try to make chemicals less expensively or through cleaner routes--or that they couldn't make before. Novozymes, Maxygen, Genencor, and Diversa emerged as partners. Capacity and scale-up were among the bigger concerns in these collaborations. Meanwhile, DuPont and Cargill Dow advanced commercialization of their respective biobased polymers.

7952_7910Fuel_Cell_Photo_6
PUSHING AHEAD DuPont researcher tests membrane for use in fuel cells.
Two other areas garnering interest and investment were electronic chemicals and fuel cells. Major chemical producers--such as Air Products & Chemicals, Praxair, DuPont, BASF, and Celanese, along with many energy companies, car manufacturers, and catalyst producers--came together to move fuel-cell technology past the development stage and into testing. Linked to both electronics and fuel cells were developments in associated nanomaterials.

Although not immune to the downturn, electronics has been viewed as a growth platform and a focus of R&D investment at Rohm and Haas, JSR Corp., Sumitomo Chemical, Clariant, Shin-Etsu Chemicals, Dow, Praxair, and Air Products. Alliances and acquisitions helped some firms build operations in organic light-emitting diodes, a next-generation display technology. Supercritical CO2 also emerged as a new semiconductor chip cleaning process.

New technology came to some mature chemical sectors as well. In propylene oxide production, the quest persisted for commercially viable coproduct-free routes. Sumitomo Chemical said it expects to have a plant using its process in Japan by 2003. Meanwhile, Degussa and Krupp Uhde joined forces to develop and scale up their own styrene-free route.

New technologies for p-xylene, such as ExxonMobil's PxMax, abounded despite lackluster markets for the product. Other new processes debuted as well, including SABIC's high-selectivity a-olefin process, Celanese's lower cost vinyl acetate technology, Technology Convergence's greener methanol process, and Statoil and Lurgi's methanol-to-propylene route. Solvay backed EcoPhos' new phosphates processes, taking a 15% stake in the company and planning pilot-plant tests.

The polymer industry continued to innovate, with most of the changes coming in catalyst development. Combinatorial and high-throughput experimentation were being used as a means to speed development. Large producers met this technology need through collaborations with small firms, including HTE, Symyx Technologies, and Avantium Technologies.

Metallocene and single-site catalyst R&D took a noticeable turn away from the huge polyolefins markets that had nurtured early developments and toward niche chemicals and polymers. Thus, in addition to early players like Dow, ExxonMobil, Basell, and Chevron Phillips, other companies--Bayer, DuPont, and Eastman--are eyeing the market with catalyst technologies of their own in new areas.

 
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GENOMICS ERA. Drug developers entered the high-tech genomics era with the February announcement that sequencing of the human genome was substantially complete. They anticipate using the gene data in the discovery and development of new therapies, although use of the data has been raising challenging legal, ethical, privacy, and scientific questions simultaneously.

Genomics advances positively influenced associated markets for bioinformatics tools and services, and for manufacturing. Expanding markets for both small-molecule and biological pharmaceuticals required more capacity. Several producers announced expansions to help meet the need.

Nevertheless, fine chemicals and active pharmaceutical ingredient markets also were in a state of flux in 2001. Several operations changed hands: ISP acquired FineTech, Albemarle bought ChemFirst's business, Cambrex purchased Marathon and BioScience Contract Production, and Akzo Nobel acquired Covance Biotechnology.

Eastman originally thought it would sell its fine chemicals business; then, in April, it decided to restructure and keep all but a plant in Hong Kong. Bayer did sell its ChemDesign subsidiary to an investment group, but other major chemical companies--Dow, BASF, Solvay, and Merck KGaA--set up or strengthened businesses dedicated to fine chemicals and contract manufacturing.

The market for downstream drug products that they supply continued to grow, although patents expired on some industry blockbusters. Thus, major pharmaceutical producers faced aggressive competition from generic versions of their products. Bristol-Myers' anticancer drug Taxol and Eli Lilly's antidepressant Prozac were among the two biggest franchises to fall.

To fill their pipelines and tap into near-term products and new drug development technologies, such as pharmacogenomics, major drug producers have been putting billions of dollars into multiyear alliances and into acquisitions. Consolidation took place as well between smaller biotechnology and drug discovery companies.

Many of the major drug firms wanted greater focus and cast off noncore, nondrug businesses. Bristol-Myers sold orthopedic devices and beauty care units. Aventis struck deals to sell its animal nutrition unit to CVC Capital Partners and its CropScience unit to Bayer. As expected, Pharmacia said it would spin off its remaining 85% stake in Monsanto in the second half of 2002.

With DuPont and BASF selling pharmaceuticals, and Aventis and Pharmacia shedding agrochemicals, the "life sciences" strategy came to a grinding halt in 2001. Companies believed they hadn't seen, or wouldn't see in time to please investors, the desired synergies from a mix of agriculture and pharmaceuticals. Only Bayer pledged that it would remain diversified in drugs, agriculture, and chemicals.

However, Bayer has been pressured to forego its diversified strategy and split apart to increase the stock market visibility of more attractive pieces, such as drugs, and insulate them from less appealing chemicals and commodities, poorly performing agrochemicals, and risky agbiotech areas. In March, management insisted that the company was healthy and needed no change, only streamlining and investments for growth.

