Chemicals Primer

14 June 2005
Global
Chemicals
Equity Research
Research team
North America
William R. Young, Ph.D.
212/538-8922
william.young@csfb.com
John McNulty, CFA

212/325-4385
john.mcnulty@csfb.com
Nancy F. Traub, CFA

212/538-3950
nancy.traub@csfb.com
Keith Siegner, CFA

212/538-3094
Wear Goggles and keith.siegner@csfb.com
Source: CSFB Research.
Rubber Gloves When Nils-Bertil Wallin

212/538-8127
Handling Chemicals nils-bertil.wallin@csfb.com
Europe
Andrew Stott
44 20 7888 0300
andrew.stott@csfb.com
Chemical Industry Primer, Neil Tyler

44 20 7888 6553
neil.tyler@csfb.com
2005–2006 Catherine Haynes

44 20 7888 3270
catherine.haynes@csfb.com
. . . Making Chemicals Less Hazardous to Fraser Hill

44 20 7888 0331
Handle fraser.hill@csfb.com
Asia
THIS CHEMICAL INDUSTRY PRIMER IS A BROAD INTRODUCTION TO THE Prashant Gokhale
CHEMICALS SECTOR, ITS STRUCTURE, ITS PRODUCTS, AND ITS KEY DRIVERS. 852 2101 6944
prashant.gokhale@csfb.com
CSFB'S GLOBAL CHEMICAL TEAM HAS UPDATED AND EXPANDED THIS Masami Sawato
813 4550 9729
VALUABLE REFERENCE SOURCE. masami.sawato@csfb.com
WE HAVE INCLUDED A SECTION DESCRIBING OUR GLOBAL INVESTMENT Jim Hung

886 2 2715 6368
METHODOLOGY, EXPANDED OUR DESCRIPTION OF ETHYLENE ECONOMICS, jim.hung@csfb.com
ENLARGED OUR DISCUSSION OF GENETICALLY MODIFIED FOODS (INCLUDING
A-Hyung Cho
CORPORATE STRATEGIES), AMPLIFIED OUR PORTRAYAL OF THE FERTILIZER 82 2 3707 3735
a-hyung.cho@csfb.com
SECTOR, AND REORGANIZED THE PRESENTATION TO FACILITATE EASIER
ACCESS TO KEY INFORMATION.
ANALYST CERTIFICATIONS ARE IN THE DISCLOSURE APPENDIX. FOR OTHER IMPORTANT DISCLOSURES, visit www.csfb.com/
researchdisclosures or call +1 (877) 291-2683. U.S. Disclosure: CSFB 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. Customers of CSFB in the United States can receive independent, third
party research on the company or companies covered in this report, at no cost to them, where such research is available. Customers can access this
independent research at www.csfb.com/ir or call 1 877 291 2683 or email equity.research@csfb.com to request a copy of this research.
Chemical Industry Primer, 2005–2006 14 June 2005
CSFB GLOBAL CHEMICAL TEAM

William R. Young, Ph.D. (N. Amer. Major Chem) 1 212 538 8922 william.young@csfb.com
Nancy F. Traub, CFA (N. Amer. Major Chem) 1 212 538 3950 nancy.traub@csfb.com
Nils-Bertil Wallin (N. Amer. Major Chem) 1 212 538 8127 nils-bertil.wallin@csfb.com
John McNulty, CFA (N. Amer. Spec. Chem) 1 212 325 4385 john.mcnulty@csfb.com
Keith Siegner, CPA, CFA (N. Amer. Spec. Chem) 1 212 538 3094 keith.siegner@csfb.com
Andrew Stott (Europe) 44 20 7888 0300 andrew.stott@csfb.com
Catherine Haynes (Europe) 44 20 7888 3270 catherine.haynes@csfb.com
Neil Tyler (Europe) 44 20 7888 6553 neil.tyler@csfb.com
Fraser Hill (Europe) 44 20 7888 0331 fraser.hill@csfb.com
Prashant Gokhale (Asia) 852 2101 6944 prashant.gokhale@csfb.com
Masami Sawato (Japan) 813 4550 9729 masami.sawato@csfb.com
A-Hyung Cho (Asia) 82 2 3707 3735 a-hyung.cho@csfb.com
Jim Hung (Asia) 88 62 2715 6368 jim.hung@csfb.com
Emerson Leite, CFA (Latin America) 55 11 38416290 emerson.leite@csfb.com
Rohan Gallagher (Australia) 61 2 8205 4858 rohan.gallagher@csfb
2
Table of Contents
I. Executive Summary .......................................................................................................6

Purpose of This Report ................................................................................................. 6
The Chemicals Sector ................................................................................................... 6
Six Main Subsectors...................................................................................................... 7
II. Investment Methodology.............................................................................................11

U.S. Major Chemicals.................................................................................................. 11
U.S. Specialty Chemicals ............................................................................................ 15
European Chemicals ................................................................................................... 17
Asian Chemicals.......................................................................................................... 21
Japanese Chemicals ................................................................................................... 25
III. Commodity Chemicals ...............................................................................................26

Introduction.................................................................................................................. 26
Commodity Chemicals Industry Trends and Value Drivers ........................................ 26
IV. Inorganic Chemicals ..................................................................................................28

Chlorine, Caustic Soda, and Soda Ash: The Chlor-Alkali Industry ............................. 28
Phosphates (Nonfertilizer) ........................................................................................... 34
Titanium Dioxide.......................................................................................................... 38
V. Organic Chemicals .....................................................................................................40

“Cracking”: Production of Ethylene.............................................................................. 40
Feedstocks .................................................................................................................. 41
Ethylene and Other Olefins: Introduction .................................................................... 43
Ethylene....................................................................................................................... 48
Propylene .................................................................................................................... 51
Butadiene .................................................................................................................... 53
Benzene and Other Aromatics: Introduction ............................................................... 56
Benzene ...................................................................................................................... 57
Toluene........................................................................................................................ 58
The Xylenes................................................................................................................. 59
Acetone ....................................................................................................................... 62
Acrylates ...................................................................................................................... 64
Acrylonitrile .................................................................................................................. 67
Ethylene Glycol............................................................................................................ 69
Ethylene Oxide ............................................................................................................ 71
Methanol...................................................................................................................... 73
Phenol ......................................................................................................................... 75
Propylene Oxide .......................................................................................................... 77
Styrene Monomer ........................................................................................................ 79
Surfactants (Surface Active Agents) ........................................................................... 81
Vinyl Acetate................................................................................................................ 84
Vinyl Chloride Monomer (VCM)................................................................................... 86
3
VI. Thermoplastics and Thermoset Resins .....................................................................88

Polyethylene ................................................................................................................ 89
Polypropylene.............................................................................................................. 92
Polyvinyl Chloride (PVC) ............................................................................................. 94
Polystyrene.................................................................................................................. 96
Polyethylene Terephthalate (PET) .............................................................................. 98
Polyurethanes............................................................................................................ 100
VII. Man-Made Fibers....................................................................................................102
Polyester Fiber .......................................................................................................... 103
Acrylic Fiber............................................................................................................... 106
Nylon 6 and 66 Fibers ............................................................................................... 108
Elastane/Spandex ..................................................................................................... 110
Rayon/Lyocell ............................................................................................................ 112
VIII. Fertilizers (Plant Nutrients) ....................................................................................114
Nitrogen (N) ............................................................................................................... 116
Ammonia ................................................................................................................... 117
Urea ........................................................................................................................... 120
Phosphate (P)............................................................................................................ 122
Potash (K).................................................................................................................. 125
IX. Agricultural Chemicals (Crop Protection, GMOs)...................................................130

Introduction................................................................................................................ 130
Herbicides.................................................................................................................. 130
Fungicides ................................................................................................................. 131
Insecticides................................................................................................................ 131
Seeds and GMOs ...................................................................................................... 132
Product Development in Breeding and Ag-Biotech................................................... 134
Agrochemical Industry Trends and Value Drivers..................................................... 138
Agrochemical Near-Term Growth Prospects ............................................................ 144
X. Industrial Gases........................................................................................................145
Introduction................................................................................................................ 145
Air Separation Technology ........................................................................................ 146
Industrial Gases Industry Trends and Value Drivers................................................. 149
Industrial Gases Growth Drivers ............................................................................... 151
Industrial Gases Growth ............................................................................................ 151
XI. Atmospheric Gases .................................................................................................152
Nitrogen ..................................................................................................................... 152
Oxygen ...................................................................................................................... 156
Argon ......................................................................................................................... 162
Other Noble Gases.................................................................................................... 164
XII. Nonatmospheric Gases ..........................................................................................165

Hydrogen ................................................................................................................... 165
Helium ....................................................................................................................... 171
Carbon Dioxide.......................................................................................................... 173
4
XIII. Specialty Chemicals ..............................................................................................177

Background ............................................................................................................... 177
Specialty Chemicals Industry Trends and Value Drivers .......................................... 177
Specialty Product Categories .................................................................................... 182
Paints and Coatings .................................................................................................. 183
Adhesives and Sealants ............................................................................................ 184
Water Treatment........................................................................................................ 185
Flavors and Fragrances ............................................................................................ 187
Catalysts .................................................................................................................... 191
Additives .................................................................................................................... 194
Fine Chemicals.......................................................................................................... 198
Colorants ................................................................................................................... 201
XIV. Pharmaceutical Hybrid Companies.......................................................................203

Introduction................................................................................................................ 203
Company Overviews ................................................................................................. 203
Industry Trends and Value Drivers............................................................................ 205
XV. Sources ..................................................................................................................208
Appendix 1 ....................................................................................................................209
Appendix 2 ....................................................................................................................210
5
I. Executive Summary
Purpose of This Report

CSFB’s Global Chemical team has updated and expanded this reference resource this
year, and we welcome your suggestions to further enhance it next year. The goal of this
report is to provide a broad introduction to and overview of the chemicals sector. Rather
than being stock-specific, this “primer” is intended as a reference guide for information
on specific areas of the industry. It is, therefore, primarily aimed at those who are new to
the sector. We hope it will also prove a useful source of reference for those who have
worked on the sector for some time.
The Chemicals Sector

The chemicals industry converts raw materials derived principally from oil and natural
gas, minerals, and air into more valuable products for use in industrial and consumer
markets. The range of these products is so vast that it would not be exaggerating to say
that the products are involved at some stage in virtually everything we do and consume
on a daily basis.
Exhibit 1: Share of Global Chemical Output by Market Exhibit 2: Share of Global Chemical Output by Subsector
Other
Manufacturing Consumer Other Specialty Pharmaceutical
8% Products Chemicals & derivatives
Metals, Mining &
21% 15% 19%
Petroleum
Refining
10%
Fertilizers
Motor Vehicles Consumer
4%
6% Products
14% Crop Protection
2%
Construction
Rubber & Man-Made
5% Additives &
Plastic Products Fibers
solvents
14% 2%
Paper & Printing 2%
Coatings Petroleum-
6%
4% Derived Organic
Agriculture Chemicals
7% Industrial Gases
Inorganic 14%
Healthcare & 2%
Furnishing Chemicals Plastics &
Other Services
Textiles & 7% Polymer Related
13%
Apparel Products
10% 15%
*Excluding pharmaceuticals. Source: CSFB research.

Source: CSFB research.
The huge range of products also means that the industry’s returns and financial
condition in general are heavily reliant on the overall health of the economy. As a result,
the sector is cyclical, with one of the key bellwethers of its fortunes being GDP trends.
The sector is characterized by global markets, with all of the major operators having
international businesses. In response to this globalization, and as part of the continued
search for scale efficiencies, the industry has undergone considerable consolidation in
recent years. We expect M&A activity to continue, perhaps at a reduced rate, as
industry participants tune their portfolios.
6
The CEFIC (European Chemical Industry Council) estimates world chemicals sales
were €1,736 billion in 2004. Exhibits 4 and 5 list the major U.S., European, and Asian
producers by market cap and by revenue.
Six Main Subsectors

For analytical purposes, we divide the companies within the sector into six main
categories: Commodity Chemicals, Fertilizers, Crop Protection/GMO (Genetically
Modified Organisms), Industrial Gases, Specialty Chemicals, and Pharmaceutical
Hybrids. Although the activities of the companies often span more than one of these
areas, we adopted this demarcation to approach the sector methodically.
Exhibit 3 provides a rough overview of where the companies covered by CSFB fall
within each segment.
Exhibit 3: Global Chemicals by Segments

Commodity Fertilizers Crop Protection/GMO Industrial Gases Specialty Pharma Hybrids
BASF, Celanese, DuPont, Dow Chemical, Eastman PotashCorp, Yara, Syngenta, Monsanto, UAP BOC, Air Liquide, Praxair, Air ICI, Johnson Matthey, Rhodia, Solvay, Bayer, Akzo Nobel
Chemical, Georgia Gulf, Lyondell Chemical, PPG CF Industries, Holding Products & Chemicals, Linde, Givaudan, Degussa, Yule Catto,
Industries, Nova Chemicals, Huntsman, PolyOne, Agrium, Terra, Taiyo, Nippon Sanso Ciba Specialty Chemicals, Lonza,
Westlake Chemical, Compass Minerals Mosaic British Vita, Croda, Lanxess, Rohm
International, Asahi Kasei, Showa Denko, & Haas, Cytec, Sealed Air, Ecolab,
Sumitomo Chemical, Mitsubishi Chemical, Tosoh, 3M, Engelhard, Ferro, Avery
Mitsui Chemicals, Ube Industries, Formosa Dennison, Valspar, DSM, Hexcel,
Plastics, Honam Petrochemical, Reliance Mitsubishi Gas Chemical,
Industries, Hanwa Chemical, Nan Ya Plastics, Tokuyama, Shin-Etsu Chemical,
SABIC, ExxonMobil, Royal/Dutch Shell Group JSR, Zeon, Hitachi Chemical, Rasa
Industries, Mimasu Semiconductor
*High-value-added mix.
Source: Company data, CSFB estimates.
• Commodity chemicals are typically produced in large quantities and sold on the basis
of price, and, in some cases, by small, targeted variations in compositions; that is,
customers tend to differentiate between suppliers on the basis of price, rather than
effect. Product types included within industrial commodity chemicals are organic
chemicals, petrochemicals, plastics and other resins, inorganic chemicals, and man-
made fibers. Because of their ability to integrate production with the manufacture of
feedstocks, many commodity chemicals are increasingly becoming the domain of the
oil companies and firms in areas such as the Middle East, which have access to
cheap raw materials. Approximately 55% of the industry is currently held by oil
companies.
• Fertilizers are substances that are added to the soil to replace essential nutrients
depleted by crops. They contain one or more of the primary plant nutrients (nitrogen,
phosphorous, and potassium) and sometimes contain secondary trace nutrients
(calcium, magnesium, sulfur, iron, copper, and zinc).
• The crop protection/GMO sector includes pesticides, which can be divided principally
between herbicides, fungicides, and insecticides, all of which are used to increase
crop yields by combating weeds, fungal pests, and insects, respectively. The
agrochemicals industry is characterized by high barriers to entry, as significant R&D
costs and extensive intellectual property rights allow a small number of significant
7
companies to dominate the industry globally. In addition, the discovery and

commercialization of genetically modified organisms (GMOs) by Monsanto and others
brought an entirely new paradigm to the agrochemical industry.
• The industrial gases industry separates air into its components and sells these
components to third parties. In addition, gas producers now provide an array of
specialty gases for a wide variety of uses. Because of the high reliance on long-term
contracts, the industry tends to be less cyclical than many other areas of the
chemicals sector.
• Specialty chemicals, in contrast to commodities, are those chemicals that are sold on
the basis of their performance (and, often, technical service), rather than for their
chemical composition. The variety of end products is vast, including both industry and
function-specific chemicals.
• Pharmaceutical hybrids. The final section of the report becomes more company-
specific as it examines those hybrid companies—which are European-based, as the
U.S. hybrids sold their pharma operations—that have significant pharmaceutical
businesses in addition to chemicals operations. As scale becomes ever more
important in the pharmaceutical sector, we examine the issues faced by these
companies as a result of their presence in this industry.
8
Rasa Industries
Sinopec Yizheng Chemical
Mimasu Semiconductor
Polyone Corp
Yule Catto
Compass Mineral
UAP Holding
Ferro Corp
Croda
Delta and Pine Land
Rhodia
LG Petrochemical
Hanwha Chemical
Georgia Gulf
British Vita
Honam Petrochemical
Sumitomo Bakelite
Hexcel
Westlake Chemicals
Lanxess
Sinopec Beijing Yanhua
Cytec Corp
Ube Industries
Tokuyama
Zeon
Taiyo Nippon Sanso
FMC
Mitsubishi Gas Chemical
Tosoh
Sinopec Shanghai
Agrium
Exhibit 4: Global Chemical Producers by Market Capitalization/Share Prices as of June 10, 2005
Valspar
LG Chemical
Showa Denko
Nova Chemicals
Lonza
Clariant
Orica
Engelhard Corp
Hitachi Chemical
Givaudan
Ciba
Johnson Matthey
Huntsman
Mitsui Chemical
Eastman Chemical
Yara
Sealed Air Corp
JSR
Avery Dennison Corp
ICI
Lyondell Chemical
Mitsubishi Chemical
DSM
Asahi Kasei
Sumitomo Chemical
Degussa
Ecolab
Linde
Solvay
Formosa Plastics
BOC
Nan Ya Plastics
Potash
Rohm and Haas

Syngenta
PPG Industries
Akzo Nobel
Air Products and Chemicals
Praxair
Shin-Etsu Chemical
Monsanto
Reliance Industries
Air Liquide
Bayer
BASF
Dow Chemical
US$ in millions
Du Pont
3M
60,000
50,000
40,000
30,000
20,000
10,000
0
9
Rasa Industries
Mimasu Semiconductor
Delta and Pine Land
Sinopec Yizheng Chemical
Compass Minerals Int'l
Croda
Yule Catto
LG Petrochemical
Sumitomo Bakelite
Cytec
Honam Petrochemical
Sinopec Beijing Yanhua
Ferro
Lonza
British Vita
Westlake Chemical
Zeon
Tokuyama
FMC
Polyone
Georgia Gulf
Givaudan
Johnson Matthey
Valspar
UAP Holding
Hanwha Chemical
JSR
Agrium
Potash Corp. of
Mitsubishi Gas Chemical
Sealed Air
Orica
Sinopec Shanghai
Engelhard
Ecolab
Tosoh
Ube Industries
Hitachi Chemical
LG Chemical
Celanese
Nova Chemicals
Avery Dennison
Monsanto
Ciba Specialty Chemicals
Lyondell Chemical
Syngenta
Eastman Chemical
Praxair
Yara
Rhodia
Showa Denko
Clariant
Exhibit 5: Global Chemical Producers by Revenues, 2004
Rohm and Haas

BOC
Air Products and
Shin-Etsu Chemical
Lanxess
PPG Industries
Mitsui Chemical
Solvay
DSM
Formosa Plastics
ICI
Sumitomo Chemical
Huntsman

Asahi Kasei
Linde
Air Liquide
Nan Ya Plastics
Degussa
Akzo Nobel
Mitsubishi Chemical
3M
Reliance Industries
Du Pont
Bayer
Dow Chemical
US$ in millions
BASF
60,000
50,000
40,000
30,000
20,000
10,000
0
10
II. Investment Methodology
U.S. Major Chemicals

When is the right time to buy chemical stocks as an investment—i.e., beyond a one- or
two-month move? Said differently, how do the supply/demand cycles affect chemical
stock performance?
The first point to emphasize, if an investor hopes to outperform the market, is that basic
U.S.-based chemical stocks are bought to be sold. Since 1970, the share price
appreciation of the S&P Chemicals has been 7.7%, while that of the S&P 400 Industrials
has been 8% (CAGR).
Furthermore, we have learned that, over the long term, most major U.S. chemical
companies do not create shareholder value, in that they fail to return the cost of capital.
The commodity end of the industry is capital intensive, and significant mistakes have
been (and will continue to be) made. This may involve building plants that cost $100
million or more, which become underperformers as a result of overcapacity. Also,
returns on acquisitions have been below par, in view of prices paid relative to earnings
generated—even when including synergistic cost reductions; one should simply
examine goodwill impairments taken in 2002 to get a handle on this. Too frequently, the
high returns generated at the peak are too fleeting to compensate for the low returns
produced in less robust times, which can often be prolonged. Moreover, whereas unit
growth in the chemical industry overall still exceeds GDP on a global basis, we would
generally not categorize the chemical companies as “growth vehicles.”
Now that a good case has been presented for not owning equities of major chemical
companies on a long-term basis, why bother? Timing is the key to developing a winning
formula. That is, we believe investors can outperform the market if they play the
chemical cycles correctly. As shown in Exhibit 6, comparing EPS for the S&P Chemicals
versus the S&P 400 Industrials, obvious cycles are apparent. (Note: The old S&P 400
Industrials Index—a so-called non-“GIC” measure, according to S&P—includes such
“industrial” giants as Intel, Pfizer, McDonald’s, Federated Department Stores, Citigroup,
etc.; that is, large firms that are not primarily transportation or utility companies.)
11
Exhibit 6: Relative EPS: S&P Chemicals versus S&P Industrials
RELATIVE EPS
S&P CHEMICALS vs S&P Industrials
0.8 0.8
0.7 0.7
0.6
0.6
0.5
0.5
0.4
0.4
0.3
0.3
0.2
0.2 0.1
0.1 0.0
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
Between 1970 and the present, it is clear there are three distinct periods during which
chemical company earnings outperformed industrial firms as a whole over a multiyear
period: 1971-1975, 1986-1990, and 1994-1997.
How do these periods relate to the secular chemical cycle? As in all commodity
products, supply/demand determines the profitability. That is, high capacity utilization
should correlate with margins and earnings performance. Since it is unlikely that all
“industrials” will march to the same supply/demand cycle, it stands to reason that
earnings for major chemical companies should outperform results for their nonchemical
peers when capacity operating rates are high, and conversely. This is borne out in
Exhibit 7 and Exhibit 8.
12
Exhibit 7: U.S. Ethylene Operating Rates
110%
100%
90%
80%
70%
60%
50%
E
77
89
79
81
83
85
87
91
93
95
97
99
01
03
05
19
19
19
20
20
19
19
19
19
19
19
19
19
19
20
Exhibit 8: U.S. Chlorine Operating Rates
110%
100%
90%
80%
70%
60%
50%
95
97
99
01
03
E
77
79
81
83
85
87
89
91
93
05
19
19
19
19
19
19
19
19
19
19
19
19
20
20
20
We have utilized ethylene and chlorine as proxies for the commodity end of the
chemical industry, since they are big, basic, nondifferentiated, building-block
commodities that are upgraded into other chemical products. Without these key
intermediates, a huge range of high-volume derivatives could not be manufactured. A
corollary that follows is that derivative supply/demand trends should mirror those of
ethylene and chlorine. Also, as shown in Exhibit 9, our estimates of overall capacity
utilization for major U.S.-based chemical companies (including their ex-U.S.
components) correlate quite well with the relative earnings performance for major
chemicals companies.
13
Exhibit 9: U.S. Chemical Industry Shipment Rates (Shipments/Capacity)
100%
90%
80%
70%
60%
E
73
75
77
79
81
83
85
87
89
91
93
95
97
99
01
03
05
19
19
19
19
19
19
19
19
19
19
19
19
19
19
20
20
20
How about the stocks? Exhibit 10 portrays the relative share price performance
(logarithmic scale) for S&P Chemicals versus S&P 400 Industrials.
Exhibit 10: Relative Stock Price: S&P Chemicals versus S&P Industrials
RELATIVE STOCK PRICE

S&P CHEMICALS vs S&P Industrials
2.0 2.0
1.9 1.9
1.8 1.8
1.7 1.7
1.6 1.6
1.5 1.5
1.4 1.4
1.3 1.3
1.2 1.2
1.1 1.1
1.0 1.0
0.9 0.9
0.8 0.8
0.7 0.7
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
While it certainly doesn’t look much like the other exhibits, further examination indicates
that the relative movement in chemical stocks mirrors operating rates and relative
earnings from a timing perspective, although the magnitudes vary substantially. Also, in
most (but not all) cases, chemical stocks peak (relatively speaking) two or three
quarters ahead of relative earnings. This is no big surprise given that the stock market is
a mechanism for discounting future trends.
14
How does economic activity (i.e., expansions and recessions) factor into the equation?
The shaded areas in the exhibits mark recessions and, in the 1984-85 period, a
significant soft landing. It is noteworthy that chemical stocks outperformed the market—
for three to six months at a minimum—at the end of each slow period in the economy.
This makes sense, since investors tend to buy cyclical stocks ahead of an economic
expansion. But whether this three- to six-month trend continues (as in 1985) or not
(1975 or 1980, for example) depends on other factors. If the initial phases of economic
recovery coincide with a period of heavy capacity expansion in the chemical industry,
one might expect the positive relative price trend to be short-lived, as it was following
the 1975-1976 rebound. Or if there is a double-dip recession (such as in 1980 and
1982), chemical stocks could outperform initially but are likely to underperform once
investors believe another GDP downturn is in the cards.
Our conclusion: To enjoy relatively good returns when the cycle turns (i.e. to maximize
the upside in the stocks), such as in the 1970-1975, 1985-1989, and 1993-1997 periods,
an investor should look for the following conditions before overweighting a portfolio with
commodity chemical stocks:
• An economy that is relatively sluggish;
• Low operating rates in the chemical industry;
• Low EBIT margins in the chemical industry;
• Relatively little capacity expansions expected to come onstream; and
• Healthy prospects for economic growth—at home and abroad (including, especially
these days, China).
U.S. Specialty Chemicals

