KEY ISSUES Overview of the “Lost businesss” in the US Currently the US remains the major Chemicals Industry production center for the industry. However over the past five years Overview for Coming Clean companies have begun moving operations to Asia, India and the Middle March 2007 East and will continue to do so for the forseeable future. REACH Report prepared by: Innovest Strategic Value Advisors, Inc., a New York-based investment research firm with more than ten years of investment research While Innovest has developed a experience and a dedicated chemicals sector team. comprehensive analytical approach to determine individual company exposure to the regulation, the bottom line is that most large cap firms are not expected to experience dramatic affects. Commodity Firms: Business As Usual Commodity chemicals production remains a marginal business meaning that innovation is limited and negative externalities associated with production continue to be an issue. Meanwhile more specialized firms in the Diversified and Specialty segments of the industry are turning to new technological capabilities that may yield safer synthesis and better chemistry over the long term. No part of this report may be reproduced in any manner without the written permission of Innovest Strategic Value Advisors, Inc. The information herein has been obtained from sources which we believe to be reliable, but we do not guarantee its accuracy or completeness. All opinions expressed herein are subject to change without notice. Innovest Strategic Value Advisors, Inc., its affiliated companies, or their respective shareholders, directors, officers and/or employees, may have a position in the securities discussed herein. The securities mentioned in this document may not be eligible for sale in some states or countries, nor suitable for all types of investors; their value and the income they produce may fluctuate and/or be adversely affected by exchange rates. © 2005 Innovest Strategic Value Advisors, Inc. All rights reserved. New York Toronto San Francisco Tokyo Mr. Peter Wilkes Ms. Susan McGeachie Mr. Pierre Trevet Mr. Hiromichi Soma Managing Director Director Managing Director Director +1 212 421 2000 ext. 216 +1 905 707 0876 ext. 217 +1 415 332 3506 +81 3 5976 8337 [email protected] [email protected] [email protected] [email protected] Paris London Sydney Innovest Uncovering Hidden Value Perrine Dutronc Mr. Andy White Mr. Bill Hartnett for Strategic Investors Managing Director Managing Director Managing Director +33 (0)1 44 54 04 89 +44 (0) 20 7073 0469 +61 2 9940 2688 [email protected] [email protected] [email protected] www.innovestgroup.com Innovest Strategic Value Advisors Chemicals Industry Overview www.innovestgroup.com March 2007 Table of Contents Chapters 1 Executive Summary.............................................................................................6 2 The Chemical Industry ........................................................................................8 Definitions & Categories ........................................................................................8 Organic Chemicals ................................................................................................9 Inorganic Chemicals ............................................................................................10 Market Based Categories ....................................................................................11 Notes on Sector Definitions .................................................................................27 3 Global Market and Production..........................................................................28 Regional Trends in Chemical Production ............................................................32 Profits ..................................................................................................................39 Manufacturing......................................................................................................41 Construction ........................................................................................................41 Automobiles.........................................................................................................41 Forces for Change in the Industry: ......................................................................41 4 The Corporations...............................................................................................50 Clean Tech Development, Capturing Future Value............................................54 Biobased Plastic ..................................................................................................60 Ethanol and Bio-fuels ..........................................................................................63 Environmental Catalysts......................................................................................66 REACH ................................................................................................................67 Analysis of REACH..............................................................................................73 5 End Users ...........................................................................................................77 Commodity Chemicals.........................................................................................80 Specialty Chemicals ............................................................................................83 Specialty chemical end user markets: .................................................................83 6 Innovest Suggestions for NGO Focus.............................................................92 Climate Change...................................................................................................92 Emerging Markets................................................................................................93 Health & Safety....................................................................................................93 Toxic Waste.........................................................................................................95 2 Innovest Strategic Value Advisors Chemicals Industry Overview www.innovestgroup.com March 2007 Site Security issues .............................................................................................98 Product Liability and Regulation ..........................................................................99 6 Appendices.......................................................................................................109 Figures FIGURE 1 US Business of Chemistry Flow Chart 2005 (billions).......................8 FIGURE 2 Chemical Sector Value Chain ...........................................................9 FIGURE 3 Chlor-Alkali Chain ...........................................................................14 FIGURE 4 Ammonia Chain...............................................................................15 FIGURE 5 Methanol Chain ...............................................................................16 FIGURE 6 Ethylene Chain (Ethylene is the most important basic chemical) ...17 FIGURE 7 Propylene Chain..............................................................................18 FIGURE 8 C-4 Chain ........................................................................................19 FIGURE 9 Benzene Chain................................................................................20 FIGURE 10 Toluene Chain.................................................................................21 FIGURE 11 Xylene Chain...................................................................................22 FIGURE 12 International Classification Codes...................................................26 FIGURE 13 US Industrial Production according to chemical type (index where 2002 = 100)……. ................................................... ……………………………………..26 FIGURE 14 Global Chemical Sales (billions of dollars) 2005.............................28 FIGURE 15 Global Chemical Shipments, By Region Origin/Export 2005 ..........29 FIGURE 15 Global Chemical Shipments, By Region Origin/Export 2005 ..........29 FIGURE 16 Global Chemical Shipments by Industry .........................................30 FIGURE 17 Size of Regional Business of Chemistry .........................................30 FIGURE 18 US Direct Investment Abroad (USDIA) and Foreign Direct Investment in the US (FDIUS) in the business of chemistry ($ million)......................32 FIGURE 19 Capacity Utilization in the Business of Chemistry (% of capacity) ..33 FIGURE 20 Lost Manufacturing in the United States .........................................34 FIGURE 21 Percentage of Production Assets in Emerging Markets Global Chemicals Sector 2005/06 .........................................................................................35 FIGURE 22 US Business of Chemistry, 2005 ($ billions) ...................................40 FIGURE 23 Global Chemicals Market Segmentation: % Share by Value, 2004 40 FIGURE 24 Energy Performance of Select Companies, 2005 ...........................43 FIGURE 25 Patents Granted by Segment and Nation .......................................48 3 Innovest Strategic Value Advisors Chemicals Industry Overview www.innovestgroup.com March 2007 FIGURE 26 Basic and Specialty Chemical Revenues from New Products (as % of Revenues) ESTIMATED.........................................................................................49