By August, deaths related to side effects from Bayer's cholesterol-lowering drug Baycol forced the company to recall the drug, which had an annual market of $875 million a year. This dealt a serious blow to the company's drug business, overall earnings prospects for 2001, and plans for a U.S. stock market debut in 2001. It also was enough to force Chairman Manfred Schneider to consider cutting 5,800 jobs, finding a partner in drugs, and making Bayer's drugs and crop science units legally independent subsidiaries.

In December, Schneider extended the management holding company structure to all four of Bayer's businesses, effective Jan. 1, 2003. Bayer will also seek a partner for specialty chemicals and sell some smaller chemicals businesses. The company expects the moves to yield annual savings of about $1.6 billion by 2005.

"We are adjusting our organizational structure to increase maneuverability in our markets, to improve our competitiveness, to better exploit synergies, and to align our business for potential strategic partnerships," Schneider said. Increasingly difficult conditions in the world market for chemicals--especially specialties, fine chemicals, and life sciences intermediates--are leading to industry consolidation, he added.

Since the Sept. 11 attacks, Bayer also became embroiled in disputes surrounding its Cipro antibiotic against anthrax. Despite Bayer's tripling of production to try to meet potential demand, U.S. government officials considered going around Bayer's patents and buying from generic producers. Eventually, Bayer and the government reached an agreement. Meanwhile, U.S. drug producers formed an emergency preparedness task force to work with the government and address the health consequences of terrorist activities.

Similarly, intellectual property became a contentious issue regarding the availability and costs of AIDS drugs. Activists pressured the major drug firms, and several eventually lowered prices for their antiretroviral drugs in developing countries. The industry, however, still fought potential patent infringement by generic producers, mostly in India.

Nearly 40 international companies dropped a lawsuit that challenged a South African law allowing health officials to skirt patents; under a settlement, the law will be carried out according to the international Trade-Related Intellectual Property Rights (TRIPS) agreement. The debate has raised larger and more complex concerns about how to control the AIDS pandemic, other diseases, and global patent law.



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Global Top 10 companies undergo shifts
RANK 2000 CHEMICAL
2000 1999 COMPANY SALES ($ BILLIONS)
1 1 BASFa $30.8
2 2 DuPont 28.4
3 4 Dow Chemicalb 23.0
4 5 ExxonMobil 21.5
5 3 Bayer 19.3
6 11 TotalFinaElfc 19.2
7 9 Degussad 15.6
8 7 Shell 15.2
9 6 ICI 11.8
10 10 BP 11.3
a Includes pharmaceutical unit sold to Abbott Laboratories in 2001. b Prior to merger with Union Carbide; expected to move company to number one rank. c 1999 ranking for TotalFina. d Pro forma for 1999 and 2000.

 
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PEOPLE PASSAGES. As expected, executives moved in and out of roles at many major chemical producers. This year also brought the first woman to the head of a major chemical operation when Fran Keeth was named president and CEO of U.S.-based Shell Chemical in July.

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AT THE HELM Keeth now oversees U.S. operations, as well as retains a global role, as president and CEO of Shell Chemical.
At the North American operations of other European companies, Degussa named Paul O'Brien president of Degussa Corp., effective Sept. 1. Avecia's U.S. subsidiary is now headed by Robert W. Porter, who succeeded Warren A. Scott. Jean-Pierre Seeuws became president and CEO of Atofina Chemicals in North America. And at Solvay America, David G. Birney is to succeed Whitson Sadler as president and CEO at year's end.

Back in Europe, ICI Chairman Charles Miller Smith said he plans to retire in May 2002, and Alexander Lord Trotman has been given the job. At Bayer, Werner Wenning will succeed Schneider, who is scheduled to retire next spring. Geoffrey Gaywood joined British specialty chemicals maker Elementis as CEO when the former executive, Lyndon Cole, resigned after attempts to sell the company failed.

Similar changes occurred at Hercules, where former chairman Thomas L. Gossage left after not winning a board seat in the company's takeover battle with ISP. William H. Joyce, former Union Carbide chairman, then became Hercules CEO and chairman. Former Carbide Chairman Robert D. Kennedy joined Hercules' board as well.

At Honeywell, Chairman and CEO Michael R. Bonsignore resigned after the merger attempt with GE failed. A returning Lawrence A. Bossidy, who had been head of AlliedSignal before it merged with Honeywell, replaced him. Later in the year, Nance K. Dicciani left Rohm and Haas to become president and CEO of Honeywell's specialty materials business.

When the idea was still to split in two, Eastman Chemical named J. Brian Ferguson to head what would have been the specialties firm, Eastman Co., and Allan R. Rothwell to head the polymer company, Voridian. Now that plans are postponed, Ferguson will become chairman and CEO of Eastman Chemical, succeeding Earnest W. Deavenport Jr., who retires on Jan. 1, 2002. Rothwell will be president of Voridian, now an Eastman division.

J. Roger Hirl will step down as president and CEO of Occidental Chemical, effective Dec. 31. He will remain an executive vice president of OxyChem's parent company, Occidental Petroleum, until his retirement on June 30, 2003.

Two executives were recognized for their continued service. Dow Chemical Chairman William S. Stavropoulos won the 2001 Chemical Industry medal awarded by the American Section of Society of Chemical Industry and the International Palladium Medal from the American Section of Société de Chimie Industrielle. Sir Richard B. Sykes, nonexecutive chairman of GlaxoSmithKline, received the Centenary Medal of the London-based Society of Chemical Industry.

The industry also lost one of its longtime members with the death of a former DuPont chairman and CEO, Irving S. Shapiro, 85, in mid-September.

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