The U.S. specialty chemical group is an eclectic group of companies. Each firm is
composed of one or more segments that basically make up their own niche industries
where there is minimal overlap with other companies. As a result, to look at the entire
group as one industry and make a generalization on how the “sector” will perform
relative to the broader market leaves quite a lot of room for error. That being said, we
believe there are a number of fundamentals/characteristics that the majority of the
companies possess (especially on a market-cap-weighted basis). These
drivers/fundamentals include:
• Defensive in nature. Many of the specialty chemical names are viewed by the
market as being defensive in nature and subsequently perform best when the
economy is soft or there is economic uncertainty. In those periods, the stocks tend
to outperform the broader market. The group tends to perform in-line with the
market when the economy is seeing normalized growth of 2.5-3.0% and tends to
underperform when the economy is accelerating. We believe this is the case for a
number of reasons: (1) the bulk of the companies generate significant levels of free
cash even at the trough of the economic cycle, making them less financially risky
than many other groups (such as the commodity chemical names); (2) in many
cases the products produced by specialty chemical companies are essential to their
end customers’ products and difficult to replace, resulting in a price set by a value
proposition instead of industry supply/demand balance or capacity utilization rates;
15
and (3) in some cases, the companies have been able to negotiate take-or-pay
contracts, as well as energy price pass-through clauses, which help them maintain
profitability during periods of economic weakness (especially the industrial gas
companies).
• Improving return profiles. We believe a number of the specialty chemical names in
our universe have started to see or will see improving midcycle returns over the next
few years (not just improvements driven by an expected economic recovery). Such
improvements may result in greater earnings power and multiple expansions, both
of which should lead to solid stock performance—this has already started in some of
the names. Some of the catalysts behind this trend include management changes
and industry consolidation, which has resulted in improved capital discipline (the
industrial gas companies); acquisitions that may drive returns higher (ECL and
FOE); and cost-cutting/restructuring that should potentially result in higher midcycle
returns (SEE, CYT, and EC—although EC has other offsetting headwinds).
• Foreign currency exposure. Many of the companies we follow have a sizable global
reach and international platforms. As a result, these companies are benefiting from
the recent weakening of the U.S. dollar, especially relative to some of their
European competitors. While this trend may continue in the near term, it is one to
stay focused on because a reverse in the dollar’s weakness could negatively impact
the U.S. names while helping the European companies.
• Raw material pressure. The specialty chemical names have been and will likely
continue to see significant raw material pressures, owing to (1) rising energy prices
and (2) a tightening supply/demand balance on some of the commodity chemicals
that they use. This has resulted in severe margin pressure because the specialty
companies that price their products on a “value proposition” often find it difficult to
raise prices in conjunction with their raw materials (because the “value” of the
product to their customer has not grown just because the specialty chemical
company’s costs went up.) Most specialty chemical companies have started to put
through price increases, and most of their customers are willing to take them (to a
degree) because of the extreme nature of the cost pressure being seen. However,
the names are in a game of “catchup.”
• Financial strength may lead to acquisitions. Because the specialty chemical group
generates significant levels of free cash and they had been working aggressively
through the recession to pay down debt, most specialty chemical companies have
relatively strong and underleveraged balance sheets. We believe they will be putting
them to work in the form of acquisitions over the next few years. These will likely be
in the form of both bolt-on and larger acquisitions.
Again, to make investment generalizations about the entire specialty chemical group is
often difficult, but the above three trends/fundamentals seem to occur in many of the
names that we cover. Beyond that, we would look carefully at the (1) individual business
models and stories, (2) end markets served, and (3) the R&D platforms and pipelines to
get a better understanding of what names will enjoy solid outperformance while others
disappoint.
16
European Chemicals
What Are the Drivers behind the European Chemicals sector?
Our first point is that this is a difficult question to answer because of the heterogeneous
nature of the sector. It is fair to say that, as with most sectors, there is not one dominant
variable, but a complex interaction of external factors.
For the purposes of this note we intend to talk only about the top-down factors, rather
than bottom-up corporate issues, and thus we are only interested in what dictates fund
managers’ asset allocation decisions with regard to chemicals (whether it is from one
quarter to the next or one cycle to the next). The chemical sector is highly volatile as
seen in Exhibit 11.
Exhibit 11: EV/Sales by Subsector for European Chemicals
2.3
1.8
1.3
0.8
0.3
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005e 2006e
Commodities Pharma hybrids Specialties Gases Sector
17
We propose to split our driver categories into five sections:
1. Macroeconomic Drivers
Being a mature sector by and large, the chemicals sector is heavily influenced by
perceptions of GDP and industrial production growth. These factors themselves are in
turn heavily influenced by three main variables:
• interest rates
• exchange rates
• energy prices
Interest rates and the perception of the direction of monetary policy are critical
determinants of the performance of the sector relative to the market. Clearly, it is not
just a case of the sector performance being aided by the easing of monetary policy, but
also the expectations of the effect of that monetary policy. CSFB strategists believe a
steepening of the yield curve at the long end, not the short end, is a reasonable basis
for positive performance of the sector, and there is evidence to support this with certain
stocks, especially BASF.
Exchange rates are important from three aspects. First, there is the direct and simple
effect on overseas earnings. Second, there is the potential impact on margins from
transaction risk (i.e., where a company has a geographical mismatch between assets
and sales). Third, there is a potential competitive effect, whereby a company’s pricing
strategies in international markets can be affected by exchange rates and can thus lead
to market share gains or losses. We show below how influential significant swings in
currencies can be on the sector’s performance.
Exhibit 12: Euro Strengthening Correlates with Sector Relative De-Rating

140.0
130.0
120.0 Significant strengthening of Euro

spells start of sector underperformance
110.0
100.0
90.0
80.0
70.0
Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05
$ to € Chemical sector relative to DJSTOXX (RHS)
Source: Datastream.
18
Energy prices are clearly critical for an industry that typically consumes significant
volumes of oil and natural gas for purposes of raw materials, energy, and distribution.
However, we would caution about seeing the oil price as an especially influential factor
within the sector. Far more important, in our view, are expectations of inflection points in
GDP, industrial production, and currencies. Exhibit 13 shows little correlation in the past
between chemicals sector performance and the oil price.
Exhibit 13: Oil Price and European Chemicals Sector Relative Performance since 2000
Shows Little Correlation
260
240
220
200
180
160
140
120
100
80
60
Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05
Oil Chemical sector relative to DJSTOXX
Source: Datastream.
2. Lead Indicators
This ties in with the above section, in the sense that perception of economic growth can
be influenced as much by lead indicators as by monetary policy. The key lead indicators
that we use are the ISM and IFO surveys, as well as regional consumer confidence
surveys. The new orders sections of the ISM and IFO are especially influential for most
of our stocks. Stocks that are more sensitive to the perception of consumer demand
trends are Croda, Givaudan, ICI, and Johnson Matthey.
3. Mergers and Acquisitions/Consolidation

Corporate developments in the industry and the level of consolidation can have
significant influence on money flows in and out of the sector. In the late 1990s and the
very early stages of this decade, the industry witnessed a number of major corporate
deals. In particular, this period saw a proliferation of demergers, creating new
companies, which stemmed from the life science industry’s efforts to focus on
pharmaceuticals and other healthcare businesses. Thus, ICI (which set the ball rolling in
1993 with the demerger of Zeneca), Ciba Specialty Chemicals, Clariant, Celanese,
Givaudan, Rhodia, and Syngenta all appeared in their varied forms. Following and
during this phenomenon was another theme: value destruction. This was a simple
phenomenon: Newly demerged companies, in an attempt to increase scale and utilize
their balance sheets, acquired a number of assets and more often than not paid too high
19
a price during this period of aggrandizement. For example, Ciba (Allied Colloids),
Clariant (BTP), ICI (Unilever Specialty Chemicals), and Rhodia (Chirex and Albright and
Wilson) all paid the price for expansionary moves.
We expect M&A to be a greater feature of the industry’s development in the short term,
compared with the relatively barren 2001-2004 period. Our view in this regard is based
upon the strengthening of balance sheets in the last few years through a process of
disposal programs and capital restructuring. Private equity companies are also taking an
increasing interest in the sector’s fortunes and provide liquidity as both buyers and
sellers of chemical assets.
4. Capital Discipline
This will always be an important theme among investors. The chemicals sector has a
rotten reputation for reinvesting at the top of the cycle, only for margins to be adversely
affected at the bottom of the cycle.
Another important issue is, What is happening with regard to capital discipline relative to
other basic materials sectors and is it sustainable?
At present, it is fair to say that the industry in Europe at least is at a relatively low level
of expenditure. Whether this is sustainable or not remains to be seen and, based upon
recent guidance for 2005 estimates, there is every reason to view 2004 as a trough.
Exhibit 14: Capex/Depreciation Ratios for European Subsectors

250%
230%
210%
190%
170%
150%
130%
110%
90%
70%
50%
1997 1998 1999 2000 2001 2002 2003 2004e 2005e 2006e
Commodity Specialty Hybrid Industrial Gases Average
20
Asian Chemicals
Asian companies have a relatively short history (short in terms of chemical cycles), and
the markets have evolved over the last decade, with investment methodologies getting
fine-tuned. There is a greater appreciation that petrochemicals are cyclical, and for
cyclical companies, earnings multiples tend to be high at the trough, low at the peak.
Most Asian companies are trading at EV/EBITDA multiples of 3-5 for 2005E—a point
where we believe chemical margins are likely to peak. (This does not necessarily mean
margins are going to collapse thereafter—we expect above-average margins.)
At this point in the cycle, we look at what market expectations are in terms of future
returns and use HOLT to analyze embedded return expectations. Using multiplies is
more complicated given where we are in the earnings cycle.
Asian companies have been the biggest beneficiaries of the current earnings upcycle in
the petrochemical sector—the chart below highlights that they have generated the
greatest spread in CFROIs from the median achieved between 1998 and 2003 and to
2004.
Exhibit 15: CFROI Spread from Median to 2004
25.0
20.0
15.0
10.0
5.0
RELI
ATC
TOC
GGC
NPC
LYO
DOW
DD
EMN
PPG
DSMN
AKZO
11170
1326
1301
12990
1303
325
338
9830
51910
BASF
4063C
1033
600002
(5.0)
2004 CFROI less -5Y Median CFROI
The chart above highlights that most companies at the left-hand side of the chart are
from Asia. A combination of higher operational leverage, greater commodity exposure,
and greater gearing into spot pricing (versus contract pricing) is likely to be behind this
dramatic difference in the way earnings have performed in Asia, and in the rest of the
world.
The key question for Asia is, therefore, What happens to returns in a downcycle? We
note that even the most optimistic views see a downcycle by 2008-2009—HOLT allows
us to look at implied returns in that time frame. We assume that asset growth for the
companies will be limited to 5% per year, in-line with global growth in volumes. This
represents our estimate of what the industry can bear as a reinvestment rate, for a given
outcome on returns. Too much capex would crush returns and profitability in the future.
21
Exhibit 16: Median Returns in the Past Have Been below Cost of Capital
25.0
20.0
15.0
10.0
5.0
0.0
-5.0
-10.0
ATC
TOC
NPC
325
338
RELI
1326
1301
1303
9830
1033
12990
11170
51910
4063C
600002
Cost of Capital -5Y median CFROI 2004 CFROI
Our analysis suggests that the market is implying that returns for chemical companies in
Asia will fall from 2004 levels. It also indicates that the returns implied by the market in
2008 are now low enough, if one looks at history. We note that returns for Asian
companies fall below the cost of capital through a downcycle—i.e., even an assumption
of a reversion of WACC in the case of Asian chemical companies might be too
aggressive
Exhibit 17: What Does the Market Expect in the Future?
25
20
15
10
-5
LYO
RELI
TOC
1301
1326
DD
1303
600002
12990
GGC
51910
1033
338
325
11170
NPC
4063C
9830
PPG
ATC
EMN
DSMN
AKZO
BASF
DOW
-10
2004 CFROI -5Y median CFROI Market Implied T+5 CFROI
22
Finally, we look at what the market is implying in terms of CFROI in 2008 (the dot in
Exhibit 17), relative to the 2004 CFROI and the median CFROI in 1998-2003. In the
case of most stocks residing on the left of the chart, the return expectations in the future
look aggressive relative to where we are today—i.e., in the case of ATC and Thai
Olefins, the market expects returns to remain at current levels to 2008. ATC, we note is
also one of the biggest beneficiaries of the current upswing (as its 2004 CFROI is not
muted for one-off reasons). Expectations here are high and are likely to be
disappointed. At the right-hand side of the chart, we move toward companies where
returns are expected to fall from current levels. However, in most cases, return
expectations are still above the historical median levels achieved. As noted above,
returns for many Asian companies fall below the cost of capital in a downcycle.
Exhibit 18: Upside/Downside if T+5 Returns Equal Cost of Capital
100%
80%
60%
40%
20%
0%
(20%)
(40%)
(60%)
GGC
DOW
EMN
TOC
DSMN
PPG
338
325
NPC
LYO
DD
RELI
AKZO
1033
9830
BASF
1303
1326
1301
11170
4063C
51910
12990
600002
Upside/Downside if t+5 CFROI is Equal to Cost of Capital
23
Exhibit 19: Upside/Downside if T+5 Returns Reach Median Historical Levels
40.0%
20.0%
0.0%
-20.0%
-40.0%
-60.0%
-80.0%
-100.0%
-120.0%
-140.0%
GGC
DOW
EMN
TOC
DSMN
PPG
NPC
LYO
325
338
DD
ATC
RELI
AKZO
9830
BASF
1033
1303
1326
1301
11170
4063C
12990
51910
600002
Upside/Downside if t+5 CFROI is Equal to -5Y median CFROI
Conclusions
Asian companies have been the biggest beneficiaries of the current cycle—that
probably explains why we are more cautious than our U.S. and European commodities
analysts.
CFROIs are high, and the market implies in general that they will fall. That is the good
news.
The bad news is: (1) Asian companies have higher earnings volatility, and hence the
risk of getting earnings wrong is high both on the upside and on the downside; and (2)
while returns are expected to fall, current expectations are not low enough to invest in
the stocks. We would avoid the Asian chemical sector for now.
24
Japanese Chemicals
Over the last ten years, Japanese major chemical stocks mainly outperformed during
three periods: (1) the Asian demand increase around 1994-1995, (2) the IT bubble in
2000-2001, and (3) Asian demand recovery with price rises in 2003-2004. Share price
momentum had been strong during these periods, and earnings had also increased, so
such valuations were justified.
Exhibit 20: Ethylene Margin and Relative Performance of Major Chemicals

㧔
$/tons 㧕
1,550 Ethylene margin (3 month moving average) 0.1
Relative performance of 7 major chemicals (RHS) 0

1,300
-0.1
1,050
-0.2
-0.3
800
-0.4
550
-0.5
300 -0.6
11/1/95 1/1/97 3/1/98 5/1/99 7/1/00 9/1/01 11/1/02 1/1/04 3/1/05
Source: Datastream.
We expect domestic demand for petrochemical products to stay relatively strong in 2005
after a strong 2004. We anticipate that 2005 ethylene production will drop 0.4%, to 7.54
million tonnes from 7.57 million tonnes in 2004, as domestic demand drops slightly.
However, we expect a continued increase in the export of monomers to non-Japan Asia
for use as intermediate products in chemical production, and even if there is a reduction
in exports of polyethylene and some other products, we expect growth in exports overall
to be roughly flat year over year.
Any upward move in petrochemical stocks would probably come once demand in China
recovers from its seasonal downturn, and prices should improve in the autumn (August
through September), when we expect to see general strength in the petrochemical
sector. Once earnings start to recover as a result of the adjustment in raw materials
prices, we should start to see some positive surprises, in the form of upward earnings
revisions for the second half. As a result, we expect to see a recovery in the
petrochemical stocks that have been underperforming since the start –of 2005. From
year-end 2004 through the beginning of 2005, the drop in Asian market prices has been
undermining ethylene margins, but once recovery starts to come through, we expect to
see an improvement in share price performance at the general chemical makers.
25
III. Commodity Chemicals
Introduction
There is no strict definition of what constitutes a “commodity chemical.” Instead, the
term refers to chemicals that share a number of characteristics. They are typically those
products that are manufactured in large volumes and by a number of different
producers. Quality of the product is largely generic; thus, customers rarely distinguish
between manufacturers on this basis. Instead, price and location are often key
determinants in choosing a supplier. Commodity chemicals tend to form the building
blocks of a vast array of specialty chemicals and consumer products. But value-added
products can easily become commodities over time; one need only consider generic
pharmaceutical or crop protection products as examples.
We divide the basic commodity chemicals subsector between organic and inorganic
chemicals. Organic chemicals—derived from either crude oil or natural gas—are
carbon-containing entities. Some organic chemicals are used “straight away,” such as
ethylene glycol as antifreeze or acetic acid as a solvent. Some are intermediates in the
synthesis of other organic materials. An important subclass of organic chemicals is
known as “monomers;” monomers are typically combined to form long-chain
compounds, known as “polymers,” almost like a string of paper clips. Examples of
polymers are such ubiquitous plastics as polyethylene or polystyrene, or man-made
fibers such as polyester or nylon. Inorganic chemicals are derived principally from salt-
containing brines and various minerals such as trona (for soda ash) or phosphate rock
(for fertilizers). They form the foundations of major classes, such as the chlor-alkali
chemicals, and of products such as salt, fertilizers, industrial phosphates, and metal
oxides, including titanium dioxide and iron oxide.
Commodity Chemicals Industry Trends and Value Drivers

Because of the integral role played by commodity chemicals in a vast array of
manufacturing processes, a huge number of factors drive demand for them. Of these,
the most influential are cyclicality, globalization/consolidation, and capital intensity.
• Cyclicality. Volume growth and pricing flexibility are the main factors driving the top
line in the commodity chemical industry, while profitability relies on capacity utilization,
operating efficiency, product mix, and raw material costs. The largest customers are
the general manufacturing, automotive, agricultural, and construction industries. As
the health of the industry is heavily reliant on the health of these cyclical industries,
the chemicals industry itself is cyclical. In addition to shifts in demand, imbalances in
supply caused by capacity additions within the industry can lead to sharp price/margin
swings, and can thus increase cyclicality further. As a result, we traditionally measure
growth in terms of GDP, although industrial production (IP) can also be used. CSFB
global economists currently estimate global GDP growth was 4.9% for 2004 (the
largest gain in 20 years) and forecast growth of 4.0% for 2005 and 4.3% for 2006.
26
• Consolidation/globalization. Competitive pressure and the search for growth are

forcing chemicals companies to expand globally, both through “organic” growth and
via consolidation. The chemicals industry in the developed economies of Europe and
the U.S. is largely mature, with growth only marginally outpacing that of GDP. In
developing markets, however, rapid industrialization and improving living standards
are attracting large numbers of manufacturing companies to the regions. To serve
these customers, and to benefit from lower-cost labor, many chemicals companies are
building facilities nearby.
• Capital intensity. Commodity chemicals companies are characterized by their capital-

intensive nature. Significant scale is required to manufacture the majority of
commodity chemicals efficiently, and the consequent capacity also requires continual
maintenance and upgrading. In addition to the standard production technology,
stringent environmental regulations require extensive protection equipment for every
plant, leading to further expense.
• Energy intensity. Commodity chemicals companies are huge consumers of energy.

For petrochemical companies, consumption of oil, natural gas, and/or their derivatives
for both fuel and raw materials represents the largest single component of the total
cost of production. Even chlorine and caustic soda production requires energy (in the
form of electricity) as the largest input cost—far larger than that of the other key
ingredient, salt. A significant proportion of the feedstocks is often purchased under
long-term contracts in an attempt to stabilize this proportion of the cost base. These
contracts typically “lock in” volumes, but fixed-price contracts are difficult to engineer.
Thus, significant raw material volatility can still have a large effect on margins within
the industry, especially on a short-to-intermediate-term basis.
27
IV. Inorganic Chemicals

The majority of inorganic chemicals are derived from mineral ores or brines. These
substances are used both as building-block materials and as processing aids and
catalysts in the production of other chemical and industrial products, including fertilizers,
paper, metals, and glass. Inorganic chemicals are largely considered high-volume
commodities, and operations are characterized by limited R&D spending, with emphasis
placed instead on improving margins by reducing feedstock costs, energy requirements,
and labor costs though process improvements.
Chlorine, Caustic Soda, and Soda Ash: The Chlor-Alkali

Industry
The chlor-alkali industry produces chlorine and the well-known alkali, caustic soda
(sodium hydroxide). Beyond chlorine/caustic soda, another alkaline product, soda ash
(sodium carbonate), is produced either via the synthetic Solvay process, using salt and
limestone, or in certain areas, including Green River, Wyoming, from trona or a similar
mineral. Between them, these three chemicals have an enormously diverse range of
applications, so wide that almost all consumer products will, at some stage of
production, be dependent on them. As a result, the chlor-alkali industry is one of the
largest chemical industries by value.
Chlorine and Caustic Soda (Sodium Hydroxide)

Chlorine and caustic soda are produced simultaneously in a fixed ratio, through the
electrolysis of brine (sodium chloride solution). The three existing methods of
electrolysis all generate 1.0 part chlorine to 1.13 parts caustic soda.
• Mercury cell. This is the oldest and most energy-intensive method of production. It is
being phased out because of environmental risks surrounding the use of mercury.
Mercury, which is used as the cathode, is highly toxic and would be extremely
damaging if released into the water table. The advantage of this process is the ability
to produce caustic soda in high concentration, reducing the need for evaporation.
• Diaphragm cell. In this process, the electrolysis cell contains a diaphragm (usually
made of asbestos fibers) to keep the newly formed chlorine and caustic soda
separate. Although this method of production can use fairly impure brine, it tends to
produce less concentrated caustic soda and consumes a large amount of energy in
the process.
• Membrane cell. Similar to the diaphragm cell, the membrane tends to be more
effective, and thus, although more concentrated brine is required, a far more
concentrated product is produced. The membrane cell process is the method of
choice today.
Chlorine and Caustic Soda Uses

• Chlorine. The major use for chlorine is in the manufacturing of PVC plastics and a
variety of other chemicals. It is also used as a bleaching agent in pulp and paper
manufacturing, although this application has lost position (owing to environmental
issues, as dioxin is a by-product) in favor of sodium chlorate.
28
Exhibit 21: Major Uses of Chlorine by End Market, 2004
Other
28% Vinyls
34%
Inorganics
2%
Pulp & Paper
4%
Chlorinated
intermediates
6% Water treatment Organics
6% 20%
Source: Chemical Week, CSFB research.
• Caustic soda. More than 50% of caustic soda production is used in the manufacturing
of other chemicals. A large proportion is also used as an alkali in pulp and paper
manufacturing. Other significant markets are water treatment, alumina, soaps and
detergents, textiles, and petroleum and gas processing.
Exhibit 22: Major Uses of Caustic Soda (Sodium Hydroxide) by End Market, 2002
Pulp and paper

Other
17%
24%
Water treatment
5%
Organics
17%
Alumina
8%
Soaps,
Inorganics
detergents, and
17%
textiles
12%
29
Exhibit 23: Major Chlorine Producers, 2005E

2005 Average Capacity % share of
metric tons (000) Global Capacity
Dow Chemical 6.448 31.7%
Occidental Petroleum 2.676 13.2%
Formosa Plastics 2.016 9.9%
Solvay SA 1.703 8.4%
PPG Industries, Inc. 1.696 8.3%
Bayer AG 1.507 7.4%
Olin Corporation 1.105 5.4%
Akzo Nobel AB 1.073 5.3%
Asahi Glass Co., LTD 1.065 5.2%
TotalFinaElf 1.027 5.1%
Source: CMAI, Company data, CSFB estimates
Exhibit 24: Major Caustic Soda Producers, 2005E

Occidental Petroleum 2.671 12.4%
Formosa Plastics 2.218 10.3%
Solvay SA 1.873 8.7%
PPG Industries, Inc. 1.836 8.5%
Bayer AG 1.32 6.1%
Olin Corporation 1.171 5.4%
Akzo Nobel AB 1.117 5.2%
Asahi Glass Co., LTD 1.115 5.2%
TotalFinaElf 1.109 5.2%
Source: CMAI, Company data, CSFB estimates
Chlorine and Caustic Soda Industry Growth Trends and Value Drivers
Chlorine and caustic soda are produced in a fixed ratio, 1.0 to 1.13. An electrochemical
unit (ECU) is defined as 1 short ton of chlorine plus 1.13 tons of caustic soda. Chlor-
alkali prices are often quoted in terms of $/ECU, and costs are often measured on a per
ECU basis.
Because chlorine is a toxic green gas and expensive to store, chlor-alkali production is
typically tied to demand for chlorine. Caustic output, therefore, is tied to chlorine
demand, meaning caustic is often overly abundant or in short supply.
It should be noted that chlorine increasingly is being replaced as a bleaching agent in

the pulp and paper industry by hydrogen peroxide and especially sodium chlorate.
Hydrogen peroxide not only produces excellent whiteness with very little deterioration of
the substance being bleached, but is also far more environmentally friendly,
decomposing into water and oxygen. It is, however, more expensive than sodium
chlorate, which has gained a considerable market position in North America.
30
Demand for chlorine is highly dependent on demand for PVC, and thus, on the health of
the construction industry. But it should be kept in mind that PVC is utilized not only in
new construction, but also in-house remodeling, siding, fences, decks, and windows.
Furthermore, infrastructure is also an important application; for example, in large
diameter sewer pipes and water mains.
As demand for chlorine is more cyclical than the need for caustic soda, this alkali can be
in long or short supply when production of chlorine increases or decreases. Aggregate
GDP is most heavily correlated with the use of caustic soda.
31
Soda Ash
Soda ash is the second-largest alkali in terms of volume behind caustic soda. It can be
produced through either refining of mined trona ore or the synthetic processing of
ammonia-soda. Naturally based soda ash is more “dense” than synthetic soda ash; it is
also more environmentally friendly and cost-efficient to produce. However, synthetic
soda ash can be processed further to increase its density, and about half of the
synthetic soda ash produced today is sold as dense soda ash. Today, more soda ash is
produced from trona than through the older synthetic Solvay method, which was a major
advance when it was discovered in the late 19th century.
Soda Ash Uses

Glass manufacturing is the largest application for soda ash. Other uses are chemical
production, soap and detergents, and flue gas desulfurization.
Exhibit 25: Consumption of Soda Ash by End Market, 2004
Others
19% Container Glass
23%
Pulp & Paper
1%
Other Glass
7%
Metals & Mining
4% Flat Glass
Chemicals 22%
10%
Soaps &
Detergents
14%
Source: CMAI, CSFB research.
Soda Ash Manufacturers

Exhibit 26: Major Global Soda Ash Producers, 2004
Solvay SA 7,225 15.32%
FMC Corporation 2,546 5.40%
Soda Alkali Industrial Corporation 2,527 5.36%
Sterlitamsk Combine 2,098 4.45%
Shandong Ocean Chemical Group 1,600 3.39%
General Chemical Soda Ash Partners 1,273 2.70%
Tangshan Jidong Chemical Plant 1,200 2.54%
Sun Capital Partners 1,105 2.34%
Ciech 1,100 2.33%
Oriental Chemical Industries 1,066 2.26%
Source: CMAI, CSFB estimates.
32
Soda Ash Industry Trends and Value Drivers

The production of soda ash through the refining of trona ore is far more cost-efficient
than the Solvay process. As a result, U.S. producers who have large natural trona
deposits at their disposal have a significant cost advantage over their non-U.S.
competitors. Hence, the European industry has seen extensive consolidation in recent
years in the face of increasing imports of soda ash from the U.S. The same is true in
Asia and Latin America. In fact, about one-third of soda ash produced in the U.S. is
exported through a legal cartel, ANSAC, sanctioned under U.S. law.
The price of soda ash and caustic soda is loosely linked, as approximately 5-10% of
their demand is interchangeable. However, as caustic soda is produced in far larger
volume, soda ash is more influenced by the price of caustic soda than vice versa.
Demand for soda ash has been dented in recent years by the replacement of glass
bottles in the beverages industry with PET and recycled glass bottles.
Soda Ash Growth Prospects

We expect growth in soda ash to fall short of GDP growth because of the continued
decline in demand for glass in favor of plastic materials.
We, therefore, forecast no growth in European demand for production of soda ash for
the next five years. However, we do expect usage to continue to increase in emerging
parts of Asia.
The soda ash industry has experienced widespread oversupply in recent years.
Capacity in Asia has expanded, and a new Colorado-based operation (now idled) was
opened in the U.S. Price wars between Asian soda ash producers, especially the
Chinese, and U.S. manufacturers (through ANSAC) have prevailed for several years.
However, several U.S. producers have curtailed output, allowing supply and demand to
come into better balance. Prices in the U.S. began to recover in 2004 and are
advancing noticeably in 2005-2006.
33
Phosphates (Nonfertilizer)
The primary market for phosphate rock is the production of phosphate fertilizer products
such as ammonium phosphates and super phosphates. (We provide detailed analysis of
this in the fertilizer section to follow.) It is estimated that 95% of the world consumption
of phosphate is in the form of fertilizers. The balance is consumed for a variety of
industrial, consumer, and animal feed applications. Exhibit 27 shows the major
derivative products of phosphate and their end uses.
Exhibit 27: Major Products and End Uses of Phosphate

