Europe Equity Research 26 July 2010 Chemicals Primer An investor's guide to the world of chemicals Chemicals Neil C TylerAC (44-20) 7325-9935 [email protected] J.P. Morgan Securities Ltd. Martin EvansAC (44-20) 7155 6169 [email protected] J.P. Morgan Securities Ltd. Heidi VesterinenAC (44-20) 7325-4537 [email protected] J.P. Morgan Securities Ltd. Neeraj Kumar (91-22) 6157 3289 [email protected] J.P. Morgan India Private Limited Hella Zouiten (44-20) 7155-6408 [email protected] J.P. Morgan Securities Ltd. See page 313 for analyst certification and important disclosures, including non-US analyst disclosures. J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. 2 Neil C Tyler Europe Equity Research (44-20) 7325-9935 26 July 2010 [email protected] Table of Contents Chemicals primer – An investor’s reference guide......................................................6 Introduction ..............................................................................7 What makes up the chemicals sector?..........................................................................7 Five main subsectors....................................................................................................7 1. Commodity chemicals .............................................................................................8 2. Fertilisers/Agrochemicals ........................................................................................9 3. Industrial gases ......................................................................................................10 4. Specialty chemicals................................................................................................10 5. Pharmaceutical hybrids..........................................................................................10 The global chemical industry in numbers ..................................................................10 Production costs and energy structure........................................................................16 Investing in chemicals ...........................................................18 Key factors to look out for.........................................................................................18 1. Demand growth......................................................................................................18 2. Macroeconomic trends...........................................................................................21 3. Input costs/pricing power.......................................................................................23 4. Restructuring..........................................................................................................24 5. Capital discipline ...................................................................................................26 Valuation....................................................................................................................28 1. Key valuation methodologies.................................................................................28 2. Peak to trough valuation ........................................................................................30 Mergers and Acquisitions......................................................31 1) Increasing portfolio focus......................................................................................33 2) Increased balance sheet liquidity...........................................................................36 3) Globalization .........................................................................................................37 4) Need to reduce cyclicality .....................................................................................38 5) Interest from financial buyers................................................................................41 Commodity Chemicals...........................................................44 Inorganic Chemicals ..............................................................44 Introduction................................................................................................................44 Chlor-alkali................................................................................................................44 Soda Ash....................................................................................................................51 Titanium Dioxide.......................................................................................................54 Hydrogen Peroxide ....................................................................................................58 Petrochemicals.......................................................................60 Introduction................................................................................................................60 Feedstock ...................................................................................................................61 Olefins (primary).....................................................................64 Ethylene .....................................................................................................................65 Propylene ...................................................................................................................69 Butadiene ...................................................................................................................73 2 3 Neil C Tyler Europe Equity Research (44-20) 7325-9935 26 July 2010 [email protected] Aromatics (primary) ...............................................................77 Benzene......................................................................................................................77 Toluene ......................................................................................................................81 Paraxylene..................................................................................................................83 Other monomers (intermediates)..........................................87 Ethylene Glycol .........................................................................................................87 Methanol....................................................................................................................90 Phenol ........................................................................................................................94 Styrene Monomer ......................................................................................................97 Acrylic Acid.............................................................................................................100 Acrylonitrile.............................................................................................................102 Plastics (or Polymers)..........................................................106 Polyethylene.............................................................................................................107 Polypropylene ..........................................................................................................115 Polyvinyl Chloride (PVC)........................................................................................119 Polystyrene ..............................................................................................................123 Polyethylene Terephthalate (PET)...........................................................................126 Other Polymers.....................................................................130 Polyurethanes...........................................................................................................130 Methylene-diphenyl diisocyanate (MDI).................................................................130 Toluene diisocyanate (TDI) .....................................................................................133 Polycarbonate...........................................................................................................135 Fibres.....................................................................................138 Polyester Fibre .........................................................................................................138 Polyamide (Nylon)...................................................................................................140 Fertiliser ................................................................................145 Fertiliser Measurement ............................................................................................145 Fertiliser Market and its Drivers ..............................................................................147 Nitrogen fertiliser.....................................................................................................154 1. Ammonia .............................................................................................................160 2. Urea......................................................................................................................164 Phosphate.................................................................................................................168