Products Primary End Uses
Merchant-grade acid Feedstock for other phosphate products:
technical and food-grade purified acid, feed
supplements, fertilizer for agriculture
DAP/MAP Solid fertilizer
SPA, LoMag, Poly-N Liquid fertilizer, feed, industrial products
Dical/Nonocal/DFP Livestock and poultry feed supplements
Industrial acid Soft drinks, food products, industrial
detergents, personal care items, metal
treating, water treatment, pharmaceuticals.
Source: SRI, CSFB research.
Phosphorus and High-Purity Phosphoric Acid

Elemental phosphorus and high-purity “wet process” phosphoric acid (PPA, or purified
phosphoric acid) are the starting points for phosphorus-containing chemicals used in a
wide range of nonfertilizer markets. Phosphorus itself is the key feedstock where ultra-
high-purity phosphoric acid (thermal acid) is required in the end product or when the
desired products cannot be manufactured conveniently from high-purity acid.
Phosphorus is a nonmetallic element (atomic weight 30.97) that can occur in several
allotropic forms (white/yellow/red/black). It is produced in furnaces that require large
amounts of electric power. The resultant element is then oxidized and converted to high-
purity phosphoric acid.
In recent years, the ability to economically produce PPA directly from phosphate rock—
the so-called “wet process”—has evolved as a major alternative route. Potash
Corporation of Saskatchewan has been quite successful in this endeavor, but its
process cannot be employed universally, probably owing to the different characteristics
of various phosphate rock types.
Uses for Phosphorus and High-Purity Phosphoric Acid

Elemental phosphorus is used as a process input to produce a wide array of
phosphorus chemicals, including phosphorus sulfides and halides, phosphorus
pentoxide, and phosphoric acid. Exhibit 28 shows consumption of elemental
phosphorus by end use. Among the pesticides that require high-purity phosphoric acid
are the herbicide glyphosate (including Monsanto’s Roundup brand) and a wide class of
insecticides known as organophosphates.
34
Exhibit 28: Consumption of Elemental Phosphorus by End Use, 2004
Plastics and Other

Elastomer 8%
Additives
10%
Lubricating Oil
Additives
11%
Pesticides
60%
Surfactants and
Sequestrants
11%
Elemental Phosphorus Manufacturers
Exhibit 29: Major Global Elemental Phosphorus Producers, 2005E Capacity

2005 Average Capacity.
short tons ('000)
Astaris 0 (Exited the market)
Monsanto 120
Thermphos International 170
Chinese Producers 500
Phosphorus Industry Trends

Historically, the elemental phosphorus industry had been highly concentrated,
dominated by a few major producers with relatively large-capacity plants sized for
production of thermal phosphoric acid in addition to phosphorus derivatives. In 1985,
Albright & Wilson, FMC (now a 50% owner of Astaris), Hoechst, Solutia (now a 50%
owner of Astaris), Occidental, and Rhodia (formerly Stauffer) accounted for almost half
of world capacity with 10 plants. By 1995, Albright & Wilson and Occidental had both
stopped elemental phosphorus production; and FMC, Hoechst, Solutia, and Rhodia had
rationalized to one plant each, representing only 33% of the world total. In 1996,
Hoechst then exited the business. Rhodia acquired Albright & Wilson in 2000, and
Astaris was created as an FMC/Solutia joint venture in that same year. Rhodia’s
operation was purchased by Thermphos. Monsanto remains a significant player, with
the vast majority of its production used to manufacture Roundup, the firm’s brand name
for the ubiquitous, nonselective herbicide, glyphosate.
The newer Chinese phosphorus plants are much smaller in scale, but there are over
100 producers. As a result, although there has been a net decline in capacity over the
past decade, the number of participants has risen substantially. Major companies in the
phosphorus industry are now shifting their production to China by way of joint ventures.
35
Unfortunately, the output from some of these phosphorus furnaces in that country has
been curtailed due to power shortages.
The successful producers of wet–process, high-purity phosphoric acid include Astaris

and PotashCorp. Other manufacturers include FMC’s Foret unit in Europe; Innophos (a
company controlled by Bain Capital, which purchased Rhodia’s U.S. phosphate
operations in 2004); Prayon (based in Belgium); Tata Group (India); Thermphos
(Holland); and Budenheim. (Germany).
Exhibit 30: Major Producers of Purified Phosphoric Acid and Phosphorus Salts, 2001
Annual Capacity
Short tons ('000)
Rhodia 1405
Astaris (FMC & Solutia) 861
Thermphos (Holland) 325
Prayon (Belgium) 245
Potash Corp. of Saskatchewan 195
GIRSA, S.A. de C.V. and Quimir, S.A. de C.V. 195
Israel Chemicals Ltd. (BK Giulini Chemie) 116
Europhos 95
The following chart illustrates the proportion of products derived from wet-process
phosphoric acid (includes detergents/animal feed/personal care/food ingredients) in
North America (2003).
Exhibit 31: Consumption of Wet Process Phosphoric Acid by End Use, 2003
Phosphorus
Pentasulfide Speciality Acids
Phosphorus 5% 3%
Trichloride Food Salts (Largely
4% as preservative for
Sodium baked foods)
Tripolyphosphate 32%
(STPP) detergent
builder
16%
Technical Grade
Salts Phosphoric Acid
18% (Beverages &
Foods)
22%
Source: FMC, CSFB research.
STPP is a more prevalent product outside of North America, as it has been banned for
use in laundry detergents in the U.S.
36
Phosphorus Industry Growth Prospects

Demand growth for phosphorus chemicals, which tends to mirror GDP, improved in
2004 with the strengthening of economies in North America and Europe. Though the
demand has not changed appreciably, several factors have led to much tighter market
conditions for key phosphorus chemicals, including Astaris’s actions to close several of
its plants and exit commodity-grade sodium tripolyphosphate (STPP) as part of its
restructuring; Rhodia’s action to close its Rouen plant in Europe; and Chinese
production constraints resulting from energy shortages. As a result, in both North
America and Europe, purified phosphoric acid and phosphorus salts, particularly STPP,
are in short supply. In 2005, we anticipate growth continuing at GDP levels.
37
Titanium Dioxide
Titanium dioxide is a white pigment. It is manufactured from mined titanium ore through
one of two processes, the sulfate or chloride process.
The sulfate treatment uses a wet-chemical process, in which concentrated sulfuric acid
is added to ilmenite titanium ore to produce a titanium solution. This solution is
converted into titanium dioxide through hydrolysis and calcination.
The chloride route is increasingly being adopted worldwide, as it is more cost-effective,
produces a higher-quality end product, and is more environmentally friendly.
Titanium Dioxide Uses

This white pigment is used primarily to enhance brightness and opacity. Fifty-five
percent of the demand for titanium dioxide comes from the paints and coatings industry,
while other major users are plastics, paper coating and fillers, and, to a lesser degree,
man-made fibers. Additional demand stems from the manufacturing of rubber, printing
inks, floor coverings, ceramics, textiles, and cosmetics.
Exhibit 32: Global Consumption of Titanium Dioxide by End Market, 2004
Other
Printing Inks
6%
2%
Paper
10%
Coatings
Plastics
58%
24%
Source: Kerr-McGee, CSFB research.
38
Exhibit 33: Global Capacity for Titanium Dioxide, 2004
Other
DuPont
18%
23%
Kemira
3%
ISK
4%
Kronos
Lyondell Chemical
10%
16%
Huntsman Kerr-McGee
13% 13%
Source: Orr & Boss, CSFB research.
Titanium Dioxide Industry Growth Prospects, Trends, and Value Drivers

Reliance on the paints and coatings industry creates exposure to both consumer and
industrial confidence. Demand for architectural paints is not that cyclical. Following a
period of downstream destocking that ended in the latter half of 2003, shipments of TiO2
reverted to their moderate growth rate in the U.S. In Europe, migration to the more cost-
effective chloride manufacturing process, combined with the increasing substitution of
titanium dioxide for kaolin in the lamination of paper and board, has fueled strong
demand.
The industry has seen considerable consolidation in recent years and, as a result,
returns have improved somewhat. Following a period of dismal earnings during and
after the 2001 recession (as the inventory correction intensified price competition),
pricing and profitability are on an upswing.
Growth rates over the medium to long term have been largely in-line with GDP, and this
correlation is expected to continue in the future.
39
V. Organic Chemicals
Organic chemicals are derived from either of the two hydrocarbon feedstocks, crude oil
and natural gas. Oil and gas companies, as well as chemical companies, have
undertaken the manufacturing of first-generation commodity organic chemicals. The
former group has gained some market share, as it often possesses a number of cost
advantages that lead to greater production efficiency. Foremost among these are:
security of feedstock, or the ability to integrate the chemical production into a refinery,
and consequently, gain significant capex advantages; and location in a deep-sea port
enabling ease of transport of the end product.
Oil/gas and chemical producers located in the Middle East and other oil-rich zones are
expanding their market positions fairly rapidly, taking advantage of stranded natural gas
in their locales and exporting the derived chemical products. And, if you can’t beat ’em,
join ’em, as evidenced by joint ventures, which include the raw material “owner,” such
as Kuwait, Petronas, and SABIC and a Western partner, such as Dow Chemical,
ExxonMobil, and Royal Dutch/Shell. Elsewhere in Asia, backward integration by
Reliance and Formosa groups from chemicals to refining and exploration, as well as
creation of vertically integrated oil and chemical giants in China, stand testimony to this
latest trend in which organic chemical production is becoming a forte of oil companies.
“Cracking”: Production of Ethylene

The organic chemical industry begins with the manufacturing of base chemicals. These
form the building blocks for an enormous array of other chemicals and products. The
majority of organic base chemicals are manufactured in an olefin plant or “cracker.” The
“thermal”—also known as a “steam”—cracker uses heat and steam in tubes within
furnaces to break down longer-chained carbon molecules into smaller units. Regardless
of the feedstock, crackers always produce the smallest olefin ethylene, but propylene,
butenes, and butadiene may also be generated. Beyond these olefins, aromatics and
fuel components may also be manufactured.
40
Exhibit 34: Inputs and Outputs in the Petrochemical Industry
Feedstocks
The cost of the feedstock has a significant influence on the profitability of the
participants in the olefin industry. Not only is it the principal component in the
manufacturing of the majority of base chemicals and polymers, but it also reflects the
cost of the energy that the cracking process consumes in large quantities. The principal
feedstocks for an olefin plant are the derivative naphtha (a low-octane form of gasoline
made by fractional distillation of crude oil), used more frequently in Europe and
Asia/Pacific, and natural gas (or more specifically, its natural gas liquids [NGLs]
components—ethane, propane, and butane), used more often in the U.S. and the
Middle East. A cheap raw material base (predominantly natural gas feed) is the key
driver of capacity growth in the Middle East. Natural gas-fed units produce a far higher
proportion of ethylene than naphtha-fed units (and thus, a reduced proportion of
butadiene, propylene, and aromatics), and also require less capital investment.
41
There is no European spot market for natural gas, as all of the capacity is traded under
long-term contracts, the terms of which are kept confidential. The price of natural gas
liquids tends, however, to track the price of crude oil, sometimes with a lag of three to
six months.
Exhibit 35: Crude Oil and Natural Gas Prices

on a monthly basis
Crude Oil (WTI) Natural Gas (Delivered Texas)

10
Low Natural Gulf War II
50 Gas 9
Gulf War I Inventories
8
40 Severe 7
Winter
Natural Gas $/MM Btu

6
Crude Oil $/bbl
30
5
4
20
3
2
10
0 0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
42
Exhibit 36: Oil and Naphtha Prices

on a monthly basis
505
470
435
400
365
330
US$ / tonne
295
260
225
190
155
120
85
50
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Brent West Europe Naphtha West Europe
Ethylene and Other Olefins: Introduction

The three most important olefins (a subsector of so-called aliphatic organic
chemicals)—ethylene, propylene, and butadiene—form the building blocks for the
majority of organic chemicals and synthetic materials.
After supply/demand, the prices of crude oil (or more specifically, of naphtha or gas oil)
and natural gas are important drivers of profitability of olefin production, as a significant
change in raw material price passes straight to the bottom line. Over the short term, this
is because NGLs and naphtha pricing are established daily, but contract olefins prices
are set on a monthly basis.
Changes in production capacity determine the level of olefin supply. A producer may
build new capacity, marginally expand an existing facility, or may suffer a loss of
capacity because of technical problems at one of its plants. Demand is reliant on
production of derivative products, which are used in a wide variety of industries.
Profitability of Ethylene—The Most Important Petrochemical Intermediate

What is the best way for investors to measure profitability in ethylene in particular and in
the ethylene chain in general? No matter how you slice and dice, it is not a simple
matter.
43
Looking at ethylene itself is complex enough! We at CSFB have typically looked at the
spread between ethylene and the principal feedstock ethane (which contains 2 carbon
atoms—C2), one of the NGLs derived from natural gas. This methodology is relatively
simple, since for every pound of ethane used, 0.8 pounds of ethylene are produced,
with the bulk of the remainder being hydrogen and methane, which can be recycled as
fuel.
The Impact of Heavier Feedstocks

Moving to heavier NGLs, propane (3 carbons, i.e., C3) and butane (C4) provide 0.44
and 0.37 pounds of ethylene per pound of feedstock. In these cases, co-products
include not only hydrogen and methane, but also propylene and, in the case of butane,
butenes and butadiene.
Exhibit 37: Olefin Cracker Output by Feedstock
Olefin Cracker Output by Feedstock

(Pounds of Ethylene/Pound of Feedstock)
1.2
1.0
0.8
0.6
0.4
0.2
0.0
ethane propane butane light naphtha gas oil heavy gas oil
ethylene co-products
If even heavier oil-derived liquids (known as distillate fractions that contain C5

molecules or higher) are employed, the ethylene output as a proportion of input feeds
drops to 0.34 (naphtha), 0.29 (gas oil), and 0.22 (even heavier vacuum-distilled gas oil).
This means that for every pound of ethylene produced in a gas-oil-based cracker about
3.5 pounds of co-products are also produced, as illustrated in Exhibit 38. Hence, co-
product prices can be even more important than ethylene prices when utilizing heavy
feedstocks.
Co-Product Values Are Critical to the Profitability Equation

Because more co-products are produced, their values become increasingly important as
one moves from ethane to the slate of heavier feedstocks, in which heavier means
higher molecular weight (i.e., more carbon atoms per molecule) and higher boiling
points.
44
Hence, ethylene economics are determined not only by the cost of feedstock and the
price of ethylene, but also by the value of the entire slate of co-products. Key ethylene
co-products are shown in Exhibit 38. Beyond ethane raw material, this is not a simple
task, and it becomes downright confounding by the time naphtha or gas oil is employed.
To complicate matters even further, there are different types of naphtha and gas oils,
and different cracking conditions (known as cracking severity) that cause the range of
co-products to vary.
Exhibit 38: Ethylene Co-Products and End Uses
Key Ethylene
Co-products Derivatives/End uses
Polypropylene
Acrylonitrile
Propylene Propylene Oxide
Acetone
Gasoline Alkylate
PE Comonomer
Butenes MTBE
Gasoline
Synthetic rubber
Butadiene ABS Resins
Nylon
Styrene
Phenol
Benzene Nylon
Urethanes
Gasoline
Benzene
Toluene Urethanes
Gasoline
PET resins
Polyester Fiber
Xylenes PVC Plasticizers
Gasoline
Optimizing Feedstocks
When determining their choice of feedstock and cracking severity, ethylene producers
use sophisticated models to maximize their economics. Moreover, since the bulk of
these manufacturers utilize cracker output “in house” for upgrading into higher value
derivatives, the various internal requirements for these co-products is another variable
that has to be evaluated.
45
CSFB measures ethylene spreads versus ethane, as it is the simplest method by far
and does not require access to linear programming models that ethylene producers
employ.
How Important Is the Oil:Gas Ratio?

One rule of thumb that we (and others) have used is the thermal ratio between oil and
gas. When the oil:gas ratio is 6:1 (such as $18 oil and $3 gas), the cost of generating
heat from either fuel source is the same. A ratio above 7:1 typically favors natural gas-
derived ethylene feedstocks, while below 5:1 generally supports the use of those raw
materials derived from oil. But this ratio guideline certainly does not indicate which NGL
or which oil distillate fraction would be the most cost-effective.
Moreover, even the “rule of thumb” can provide the incorrect answer if co-product
values are especially high or low. For example, in recent weeks, when the oil:gas ratio
was in the neighborhood of 7:1, the use of naphtha was preferable to NGLs, as gasoline
values were above normal relative to crude oil. This led to a situation in which propylene
and the simple aromatic compounds (benzene, toluene, and the xylenes) were
particularly valuable, since they are utilized through upgrading (in the case of propylene)
or directly (aromatics) to enhance the properties of motor fuel. In fact, generally
speaking, oil distillate fractions had better economics through most of the first half of
2004, a switch from the fourth quarter of 2003 when co-product values were particularly
low. This was a strong contributory factor to the impressive earnings performance in
2004 for ethylene producers that crack naphtha.
How Flexible Are Ethylene Units with Regard to Feedstock Selection?

Another interesting corollary relates to the feedstock mix that any given company (or
ethylene cracker) can utilize. Units based on natural gas liquids can often use a mix of
C2, C3, and C4, although in some cases only ethane (C2) can be utilized. But they
cannot, in general, use naphtha or gas oil, although some NGL-based plants are being
modified on the back, or “cold end” (i.e., enhancing the co-product separation part of the
plant), with only minor changes to the cracking furnaces in the front section, or “hot
end,” to use what are called “light naphthas.” These are oil fractions that are limited to
lower boiling materials that contain C5 molecules, and possibly some C6 as well. Light
naphthas yield far fewer co-products than full-range naphthas.
Facilities based on naphtha or gas oil are usually flexible in that they can often employ
NGLs as well.
The Feedstock and Geographic Mix Is Critical to a Firm’s Profitability

It is just plain wrong to state categorically that, since the U.S. natural gas cost
advantage has disappeared (i.e., assuming foregone days of an oil:gas ratio of 9:1 or
10:1 are not returning), the domestic ethylene industry can essentially be written off
because economics have turned against it. Since there is a constant arbitrage between
fuel oil and natural gas prices, we certainly do not believe NGLs are washed up as an
economically viable ethylene feedstock, but what if they were? Whereas about two-
thirds of the U.S. olefin industry is based on NGLs, there are lots of facilities that are
not. For example, Lyondell’s Equistar unit has about two-thirds of its ethylene output
based on naphtha and only one-third on NGLs. While about 70% of the ethylene
46
produced by Nova Chemicals is made in Alberta and based on ethane (the remaining
output is derived from a naphtha cracker in Ontario), it should be emphasized that
Alberta ethane is derived from natural gas priced about $0.70/mcf below the U.S. Gulf
Coast price. Dow Chemical has several flexible naphtha crackers in the U.S. and has
closed two uneconomic NGL units. Furthermore, with four naphtha crackers in Europe
and three low-cost operations that employ NGLs based on very inexpensive stranded
natural gas (Argentina, Kuwait, and Malaysia—the latter two of which are not majority-
owned), less than 20% of its global ethylene feedstock mix is U.S. Gulf Coast NGLs.
What about the Ethylene Chain in General?

When going beyond just ethylene and examining the profitability of the ethylene chain in
general, what is the best approach? While some ethylene is sold into the merchant
market, the bulk is used internally to produce such products as polyethylene, ethylene
oxide/ethylene glycol, ethylene dichloride/vinyl chloride, styrene, vinyl acetate, etc. PE,
EO/EG, and EDC/VCM account for over 80% of ethylene consumption, with PE alone
constituting slightly over half.
Some observers try to “shortcut” the issue by looking at polyethylene spreads, since this
thermoplastic typically guzzles more ethylene than any other derivative. This approach
can often yield misleading results, however. For example, while polyethylene margins
were relatively lackluster during the first half of 2004, giving pause to some investors
that use this as a proxy for trends in the ethylene cycle, this was certainly not the full
answer to the question.
The best way to attack the problem, in our view, is to examine the entire array of
products. Again, this is no simple matter, but even a rough look at a series of
compounds manufactured along the chain can be more helpful. Thus, while profitability
of PE had been lagging during the first half of 2004, margins for ethylene oxide/glycol
and EDC/VCM were on a sharp upward trajectory. In addition, when factoring the high
value of ethylene co-products generated in naphtha or gas oil crackers, it is clear that
profitability in the ethylene chain was at the time advancing sharply after several dismal
years. That is, ethylene feedstocks are critical in evaluating ethylene chain economics.
How Does Middle East Output Affect Profits in Various Scenarios?

An interesting counterintuitive example of ethylene chain profitability concerns
petrochemical complexes that are based on ethane derived from stranded natural gas
(such as in the Middle East), which sells at $1.00/mcf or less. The higher the free
market price of oil and gas, the more profit is generated in these facilities when
downstream output is factored into the equation. For example, polyethylene or ethylene
glycol production costs, including inexpensive ethane feedstock, are considerably lower
when manufactured in the Middle East. Yet these products command world-selling
prices, which are largely determined by oil costs in the U.S., Europe, China, Brazil,
Japan, Korea, etc. and gas prices in the U.S. Besides the owners of stranded gas,
beneficiaries include joint venture partners such as ExxonMobil, Dow Chemical, Royal
Dutch/Shell, BP, and ConocoPhillips.
As of the start of 2005, announced capacity expansions in the Middle East approximate
50 billion pounds of ethylene, roughly 20% of current global capacity. However, about
40 billion pounds of this incremental capacity, domiciled mainly in Saudi Arabia and
47
Iran, are not slated to come onstream and be operable until after 2007; this should
protect less cost-advantaged producers in the interim. About 10% of the potential Saudi
Arabian capacity seems unlikely to be built, and about 20% of the Iranian capacity
startup has been pushed back. It could take up to a year after startup for new capacity
to affect the market fully.
The completion of the Iranian facilities in a timely manner is somewhat more

challenging, since different facets of a given project—such as raw material procurement,
downstream manufacturing, utilities, the cracker itself—typically are owned by different
groups, making coordination more difficult. Also, unlike the situation in Saudi Arabia and
most other Middle East countries, Iranian projects do not usually include partners from
outside the country.
Ethylene
Ethylene Uses
Ethylene is produced predominantly in thermal (steam) crackers and is used in the
manufacturing of a huge variety of chemicals and products. Demand for ethylene, and
therefore its price, is largely driven by demand for its derivative plastics—polyethylene,
polyvinyl chloride, and polystyrene—which combined account for approximately 75% of
demand for ethylene. (These plastics are discussed in more detail later in this report.)
Much of the remaining use is linked to demand for ethylene glycol, used in
manufacturing antifreeze, PET bottle resin, and polyester fibers.
Exhibit 39: Global Ethylene Demand by Derivative, 2004
Alpha Olefins
Vinyl Acetate
Other 3%
1%
4%
Ethylbenzene
7%
Ethylene Dichloride
13%
Polyethylene
59%
Ethylene Oxide
13%
*Ethylene dichloride is a precursor of PVC

**Ethylene oxide is a precursor of ethylene glycol
48
Exhibit 40: Ethylene Derivatives
Low-Density
Polyethylene
Linear Low-
Linear Low-
Density
Density
Polyethylene
Polyethylene
High-Density
Polyethylene
59% Ethylene
VCM4 PVC5
Dichloride
13%
+ chlorine
Ethylene
Glycol
13% Ethylene Oxide

ETHYLENE
Ethylene
7% GlycolEO
Other
Derivatives
+ benzene
8%
Ethylbenzene Styrene Polystyrene
1. LDPE =Low Density Polyethylene

2. LLDPE = Linear Low Density Polyethylene
3. HDPE = High Density Polyethylene
4. VCM = Vinyl Chloride Monomer Others
5. PVC = Polyvinyl Chloride
Source: ECN, CSFB research.
Ethylene Manufacturers
Exhibit 41: Major Global Ethylene Producers, 2004 Capacity

2004 Average Capacity.
Metric tons ('000)
Dow Chemical 9,772
ExxonMobil 8,228
Royal Dutch/Shell Group 6,848
SABIC 6,203
Lyondell Chemical 4,749
BP 4,741
TotalFinaElf 3,490
China Petrochemical Corp 3,292
Formosa Plastics 3,165
BASF 3,020
Ethylene Industry Trends, Growth, and Value Drivers

As with many commodity petrochemicals, ethylene production is increasingly being
consolidated among only the largest oil and chemical companies, including those with
secure sources of cheap feedstocks. The increasing need for scale in petrochemicals is
leading to sizable global players and reducing the aggregate market positions of smaller
companies that are reluctant to commit further capital to this business. In addition, the
limited ability of producers to pass on feedstock price changes to their customers during
periods of oversupply tends to lead to a level of earnings volatility that only the largest
and/or most diversified players can handle. Finally, the ability of oil and gas companies
to integrate an ethylene plant into a refinery presents significant cost advantages and
consequent production efficiencies that are unmatchable by those without this ability.
49
As demand growth is closely linked to economic health, ethylene usage is often

measured in relation to GDP. We use a trendline global GDP multiplier of 1.5 through
2006 to forecast future demand for ethylene and its derivatives.
Exhibit 42: Ethylene Prices, 1993–Present

on a monthly basis
1,600
1,500
1,400
1,300
1,200
1,100
US$ / tonne
1,000
900
800
700
600
500
400
300
200
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
US Ethylene EU Ethylene Asian Ethylene
Exhibit 43 presents our supply/demand forecast for ethylene. Demand growth is

expected to approximately match capacity growth, most of which is centered in the
Middle East and, to a lesser extent, China. Hence, global capacity utilization is
Exhibit 43: Estimated Global Supply/Demand for Ethylene

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004E 2005E 2006E 2007E 2008E
World Capacity (Avg) 72,359 75,010 78,475 81,707 85,171 89,229 92,981 95,965 103,563 110,365 111,699 113,298 119,327 126,437 131,772 138,667
% change 5.4% 3.7% 4.6% 4.1% 4.2% 4.8% 4.2% 3.2% 7.9% 6.6% 1.2% 1.4% 5.3% 6.0% 4.2% 5.2%
Demand* 61,614 66,976 69,999 74,306 78,045 81,245 87,302 90,579 92,286 95,717 98,063 104,615 111,242 116,714 122,527 128,707
%change 2.4% 8.7% 4.5% 6.2% 5.0% 4.1% 7.5% 3.8% 1.9% 3.7% 2.5% 6.7% 6.3% 4.9% 5.0% 5.0%
Shipment Rate 85% 89% 89% 91% 92% 91% 94% 94% 89% 87% 88% 92% 93% 92% 93% 93%
Source: Credit Suisse First Boston Estimates * Projections based on the IMF's GDP forecasts
expected to remain in the low 90s, a healthy environment for profitability. It appears
more likely that some of the projects that were scheduled to come onstream between
2005 and 2007 may be delayed, a phenomenon that would boost shipment rates in
those three years somewhat. In support of this view, we cite a recent report from CMAI,
which projects that 20% of Middle Eastern ethylene capacity scheduled for 2005-2010
will come onstream in 2005-2007, with the remaining 80% in the following three years.
50
Propylene
Like ethylene, propylene can be manufactured either in an olefins plant or as part of the
oil refining process. There are three different grades of propylene: refinery (the least
pure, used to make high octane gasoline alkylate); chemical (used to make various
chemical products such as acrylonitrile, cumene, propylene oxide, and acrylate
monomers); and polymer (used to make polypropylene). Refinery grade propylene is
often upgraded to chemical or polymer grade material. A small proportion of propylene
is derived from the propane dehydrogenation process, a more expensive route, but one
that is helpful if no alternate sources are available. Moreover, some can be produced by
olefin metathesis, as described below.
Exhibit 44: Propylene Derivatives
Polypropylene
Acrylic Fibers
Acrylonitrile
ABS* Resins
61%
9%
Cumene Phenolic Resins
6%
PROPYLENE
Polyurethane
resins &
7% Propylene coatings
Oxide
Solvents
2%
Acrylates
Paints,
Coatings,
Superabsorbers
15%
Other
* ABS = Acrylonitrile Butadiene Styrene
Propylene Uses
Propylene itself has few direct uses. Its largest chemical market is for the manufacturing
of polypropylene resin, an important intermediate product in the manufacturing of a wide
range of consumer and industrial goods. (See the “Polypropylene” section.) This
accounts for around 60% of output. It is also used in the manufacturing of a number of
derivative chemicals that are used in the manufacturing of certain textiles, fibers,
coatings, and plastics.
51
Exhibit 45: Global Propylene Consumption by Derivatives, 2004
Isopropanol
Butanols
2%
4% Oligomers
2-Ethyl Hexanol 2%
4%
Others
6%
Cumene
6%
Propylene Oxide
7% Polypropylene
60%
Acrylonitrile
9%
Exhibit 46: Major World Producers of Propylene, 2004 (annual capacity)

2004 Average Capacity
metric tons ('000)
ExxonMobil 4,466
BP 3,183
TotalFinaElf 3,141
Dow Chemical 3,066
China Petrochemical Corp 2,779
Ente Nazionale Idrocarburi SpA 2,386
BASF AG 2,272
BASF and Dow aside, the majority of propylene producers are petroleum-refining
companies. Approximately 70% of propylene production is derived as a co-product of
ethylene manufacturing; the remainder is produced as a by-product of petroleum
refining.
Propylene Industry Trends, Growth, and Value Drivers

The value of propylene is closely allied to general economic activity because propylene
forms the base for a huge number of derivative products that are used in a wide variety
of industrial and consumer goods. In addition, as propylene is produced as a by-product
of ethylene production, the manufacturing base is broadly similar. Thus, the trends
toward consolidation, scale, and participation by oil and gas producers also apply.
One interesting situation that may be unfolding is tightening propylene availability

through the rest of the decade, ethylene expansions notwithstanding. The reason
behind this apparent dichotomy relates to the nature of the new ethylene facilities. The
largest portion of world expansion in ethylene is coming from the Middle East, and
ethane is the predominant feedstock there. Hence, hardly any propylene will be
52
produced in these new olefin units. This will put more pressure on refineries to supply
incremental propylene demands (raising the price of propylene vis-à-vis ethylene over
the next five years). Another possibility is the increased use of the propane
dehydrogenation route to propylene, another relatively expensive proposition. A third
source would be olefin metathesis. For example, a combination of ethylene and
butylenes can be metathesized to propylene in a catalytic reaction; the BASF/Total
cracker in Port Arthur, Texas, utilizes this process to bolster propylene output from its
facility.
Long-term demand for propylene has grown at twice the annual rate of GDP historically.
We expect growth to remain at 1.5-2.0 times GDP on a long-term basis.
Butadiene
Butadiene Uses
The primary use of butadiene is as an intermediate product in the production of two
principal types of synthetic rubber. This in turn is used in the manufacturing of tires and
other fabricated items. The remaining demand for butadiene comes from manufacturers
of styrene-butadiene latex (often used as an adhesive or coating); ABS resins (used in
engineering plastics); and nylon 66 fibers—by those who utilize the DuPont technology.
Exhibit 47: Butadiene Derivatives
Styrene-
butadiene
Synthetic rubbers
Polybutadiene
66%
BUTADIENE Latexes
33%
ABS resins*
Nylon fibers
and resins**
•* ABS = Acrylonitrile Butadiene Styrene
** DuPont Technology
53
Exhibit 48: Global Butadiene Consumption by Market, 2004
Other
ABS resins 5%
11%
Adiponitrile/HDMA
5% SBR & Latex
36%
2, 6 NDC
0.2%
Nitrile rubber
3%
Polybutadiene
rubber SB copolymer latex
26% 11%
Polychloroprene
rubber
3%
Butadiene Manufacturers
As the third major product of the cracking process, butadiene is produced by the same
companies that produce ethylene and propylene, although the proportions of butadiene
produced depend upon the feedstock used. Ethane and propane feedstocks do not lead
to commercial amounts of butadiene; butane or higher-molecular-weight raw materials
(such as naphtha and gas oil) are required to provide healthy output.
Exhibit 49: Major World Butadiene Producers, 2004

2004 Annual Capacity % share
Royal Dutch/Shell Group 975.9 8.8%
China Petrochemical Corporation 789.1 7.1%
Texas Petrochemicals 762 6.8%
ExxonMobil 536.75 4.8%
Huntsman 520 4.7%
BP 494.5 4.4%
Lyondell Chemical 390.5 3.5%
JSR Corporation 333 3.0%
SABIC 320 2.9%
EniChem 313.1 2.8%
Source: Company data, CSFB estimates
The companies mentioned in Exhibit 49 accounted for approximately 51% of global

butadiene production.
54
Butadiene Industry Trends, Growth, and Value Drivers

Traditional markets for butadiene derivatives tend to be largely mature (such as
automotive); thus, butadiene growth has been modest. In recent years, however,
demand has picked up because of increased use of ABS resins as an engineering
plastic.
We expect butadiene demand growth to remain broadly in-line with GDP over the next
five years. Demand suffered in 2001-2002 because of the weak economies, particularly
in Western Europe and the U.S. However, meaningful recovery was noted in late 2003
and 2004.
55
Benzene and Other Aromatics: Introduction

Like the olefins, the aromatics—including benzene, toluene, and the xylenes—are
derived either from the cracking process or from petroleum refining. As a large
proportion of aromatics are produced in the petroleum refining industry, the economics
of the aromatic chain are closely linked to those of crude oil and gasoline. Prices for
aromatics, therefore, tend to be some of the most volatile of any of the base chemicals.
Exhibit 50: Principal Derivatives of Aromatics
Polystyrene
Styrene
Bisphenol-A
Polycarbonate
Benzene
Phenolic Epoxy
Phenol Resins Resins
Caprolactam Adhesives
Cyclohexane
Crackers or Nylon 6
Adipic Acid
Refineries
Aniline Nylon 66
MDI
Toluene Polyurethane
Dinitrotoluene Toluene
Diisocyanate
(TDI) Polyurethane
Para-Xylene
Purified
Polyester/
Xylenes Terephthalic
PET Resin
Acid (PTA)
Ethylene
Acetic Acid Glycol
Base Chemical Intermediate Product End Product
56
Benzene
Benzene Uses
Benzene is the most widely used aromatic compound. Of its derivatives, styrene is
produced in the greatest volume for use in polystyrene for packaging, as well as in ABS
resins and styrene-butadiene rubber. In addition, phenol is employed as an intermediate
in the manufacturing of adhesives and epoxy resins. The other large derivative of
benzene, cyclohexane, is widely used in the production of nylon and as a gasoline
component.
Exhibit 51: Global Consumption of Benzene by End Market, 2004
Others
15%
Ethyl Benzene/
Cumene
Styrene
18%
55%
Cyclohexane
12%
Benzene Manufacturers
Exhibit 52: Major World Producers of Benzene, 2002
2002 Annual Capacity
metric tons '000
ExxonMobil 3,276
Dow Chemical 2,264
TotalFinaElf 2,056
BP 1,912
China Petrochemical Corporation 1,655
ConocoPhillips 1,052
Petróleos de Venezuela 972
Nippon Oil Corporation 938
The companies mentioned in Exhibit 52 accounted for approximately 40% of global

benzene production.
57
Benzene Industry Trends and Value Drivers
Benzene supply in Asia will likely be tight from 2005. Asian oversupply in 2004 was
200,000 tons. However, due to a demand increase for derivative products, we estimate
supply will be 400,000-500,000 tons short in 2005. In 2008, we estimate supply will be
short by over 800,000 tons.
Benzene Growth Prospects

The majority of benzene capacity additions are expected to be in Asia, where plans
scheduled would add 1.64 million tons in 2005-2007. During the same period, capacity
additions for 2.76 million tons of derivative products are also planned. We expect
benzene demand to grow more than capacity during this period.
Toluene
Toluene Uses
Toluene’s major use is as an additive to gasoline to boost the octane rating. The major
chemical use is in the production of the xylenes and benzene through
disproportionation. Its use in the manufacturing of solvents is declining because of
stricter emissions laws, but it is also used to make toluene di-isocyanate (TDI), which is
used in the manufacturing of polyurethane foams.
Exhibit 53: Global Consumption of Toluene by End Market, 2003
Other
Gasoline blending 10%
5%
Toluene Benzene
diisocynate 35%
10%
Solvents
10%
Xylenes
30%
58
Toluene Manufacturers
Exhibit 54: Major World Producers of Toluene, 2002
metric tons '000
ExxonMobil 1,964
China Petrochemical Corporation 1,154
BP 1,075
Chevron 928
Reliance Industries 913
ConocoPhillips 887
Royal Dutch/Shell Group 873
Koch Industries 814
Petróleos de Venezuela 717
TotalFinaElf 686
The top-10 producers listed above accounted for approximately 41% of global toluene
production.
Toluene Industry Trends and Value Drivers

The majority of toluene production is unrecovered (as it is consumed as a constituent of
various refinery systems). Because of its major use as a gasoline additive, prices are
primarily driven by gasoline prices and are also, therefore, closely linked to the price of
oil.
Toluene Growth Prospects

Toluene economics depends on the price of oil, refining margins, and supply/demand
conditions in the aromatics business in general, including benzene. We expect demand
to grow for TDI and to firm for other applications.
The Xylenes
Mixed xylene is used primarily as a solvent and as an additive in gasoline. In the
chemical industry, xylene is separated into three isomers: para-xylene, ortho-xylene,
and meta-xylene.
Xylene Uses
Mixed xylenes are the second most important aromatic product in terms of world
consumption for chemical manufacturing. Almost all para-xylene is converted into either
terephthalic acid (TPA) or dimethyl terephthalic acid (DMT), which comprises the basic
intermediates for polyester fibers and films and polyethylene terephthalate (PET) resins.
It is also used to manufacture polybutylene terephthalate (PBT), a specialty engineering
resin.
The other major isomer is ortho-xylene, used to produce phthalic anhydride, which itself
is used in the production of plasticizers, polyester resins, and alkyd resins.
59
Exhibit 55: Xylene Materials Flow

Major Chemical
Major End-Use
Intermediates
Derivatives
Direct use
of mixed Unsaturated
Major Aromatic Xylene Meta- Isophthalic Polyesters
Source Xylene Acid Surface Coatings
PET Copolymers
Coal
Processing
Steam
Cracking
PVC Plasticizers
Mixed
Separation Ortho- Surface Coatings
Xylene Phtalic Acid
Isomerisation Xylene Unsaturated
recovery
Polyesters
Petroleum
Reforming
Other Aromatic Polyester Fibers

Sources Para-Xylene DMT/PTA
Disproporti PET Resins
onation
Toluene Benzene
Source: SRI.
Xylene Manufacturers
Generally, oil companies recover xylenes and isolate the isomers, while the chemical
companies purchase the isomers for manufacturing of derivatives.
Exhibit 56: Leading Producers of Xylenes, 2004

Mixed Xylenes Ortho-xylene Para-xylene
World World World
Share Share Share
Company (%) Company (%) Company (%)
ExxonMobil 11 ExxonMobil 11 ExxonMobil 13
China Petrochemical 8 China Petrochemical 9 BP 12
Reliance Industries 6.5 Reliance Industries 8 Reliance Industries 7
TotalFinaElf 6 Kohap 5 China Petrochemical 7
BP 5 SK Group 4 Chevron 4
Nippon Oil Corporation 4 Formosa Plastics 4 Nippon Oil 3
China National Pet 3 Flint Hills 4 Kohap 3
ConocoPhillips 3 Sibneft 4 Formosa Plastics 3
Royal Dutch/Shell Group 2.5 Others 51 SK Group 3
Flint Hills 2.5 Flint Hills 3
Chevron 2.5 Others 43
Others 49
60
Xylene Industry Trends and Value Drivers

As the three xylene isomers are used in a broad range of applications, principally
polymers, it is difficult to generalize regarding demand drivers. However, the majority of
end markets for these applications tend to be fairly mature, although some end markets,
such as PET for use in plastic bottles, are growing well above GDP and have prompted
recent capacity additions.
Xylene Growth Prospects

Overall, we expect demand growth of around 3-5% for all xylenes over the next five
years. However, para-xylene demand should grow around 7-8% in 2005-2006, so near-
term demand growth for xylene may be higher.
61
Acetone
Acetone is produced principally as a co-product of phenol in the peroxidation of
cumene, although some production is via the dehydrogenation of isopropyl alcohol.
Acetone is an intermediate in the production of methyl methacrylate, bisphenol A, and
aldol chemicals. It is also widely used as a solvent.
Exhibit 57: Global Consumption of Acetone by End Use, 2006E
Other
8%
Aldol chemicals
ACH/MMA
11%
30%
Bisphenol A
23%
Direct Solvent
28%
Exhibit 58: Leading Global Producers of Acetone, 2002

metric tons ('000)
Ineos Phenol 899
Sun Chemical 536
Mitsui Chemical 357
EniChem 295
Dow Chemical 243
TotalFinaElf 217
General Electric 194
Rhodia 183
Georgia Gulf 181
Acetone Industry Trends and Value Drivers

Acetone derivative demand is highly affected by macroeconomic conditions, as
shipments depend on the health of the auto and construction sectors. Acetone supply is
driven more by phenol (its co-product) demand than by acetone (its own end markets).
62
Acetone Growth Prospects

Acetone remains in oversupply and is expected to remain so for a few years. Global
phenol demand continues to outpace the growth for acetone, and with acetone thus
perennially long, producers continue to explore economically efficient ways of producing
phenol without acetone.
63
Acrylates
Acrylic Acid and Acrylate Esters
The most common (and economically efficient) path of acrylic acid production is the
oxidation of propylene to acrolein and then to acrylic acid, employing various catalysts.
The catalyst is a critical component of the associated cost economics of acrylic acid
manufacture. Typically, the acrylic acid is either converted to polyacrylic acid—a
superabsorbant polymer used in disposable diapers and incontinence pads—or to
acrylate esters. In the latter case, the acrylic acid undergoes esterification with an
alcohol (such as butanol or ethanol) to yield acrylate esters, which are heavily employed
in the manufacturing of coatings and adhesives. Acrylic acid production accounts for
about 5% of total propylene consumption in North America.
Exhibit 59: Global Consumption of Crude Acrylic Acid by End Use, 2003
Other
15%
Commodity Esters
39%
Superabsorbents
46%
Source: CSFB estimates.
Exhibit 60: U.S. Consumption of Commodity Acrylate Esters by End Use, 2003
Others
27%
Surface coatings
39%
Fibers
2%
Textiles
7%
Adhesives/
Sealants
25%
Source: SRI, CSFB estimates.
64
Acrylates Manufacturers
Exhibit 61: Major Producers of Crude Acrylic Acid, 2004
Annual Capacity
metric tons ('000)
BASF 850
Rohm and Haas 739
Dow Chemical 517
Nippon Shokubai 406
ATOFINA 296
Formosa Plastics 111
Other 776
Exhibit 62: Major Producers of Commodity Acrylate Esters, 2004

Annual Capacity
metric tons ('000)
BASF 859
Dow Chemical 430
Rohm and Haas 396
Nippon Shokubai 231
ATOFINA 198
Other 1024
Acrylates Growth Prospects

We anticipate growth rates of 4-5% for acrylic acid and acrylate esters. The highest
growth for these products continues to be witnessed in hygiene products, such as
diapers and incontinence pads, as well as in the replacement of oil-based paints with
water-based paints.
Methyl Methacrylate (MMA)

MMA is a monomer—produced from acetone—that is generally polymerized into pMMA
and other polymeric systems for various end markets. It has a wide range of uses and is
the principal building block for acrylic resins. In acrylic sheet form, it is often branded
(such as Perspex or Plexiglas) or molded into household products. Acrylic polymers
continue to be used as a substitute for materials such as glass because of their
toughness and other attractive properties. However, the market is mature; thus, demand
only marginally outpaces GDP. In addition, MMA can be co-polymerized with various
acrylate esters (derived from propylene) to be formulated into water-based emulsions;
these products are often used in surface coatings and also as fixatives in products such
as hairsprays. One growth area, however, is mineral-filled acrylic surface materials such
as Corian (DuPont), which continues to make a splash in sink and countertops.
65
Exhibit 63: Major End Uses for MMA, 2007E
Other
26% Acrylic sheet
34%
Surface Coatings
18% Moulding &
Extrusion
Compounds
22%
Exhibit 64: Major Producers of MMA, 2003

2003 Average Capacity
metric tons ('000)
Rohm and Haas 615
Lucite International 365
Mitsubishi Rayon 287
ATOFINA 180
Asahi Kasei 100
Honam Petrochemical 100
66
Acrylonitrile
Acrylonitrile (AN) is produced by the ammoxidation process from propylene, ammonia,
and air. This propylene-based route was developed by Standard Oil of Ohio in the
1950s and is referred to as the Sohio process (now owned by BP). The process
replaced a higher-cost route that employed acetylene and hydrogen cyanide.
Acrylonitrile Uses
The largest end use for acrylonitrile is acrylic fibers, which accounts for nearly half of
total output. Acrylonitrile-butadiene-styrene (ABS) and styrene-acrylonitrile (SAN) resins
represent 30% of acrylonitrile consumption. The consumption of these thermoplastic
resins is primarily in the manufacture of durable goods, including automobile
components, appliances, business machines, and pipe and fittings, and, hence, demand
is economically sensitive. Adiponitrile (ADN) is used exclusively in the production of
hexamethylenediamine (HMDA), which is a precursor for nylon 66 resins and fibers.
Solutia (formerly Monsanto) is the prime practitioner of this process that converts AN to
AND. Other smaller-volume end uses for acrylonitrile include acrylamide, nitrile rubber,
and acrylonitrile co-polymers.
Exhibit 65: Global Consumption of Acrylonitrile by End Use, 2003
Others
12%
Acrylamide
4%
Acrylic Fibers
Adiponitrile
50%
10%
ABS
24%
Source: Chemical Week, CSFB estimates.
67
Acrylonitrile Manufacturers
Exhibit 66: Leading Global Producers of Acrylonitrile, 2004
metric tons ('000)
BP 935
Asahi Chemical 695
Solutia 467
China Petrochemical 355
Sterling Chemical 339
BASF AG 300
Tae Kwang Petrochemicals 250
DSM 235
Cytec Industries 215
Acrylonitrile Industry Trends and Value Drivers

The growth of acrylic fibers and ABS resin capacity in the Far East has been the key
driver of acrylonitrile demand. Imported acrylonitrile from North America is a critical
source of feedstock for the Asian markets, and that region is not expected to become
self-sufficient for the next several years.
Acrylonitrile Growth Prospects

Global acrylonitrile demand is expected to grow at a 4% CAGR through 2005. Robust
Asian demand growth is expected to be partially offset by much slower growth in the
mature European and North American markets.
68
Ethylene Glycol
Ethylene Glycol Uses
Ethylene glycol is an ethylene derivative and is used primarily in the manufacture of
polyester (81%) and antifreeze (11%). Of the ethylene glycol consumed for polyester
production, 25% is used for PET containers, 52% for polyester fibers, and 4% for PET
films. Antifreeze is used in motor vehicles, pumps, and heating, and serves to lower the
freezing point of water. Other smaller outputs include resins for surface coatings, and
hydraulic brake and shock absorber fluids.
Exhibit 67: Global Consumption of Ethylene Glycol by End Market, 2003
PET Film Other

Industrial 4% 3%
5%
Antifreeze
11% Polyester Fiber
52%
PET Containers
25%
Exhibit 68: Ethylene Glycol Manufacturers, 2003

metric tons ('000)
MEGlobal* 2,158
SABIC** 1,050
Mitsubishi Corp 650
Lyondell*** 442
Honam Petrochemical 400
ExxonMobil 400
Mitsui Chemicals 380
Reliance Industries 370
*50/50 joint venture between Dow Chemical and Petrochemical Industries Company (Kuwait).
**Includes capacity from JVs with Japanese consortium and ExxonMobil.
***Includes capacity from JV with DuPont.
69
Ethylene Glycol Industry Trends and Value Drivers

Increasingly, most producers believe manufacturing MEG in North America, Europe,
and Japan is not as profitable as other petrochemicals. Many producers in this region
cannot justify capacity expansion due to low or negligible returns. As a result, all new
capacities are being developed in the Middle East due to the abundant supply of natural
gas reserves in that region.
Ethylene Glycol Growth Prospects

Monoethylene glycol’s growth is highly dependent on polyester fibers and resins. We
anticipate growth rates of 4-5% through 2007.
70
Ethylene Oxide
Ethylene oxide is produced mainly via the catalytic oxidation of ethylene and is used in
the production of ethylene glycols (used for antifreeze, PET bottle resin, polyester fibers,
and polyurethanes), surface-active agents (alkylphenol ethoxylates), ethanolamines
(soaps and detergents), and glycol ethers (used in surface coatings, cleaning products,
and aircraft fuels).
Exhibit 69: Global Consumption of Ethylene Oxide by End Market, 2002
Ethanolamines
Other
Polyols 6%
2% Ethoxylates
2%
11%
Polyethylene Glycol
1%
Higher Glycols
8%
Glycol Ethers
3%
Ethylene Glycols
67%
Ethylene Oxide Manufacturers
Exhibit 70: Leading Global Producers of Ethylene Oxide, 2004

metric tons ('000)
Dow Chemical 2,758
BASF 1,040
SABIC 988
China Petroleum Corporation 603
Japanese MEG 583
BP 540
Huntsman 505
Lyondell Chemical 485
The top-10 producers accounted for approximately 55% of global ethylene oxide
production in 2004.
71
Ethylene Oxide Industry Trends and Value Drivers

Most ethylene oxide is used by its manufacturer. In North America, for example, only
about 10% of ethylene oxide produced is sold in the merchant market. The largest
producers of ethylene oxide are located in North America and the Middle East, where
the players have economies of scale and a cost advantage.
Ethylene Oxide Growth Prospects

Most of the capacity growth is expected in the Middle East and Asia over the next four
to five years. Demand for ethylene oxide is expected to grow at an annual average rate
of 5.1% through 2008.
72
Methanol
Methanol (methyl alcohol) is one of the few organic base chemicals not produced in an
olefin plant. Instead, the vast majority (90%) is produced by reforming natural gas, or
more specifically, synthesis gas with steam.
Methanol Uses
The principal derivatives of methanol are methyl tertiary butyl ether (MTBE),
formaldehyde and acetic acid. Methanol is also used as a solvent. Over 40% of
methanol is used to produce the latter two derivatives in the manufacturing of polymers
for adhesives, fibers, and plastics. It is also used in some types of antifreeze, but
generally not as an automobile coolant. In the gasoline industry, MTBE is used as an
octane booster and a blending agent.
Exhibit 71: Global Methanol Demand by End Market, 2004
DMT Other
1% 24%
Methyl methacrylate
3%
Methylamines
3%
Formaldehyde
Chlorinated 34%
methanes
4%
Acetic Acid
10%
MTBE
21%
Methanol Manufacturers
Exhibit 72: Leading Methanol Producers, 2004

2004 Capacity
metric tons (‘000)
Methanex 7316
SABIC 2225
Celanese 1963
Ferrostaal AG 1575
National Iranian Oil 1510
Japan Saudi Methanol Consortium 1500
Terra Industries 963
Metafrax 825
Tomsk Group of Petrochemical Enterprises 825
PDVSA 780
Statoil 738
Petronas 726
73
Methanol Industry Trends and Value Drivers

Since almost all formaldehyde is manufactured using methanol, demand for
formaldehyde is a key growth driver. Formaldehyde is used to produce resins for
adhesives used principally in the construction industry. As a result, activity in this
industry is a key determinant of demand for methanol.
The use of MTBE as a fuel additive was a major driver of demand for methanol during
the early to mid 1990s. Because of environmental concerns (leaching into groundwater
from leaking tanks at gasoline stations), the long-term use of MTBE in the U.S. has
been called into question.
Methanol could well see a long-term fillip to demand growth from fuel cells if adopted as
the fuel of choice. However, in our view, we are unlikely to see any meaningful effect
from this source for several years to come.
Methanol Growth Prospects

There are concerns that new methanol facilities slated to come onstream will result in
oversupply. However, we believe this is not likely, given that small-scale facilities in
China and South-East Asia will shut down once these new plants are complete. In
addition, since high prices for natural gas have significantly curbed methanol production,
we expect the increases to methanol supply in 2005 to be limited.
Global demand rose to 31.2 million tons in 2003, and we expect demand to continue
expanding at a pace of 2.5% annually. We forecast demand will grow by 0.9-1.0 million
tons in 2005, and by a similar amount in 2006. New capacity amounting to 2.59 million
tons is slated to come onstream in 2005 and a further 2.75 million tons in 2006.
However, since total production capacity of 3.42 million tons will likely be halted, we
expect supply/demand to remain tight in 2005. In 2005-2006, the increase in demand
(assuming 1.8 million tons), combined with the expected halts to production capacity,
should amount to 5.22 million tons, which is roughly the same level as the 5.34 million
ton slated increase in production capacity. As a result, we expect supply/demand to
remain relatively tight until 2007, when production capacity totaling 8.4 million tons
(including that of Mitsubishi Gas Chemical) is slated to come onstream.
74
Phenol
Phenol is an aromatic intermediate produced predominantly via the peroxidation of
cumene, a process that also yields acetone. Other processes may be used, but this is
the most economic route. Solutia has patented a production process that yields phenol
from benzene and nitrous oxide through a one-step process without the intermediate
cumene and the co-product acetone; however, commercialization has been put on hold
owing to oversupply, and a change in Solutia’s strategy implies the company might
prefer to license the technology, rather than committing its own capital. Key phenol
derivatives are bisphenol A, phenol-formaldehyde resins, caprolactam, and
alkylphenols.
Exhibit 73: Global Consumption of Phenol by End Use, 2006E
Other
17%
Alkylphenols
Bisphenol A
4%
43%
Caprolactam
9%
Phenol/
formaldehyde
resins
27%
Phenol Manufacturers
Exhibit 74: Leading Global Producers of Phenol, 2003

metric tons ('000)
Ineos Phenol 1,530
Sunoco Chemicals 976
Royal Dutch/Shell group 535
Polimeri Europa 480
Ertisa 350
Dow Chemical 295
Novapex* 275
* Bain Capital (Boston) acquired Rhodia’s Phenol business and formed Novapex.
75
Phenol Industry Trends and Value Drivers

Demand for phenol is highly sensitive to the overall economy, as end uses lie
predominantly in the construction and auto sectors. Bisphenol A is a precursor of
polycarbonate and epoxy resins, which are employed in various OEM- and construction-
related materials, as well as in electronics. Phenol-formaldehyde resins are used to bind
wood for construction and furniture. Caprolactam is an intermediate in the manufacture
of nylon 6 fibers and resins. In addition to demand, phenol prices are also driven by raw
material (propylene and benzene) tabs.
Phenol Growth Prospects

Phenol demand in 2004 grew by 4.2% year over year. Asian growth was 8.9% year over
year due to good demand for BPA and phenol resins. Phenol demand should grow by
3% in 2005, as demand remains firm for BPA for polycarbonate and phenol resins. We
envision long-term growth rates of 3-4%.
76
Propylene Oxide
Propylene oxide (PO) is produced via two major routes commercially: (1) the
chlorohydrination of propylene and (2) the peroxidation of propylene. The chlorhydrin
process uses large volumes of chlorine (1.45 pounds of chlorine for each pound of
propylene oxide) and is only competitive if employed by an integrated producer. There
are two distinct process technologies that use the peroxidation process, and both yield
co-products. One process yields tertiary butyl alcohol (TBA) as the co-product; the other
yields styrene monomer (SM) as the co-product. These methodologies yield two to three
times as much co-product (styrene or TBA) as propylene oxide, a significant
disadvantage. Most of the recent capacity expansions have been in the form of
propylene oxide/styrene monomer (PO/SM) plants.
Several firms are developing routes to manufacture propylene oxide through the direct
oxidation of propylene. The advantage of these processes is that they will not yield a co-
product. One is commercial at this point, but Lyondell Chemical Company and
Sumitomo Chemical Company, through their joint venture Nihon Oxirane Co., Ltd., are
in the process of building a 200,000-metric-ton-per-year propylene oxide facility in
Chiba, Japan, that utilizes a proprietary process.
Propylene Oxide Uses

The largest end use, representing 60-70% of propylene oxide output, is polyether
polyols, which are used with MDI or TDI to produce polyurethanes. Propylene glycol
(PG), which accounts for 20% of end demand, is the second-largest use for propylene
oxide. PG is used as an intermediate in the production of unsaturated polyester resins,
as well as for deicing fluid or antifreeze, and is also employed as an additive in
processed foods, drugs, and cosmetics. Glycol ethers represent 5% of PO output and
are largely used as solvents in a variety of market applications.
Exhibit 75: Global Consumption of Propylene Oxide by End Use, 2003
Other
10%
Glycol Ethers
5%
Propylene Glycols
20% Polyols
65%
77
Exhibit 76: Leading Global Producers of Propylene Oxide, 2004

metric tons ('000)
Dow Chemical 1850
BASF 374
Repsol 215
Sumitomo Chemical 213
BP 200
Huntsman 181
Sunkyog Industries 165
Bayer AG 143
Source: CMAI CSFB estimates.
The top-10 producers accounted for 88% of global propylene oxide production in 2004.
Propylene Oxide Industry Trends and Value Drivers

The durable goods market, as represented by polyurethanes, is the key driver of the
propylene oxide market. The industry is highly consolidated with two key players, Dow
Chemical and Lyondell Chemical, accounting for 56% of global supply. The capital
intensity of the business (it costs about $500 million to build a world scale POSM plant
with 500 million pounds of PO capacity) as well, as the proprietary nature of the
technology that is not freely licensed, limits the number of players.
Propylene Oxide Growth Prospects

Global propylene oxide demand is expected to grow at 3-4% per year in 2005. A large
amount of capacity started up in the past three years, which the industry has been able
to absorb. Currently, the supply/demand ratio is balanced globally and looks to become
tight moving beyond 2005
78
Styrene Monomer
Styrene monomer is manufactured through the oxidation of ethylbenzene, which is
produced via the alkylation of benzene with ethylene using a catalyst.
The majority (about two-thirds) of styrene monomer is consumed in the manufacture of
polystyrene resins. Other key derivatives include acrylonitrile-butadiene-styrene (ABS)
and styrene-acrylonitrile (SAN) resins, styrene-butadiene (S/B) co-polymer latex
emulsion, unsaturated polyester resins, and S/B elastomers.
Exhibit 77: Global Consumption of Styrene Monomer by End Market, 2003
Others
12%
SBR
10%
Polystyrene
47%
ABS/SAN
15%
EPS
16%
Styrene Manufacturers
Exhibit 78: Leading Global Producers of Styrene, 2003

metric tons ('000)
Dow Chemical USA 2,086
BASF* Germany 1,920
Lyondell Chemical USA 1,895
Royal Dutch/Shell Group UK 1,830
ATOFINA** France 1,628
Sadaf Saudi Arabia 1,050
Nova Chemicals Canada 997
Chevron USA 950
BP UK 804
Sterling Chemicals USA 750
* Includes Ellba JV between BASF & Royal Dutch/shell Group.

**Includes CosMar JV between ATOFINA and GE Plastics.
Source: Chemical Week, CSFB estimates
79
Styrene Industry Trends and Value Drivers
We expect an improved supply/demand, as the rate of capacity growth has eased and
customer restocking should result in a meaningful shipment recovery for end products.
POSM (propylene oxide and styrene monomer) manufacturers will have to consider
market dynamics for each co-product before pursuing further expansions; that is, a
significant proportion of new styrene capacity reflects the construction of facilities
designed primarily for producing propylene oxide, which is growing more rapidly than its
less desirable co-product.
Styrene Growth Prospects

We anticipate a global growth rate of 3-4% for styrene monomer; lower rates are
expected for developed markets, while much higher growth is foreseen for developing
regions such as Asia and South America.
80
Surfactants (Surface Active Agents)

Surfactants are chemicals that allow molecules to mix with water by having a water-
seeking end and a water-repelling end. The water-repelling end is attracted to oil and
creates a bond between the water and the oil. Surfactants can be manufactured from
two main categories of raw material, naturally derived (oleochemicals) or synthetically
derived (petrochemicals). Derivatives can either be combined or used individually to
produce a wide range of surfactants.
Exhibit 79: Surfactant Production
•Heavy-Duty laundry liquids

Anionic •Light-Duty dishwasher
Benzene LAB Surfactants •Personal care
•Washing Powders
SYNTHETIC
•Heavy-Duty laundry liquids

Non-Ionic •Heavy-Duty laundry powders
Paraffins Ethylene Oxide Surfactants •Industrial cleaners
•Disinfectants
ALCOHOLS
Synthetic
Linear Olefins Alcohols
•Fabric Softeners
Cationic •Baby products
Amines •Shampoos
Surfactants
•Household Cleaners
Fatty
Alcohols
•Conditioners
Coconut Oil,
Amphoteric
OLEOCHEMICALS
•Specialised toiletries
Palm Kernel Oil, Fatty Acid
Surfactants •Anti-static plasticizers
Tallow
•Agrochemicals
Glycerine
Surfactant Uses
Broadly speaking, there are four types of surfactants, and each possesses distinct
qualities, which make them suitable for different end uses. Commodity surfactants are
used principally as detergents; however, their chemical properties can be further refined
to create specialty chemicals for use in personal care products.
• Anionics (negatively charged) are used mainly in detergents, washing powders, and
industrial applications, but also in the personal care market.
• Nonionics (uncharged) are synthesized principally from petrochemicals. They are

used mainly in detergents and industrial applications.
• Cationics (positively charged) are milder than both anionics and cationics. They are
used principally in fabric softeners and baby products.
81
• Amphoterics surfactants have an active chemical entity attached to both ends of the
molecule and are used in specialty applications such as hair conditioners and
agrochemicals.
Exhibit 80: Consumption of Surfactants by End Market, 2004
Other Industrials
17%
Construction
3%
Paper
3% Household
Agrochemical 51%
3%
Polymers &
Coatings
5%
Industrials &
Institutional Personal Care
Cleaning 12%
6%
Surfactant Manufacturers
The range of surfactants is extremely broad; thus, the manufacturing base is widely
diversified. Major manufacturers of the raw materials for many surfactants include,
among others, Henkel, Huntsman, Dow Chemical, and Royal Dutch/Shell.
Exhibit 81: Principal Manufacturers of Surfactants, 2000
Dow Chemical
RoyalDutch/Shell
10%
12%
Stepan
Others 10%
17%
Sasol
10%
Goldschmidt
4% Huntsman
Rhodia 8%
6% BASF
A&W Henkel
7%
8% 8%
Source: Rhodia, CSFB research.
82
Surfactant Industry Trends and Value Drivers

The industry has suffered from significant oversupply at the commodity end of the
surfactant spectrum, as the barriers to entry are low and the technology and feedstocks
are readily available. Competition has, therefore, tended to be based on price, rather
than on product differentiation, and this has been exaggerated by the enormous
purchasing power of the customers (such as washing powder manufacturers). These
competitive forces led to consolidation among the larger players.
Surfactant Growth Prospects

Growth in surfactants has traditionally been closely allied to growth in detergents, which
tends to grow in-line with GDP. However, more recently, increased demand for products
made from natural oils has meant that oleochemical-based surfactants have grown
faster than those based on petrochemicals, and are likely to continue growing faster.
Overall volume growth in major world areas is expected to average around 1.9%
annually through 2008.
83
Vinyl Acetate
Vinyl acetate (VAM) can be produced via several routes. The most common commercial
process employs ethylene as a feedstock and reacts the gas with acetic acid and
oxygen to form vinyl acetate. An older, alternative route reacts acetylene with acetic
acid. This process is no longer used in North America and Japan but still accounts for
much of the older Western European and Chinese VAM capacity. Another process that
is based on the reaction of acetic anhydride with acetaldehyde is no longer practiced
commercially because of the relatively high cost of acetic anhydride.
Vinyl Acetate Uses

Polyvinyl acetate, which accounts for 44% of global VAM output, is primarily used in
latex paints for architectural coatings and adhesives for packaging and labeling
applications. Polyvinyl alcohol represents 39% of VAM production and is used in the
manufacture of plywood adhesives, as well as in the production of polyvinyl butyral for
the manufacture of laminated safety glass. In addition, polyvinyl alcohol is used as a
textile sizing. Ethylene vinyl acetate co-polymers represent 9% of vinyl acetate demand
and are used in film applications, as well as in the production of hot-melt adhesives for
bookbinding and packaging. Other end uses include vinyl acetate co-polymers used in
the manufacture of adhesives and caulks.
Exhibit 82: Global Consumption of Vinyl Acetate by End Market, 2002
Other
8%
EVA Copolymers
9%
Polyvinyl Acetate
44%
Polyvinyl Alcohol
39%
84
Exhibit 83: Leading Global Producers of VAM, 2004

Annual Capacity
metric tons ('000)
Celanese 1,463
Dow Chemical 422
E.I. Du Pont de Nemours & Company 330
BP 308
China Petrochemical 276
Various China Facilities 250
Darien Chemical 240
Nippon Synthetic Chemical 180
The top-9 producers accounted for 71% of global VAM capacity in 2004.
Vinyl Acetate Industry Trends and Value Drivers

Vinyl acetate capacity expansions have been announced for Asia and the Middle East;
these are expected to keep the industry well supplied for the next few years. The U.S.
accounts for 70% of global exports, and as new capacity comes online in other regions
of the world, North American producers will be the most vulnerable. Backward
integration into low-cost acetic acid production is another critical ingredient to being a
competitive vinyl acetate producer.
Vinyl Acetate Growth Prospects

Most of the applications of vinyl acetate are mature. The strongest growth areas are
likely to come from end uses such as ethylene-vinyl alcohol, polyvinyl butyral, and
acetate-ethylene resins. Overall growth of vinyl acetate consumption during 2003-2008
is expected to be 2.7% in the U.S., 2% in Western Europe, 1.1% in Japan, and 4.5% in
China.
85
Vinyl Chloride Monomer (VCM)

Vinyl chloride monomer (VCM) is a colorless, flammable gas with a sweet odor, and it is
a key intermediate in the petrochemical industry. Historically, vinyl chloride monomer
was used as a component in aerosol propellants for women’s hair spray, pesticides, and
some medical applications. It is now mainly used in the production of polyvinyl chloride
(PVC) polymers and vinyl co-polymers used primarily in construction markets, and less
so in the automotive, electrical, and packaging sectors. PVC represents approximately
97% of VCM’s global consumption.
Exhibit 84: Global Consumption of VCM by End Use, 2007E
Other
3%
PVC
97%
Vinyl Chloride Monomer Manufacturers
Exhibit 85: Leading Global Producers of Vinyl Chloride Monomer, 2003

2003 July Capacity
metric tons ('000)
Dow Chemical 2,739
Occidental Petroleum 1,930
Georgia Gulf 1,467
Solvay 1,207
European Vinyls Corporation (INEOS Group) 1,110
Tosoh 1,050
ATOFINA 1,009
LG Chemical 920
Shin-Etsu Chemical 820
The top-10 producers accounted for 51% of global VCM capacity in 2003.
86
Vinyl Chloride Monomer Industry Trends and Value Drivers

The PVC industry has been under close scrutiny in recent years as a result of
environmental concerns and because the manufacturing of VCM produces small
quantities of toxic dioxins, which are believed to have a detrimental effect on human
fertility and may be carcinogenic.
VCM prices are formula based, accounting for raw material (chlorine and ethylene) tabs
as well as PVC prices.
Vinyl Chloride Monomer Growth Prospects

Future prospects of VCM depend on the demand for PVC products, which is expected
to grow at an average annual rate of 3.5% through 2007. Geographic patterns will vary
significantly, with developed regions demonstrating lower growth rates than other
developing regions. The close ties of PVC to the construction sector make VCM heavily
cyclical.
87
VI. Thermoplastics and Thermoset Resins

Plastics are polymers that are combined with additives and other ingredients before
being molded into a solid state using pressure and heat. Polymers are created through
the linking of monomers (such as ethylene) into long chains, typically using heat,
pressure, and a catalyst. A number of different polymerization processes can produce
such output as pellets, flakes, granules, powders, lattices, liquid resins, sheeting, or film.
Each polymerization process has its own merits and downsides, and the economics of
each also vary. The five principal methods are bulk/gas-phase, solution, slurry,
suspension, and emulsion polymerization. Also, some polymers are made from a single
monomer, such as polyethylene and nylon 6, while others, such as styrene-butadiene
latex, ABS, and nylon 66, are produced using two or more monomers.
The two types of plastics are thermoplastics, which can be heated and resoftened into
their original state, and thermosets, which cannot be resoftened. Thermosets are
produced in far smaller volumes than thermoplastics, and demand is tied closely to the
construction industry and is thus highly cyclical.
Demand for thermoplastics tends to be more resilient to recession than some other
areas within the chemicals sector, as the products are geared toward the packaging and
consumer markets. However, they are subject to significant downstream inventory
swings, which can foster significant earnings volatility, as shown in the past 12-18
months. They have accounted for approximately 90% of total plastic production in
recent years. The five-largest volume thermoplastics are polyethylene (PE), polyvinyl
chloride (PVC), polypropylene (PP), polystyrene, and polyester (PET).
88
Polyethylene
Polyethylene is the largest volume plastic. The three principal types of polyethylene are
high-, low-, and linear-low-density polyethylene. The majority is used for packaging and
for consumer and institutional products.
Polyethylene Uses
Exhibit 86: Global Consumption of Polyethylene by Market, 2004
Other
13%
Wire & Cable
2%
Extrusion coating
13%
Pipe & Extrusion 6% Film & Sheet
50%
Blow Molding 13%
Injection Molding
13%
• High-density polyethylene (HDPE). HDPE is a rigid plastic made at low temperature

and low pressure. Its principal uses are as a resin for blow-molding bottles and
containers, or for injection-molding items such as crates, tubs, gasoline tanks, and
containers. It can also be manufactured into sheets or films for packaging and bags.
• Low-density polyethylene (LDPE). LDPE is made at high temperature and pressure

and is more flexible than HDPE. Its major use is for sheets and films for packaging.
• Linear-low-density polyethylene (LLDPE). LLDPE is actually a co-polymer, as other

monomers, such as butene or octane, are added to it. It is manufactured using lower
temperature and pressure than either HDPE or LDPE; thus, the manufacturing
process is more cost-effective. As it is flexible yet tougher than either HDPE or LDPE,
it is often used in films for heavy-duty applications.
89
Polyethylene Manufacturers
• HDPE.
Exhibit 87: Major Producers of HDPE, 2004

Company 2004 Capacity % share of
metric tons '000 Global Capacity
ExxonMobil 2,709 8.7%
SABIC 1.715 5.5%
Dow Chemical 1,589 5.1%
Lyondell Chemical 1,364 4.4%
Formosa Plastics 1,293 4.1%
TotalFinaElf 1,292 4.1%
BP 1,178 3.8%
Solvay SA 1,155 3.7%
Chevron 1,117 3.6%
ConocoPhillips 1,117 3.6%
Source: CMAI; CSFB research.
• LDPE.
Exhibit 88: Major Producers of LDPE, 2004

Company 2004 Capacity % share of
Ente Nazionale Idrocarburi 837 4.2%
China Petroleum 801 4.1%
Lyondell Chemical 717 3.6%
TotalFinaElf 694 3.5%
SABIC 693 3.5%
Royal Dutch/Shell Group 588 3.0%
BASF AG 560 2.8%
Norwegian Government 503 2.5%
• LLDPE.
Exhibit 89: Major Producers of LLDPE, 2004

2004 Capacity % share of
metric tons ‘000 Global Capacity
SABIC 1,550 7.9%
Nova Chemicals 935 4.7%
China Petroleum 725 3.7%
BP 588 3.0%
Ente Nazionale Idrocarburi SpA 530 2.7%
Lyondell Chemical 512 2.6%
Formosa Plastics 414 2.1%
Japanese MEG Consortium 390 1.9%
90
Polyethylene Industry Trends and Value Drivers

The global polyethylene business is undergoing extensive restructuring and
consolidation. The need to improve profitability, reduce costs, enhance scale, and
expand geographic coverage has led to rather rapid consolidation in the industry. The
HDPE industry is consolidating globally, while LLDPE is gradually gaining market share
at the expense of LDPE as a result of its wider range of applications, as well as its more
cost-effective manufacturing process.
The Polyethylene business is characterized by high profit volatility. Increased

competition has forced attention toward building and maintaining a competitive cost
position. So while low feedstock costs are still the most important factor in decreasing
costs per unit, production scale has diminished as a significant cost advantage over
recent years.
The majority of LLDPE is manufactured in “swing” plants that are also capable of
manufacturing HDPE. Finally, increasing demand for recycled resin has begun to
hamper demand for “virgin” resin, but at a very slow pace.
Polyethylene Growth Prospects

As a large proportion of the demand for polyethylene is linked to packaging and
consumer markets, these polymers tend to be less vulnerable to cyclicality but are
subject to significant inventory swings. More cyclical are those products used in the
construction industry, but these account for a minority of the end uses of polyethylene.
In addition, we expect globalization and consolidation of the industry to continue.
Historically, polyethylene demand has grown at approximately twice the rate of GDP
and should essentially continue to be driven by the overall health of world economies.
We estimate global demand for HPDE, LDPE, and LLDPE will grow at 5.7%, 2.2%, and
5.9%, respectively, through 2008; however, Asia is likely to record a higher growth rate,
with China contributing significantly to the pace.
91
Polypropylene
Polypropylene (PP) is the second-largest volume plastic resin globally. It has a wide
range of applications depending on the grade, including packaging, fibers, and
automotive parts.
Polypropylene Uses
Film grade PP is used for packaging confectionary goods, cigarettes, and electrical
capacitors. PP is used in thermoformed food containers, which can be either blown or
injection molded. Co-polymer PP is used primarily in car and truck bumper
manufacturing but also has medical applications, while PP fibers are used in carpets,
clothing, and nonwoven textiles.
Exhibit 90: Global Consumption of Polypropylene by End Market, 2004
Other
8%
Raffia
13% Injection Molding
38%
Fiber
16%
Blow molding
1%
Pipe & Profile
Film & Sheet
3% 21%
Polypropylene Manufacturers
Exhibit 91: Major Producers of Polypropylene, 2004

2004 Capacity % share of
Basell 4397 10.48
BP 2180 5.19
ATOFINA 1957 4.66
ExxonMobil 1860 4.43
Borealis N.V. 1315 3.13
Reliance Industries Ltd 1100 2.62
SABIC 1100 2.62
Dow Chemical 1072 2.55
Japan Polypropylene 1067 2.54
Sunoco Chemical 784 1.87
92
Polypropylene Industry Trends and Value Drivers

As the European (naphtha) cracking process produces a comparatively low proportion
of propylene (but far more than ethane crackers in North America and the Middle East
yield), its availability is a key driver of the profitability of the PP industry. While new
applications continue to develop for polypropylene, it is still largely a commodity
chemical subject to economic cyclicality, where cost volatility plays a vital role, often
undercutting the ability to recover pricing. Major players have, therefore, consolidated to
secure feedstock, technology, and superior commercial positions in the hope of
reducing profit volatility.
Polypropylene Growth Prospects

Unlike other commodity thermoplastics that have slowed relative to economic growth,
Polypropylene consumption continues to grow at 1.5-2.0 times the GDP growth even in
industrialized countries. Substitution of other polymers and significant improvements in
process and technology have been the significant driving force for this growth. We
expect polypropylene consumption to grow by 5-6%.
93
Polyvinyl Chloride (PVC)

PVC is the most widely used plastic globally. It is manufactured through the
polymerization of vinyl chloride monomer (VCM) using a slurry-based process, and it
has a wide variety of uses. It is also cheap to produce.
PVC Uses
PVC’s principal use is in the building and construction industry, where it is employed to
manufacture pipes, siding, gutters, flooring, windows molding, and wire coating. It is
also used in food packaging in film form, a declining application.
Exhibit 92: Consumption of PVC Resins by End Market, 2004
Film and Sheet

5%
Wire and Cable

4%
Ot her Rigid Pipe and Tubing

0% 44%
Compounding
4% Ext rusion
70%
Past e Processes Siding,
1% 15%
Coat ing
All Ot her Ext rusion Uses
2%
5%
Ext ruded Windows
M olding
and Doors
4% Fencing and Decking
6%
3%
Calendering
7%
PVC Manufacturers
Exhibit 93: Major Producers of PVC, 2003

2003 July Capacity
metric tons ('000)
Shin-Etsu Chemical 3,041
OxyVinyls* 2,003
Solvay 1,481
European Vinyls Corporation (INEOS Group) 1,390
Georgia Gulf 1,273
LG Group 1,149
TotalFinaElf 848
Vinnolit GmbH 645
*Joint venture: 76% Occidental, 24% PolyOne. (Both companies produce small amounts outside of the JV.)
The top-10 producers listed above represented 47% of global PVC capacity in July
2003.
94
PVC Industry Trends and Value Drivers

As with many commodity resins, competition is fierce in the PVC business. So feedstock
integration is critical to control production costs. Companies have adopted various
strategies like consolidation, streamlining operations, and forward integration to remain
competitive. The PVC industry has been under close scrutiny in recent years as a result
of environmental concerns. The manufacturing of both chlorine and VCM produces
small quantities of toxic dioxins, which are believed to have a detrimental effect on
human fertility and may be carcinogenic. It is unlikely that further capacity additions will
take place in the developed economies of North America and Western Europe, as the
focus shifts to Asia.
We believe replacement of traditional materials such as aluminum in the construction

industry is likely to be one of the key demand drivers.
PVC Growth Prospects

The close ties of PVC to the construction industry mean that demand for PVC can be
very cyclical. The market for the product is fairly mature; thus, we expect medium-term
growth of around 3.5% through 2007.
95
Polystyrene
Polystyrene is manufactured from styrene monomer in three main grades: general
purpose/crystal, high impact, and high heat (ignition grade). Expandable polystyrene
(EPS) is manufactured using a different process and is even considered to be a
completely separate product in its own right.
Polystyrene Uses
High-impact polystyrene is a strong, durable plastic; thus, it is used in appliances and
other demanding applications, competing against engineering plastics such as ABS.
Ignition-grade PS is used in heat-generating appliances such as TV sets. General
purpose/crystal polystyrene is mainly used for packaging (such as jewel boxes for CDs)
and household items such as domestic food service items and toys. EPS is used for
insulation and packaging.
Exhibit 94: Consumption of Polystyrene (GP/HIPS) by End Market, 2005E
Housewares/
Furniture Electrical/
8% Appliances
39%
Construction
3%
Appliances
20%
Packaging/One
Time Use
38%
Others
21%
Exhibit 95: Global Consumption of Expandable Polystyrene by End Market, 2005E
Others
8%
Construction
Packaging
53%
39%
96
Polystyrene (GP/HIPS) Manufacturers
Exhibit 96: Major Producers of Polystyrene, 2002

2002 Capacity
metric tons ('000)
Dow Chemical 2,098
BASF 1,548
TotalFinaElf 1,200
Nova Chemicals 955
Chi Mei 570
BP 498
EniChem 405
Mitsubishi Chemical 318
Idemitsu Kosan 266
Chevron 225
The top-10 producers of polystyrene (GP/HIPS) accounted for 61% of global capacity in
2002.
Polystyrene (EPS) Manufacturers
Exhibit 97: Major Producers of Polystyrene, 2002

2002 Capacity
metric tons ('000)
BASF 540
Nova Chemicals 465
Taita Chemical 160
Radnor Holdings 145
BP 135
EniChem 126
Huntsman 105
Kumho & Co. 90
Mitsubishi Chemical 90
Shinho Petrochemical 77
The top-10 producers of polystyrene (EPS) accounted for 53% of global capacity in
2002.
Polystyrene Industry Trends and Value Drivers
Industry oversupply in recent years led to consolidation and restructuring within the
industry. Subsequent reduction in capacity provided some support for prices, although
rising crude oil tabs drove up feedstock costs, further pressuring margins. As packaging
accounts for over 50% of demand for polystyrene in Europe, this area is relatively
resilient against recession. However, its role in this industry is being eroded by the
increasing use of polypropylene.
Growth for EPS is driven largely through its use as an insulator in the building trade.
However, this area is extremely competitive, and suppliers are exposed to cyclicality.
Some high-cost capacity is being shuttered in an effort to help balance supply and
demand.
Polystyrene Growth Prospects

As a fairly mature product and market, we expect polystyrene demand to grow largely
in-line with GDP.
97
Polyethylene Terephthalate (PET)

PET is a downstream product of para-xylene and ethylene (via PTA/DMT and ethylene
glycol). Purified DMT is reacted with excess ethylene glycol in a catalytic reaction that
facilitates ester exchange and polymerization; the by-product methanol is recycled.
Currently, the more popular and more economic route involves the direct esterification
of purified terephthalic acid with ethylene glycol, producing by-product water. (Additives
are often used in the polymerization process to alter the color of the material.) The
polymer produced, melt-phase PET can be melted and extruded through spinnerettes
into man-made polyester fiber.
Alternatively, it can be “digested” further through the application of heat to manufacture
high-molecular-weight solid-state resin. This PET is subsequently extruded and broken
into resin chips, which can be converted into bottles through a two-step process utilizing
injection-molding (into a “test tube” perform), followed by blow molding. (Note: Certain
applications, such as packaging, require such higher-molecular-weight resins. The
“digestion” step promotes further polymerization at below-melting temperatures, a
process known as solid-stating.)
Demand for the solid-state resin increased greatly in recent years because of its rapidly
expanding use in the bottled drinks industry. PET bottle resin is likely to be a material
driver of growth in many developing countries, but growth of PET fiber remains
dominant in terms of total polyester. The global PET business has deteriorated since
mid-1996 in terms of price stability, operating margins, and industry profitability. The
world market for PET solid-state resins is still oversupplied despite strong demand
growth.
In the “Man-Made Fibers” section of this report, we discuss polyester fibers.
98
Exhibit 98: Global Consumption of PET by End Market, 2002
Others
2%
Rigid Packaging
26%
Film
5% Fibers
67%
Exhibit 99: Major Manufacturers of PET Solid State Resins, 2005E

2005 Capacity
metric tons ('000)
Voridian (Eastman Chemical) 1500
M&G Group 1230
Invista (Koch Industries) 1100
Wellman 635
Nan Ya Plastics 610
Equipolymers 450
DAK Americas 310
DuSa 290
99
Polyurethanes
Polyurethanes are types of thermoset foams that are used in a wide range of
applications and markets for their cushioning and insulating properties. These materials
are produced by reacting an appropriate glycol or glycol ether with a di-isocyanate. They
are easily manufactured into a wide range of different physical forms. The two main
types of polyurethane foam are MDI-based (methylene-di-para phenylene isocyanate)
and TDI-based (toluene di-isocyanate).
Exhibit 100: U.S. Demand for MDI by End Market, 2004 Exhibit 101: U.S. Demand for TDI by End Market, 2004
Others
Other 15%
19%
Transport
Packaging 33%
Carpet Cushion 6%
4%
Construction
Insulation 46%
3% Bedding
10%
Transport
14%
Carpet Underlay
16% Furniture
20%
Packaging
5% Appliances
(refrigirator)
9%
Source: SRI, CSFB estimates. Source: SRI, CSFB estimates.
• MDI. The main use for MDI is in the production of rigid and semi-rigid foams, which
account for approximately 80% of global output and are used mostly in the
construction industry. Demand for MDI has been strong in recent years on the back of
the booming construction, automotive, and consumer industries.
Exhibit 102: Major Manufacturers of MDI, 2005

2005 Capacity
metric tons('000)
Bayer 895
BASF 805
Huntsman 745
Dow Chemical 705
Nippon Polyurethane 200
Yanatai Synthetic 130
Borsodchem 60
100
• TDI. TDI is used principally in manufacturing flexible foams for furniture and car
seating. It can also be used to produce coatings, rigid foam adhesives, sealants, and
cast elastomers. It enjoyed a resurgence in demand in recent years following a period
of decreased usage, as it was replaced by MDI, which has a broader range of uses.
This led to a period of modestly rising prices, as capacity was insufficient to meet the
rebound in demand.
Exhibit 103: Major Manufacturers of TDI, 2005

2005 Capacity
metric tons ('000)
Bayer* 420
BASF 370
Dow Chemical 250
Mitsui 240
Borsodchem 70
Organika Zachem 65
Huntsman 40
*About 100KT of Bayer’s capacity is idle.

101
VII. Man-Made Fibers

Man-made fibers are classified into two groups: cellulosic and noncellulosic. The former
type is produced from wood pulp and includes rayon staple, acetate filament, and
lyocell. Cellulosic fibers were introduced about 100 years ago. During the manufacturing
process, wood pulp is dissolved in a solvent, sodium hydroxide, processed further with
additional chemicals and/or solvents, and the resultant polymer is then put through a
spinnerette, which resembles a showerhead (rayon is wet-spun into a sulfuric-acid bath
and lyocell is dry-spun into air). Noncellulosic fibers are petrochemical derivatives and
include polyester, nylon, acrylics, spandex, and polyolefin fibers. Except for spandex,
which is solvent spun, the remaining types are formed from molten polymer that is
passed through spinnerettes. Noncellulosic fibers are much newer (introduced in the
1930s-1950s) and have exhibited faster growth rates than cellulosic types, owing to
more favorable properties and economics.
Man-made fiber production continues to gravitate to Asia, where manufacturing costs

(particularly manual labor) are substantially lower than in North America and Europe. In
1970, almost 90% of the global fiber production was in the U.S., Western Europe, and
Japan. Over the following two decades, fiber capacity grew rapidly in Asia, most notably
in Taiwan, China, and Korea, and in 1987, the three previously dominant regions
accounted for a much smaller 49% of global production. The man-made fiber producers
in countries such as the U.S., Western Europe, and Japan responded to the influx of
Asian companies in many ways. These responses include attempts at differentiation
through product quality and designs, alliances with other producers and in some cases
exiting the business completely. Thus, the list of major producers has undergone a
major change over recent years.
Among the major producers of man-made fibers are DuPont, Formosa Plastics, and
Sinopec Industries. Several companies have recently disappeared from the list of top
producers, such as Akzo Nobel, Courtaulds, and Hoechst. In November 2003, DuPont
announced it was selling its fibers and textiles business to Koch Industries for $4.4
billion. We expect this consolidation trend to continue, especially with companies in
industrialized countries.
102
Polyester Fiber
The key raw materials for polyester are purified terephthalic acid (PTA) or dimethyl
terephthalate (DMT) and ethylene glycol. PTA and DMT are derived from para-xylene
(produced in naphtha crackers or refineries), and EG is an ethylene derivative.
Polyester Fiber Uses

Polyester textile filament and staple fibers are woven (or knitted) into fabric used for
apparel goods and home furnishings. Fabrics can be 100% polyester, which are wrinkle-
and stretch-resistant, fairly durable, and water insoluble. Polyester fibers are often
blended with cotton, wool, rayon, or acrylics. Polyester textile filament is employed in
the production of women’s blouses and dresses, and is also used in manufacturing
household furnishing such as curtains. Polyester staple is most commonly blended with
cotton in manufacturing sheets and men’s shirts, for example, and is also used as
fiberfill for upholstered furniture and bedding and spun into yarns for making carpet,
although its market share in this sector is well below that of nylon.
Exhibit 104: Global Polyester (All Fibers) Consumption by End Market, 2004
Industrial
20%
Apparel
48%
Home Furnishings
32%
103
Polyester Fiber Manufacturers
Exhibit 105: Global Leading Producers of Polyester Fiber, 2005E (Annual Capacity)
Company Location Annual Capacity Metric Tonnes (000)
TF IF ST Total
Reliance Industries Ltd India & Germany 590 - 590 1180
Nan Ya Plastics Taiwan, USA, Vietnam 625 - 506 1131
Zhejiang Rongshan China 530 - 400 930
Tuntex Taiwan, China, Thailand 455 - 450 905
Yizheng China 250 3 600 853
Shaoxing Yuandong China 520 - 300 820
Far Eastern Taiwan, China 323 67 330 720
Jiangying Synthetic China - - 710 710
Huvis Korea, Indonesia, China 159 - 539 698
Sinopec China Excl Yizheng 215 22 350 587
Zhejiang Hengyi China 570 - - 570
Teijin Japan, Indonesia, Thailand, 175 60 331 567
Germany, USA
Invista (Koch Industries) USA, Mexico, Germany 35 181 310 526
Zhejiang Tongkun China 500 - - 500
Hualon Taiwan, Malaysia 423 - 54 477
Source: SRI, PCI, CSFB estimates.
Polyester Fiber Industry Trends and Value Drivers

Significant low-cost capacity, especially in Asia, continues to hurt European and
American producers, depressing their operating rates. A shift in the downstream textile
manufacturing base from developed countries to emerging countries, especially to Asia,
has affected fiber demand in developed countries. Developing countries in Asia have an
inherent advantage in the form of lower manpower costs, as the textile industry is highly
labor-intensive.
Expiry of the Multi Fiber Arrangement, which brings an end to the quota system, is
expected to bring buoyancy to the market. The trend is toward globalization of the
polyester fiber industry. Major fiber producers have begun to maximize production
capabilities worldwide to optimize sales. Although the trend of consolidation through
alliances and joint ventures is not new, the shipment of fibers across nations, based on
factors such as subsidized production expenses, favorable currency exchange and low
shipping and handling costs, may become more economical with the recent removal of
tariff restrictions on textile goods shipped between nations.
Polyester demand is also influenced by cotton, which is a competing but natural fiber,
especially in apparel end uses. Substitution (of cotton by polyester) demand has been a
key demand driver for polyester in the past. However, current depressed cotton prices
mean substitution demand is limited. Moreover, the trend in recent years favors natural
fibers at the expense of noncellulosic fibers. In the long term, limitations on cotton
supply, in the form of a finite area of cultivation, should work in favor of polyester.
104
Polyester industrial filament is widely used as a tire reinforcement material in passenger

car, light truck, and minivan tires. Other nontire-related applications include sewing
thread, hoses, belts, webbing, tape, and geosynthetic fabrics.
Polyester Fiber Growth Prospects

Polyester fiber demand is expected to grow at about 3.8% per year through 2007.
Demand is projected to increase at a faster pace (5-6%) in developing regions, such as
Asia, versus levels in mature markets (2-4%). Key textile exporting economies such as
China and India will be the growth engines in Asia.
105
Acrylic Fiber
Acrylic fibers are made through the polymerization of acrylonitrile, which itself is
manufactured from propylene and ammonia.
Acrylic Fiber Uses

Acrylic fibers are consumed principally in apparel goods, such as sweaters, socks, and
sportswear. Acrylic products also include home furnishings, such as blankets,
upholstery, carpets/rugs, and curtains. Industrial applications of acrylics are minimal but
include concrete reinforcement and asbestos replacement.
Exhibit 106: Global Acrylic/Modacrylic Fiber Consumption by End Market, 2002
Other
24%
Industrial Apparel
3% 54%
Home Furnishings
19%
Acrylic Fiber Manufacturers
Exhibit 107: Major Producers of Acrylic/Modacrylic Fibers, 2004

Annual Capacity % of Global
metric tons ('000) Capacity
SINOPEC Group 410 13.7
Akrilik Kimya Sanayii 287 9.6
Montefibre 245 8.2
Dralon 176 5.9
PetroChina 156 5.2
Mitsubishi Rayon 138 4.6
Formosa Plastics 105 3.5
Source: SRI, PCI, CSFB estimates.
106
Acrylic Fiber Industry Trends and Value Drivers

Worldwide acrylic fiber capacity slightly declined over the past few years, as plant
closures and capacity reductions were not offset by new capacity additions. Asian
countries accounted for 54% of total worldwide capacity, up form 43% in 1999. Capacity
utilization also saw an upward trend, increasing from 76% in 1999 to nearly 90% in
2004.
In 2004, nearly half of world capacity was held by the seven large companies listed in
Exhibit 107. However, the industry has seen several restructuring measures by major
companies. Prominent among them were Asahi Chemical Industries, which exited the
business; Bayer Faser, which sold its acrylic fiber business to Dralon; and Solutia, which
has significantly reduced capacity.
Acrylic Fiber Growth Prospects

Recent displacement of acrylic fibers by cotton in some of the traditional apparel
segments not withstanding, we expect acrylic fiber consumption to grow at 2-3%
annually through 2009.
107
Nylon 6 and 66 Fibers

Nylon 6 and 66 Fiber Uses
Nylon 6 and nylon 66 fibers, which account for about 90% of global nylon volumes, are
produced as continuous filament yarn, monofilament, and staple. Nylon 6 is polymerized
from caprolactam, and nylon 66 is made from adipic acid and hexamethylenediamine.
Nylon is used principally for the manufacturing of carpets and rugs. Other uses include
apparel goods, such as hosiery, and industrial applications, such as auto-related
products (e.g., airbags and reinforcement for tires and hoses). Important nylon fiber
characteristics include abrasion resistance and high-tensile strength.
Exhibit 108: Global Nylon 6 and 66 Consumption by End Market, 2004
Industrial
20%
Home Furnishings
Apparal 60%
20%
108
Nylon 6 and 66 Fiber Capacity
Exhibit 109: Nylon 6 and 66 Fibers Capacity, 2005

Annual Capacity Metric Tonnes (000)
Company Location
TF IF CF ST Total
Invista USA, Canada, Mexico, Germany, UK, 98 53 465 58 674
Taiwan, Argentina, Brazil
Solutia USA, Canada, Mexico, Germany - 18 60 225 303
Honeywell USA, Canada, China 9 6 138 105 258
Radici (Includes Nylstar Italy, USA, France, Spain, Poland, 162 4 26 10 202
acquisition) Slovakia, Romania
FCFC Taiwan 112 62 - 2 176
Shaw USA - - 166 - 166
Rhodia Poland, Slovakia, Germany, Brazil, 29 78 5 50 162
Switzerland, Latvia
Hualon Taiwan, Malaysia 142 - - - 142
DUSA USA, Argentina, Brazil, Turkey, - 139 - - 139
Indonesia
Toray Japan, Indonesia, Thailand 55 30 18 10 113
Hyosung Korea 50 25 - 3 78
Beaulieu Group (inc Domo) Belgium, USA, France, Germany - 1 72 - 73
Bonazzi Group Italy, Slovenia 15 - 54 - 69
China Shenma China - 62 2 - 64
Polyamide High USA, Germany, Netherlands, India 2 57 - - 59
Performance (Acords)
Source: PCI, CSFB estimates.
Nylon 6 and 66 Fiber Industry Trends and Value Drivers

Most capacity growth in recent years has been in the Far East, particularly in China and
Taiwan, where labor is cheap and end-demand growth remains strong; this trend is
expected to continue. In an effort to increase economies of scale to compete more
favorably with Asian players, Honeywell acquired BASF’s nylon fiber business in May
2003, which doubled Honeywell’s capacity.
Nylon 6 and 66 Fiber Growth Prospects

Nylon is still growing strongly in engineering thermoplastics but near maturity in most
fiber market segments. Record high raw material prices, competition from polyester, and
growth in Asia have had a significant impact on the global nylon fiber market and put
downward pressure on margins across the value chain. We expect modest growth of 1-
2%, with Nylon 6 outpacing Nylon 66.
109
Elastane/Spandex
Elastane, or spandex, fibers are urethane-based elastomers that are produced from
polyols (either polyether or polyester) and di-isocyanates; they also include a variety of
performance-specific additives, such as UV absorbers, flame retardant agents, and
antioxidants.
The vast majority of global elastane production involves solution spinning. The filaments
are typically dry spun, although some processes involve wet spinning. Production via
dry spinning involves the extrusion of a polymer solution through a spinnerette and into
a heated air column, where the solvent evaporates, leaving the elastane filaments. The
monofilaments bind to each other and form a continuous multifilament yarn, which is
treated and wound on spools.
Elastane/Spandex Uses
Spandex fibers are used in a wide array of applications, including men’s and women’s
apparel, hosiery, home furnishings, and a small number of industrial applications. Newer
uses include providing stretch in such mainstream articles as slacks, jackets, and
dresses.
Exhibit 110: Global Spandex Consumption by End Market, 2002
Other
16%
Hosiery
32%
Intimate Apparel
24%
Active Wear
28%
Spandex Manufacturers
Exhibit 111: Major Global Spandex Manufacturers, 2003E

Annual Capacity % of Global Capacity
metric tons ('000)
Koch Industries U.S. 82 32.6%
Hyosung Korea 25 10.0
TaeKwang Korea 25 9.8
Bayer Germany 15 6.0
Asahi Japan 12 4.8
Huvis Korea 12 4.8
Others 80 32.0
110
Elastane/Spandex Industry Trends and Value Drivers

In April 2004, DuPont sold its DuPont Textile and Interior Division, rechristened
INVISTA, to Koch Industries for $4.2 billion. INVISTA is the largest producer of spandex
fiber in the world for both branded “LYCRA” and commodity “ELASPAN.” Asia is turning
out be a significant market, with increasing size, scope, and complexity. All major
producers are reorganizing their strategies to cater to the Asian demand.
Elastane/Spandex Growth Prospects

Globally, we expect elastane consumption to grow at a rate of 6-9%, with a higher figure
for Asia and a lower one for developed markets. As for capacity growth, the majority of
the expansions are planned for Asia.
111
Rayon/Lyocell
Rayon staple, lyocell, and acetate filament are cellulosic fibers (that is, wood pulp is the
chief raw material). Acetate filament has largely been displaced by polyester textile
filament, while rayon has lost share to polyester staple. Rayon production is relatively
costly, owing to a broad array of waste products that must be contained. Lyocell, a more
expensive, newer cellulosic fiber than rayon, was launched in the 1990s and is
produced by a more environmentally friendly process using a recyclable solvent.
Rayon/Lyocell Uses
Rayon staple, lyocell, and acetate filament are used predominantly in apparel. Because
of its relatively high cost, lyocell tends to be used in premium apparel products.
Exhibit 112: Global Rayon (All Types)/Lyocell Fibers by End Market, 2002
Nonw ovens
Industrial
16%
17%
Home Furnishings
16%
Apparel
51%
Rayon Manufacturers
Exhibit 113: Major Global Producers of Rayon (All Types), 2004

Capacity March 2004 % of Global Capacity
Chinese producers China 750 30.3
Lenzing Austria 240 9.7
Grasim Industries Ltd. India 221 8.9
Formosa Plastics Taiwan 161 6.5
Accordis Germany 160 6.4
South Pacific Viscose Indonesia 125 5.0
Indo Bharat Rayon Indonesia 90 3.6
Thai Rayon Public Thailand 80 3.2
Other 644 26.0
112
Lyocell Manufacturers
Exhibit 114: Major Global Producers of Lyocell, 2004

Capacity 2004 % of Global Capacity
Accordis UK 87 68.5
Lenzing AG Austria 40 31.5
Rayon/Lyocell Industry Trends and Value Drivers

Acetate filament has largely been displaced by polyester textile filament (PTF), while
rayon has lost share to polyester staple, owing to lower prices for these competing
fibers and lower cotton prices. Also, just as for noncellulosic fibers, production continues
to shift to Asia for the sake of lower production costs. In the last decade, Asia’s share of
global production of rayon fibers has moved up to 70% from a mere 29%. However, the
double-digit growth in rayon fiber production in the Far East has been offset by a
double-digit decline in Eastern Europe.
Rayon/Lyocell Growth Prospects

We expect global production of rayon fibers over the next five years to increase annually
by about 2.5%.
113
VIII. Fertilizers (Plant Nutrients)

A Short History of Fertilizers
Since the beginning of agriculture, farmers have wished to improve soil quality and crop
yield. To this end, they have employed such techniques as crop rotation, liming, and
manuring. The Chinese were some of the earliest farmers to use manure to improve
crop quality and yield. Later, the Greeks were known to have added varieties of waste
products to the soil of their olive groves to enhance its nitrogen profile and olive
production. Furthermore, the Greeks noted that legumes (such as beans) also replaced
nitrogen in the soil, and frequently recommended them as general-purpose crops. The
Romans, whose society was based heavily on agriculture, took an active interest in
systematic farming techniques, including waste collection and soil evaluation.
Through trial and error, early farmers were able to increase the three basic soil nutrients
—nitrogen, phosphorus, and potassium (N, P, and K)—though not always in the most
efficient or rigorous manner, since there was insufficient knowledge of the underlying
chemistry. While the white salt potassium chloride was well known, it was not until the
Age of Enlightenment in the 17th and 18th centuries that other chemicals soon to be
used as commercial fertilizers were discovered, such as ammonium sulfate, which
contains nitrogen, and phosphorous-containing materials. Ammonia was first produced
in 1774, and urea, another nitrogen product, was identified in 1773. As agriculturalists
began to understand the growth and development of plants, other scientists began to
experiment with chemical fertilizers. Justus von Liebig, the German chemist, was the
first to establish that plant growth was linked to the amount of nutrients contained in the
fertilizer applied. He also articulated the “Law of the Minimum”—that is, a deficient
nutrient impairs plant growth even if all other nutrients are present in adequate
quantities.
Sodium nitrate, the first commercial nitrogen product, was mined from deposits in Chile
in the early 1800s. Factory production of sodium nitrate began in the U.S. in 1928.
Phosphate mining began in 1867 in South Carolina. And the first potash factory was
built in Germany in 1857. In 1943 the world’s largest potash deposits were discovered in
Saskatchewan, Canada. Today, there are at least 12 different fertilizer products that
provide the three basic nutrients. This figure does not take into account the various
combination fertilizers, known as NPK for the three nutrients, which are formed by
mixing the basic fertilizers.
Modern production and application exhibit significant sophistication compared with
fertilizer usage even 100 years ago. Today, from fertilizers that contain a specific
quantity of the three essential nutrients to algorithms that quantify volume of fertilizer
application for a desired crop yield on any given small plot, farmers have access to
advanced methods to increase soil and crop efficiency. Current breadth and range of
product offerings indicate a substantial advance from some of the first commercial
fertilizers, such as Peruvian guano and Chilean sodium nitrate sold commercially in the
1830s.
114
There are standards units for measuring the three key nutrients, nitrogen (N),
phosphorus (P), and potassium (K):
1. Nitrogen is an element in the periodic table with the symbol N. As N2, it is a gas that
makes up four-fifths of the earth’s atmosphere. Nitrogen-containing fertilizers are
measured in units of N. Some of the most common nitrogen-containing fertilizers
include, ammonia (NH3), urea [CO(NH2)2], nitrogen solutions, or UAN, and
ammonium nitrate (NH4NO3). Nitrogen represents 82% of the content of anhydrous
ammonia, 46% for urea, and 34% for ammonium nitrate. UAN solutions vary in
nitrogen content from 28% to 32%.
2. Phosphorus is measured in units of phosphoric pentoxide (P2O5). To convert P into

P2O5, multiply by 2.29. P2O5 tonnes are the unit of measurement of phosphorus-
containing fertilizers, which vary in concentration from product to product. For
example, typically DAP is 46% P2O5 and MAP is 52% P2O5.
3. Potassium is typically measured in units of potassium oxide (K2O). K2O tonnes are
the measurement of the nutrient value of potassium-containing fertilizers. Potash
(KCl) is a term typically used to denote potassium-based fertilizer. Most potash
fertilizer is potassium chloride, also called muriate of potash. To convert KCl product
tonnes to K2O tonnes, multiply by 0.61.
World Fertilizer Drivers

It is clear that fertilizers increase crop yield, improve soil quality, add to the overall
health of the plant, and ultimately, the health of livestock and humans who consume
grains and vegetables for sustenance. As the world population grows, greater demands
will be placed on a secure and plentiful food supply. Yet, as the world develops, less
and less land will be available for planting, and fewer people will desire to work the land
as rural areas give way to cities and opportunities for social advancement and greater
utility become available. Clearly, one solution will be to increase and customize fertilizer
applications to ensure maximum crop yield and nutrient quality. This phenomenon is
already taking place. World consumption of fertilizers has grown at an annual rate of 2%
since 1970, while in Latin America/South Asia/Soviet Asia, it has grown at a 6.6% rate.
The decline in fertilizer consumption over the 1989-1994 time frame followed the
collapse of communism in Eastern Europe and the Soviet Union and the reduction in
nutrient use in that region of the world.
115
Exhibit 115: World Consumption of Fertilizers
World Consumption of Fertilizers
160
140
World
120
Millions of Tonnes of NPK
100
Latin America and South/Socialist Asia

80
Rest of World
60
40
20
FSU and Central Europe

0
1970/71
1971/72
1972/73
1973/74
1974/75
1975/76
1976/77
1977/78
1978/79
1979/80
1980/81
1981/82
1982/83
1983/84
1984/85
1985/86
1986/87
1987/88
1988/89
1989/90
1990/91
1991/92
1992/93
1993/94
1994/95
1995/96
1996/97
1997/98
1998/99
1999/00
2000/01
2001/02
2002/03
Source: IFA, CSFB estimates.
Nitrogen (N)
Nitrogen reigns as the most important nutrient for plant growth and, if not supplied in
sufficient amounts, both in an absolute sense and relative to the concentration of other
nutrients, it tends to limit the usefulness of other nutrients. That is, even when sufficient
amounts of other soil nutrients are present, if nitrogen levels are deficient, plant growth
and crop yield will suffer. Nitrogen plays its most important role as (1) the key element in
cell division; (2) an essential component of all the proteins and enzymes; and (3) a
requisite element of the chlorophyll molecule, which drives photosynthesis.
The main commercial fertilizers that provide nitrogen either contain, or are by-products
of ammonia, which is in turn produced primarily from natural gas and nitrogen in the air.
These fertilizers are anhydrous ammonia (NH3), urea [CO(NH2)2], ammonium nitrate
(NH4NO3), ammonium sulfate [(NH4)2SO4], and different types of ammonium phosphate,
such as DAP and MAP.
The amount of nitrogen farmers apply depends on soil quality, desired crop yield, prior
crops harvested, and the crop to be grown. Certain crops require greater amounts of
nitrogen in the soil than others. Corn, for example, may require up to eight times as
much nitrogen fertilizer as soybeans, but only 1.6 or 2.0 times as much as for cotton.
Moreover, economic efficiency bears consideration. Farmers must analyze the marginal
116
increase in crop yield provided by additional fertilizer application. While greater nitrogen
application does result in higher crop yields, the marginal returns, in terms of pricing,
diminish prior to maximum yield. Of course, such an analysis must also include other
variables, which cannot always be controlled—land price, weather, and government
subsidies, for example.
Nitrogen fertilizer comes in many forms. Urea accounts for 48% of the world
consumption of nitrogen fertilizer. Ammonium nitrate and urea ammonium nitrate (UAN)
solutions follow but are significantly behind, accounting for only 9% and 6% of world
nitrogen fertilizer consumption. While direct application of ammonia accounts for only
4% of world nitrogen consumption, it makes up 22% of consumption in the U.S.
Exhibit 116: Nitrogen Fertilizer Consumption by Product Exhibit 117: Nitrogen Fertilizer Consumption
Global Nitrogen Fertilizer by Product Global Nitrogen Consumption

Total 87.7 Million Tonnes N
Direct Application 4%
Calcium Ammonium Oceania 2%
Nitrate 4% Middle East 2%
Ammonium Sulfate Eastern Europe 2%
4% Urea Africa 3%
48% FSU 3%
Ammonium Nitrate 9% Latin America Asia

7% 53%
MAP 2%
DAP 5% Western Europe

13%
UAN 6%
Ammonium North America

Bicarbonate 7% Other
15%
11%
Source: Fertecon, CSFB estimates. Source: Fertecon, CSFB estimates.
Ammonia
Produced by combining hydrogen and atmospheric nitrogen, ammonia is the basic
building block for all of the nitrogen fertilizers. Natural gas, as a source of energy and
hydrogen, fixes nitrogen from the air with hydrogen to create ammonia (NH3). About
34,400 cubic feet, or 33.5 MMbtu, of natural gas yields one ton of nitrogen. Anhydrous
ammonia—ammonia free of water—contains around 82% nitrogen.
Although only accounting for 4% of world consumption of nitrogen fertilizer, anhydrous

ammonia comprises 22% of U.S. consumption. In ambient conditions, ammonia is a
gas, but it can be stored as a liquid under pressure or under refrigeration. Hence, direct
application of anhydrous ammonia requires fairly sophisticated equipment to inject the
liquid into the soil. Furthermore, ammonia must be shipped in refrigerated or
pressurized ocean-going vessels, river barges, or railroad tank cars, for it quickly
becomes a hazardous gas under normal conditions. Only developed nations can afford
such capital intensity, thus accounting for the relatively higher U.S. consumption
compared with the rest of the world.
117
Once injected into the soil, ammonia, which is in fact toxic to plants, dissolves in the soil
water to form ammonium salts, which are nontoxic. Soil sterilization may occur from the
injection, but the soil reverts to normal fertility within a few weeks and, provided the
farmer did not inject the ammonia too close to the seeds, crop damage will not occur.
Outlook
Global ammonia capacity has been relatively stable since 2000, growing at a CAGR of
0.5%. In 2005, we expect production capability to grow 3.4% year over year as new
plants come online. Thereafter, capacity growth should ease to an annual rate of 2.0-
2.5% through 2008. The global operating rate is projected to remain in the low-80s
through 2010. While such a rate may seem low, the current operating rate is in the low-
80s and the market is snug. In the view of some industry experts, an operating rate
above 80% is good. The last peak in the cycle occurred when operating rates were in
the mid-80s. The operating rate may be understated, as several ammonia plants that
have been temporarily idled in the U.S., the Former Soviet Union (FSU), and Europe are
unlikely to run again. Moreover, the ammonium bicarbonate-based ammonia plants that
are located in China typically only run for short times during the season owing to a lack
of warehousing capacity. On balance, it is likely that the ammonia market will be a
relatively healthy market for at least the next two years, although some short-term
pricing and margin volatility is possible at any time, particularly in the off-season.
Exhibit 118: Global Ammonia Supply/Demand
200 86%
Capacity
160 83%
Millions of Tonnes
120 80%
Production
Operating Rate
80 77%
40 74%
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004E 2005E 2006E 2007E 2008E 2009E 2010E
Source: Fertecon, CSFB estimates.
118
Exhibit 119: Global Ammonia Capacity, 2004

( 165.8 Million Tonnes)
Asia
45%
Oceania 1%
Africa 3%
Eastern Europe 3%
FSU
13%
Middle East 5%
Latin America 7%
North America
Western Europe 12%
11%
Exhibit 120: Global Ammonia Capacity, 2004
L arg es t G lo b al A m m o n ia P ro d u c e rs b y C a p ac ity
6000
5000
Thousands of Tonnes
4000
3000
2000
1000
0
Y ara A grium T erra K oc h TOA Z P otas h PEMEX - Ind ian S audi CF
C orp. m os tly idle F arm ers A rabia Indus tries
F ertiliser F ertilizer
C oop C o.
Natural gas accounts for over 80% of the cash cost for ammonia production in North
America when gas prices are $4 MMbtu or more, but only 70% when gas prices are at
their historical average of $2. This compares unfavorably with the 50% gas prices
account for in the cash costs of production in the Middle East. Consequently, high
natural gas costs pushed U.S. producers’ ammonia cash margins into negative territory
in 2001 and 2003. It is estimated that as long as gas remains above $4, the delivered
cost of imported ammonia will be cheaper. Some U.S.-based facilities are being used to
upgrade low-cost imported ammonia into products such as DAP, rather than produce
the ammonia onsite. Alternatively, at its Geismar facility, PotashCorp converts ammonia
imported from its facility in Trinidad into other products, including nitric acid. As
ammonia is a key input for urea and various ammonium phosphates, costs have a
domino effect for other nitrogen and phosphorous fertilizers.
119
Several of the largest ammonia producers, including Agrium, Terra, Koch, PotashCorp,
and CF Industries, have a portion of their ammonia production based on high-cost U.S.
Gulf Coast natural gas. More North American production could be shuttered in the
coming years if natural gas prices remain above $5 for an extended period. Yara
International, the company formed by the demerger of the fertilizer and related
operations from Norsk Hydro, became a public company in March 2004. The firm’s core
business is nitrogen-based fertilizers, including ammonia, urea, and nitrates. Yara has
cost-advantaged nitrogen production in the Middle East and in Trinidad. The firm sells
third-party sourced phosphate and potash fertilizers to offer customers a balanced mix
of fertilizers. Industry consolidation continues. In late December, Terra completed its
acquisition of Mississippi Chemical’s major nitrogen assets (in a bankruptcy liquidation),
which include a 50% stake in Point Lisas Nitrogen Ltd. in Trinidad with access to low-
cost natural gas, as well as two plants on the U.S. Gulf Coast.
Urea
As opposed to ammonia with its specific, capital-intensive requirements for storage and
delivery, urea is a solid and, hence, relatively easy to store and handle. As a result, urea
is the nitrogen fertilizer of choice, accounting for 48% of global nitrogen consumption.
Once ammonia has been produced, urea is the next step in the production process. The
carbon monoxide that results from the breakdown of natural gas is converted into
carbon dioxide, which is then combined with ammonia to create urea. The process
requires relatively high temperatures and pressure, producing a solution, which is then
evaporated to form solid urea. Urea usually comes in two forms: prilled or granular.
Prilled is finer and can easily be distributed by hand to cover the soil evenly. Granular is
coarser with uniformly sized pellets and it degrades less than prilled. Moreover, granular
stores better, forms less dust, and can be expelled further by farm equipment designed
to distribute fertilizers. Yet the process to form granular urea requires more labor and
additional chemicals to help it maintain its consistency. And investing in the equipment
used to distribute granular adds further costs to the farmer. Consequently, farms with
greater access to equipment and financing as well as greater acreage are more likely to
use granular urea over prilled. Regions that favor granular are in North America,
Europe, Australia, and Thailand. Countries with low labor costs and smaller farms tend
to utilize prilled urea more often.
Outlook
Several grassroots urea plants targeting the export market are scheduled to come
online with 10.5 million tonnes capacity over the 2004-2008 time frame. Some of that
capacity comprises Chinese ammonium bicarbonate plants that are being converted to
produce urea, merely substituting a higher quality form of nitrogen for another. In this
case, the net nitrogen capacity is not expanding significantly. Other units, which are
based on low-cost natural gas, are being built in the Middle East (Saudi Arabia, Oman,
Iran, and Qatar, Egypt), Trinidad, and Venezuela, and should gain share from higher-
cost suppliers.
As with ammonia, marginal suppliers of urea tend to provide a floor for prices. However,
if natural gas prices continue to rise, more high-cost U.S. producers may be forced to
close additional capacity, as new low-cost capacity comes online. On balance, as in the
120
case of ammonia, urea producers in high-cost regions are unlikely to earn the cost of
capital over the long term owing to overcapacity. Growth in demand at a greater rate
than 2% or additional permanent shutdowns in high-cost regions, including the U.S. and
Europe, would result in higher-than-anticipated operating rates. One should also keep in
mind that capacity expansions in the Middle East and similarly cost-advantaged regions
are designed for the export market and will run at full rates.
Exhibit 121: 2004 Global Urea Capacity
2004 Global Urea Capacity

Total: 141.6 Million Tonnes
Western
Europe Central
5% Europe
3%
Former
Soviet Union
8%
China
32%
North America
8%
Latin America
5%
Africa
2%
Middle East
8%
Asia (ex China)

29%
The global operating rate is expected to remain in the low- to mid-80s for the
foreseeable future, as capacity expansions offset demand growth.
Exhibit 122: Global Urea Capacity and Operating Rate
8 0 .0 8 9 .0 %
7 5 .0
8 7 .0 %
7 0 .0
Millions of Tonnes N
C a pa c ity
6 5 .0 8 5 .0 %
Operating Rate
O p e ra tin g R a te
6 0 .0 8 3 .0 %
5 5 .0
5 0 .0 8 1 .0 %
4 5 .0 7 9 .0 %
P ro d u c tio n
4 0 .0
7 7 .0 %
3 5 .0
3 0 .0 7 5 .0 %
1
8
199
199
199
199
199
199
199
199
199
200
200
200
200
200
200
200
200
200
121
Phosphate (P)
After nitrogen, phosphorous ranks second as a crop nutrient and component of
fertilizers, essential for cell division, energy utilization, uniform plant maturity, seed
production, nitrogen fixing, and resistance to disease. While the soil loses little
phosphorous from leaching, soil erosion and crop removal do contribute to phosphorous
deficiency.
There are a number of fertilizer products used to replenish or maintain phosphorous in
the soil. All of these are derived from phosphate rock, a calcium phosphate ore. In the
U.S., this ore is found primarily in Florida, North Carolina, Idaho, and Wyoming. Outside
of the U.S., Tunisia, Algeria, and especially Morocco all have significant deposits. The
U.S. has 8% of the economically viable world reserves of phosphate rock; North Africa
has over 50%; the remaining 15-20% is found in Jordan, China, Russia, South Africa,
Mexico, and Israel.
Morocco and the U.S. have excellent high-quality rock reserves, helping to account for
the high level of phosphate exports—typically in the form of DAP, MAP, and especially
for Morocco, triple superphosphate. However, the differences in costs from location to
location are relatively small and it is mitigated to some degree by shipping costs.
Compared with the U.S., Morocco’s phosphate rock quality is modestly higher, but this
advantage is largely offset by higher extraction costs. The recent rise in ocean freight
rates has elevated the price of imported sulfur; this yellow element is required to make
phosphate, as the phosphate rock needs to be treated with sulfuric acid to generate
H3PO4. Currently, the U.S. with its refinery-sourced sulfur, has about a $30 advantage
on sulfur costs per tonne of phosphoric acid versus Morocco.
Exhibit 123: Economically Viable Phosphate Rock Reserves
6
Billions of Tonnes
0
N orth Latin E urope A frica M iddle E ast A sia O ceania
A m erica A m erica
Source: USGS, Fertecon, CSFB estimates.
Once the phosphate rock has been mined, it is dissolved in a mixture of sulfuric acid
and phosphoric acid, creating wet-process phosphoric acid. The dilute phosphoric acid
produced may be evaporated into a more concentrated form. When the concentrated
phosphoric acid has reached commercial grade, it can either be combined with
ammonia, resulting in monoammonium phosphate (MAP) or diammonium phosphate
122
(DAP), or be combined with additional phosphate rock to convert it into triple

superphosphate (TSP). These three products are the principal phosphate fertilizers.
Gypsum (CaSO4) is a key by-product in the production of phosphoric acid.
Farmers may elect to not apply phosphorous fertilizers every year for two reasons. First,
there is less risk of losing phosphate in the soil through leaching, unlike nitrogen.
Second, plants tend to absorb at most 20% of the phosphorous latent in the soil, leaving
sufficient amounts for the next growing season once cropping is complete.
In addition to fertilizer use, upgraded phosphate products are also used in livestock
feed. As with plants, phosphorous plays a key role in helping animals grow and resist
disease. Poultry consumes the most phosphate, followed by swine and cattle.
With a large variety of phosphate fertilizers, the phosphorous content is generally
quoted in terms of phosphorous pentoxide (P2O5).
Phosphoric acid also has several nonagricultural applications, and some producers,
especially PotashCorp, are focusing on these markets as more profitable outlets for
their ores. Examples of nonagricultural applications include detergents, dentifrice,
carbonated beverages, and food ingredients.
Outlook
Exhibit 124 shows that phosphoric acid may continue to be in excess global supply for
the next several years, implying that higher-cost players may not earn the cost of
capital. In the U.S., phosphoric acid derived from North Carolina is low cost. However,
the differences in costs from location to location are relatively small and it is mitigated by
shipping costs.
Higher phosphate fertilizer output is anticipated to emanate from Morocco and

especially China over the next three years. China’s imports of DAP and MAP have
dropped significantly since 1998, and its growing capacity is likely to reduce imports
even more. Given its relative proximity to India and favorable freight costs versus more
distant suppliers, Morocco’s increasing production should bolster competition to the
Indian market. This should put additional pressure on U.S. producers, whose DAP
export levels have already fallen 45% from 9.9 million tonnes in 1999 to an estimated
5.5 million tonnes in 2004. India, a major importer of phosphate fertilizer, could boost
output moderately in four years.
Over the long term, Saudi Arabia—with good phosphate rock reserves and low-cost
sulfur and especially natural gas—is expected to become a major DAP player, with
obvious transportation cost advantages.
123
Exhibit 124: Global Phosphoric Acid, 1981–2009E
Global Phosphoric Acid Capacity,

Demand, and Capacity Utilization Rate
60.0 85%
Utilization Rate
50.0 75%
Millions of Tonnes P 2O5

Capacity
40.0 65%
30.0 55%
20.0 45%
Demand
10.0 35%
0.0 25%
E
81
83
85
87
89
91
93
95
97
99
01
03
05
07
09
19
19
19
19
19
19
19
19
19
19
20
20
20
20
20
The U.S. is the world’s largest producer of phosphoric acid, accounting for about 35% of
total production. On the other hand, the U.S. consumes almost 35% of all phosphoric
acid, and thus exports only 4% of global supply. The largest exporter is Morocco,
responsible for over 40% of all exports.
Exhibit 125: Global Phosphoric Acid Capacity, 2004
Global Phosphoric Acid Capacity
14000
12000
Thousands of Tonnes
10000
8000
6000
4000
2000
0
North Africa Asia FSU Middle Latin West Central Oceania
America East America Europe Europe
Source: Fertecon, SRI, CSFB estimates.
124
Exhibit 126: Leading Global Producers of Phosphoric Acid, 2004

P205 tons ('000)
The Mosaic Company 6,100
OCP Group (Morocco) 4,616
PotashCorp 2,711
PhosAgro (Russia) 1,356
Groupe Chimique Tunisien 1,356
Other 17,751
Total 33,889
Source: Fertecon, NR Canada, PotashCorp - 2002
Potash (K)
The third-largest fertilizer in terms of consumption, potash (mostly in the form of
potassium chloride, KCl) comes from mineral reserves. Unlike phosphate or the
varieties of nitrogen fertilizers, potash needs relatively limited treatment to make it
suitable for soil application. The purity of the ore and extent of the presence of other
materials such as salt, clay, or magnesium, help determine the relatively profitability of
the ore bed. The word potash comes from early soap-making techniques in which wood
ash was leached in large iron pots.
Potassium aids photosynthesis rates, fruit formation, winter hardiness, disease

resistance, and efficient uptake of nutrients, enzyme activation, protein formation, and
respiration. Crops deficient in potassium exhibit weak stalks and wilted leaves. Such
deficiency also occurs when the ratio of nitrogen to potassium is too high.
Potassium is found predominantly in the earth’s crust and bodies of water. Most of the
economically recoverable potassium is found in sedimentary deposits that were the
result of ancient seawater evaporation and is extracted through mining. However, when
mine depths exceed 1,200 meters, extraction becomes unsuitable or too costly for
conventional mining using boring machines. Solution mining was developed to
overcome these obstacles, but this process may be more costly than conventional
mining owing to the high cost of natural gas to heat the brine that is pumped
underground. The process involves dissolving salts in deep deposits, pumping the
solution to the surface, and then separating the salts through crystallization. The other
method of isolating potassium chloride is to segregate salt (sodium chloride) via
crystallization through partial evaporation of natural brine deposits found in “dry” lakes—
e.g., the Great Salt Lake in Utah and the Dead Sea in Israel. Once the salt has been
removed, the remaining brine is again evaporated to recover the potassium chloride,
which then goes through a process of beneficiation to reach a desired level of purity.
Brine-recovered potassium accounts for about 10% of commercial potash.
Outlook
The world operating rate for potash fell to a nadir of 56% in 1993, following the collapse
of communism in Eastern Europe and the Soviet Union and the decline in nutrient use in
that region of the world. This resulted in a huge influx of material into the global market.
Since that time, operating rates have slowly increased as capacity has remained
relatively stable, and production has grown at a CAGR of 2.4% over the past ten years.
125
We estimate the global operating rate as a percent of nameplate capacity was 75% in
2003. Because PotashCorp., the world’s largest potash producer, has kept significant
amounts of its capacity off-line, the effective supply/demand balance for potash is much
better than the 75% figure would imply.
There are only a few proposed greenfield units, and these operations are not expected
to come online until after 2008. They include a 1.5-2.0 million tonne facility in Argentina
and two units in Thailand, each with 1.0 million tonnes of capacity. Hypothetically, in the
unlikely event that all these projects materialize, global capacity would jump at least
10%. We have included one greenfield plant in our projections for startup in 2009.
However, several industry officials believe these new units will be delayed or may never
come online. Thailand has been an area where the development of the potash industry
has been pursued unsuccessfully for many years, but there continues to be interest in
developing a greenfield unit in that region. Rather than grassroots expansions,
according to several of our industry contacts, the biggest threat to improving capacity
utilization rates is incremental expansion, which is a much less costly process.
Where ore deposits are developed, it may be possible to increase output by improving the
mine efficiency utilizing tools such as debottlenecking equipment, adding work shifts, and
reducing vacation periods. As potash profitability is improving, we expect companies to
look for opportunities for incremental expansions, which would take about 12-18 months
to put in place. Recently, PotashCorp., which is expecting to boost output, announced that
it had approved engineering design work for several alternative Saskatchewan projects. In
addition, the firm already has engineering work under way at its Piccadilly potash site in
New Brunswick. PotashCorp. plans to bring incremental capacity online to meet demand,
and the exact location or locations will be decided when its studies are complete. In our
forecasts, we estimate PotashCorp. will have 1 million tonnes of additional KCl capacity
(0.6 million tonnes of K2O) in 2006. This capacity is in addition to the 1.6 million tonnes of
KCl (1.0 million tonnes of K2O) that the firm is bringing online over the 2004-2005 time
frame by reducing vacation periods and adding work shifts at the Allan and Lanigan mines
in 2004 and incremental debottlenecking at the Rocanville mine in the first quarter of
2005. This will bring PotashCorp.’s effective capacity to 9.6 million tonnes of KCl versus
its nameplate capacity of 12.1 million tonnes. Agrium and Mosaic also have low-cost
expansion projects under review.
Exhibit 127 shows global capacity of 36.4 million tonnes of K2O in 2003, which we have
assumed it will reach 40.5 million tonnes in 2010. Our projections include several
capacity expansions that have not yet been officially approved. We expect Agrium to
add 260,000 tonnes of capacity at its Saskatchewan mine in early 2006. We also
assumed that Agrium and Mosaic will debottleneck their Canadian capacity by an
additional 10%, or 650,000 tonnes, in 2007-2008. We have factored into our projections
the startup of one greenfield project with 1.0 million tonnes of capacity in 2009 (probably
in Thailand), and over our time horizon, we forecast 600,000 tonnes of incremental
capacity in Russia/Belarus. However, it could be more than this, if additional planned
greenfield expansions come online or more debottlenecking efforts get under way,
particularly in Russia/Belarus. We believe production will increase at a faster rate than
capacity, as some producers (particularly the Russians) currently are running their units
126
at below full rates. We estimate the global nameplate operating rate for potash was 75%
in 2003, increased to 80% in 2004, and will be 81% in 2005, 80% in 2006, and 80% in
2007 before reaching 81% in 2010.
Exhibit 127: Global Potash Nameplate Capacity and Operating Rate, 1990–2010E
G lo b a l P o ta s h S u p p ly /D e m a n d T r e n d s
5 0 .0 90%
N a m e p la te O p e ra tin g
C a p a c ity
4 0 .0 80%
Millions of Tonnes K 2O
3 0 .0 70%
2 0 .0 Dem and 60%
1 0 .0 50%
0 .0 40%
E
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
19
19
19
19
19
19
19
19
19
19
20
20
20
20
20
20
20
20
20
20
20
Source: SRI, Company Data, CSFB estimates.
Currently, the U.S. consumes the largest amount of potash, followed by Brazil and
China. Together these countries account for about half of global potash fertilizer
consumption. While the North American market is mature, use of potash in Latin
America and Asia should grow as both the acres planted and the application rates
increase.
Exhibit 128: Global Potash Consumption, 2003
Asia
33% Oceania 1%
North America
21%
Middle East 2%
Africa 1%
Europe
23% Latin America
19%
Despite potash’s substantial reserve base, major deposits exist in only 17 countries.
The largest known potash reserves are located in Saskatchewan. That ore body as
measured in nutrient terms is also rich (K2O of 25-30%) relative to other regions of the
world. The next largest supply of proven reserves is located in the Former Soviet Union,
specifically in Russia and Belarus. The ore found in the FSU is of lower grade, with 10-
15% K2O. Canada, Russia, and Belarus account for 84% of the reserve base. Smaller
127
developed reserves are located in countries that include Germany, the U.S., the U.K.,
Spain, Chile, Jordan, Israel, and China. It is estimated that there are 8 billion tonnes of
proven reserves.
Exhibit 129: Global Potash Reserves
4500
4000
3500
Millions of Tonnes K2O

3000
2500
2000
1500
1000
500
s
il
a
ia
na
s
r
el
e
az
te
ru
an
ad
a
ra
s
th
hi
rd
us
a
la
Br
m
an
Is
O
St
C
Jo
Be
R
er
C
d
G
te
ni
U
Source: USGS, CSFB estimates.
Exhibit 130: Leading Producers of Potash, 2004

KCI tonnes (000)
PotashCorp 10,100
Mosaic 8,250
Belaruskali 9,000
Kali & Salz 6,500
Dead Sea Works (Israel Chemicals Ltd.) 5,100
Uralkali 6,500
Silvinit 4,300
Arab Potash 2,100
Agrium 1,750
China 1,300
Other 2,800
Total 57,500
Source: Fertecon, NR Canada, PotashCorp - 2002
As shown in Exhibit 131, potash production is dominated by North America (primarily

Canada), and the Former Soviet Union (Russia and Belarus)—the areas that have the
largest developed reserves.
128
Exhibit 131: Global Potash Capacity, 2003
2003 Global Potash Capacity
16
14
12
Millions of Tonnes K2O

10
0
North America* Russia EU Belarus Middle East Latin America China
* Primarily Canada Production Idle Capacity
Source: Fertecon, CSFB estimates
Canada, Russia, and Belarus dominate the export market. The Russian producer,
Uralkali, announced plans to increase output by 2.0 million tonnes by 2008, from 5.0
million to 7.0 million tonnes. Some industry participants believe the Russian facilities in
their current states are not capable of raising output meaningfully without significant
additional capital investment. However, since operating rates in the Russian facilities
currently are well below nameplate capacity (70-80%) and output from the units has
been increasing steadily in recent years, other industry observers are more optimistic
that the facilities could increase output significantly by improving operating efficiencies
and incremental debottlenecking projects.
While the global potash operating rate is expected to remain relatively unchanged over
the next two to three years, we project potash output (including primarily incremental
volume from Canada and Russia) will increase at a 3.0% CAGR, which is faster than
projected 2.0% demand growth. This factor could put a lid on potash prices and
margins, although the product should still deliver healthy profits.
129
IX. Agricultural Chemicals

(Crop Protection, GMOs)
Introduction
The traditional agrochemical industry was, according to the consultants Phillips
McDougall, worth around $30.3 billion in 2004 (excluding GMO). In addition, the growing
biotechnology segment has increased to $4.5 billion, largely, but not exclusively, as a
result of the success of Monsanto’s seed technology franchise.
The overall industry has grown in the last five years at a compound annual average rate
of 2.8% per year, we estimate, but thanks mainly to a very successful season in 2004
when the industry grew in nominal U.S. dollar terms by around 14%.
The industry can be narrowed into three main types of pesticides: herbicides,
fungicides, and insecticides.
Herbicides
By category we do not have the data as yet for 2004 and so concentrate on the last
available annual data, 2003.
Herbicides, by far the most important market, prevent or inhibit weed growth, and thus
replace or reduce the need for manual and mechanical weeding. The global market was
estimated at US$13.4 billion in 2003 by Phillips McDougalll. The leading herbicide,
glyphosate, accounted for US$2.9 billion in sales that year, or 22% of the total market.
• Selective herbicides: Selective herbicides act on specific targeted plant species only.
We estimate that this sector was worth around US$9.9 billion in 2003, and we expect
selective herbicides to remain relatively flat from 2005. In the years before 2004, the
market contracted, we estimate, by an average of around 7.0% per annum, hurt by a
weak farm economy and a secular shift to nonselective herbicide products such as
Roundup, known generically as glyphosate.
• Nonselective herbicides: Nonselective herbicides act on all vegetation with which they
come into contact. The overall market, we estimate, was worth about US$5 billion in
2003, and we expect nonselective herbicides to show a flat revenue environment in
2004-2007. The market grew at a swift rate in 1997-2001 (around 10% per year), as
these nonselective products took market share from the selective herbicide class, due
to the increased level of biotechnology-based acreage, especially in soybeans and
cotton, but also corn. Thus, the higher level of sales of seeds with engineered
resistance to certain nonselective herbicides directly fed through to higher growth of
products such as Monsanto’s Roundup brand. However, growth recently has been
impacted heavily by the loss of Monsanto’s patent on glyphosate, the most popular
nonselective, which has been facing competition since 2001. Indeed growth in 2003
was only very marginal (less than 1%) as compared with 2002.
• Future growth for nonselective herbicides will depend on the acceptance of

biotechnology outside of the U.S. and Canada, but, at the moment, Europe remains a
sticking point from the viewpoint of consumers and governments. That said, growth
drivers for nonselective chemicals remain: (1) Brazil should see higher GM acreage in
130
2005; (2) Monsanto’s stacked-trait technology could mean growth in biotech acreage
in corn in the U.S.; and (3) an increasing emphasis of conservation tillage, in which a
nonselective herbicide can be used as a preplant weed burndown agent.
Fungicides
Fungicides prevent and cure fungal plant diseases that affect crop yields and quality.
The market was estimated at about US$5.7 billion in 2003 by Phillips McDougall and
has shrunk at about 3% a year over the last five years. The main crop markets are
cereals and fruits and vegetables in Europe and rice in Asia. This area has been the
worst performing in the industry during that period because of three main factors:
1. Weak demand in East Asia (especially in 1998-1999), where climactic conditions
usually dictate higher-than-average demand for fungicides, due to currency
devaluations at the end of the 1990s.
2. The U.S. experienced low disease rates over that period.
3. Europe’s heat wave in 2003 led to significantly reduced demand for that season.
That said, a reversal of fortune is under way, and we foresee a noticeable improvement
in the next five years. Data has not come in for 2004 as yet, but the spread of Asian
rust, a prolific virus that can devastate soybeans, has led to a booming market in Latin
America in 2004, which should have resulted in a high level of growth for the overall
fungicides segment. In addition, Europe saw a significant recovery in demand in 2004,
following a dry season in 2003.
Beyond 2004, projections of 3.6% growth out to 2008 by Phillips McDougall can be
justified, especially in the context of the potential for Asian rust to positively affect
demand in the U.S. market—the extent to which benefits will be seen will depend on the
extent to which the disease spreads in 2005, if at all. At the very least, though, we
expect some sales in 2005, as a precautionary measure by farmers in the U.S.
Insecticides
Insecticides are used to control chewing pests (such as caterpillars) and sucking pests
(such as aphids), which, in common with diseases, reduce crop yields and quality. The
insecticide market was estimated at about US$6.7 billion in 2003 by Phillips McDougall,
and the firm expects insecticides to grow by 0.6% per annum in the medium term,
having declined 2% per annum over the past five years.
Bioengineered cotton and corn seeds that provide insect control using Bt genes have
gained share at the expense of conventional insecticides. Further penetration of such
genetically modified organisms is anticipated.
131
Agrochemical Manufacturers
Exhibit 132: Global Market Shares for Crop Protection Only (Excluding Seeds), 2004
US$ in millions, unless otherwise stated
2004 Sales Global Market

Bayer 7000 23%
Syngenta 6309 21%
BASF 4166 14%
Dow Chemical 3143 11%
Monsanto 2864 10%
DuPont 2210 8%
Source: Phillips McDougall, CSFB estimates.
Seeds and GMOs

In addition to pesticide operations, a number of agrochemical companies have
significant seeds operations. We estimate that the seed industry was worth US$17
billion worldwide in 2003. The businesses supply seeds, tubers, or early-growth-stage
plants to commercial and professional growers. Traditionally, improving seed
characteristics have been achieved through cross-pollination or through selective
breeding. More recently, genomics and biotechnology have led to the production of
GMOs, whose genetic structure has been altered to enhance the properties of the crop.
This industry is the subject of widespread publicity, and, as a result, at this stage it is
difficult to gauge its prospects in detail. However, one way or another, we believe GMOs
will play a major role in the fortunes of the major agrochemical producers over the long
term.
It appears that Monsanto is the one agrochemicals firm that is still putting huge
emphasis on ag-biotech, and its success in this endeavor is apparent. Within ag-
biotech, the company’s technologies are the most widely used today, with emphasis on
input traits—those traits that bolster grower economics. Monsanto is the undisputed
leader in glyphosate-resistant (Roundup Ready) and insect-resistant (Bt) crops.
Beyond expanding its input trait technologies (including stacked multiple traits in one
seed), Monsanto is moving into output trait development, as described below; these will
enhance the properties of the crop, such as enhanced oil or amino-acid content.
Monsanto is no longer developing new crop protection chemicals, and management
believes it can grow EPS at a minimum of 10% per year and upwards of 15-20%.
Moreover, Monsanto has been the dominant participant in recent M&A activity with its
upcoming acquisitions of two seed companies, Seminis and Emergent Genetics. The
firm is using seeds as a way to leverage its technology and germ plasm in the
marketplace. There is a scarcity of acquisition opportunities in the seeds industry,
perhaps leading to premium prices for available properties. But whether the various
firms are likely to pay such amounts remains to be seen, especially if the purported
targets don’t have substantial growth prospects.
DuPont, in our view, would rank #2 in its focus on ag-biotech and molecular breeding.
The firm is well behind Monsanto in commercializing input traits (and, in fact, must
license certain traits from its arch opponent to keep its corn and soybean seeds
competitive). However, it is climbing up the learning curve. It is also developing output
132
traits, some of which are similar to those being “cultivated” by Monsanto. DuPont isn’t
putting all of its eggs in one basket, however, as it continues to discover new crop
protection chemicals and moves downstream into commercializing new soybean-based
food ingredients.
Bayer and BASF seem disenchanted with the outlook for ag-biotech. The prospects for
achieving EU approval to plant GM crops are dismal, and the managements believe any
meaningful payoff in this business is years away. Syngenta is a bit more sanguine than
Bayer and BASF but continues to focus on crop protection.
Technological Issues
Development of Traditional Technology
Research suggests that full and appropriate use of current agrochemical technology
could increase crop yield to around 60% of the theoretical maximum (compared with a
30% yield without any agrochemicals). The remaining 40%, therefore, would appear to
be a significant untapped source for new “traditional” crop protection agrochemicals
products. In reality, only a proportion of this untapped yield can be realized, as products
tend to lose efficacy over time as resistances grow. Despite this, intermediate-term
growth in the agrochemical marketplace is most likely to be driven by increased usage
of traditional crop protection agrochemicals.
New Productive Techniques Required in the Long Term

Longer-term growth in the agrochemical industry is more likely to come from the
increased adoption of new biotechnologies (such as GMOs, which are discussed
below). Crops that are genetically modified have genes from other organisms (such as
algae or bacteria) added to their genomes, altering the crop’s properties in various
ways. Traditional approaches appear able to only postpone the trends that are leading
to a critical point in world food supplies. However, GM technologies, beyond lowering
the cost of growing crops, can actually improve the yield, quality, and value-added
nature of particular crops. An alternative methodology that results in crops with better
commercial properties is molecular breeding. Genetics of the crops are improved—
without adding genes from other types of organisms—by breeding into the species
beneficial genes that are present in other plants of the same species. That is, with
enhanced knowledge of plant genomes and the use of molecular markers to spot the
location of specialized genes, the conventional breeding process is noticeably
accelerated.
At this stage, the most successful GMOs are Roundup Ready crops (especially
soybeans, but also cotton, corn, and canola), and Bt crops, which transfer genes from
Bt bacteria into crops so that they are naturally toxic to caterpillars (such as Bt corn and
Bt cotton). The most recent major technology is Bt corn for corn rootworm (launched by
Monsanto in 2003).
Well-publicized issues of consumer resistance are being displayed toward these

technologies in certain parts of the world, notably in Europe and in such highly
populated countries as Japan. While this view is unlikely to change in the short term, we
believe the need for this new technology will lead to a gradual acceptance. Input traits—
those that control properties such as insect, herbicide, and disease resistance—were
133
the first to be widely marketed. Output traits—those that affect end users directly, such
as yield, food flavor, quality, texture, color, and nutritional enhancement—are still early
in their development cycle.
In our view, the commercialization of biotech-related output traits could help lift the cloud
surrounding the ag-biotech industry, particularly in Europe. However, after a five-year
hiatus, the EU has finally begun to approve importation of new GM crops. This change
was encouraged by (1) the establishment of EU rules governing the labeling of GM
foods, and (2) pressure from the WTO, which threatened economic sanctions since the
refusal to approve new GM foods was viewed as a restraint of trade, because there was
no scientific basis for refusing to approve them. Ratification was certainly a politically
charged issue in the EU due to the complicated pathway that relied heavily on most or
all of the member states to agree on approval.
Product Development in Breeding and Ag-Biotech

Monsanto
Monsanto continues to emphasize some new soybean oil traits that it is developing with
molecular breeding (non-GMO). The first product to be introduced is Vistive low linolenic
soybeans, which is being launched in 2005; low-linolenic oil requires far less
hydrogenation, thereby reducing production of undesirable trans-fatty acids. The
second-generation product is mid-oleic acid plus low-linolenic soybeans, which is
expected to be commercial in 2008-2009; higher concentrations of oleic acid improve
the taste of soy oil-based products such as soymilk. The third-generation oil product will
add low-saturated-fat content, thereby mirroring the traits of olive oil; this variety is
targeted for 2010-2011.
Other products the firm continues to develop are high lysine GM corn (to be sold for
animal feed by Renessen, its joint venture with Cargill), soybeans that produce their
own omega-fatty oils in 2009 or 2010, and drought-tolerant crops by the start of the next
decade, initially corn but there are many other crops behind it.
As of 2005, Monsanto has converted all of its Roundup Ready corn technology from the
GA21 event to NK603. It expects RR corn acreage to grow in the U.S. from 16 million
acres (2004) to 20 million (2005) and ultimately to 50 million acres (out of 80 million
acres that are typically planted in the U.S. annually). The firm also stressed that the cost
of goods sold for crops with double- or triple-stacked traits is virtually the same as it is
for crops with a single trait. However, technology fees are collected for each of the traits,
bolstering revenues with little or no increase in production cost.
With regard to Monsanto’s acquisition of the fruit/vegetable seed company Seminis,

management expects the property to bolster its gross profit growth. We still believe
Seminis could slow the firm’s overall growth rate, since we don’t believe this unit is
expanding as quickly as the firm’s Seed & Trait business. Syngenta, which has the #2
position in fruit/vegetable seeds, admitted that it looked at this property as well but felt
the expected transaction price would be too high to justify.
134
Exhibit 133: Major Biotech Markets (in Green, with Percentage of Global Market per Region)
Agricultural Biotechnology Market 2003
Canada
7.2%
USA
68.8%
Rest of World
3.5%
Latin America
20.5%
Total = 173.8 million acres

(+11.8% over 2002)
Source: Phillips McDougall.
In early 2005, Monsanto announced its purchase of Emergent Genetics, a private

cottonseed enterprise owned by an affiliate of Hicks-Muse. The two operations within
Emergent are Stoneville and NexGen. This purchase provides Monsanto—the sole
current GM trait supplier to Delta and Pine Land—control of a major DLP competitor. It
ensures the rapid deployment of Monsanto’s new GM technologies and grants
Emergent direct access to Monsanto’s cotton germ plasm that has been developed in
house through Monsanto’s Cotton States unit.
DuPont
In contrast to Monsanto, DuPont is using a three-pronged approach to its ag and
nutrition business: crop protection, seeds with enhanced germ plasm and GM traits, and
Solae food ingredients. The firm has an array of new crop protection products in its
pipeline. Building on its success in sulfonylurea herbicides, the company has 18 new SU
blends in pre-launch stage for cereals and soybeans, with other blends two to four years
away for corn. As a follow-on to its success in indoxicarb insecticide (known as Steward
in some formulations), DuPont is developing E2Y—a low-toxicity, low-dose chemical for
caterpillar control. The product is on track for a 2008 launch, and management believes
it has $500 million in sales potential. Our challenge: Since caterpillars are controlled
fairly well in cotton and corn with Bt crops (genetically modified), how will this sales
target be achieved? Clearly, there are countries that don’t allow Bt crops and other
135
insect-sensitive crops such as potatoes and vegetables (a critical target market for
E2Y). But are these markets sufficient to allow $500 million in revenues?
In the seeds , DuPont makes the point that its global revenue share in corn and
soybeans continues to increase. This is a testament to its high-quality corn and soybean
germ plasm that generates a superior price. For example, high-yielding and short-
maturity corn varieties have been quite successful. Still, over the past several years—
not necessarily every year—Dupont’s Pioneer Hi-Bred corn seed has lost market share
when measured on a domestic acreage basis. Like its competitor Monsanto, the firm is
developing a variety of new crops utilizing molecular breeding and GM technologies.
Triple-stacked corn—three traits licensed from Monsanto (Bt corn borer, Roundup
Ready, and Bt corn rootworm—is in the pre-launch stage. Also, Herculex Corn
rootworm trait—developed jointly by Dow Chemical and DuPont—could be launched as
early as 2006; Herculex stacked with a new generation of Roundup Ready gene (from
Monsanto) could come one to two years after. Drought-tolerant proprietary GM corn is
thought to be 4-5 years away, roughly in-line with Monsanto’s schedule. By 2009, the
company hopes to have its own proprietary glyphosate-tolerant trait—known as GAT
(glyphosate N-acetyltransferase) and developed with Maxygen—commercialized in
corn, and perhaps in soybeans and canola as well. DuPont is also working on a
glyphosate-tolerant trait for cotton through Verdia—a 50/50 joint venture with Delta and
Pine Land. Commercialization of such a product is not likely until 2009 or 2010. With
regard to output traits, its first generation of high-energy corn for livestock feed (via
germ plasm breeding) is going commercial; an enhanced, second-generation GM
variety is in Phase 2, suggesting a launch late in the decade.
The third prong in DuPont’s ag growth fork is Solae, its 72%-owned joint venture with
Bunge. Customers of Solae already have 54 branded food varieties on store shelves,
with more on the way. Soy protein-based Slim-Fast and 8th Continent Soymilk are just
two examples. According to CSFB’s food industry analysts, the competing SILK brand
of soymilk (from Dean Foods) has about 80% market share, while 8th Continent—sold
by General Mills—has about 10% share but is growing. In addition to proprietary
processing, Solae uses soybean varieties that have been bred to help achieve the
desired results. That is, beyond the health benefits of soybean isoflavones, Solae’s
focus is on helping food companies develop better-tasting and more-digestible foods
with, if required, enhanced texture.
European Companies
It is becoming clearer that some agrochemical companies are choosing not to focus on
ag-biotech (BASF) or have decided to concentrate their efforts on the U.S. biotech
market—not Europe (Bayer and Syngenta). In late 2004, there was a meeting between
German regulators and such companies as BASF and Bayer. According to one contact,
the authorities are very willing to approve GM crop planting in Germany, but there were
so many hurdles that had to be overcome before a product could receive such approval
in the EU, that these firms believe it is not worth the expense. Syngenta has received
EU approval to offer its GM sweet corn for planting in that region, but its commercial
prospects are uncertain, to say the least.
136
Syngenta
Syngenta’s VipCot GM technology for insect protection in cotton is not expected to be
commercial until 2007. Hence, it is likely there won’t be any substantial sales of VipCot
cotton—a potential competitor of Monsanto’s Bollgard II insect protection technology—
until 2008. In 2004, Delta and Pine Land signed an agreement with Syngenta to license
the VipCot technology. Furthermore, it will probably be 2009 before Syngenta can offer
a glyphosate-resistance technology that can be stacked with VipCot for cotton;
Monsanto introduced Roundup Ready Cotton in 1997. Other areas of ag-biotech
interest for Syngenta include the production of biopharmaceuticals; the firm feels this is
the more efficient route to therapeutics (versus the enzymatic route) and hopes to be
able to offer a product to a drug company by 2008-2010.
Among the other products Syngenta has under development is glyphosate-tolerant corn,
with the GA21 event obtained from Bayer. Corn using this event had previously only
been commercialized by Monsanto, but a recent court ruling said Syngenta had an IP
(intellectual property) position associated with GA21. The court also ruled that Monsanto
had an IP associated with GA21. Syngenta initially plans to market the glyphosate-
tolerant corn only through its own seed companies—Northrup King, Garst, and Golden
Harvest—which together account for 15% of North American market share in corn. Thus
far, no technology-sharing agreement has been reached between Monsanto and
Syngenta, and Monsanto is litigating the issue with Syngenta to extract value for its IP.
Once the IP standoff is resolved, it is conceivable that Syngenta could license GA21 to
others for use in other crops such as cotton and soybeans.
Syngenta is also developing a product using the Bt 11 event for control of the European
corn borer in corn. Additionally, the firm has applied to U.S. regulators for approval of its
corn rootworm product, which would likely follow on the heels of the traits from
Monsanto (commercialized) and DuPont (to be launched in 2006-2007).
BASF
BASF only has one ag-biotech product far enough in development to discuss with
investors. It is a single-starch potato that is suitable for the paper industry. The firm has
an imidazolinone (imi) herbicide in the pipeline that is three to four years away from
commercialization in the Corn Belt. To protect corn from damage, the firm has
developed “imi-resistant corn.” The firm believes this new herbicide controls some
weeds better than Roundup (glyphosate).
Bayer
Bayer believes that ag-biotech is not going to be important to its bottom line for the next
four to five years. The firm has introduced three products: Fibermax cotton (which has
25% market share in North America); Arise hybrid rice that has been introduced in India;
and Invigoro canola with resistance to the firm’s nonselective Basta herbicide.
China: Generic Glyphosate

China accounts for about 20% of the world’s glyphosate capacity. However, a shortage
of power in that country has limited the production of elemental phosphorus, a key raw
material in the production of glyphosate. As a result, Chinese glyphosate manufacturing
plants are running at reduced rates.
137
Agrochemical Industry Trends and Value Drivers

Industry Consolidation
The crop protection market has undergone major consolidation in recent years. We
believe this trend still has some distance to run. In 2001, Hoechst and Rhône-Poulenc
merged to form Aventis, and thus combined their agribusiness (as well as
pharmaceutical) portfolios, while BASF bought Wyeth’s Cyanamid operations in early
2000. The formation of Syngenta at the start of 2001 from the agrochemicals
businesses of Novartis and AstraZeneca marked the largest deal ever within
agrochemicals. More recently, Bayer’s purchase of Aventis’s CropScience for €7.25
billion in June 2002 marked the most recent step toward a more consolidated industry.
The top six producers now represent 77% of the industry.
Demographic Trends
Demographics suggest that agrochemical growth should be driven most strongly in
volume terms—more traditional agrochemical products should be used more widely to
improve crop yields by reducing wastage. While this is likely to be a major effect, new
technology and product introductions will also have major impacts on the market.
Global Population Growth

The key driver of demand for food is population growth. According to the U.S. Census
Bureau, the global population in 2000 already reached 6 billion, having grown by 138%
in the past 50 years. This equates to an incremental 3.5 billion mouths. The U.S.
Census Bureau expects the global population to expand by another 50%, or
approximately 3 billion people, in the next 50 years.
138
Exhibit 134: Global Population and Arable Land Trends to 2050E
10,000 0.50
9,000 0.45
8,000 0.40
7,000 0.35
(Hectare)
(m)
6,000 0.30
5,000 0.25
4,000 0.20
3,000 0.15
2,000 0.10
1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050
Arable land available per person (RHS) W orld population (LHS)
Source: U.S. Census Bureau, FAOSTAT, CSFB estimates.
Static Land Availability

According to our analysis, per capita land available for food production should decrease
significantly in coming years. (We estimate approximately 33% by 2050.) According to
the Food and Agriculture Organization of the United Nations Statistical Database
(FAOSTAT), in the past 50 years, the total area of worldwide arable land expanded by
only 9%, to 1.38 billion hectares (3.4 billion acres). Forecasts for the next 50 years
suggest that only the same rate of growth in farmed acreage is likely. In other words,
most of the worldwide accessible, available land that is suitable for agricultural purposes
has already been exploited.
Agricultural Yields Must Increase

As a result of these trends, agricultural yields must improve significantly in coming
years. Intrinsic crop quality needs to be improved, both in terms of yield and yield
reliability, and wastage needs to be reduced. Generally, the most efficient and effective
way to boost yields is to utilize plant nutrients (fertilizers), plus traditional crop protection
agrochemical products such as herbicides, insecticides, or pesticides. As a crop is
cultivated, various natural factors can affect (and reduce) its ultimate productive
capability. These factors are varied but can include insect infestations, fungal growth,
and competition for nutrition and sunlight from weeds. Broadly speaking, unless the
intrinsic quality of a crop improves, yields will improve only if traditional agrochemicals
are utilized more widely and effectively or if better agrochemical products are
developed.
139
Selective Crop Breeding Also Boosts Yields

Advances in technology have meant that intrinsic crop quality can now be improved by
changing the genetic instructions that dictate how a plant actually develops—the germ
plasm. Essentially, all other things being equal, one germ plasm will be better than
another if its “instructions” on how to use the available nutritional elements, or repel
pests, or cope with an unfavorable environment are more efficient. For many years,
selective crop breeding has been used to pursue or repel pests’ particular product traits,
but this process has historically been slow and limited by the lifecycle of the plant in
question. Recent advances in genetic technologies (biotechnology or genetic
modification) have vastly accelerated this process, to the extent that crop quality and
traits can be improved faster than ever before.
Economic Growth Boosts Caloric Requirements

Industrialization tends to drive up per capita caloric intake. As countries industrialize,
and disposable income grows, typical consumers tend to increase caloric intake, and at
the very least, demand food of a higher quality (taste, texture, and purity). More
specifically, as a society becomes richer, more red meat is eaten. Given that poultry
requires 2kg of cereal to produce 1kg of meat, swine 3kg of cereal per 1kg of meat, and
cattle 7kg of cereal per 1kg of meat, the mechanism driving demand for grain is clear.
This trend underscores even more clearly the need for the methods previously
discussed to drive crop yield growth.
Trend toward Urban Dwelling: Cheaper Agricultural Labor Available

Global industrialization tends to reduce rural populations, which cuts the availability of
labor to work on crop production. As an economy moves from primary through
secondary and into tertiary economic production, higher-paying jobs are offered in
towns and cities, reducing the attractions of working on a farm. As the use of certain
agrochemicals can reduce the labor-intensity of crop production significantly (for
example, the use of herbicides reduces the need for manual weeding), this loss of labor
can be offset by the expansion of agrochemical use.
140
Cyclical Factors
Despite these relatively healthy long-term fundamentals, there are a number of short-
term drivers in the sector that can significantly affect the short-term growth
characteristics.
• Crop prices. These dynamics are discussed in detail later in this section.
• Weather. This is inevitably linked with the section on crop pricing.
• Currencies. The industry is dollar-based, and the weakening of “soft” currency

emerging markets can seriously hamper farmers’ ability to pay. This was witnessed
when there were widespread local currency devaluations in Asia in 1998-1999 and in
Latin America in 2001-2002, and these two periods of weakness materially affected
global growth rates in the last five years.
• Government subsidies. The EU Common Agricultural Policy (CAP) and the U.S. Farm
Bill are the most influential in this regard. The budget available to farmers from the
CAP is frozen until at least 2006, and thus there is little incrementally positive in
Europe within the context of subsidy levels. The U.S. Farm Bill, however, was recently
reformed (for a six-year period from 2003) to the extent that the overall package could
rise by as much as 80% over the old legislation (1997-2002). However, this is not an
absolute number and depends on pricing levels of crops, among other things.
• Technological changes. These are discussed later in this section.
141
Exhibit 135: The Agrochemicals “Cycle,” 1989–2004

% change
Conventional Agrochemical Market Real Growth 1989-2004

US glyphosate price fall
% change El Nino
Improved Crop Prices
Drought Recovery in Europe
8.0 Freedom to Farm LAM Economy Recovery
GATT Soybean Rust in Brazil
6.0 4.7
4.3 3.7
EU ‘CAP’ Reform
4.0
2.2 2.1
2.0
0.1
0.0
-2.0 -0.5 -0.5. -1.0
-1.6 -1.6
-4.0 -3.0
-6.0 -5.0
GM Crops
Weak Crop Commodity Prices -5.7 GM Crop Expansion
-8.0 Reduced Support -6.8 Improving Commodity Prices
LAM / Asian Economies Weak Drought in Northern Europe
US glyphosate price fall
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
Source: Phillips McDougall
Commodity Price Trends

Changes in farm profitability affect the profitability of the agrochemical industry by
varying the type and amount of purchased seeds and crop protection products. A key
driver to farm profitability is crop pricing, which itself is driven by the supply/demand
balance for a given crop.
142
Exhibit 136: U.S. Commodity Prices

cents/bushel
1200
1050
900
750
Cents/bushel
600
450
300
150
0
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Corn (US) Soyabean (US) W heat (US)
Crop Cycles
High crop availability, usually driven by a good harvest, tends to drive down crop prices.
As prices decline, so does income per acre for a farmer, which in turn may lead to
farmers having less available to invest for the following planting season. This tends to
reduce the yield from the following year’s harvest, which ultimately reduces product
availability and eventually tightens the supply-demand balance, thus dragging prices up.
In addition to general crop cyclicality, short-term demand for agrochemical products is
driven by factors such as crop planting mix and weather conditions. Different crops have
different herbicide, fungicide, and insecticide requirements, and although this may not
be a significant issue for an agrochemical company that offers a broad product portfolio,
it could potentially present a risk to producers with narrow offerings. Climatic effects are
completely unpredictable and generally have regional effects only, both positive and
negative. As a result, companies with broad geographical exposure are best positioned
to resist volatility caused by weather conditions.
Other Issues
Technology has, since the mid 1990s, played a significant role in growth rates within the
industry. This is typified by the success of Monsanto in the late 1990s, when the
company managed to deliver a CAGR in sales of around 20% (in the period 1995-
2000), thanks mainly to its seed and glyphosate technology. This for many soybean
farmers fundamentally changed the economics of farming. However, the flip side of this
is that the traditional agrochemical market has lost out—a number of selective herbicide
products have suffered significantly because of the success of this technology.
143
As agrochemical technology advances, the industry is forced to pay closer attention to

regulatory issues and to protect its intellectual property. The agribusiness marketplace
is subject to strict and tightening regulation in the approved use of the various products
and examination of emerging GM products; moreover, the Common Agricultural Policy
in the EU has a deep influence on the types of crops grown. Finally, in an industry
clearly and increasingly driven by technology and related issues, the availability of
patent protection is important to ensure that a good return can be made on investments.
Increasingly, companies are patenting genes, proteins, or new plant traits, in addition to
traditional crop protection chemicals, to defend their intellectual property.
Agrochemical Near-Term Growth Prospects

Sales and profitability in the agrochemical industry in recent years fell sharply in the
early part of this decade, owing to a series of strong harvests in the U.S., the strength of
the U.S. dollar, and a number of regional economic crises. However, it would now
appear that the farm cycle might be on the verge of a gentle upswing; 2004 data from
the major producers in the industry was very healthy and comments from a number of
companies so far in 2005, while early, would suggest generally healthy conditions exist
in the farm economy.
Growth is unlikely to match the 4.7% real growth of 2004, but we expect sales to grow
by 1-2% in 2005. We point to the following positive development and potential further
trends:
1. The absence of any major economic/currency crisis in 2005 thus far. The full impact
of the reduction in set-aside in the EU will improve acreages in 2005. In addition,
agrochemical product inventories in the pipelines are in general lower than in 2004,
so greater feed-through of this robust volume progression to the company sales
level is possible.
2. Crop prices. Recovery in some selected grain prices has started in recent weeks.
3. Eastern Europe is likely to continue to see improved prospects.

4. China. There has been a shift in industry structure to refocus on “row crops” and
away from specialty crops, which should benefit agrochemical demand.
The main risks ahead, in our view, center on:

1. Monsanto’s rollout of stacked-trait seed technology, which could well impact growth
in the conventional pesticide market.
2. Weather patterns (as ever), in particular the slow start to the planting season in
Europe due to snow.
3. Currencies, especially in the “soft” currency regions of Asia and Latin America,
where hedging is more difficult and/or expensive.
144
X. Industrial Gases
Introduction
Five companies, all of which have operations worldwide, dominate the global industrial
gases market—accounting for roughly 80% of the industry’s sales. The industry supplies
a variety of gases to a broad range of industrial and consumer end markets. The largest
end users are the steel, chemicals, electronics, and refining industries.
The main industrial gases are the principal ingredients of air (nitrogen, oxygen, and
argon), along with the noble gases, neon, krypton, and xenon. All of these gases are
produced using air separation units (ASUs). In addition, hydrogen, helium, and carbon
dioxide comprise significant markets, and while these gases are to be found in the
atmosphere, commercial quantities of these gases are derived primarily from other
sources. The industrial gases companies also now supply a vast range of specialist
gases.
Exhibit 137: The Principal Components of Air
Argon Helium
Oxygen 0.93% 0.0005%
Krypton
20.95%
0.0001%
Other Xenon
0.0024% 0.00001%
Nitrogen
78.09%
Neon
0.0018%
Carbon Dioxide
0.03%
Source: BOC, CSFB research.
145
Air Separation Technology

Factors Influencing Choice of Separation Technology
Five factors influence separation technology choice:
• Volume. Cryogenic methods are most economical for large-scale users.
• Purity. Noncryogenic systems tend not to be able to produce high purities

economically, although the companies are making significant headway in this area.
Additionally, less pure products are suitable for many applications.
• Continuity. Fluctuating demand is best satisfied from liquid storage tanks filled by road
tanker (or sometimes by an onsite plant). If a gas supply is an essential process
requirement, as it usually is, an onsite plant would need to be backed up with liquid
storage for emergency use.
• Location. Some places are too remote for delivery to be economical, or may be out of
reach altogether (such as an offshore oil rig or on board a ship).
• Temperature. Only cryogenic systems are able to provide the liquefied gases that are
essential for low-temperature applications such as food freezing.
Cryogenic
Cryogenic system ASUs are used principally for medium- to large-scale production of
the atmospheric gases nitrogen, oxygen, and argon. Production is either in liquid form
for storage and transportation, or as a gas for piping direct to large-volume users. ASUs
are complexes of compressors and heat exchangers with a tall column in which air is
fractionally distilled at low temperatures.
Exhibit 138: Cryogenic Air Separation

Distillation
column
Gas Gas
CO2 and
water
removed
Heat Exchanger system
Air cools
Compressed & further as it is Air Vapor recycled or
Heat removed passed through eliminated as waste
by water or an expansion
AIR refrigerant turbine to
systems Liquid air withdrawn for Liquid Liquid
reduce Reboiler /
pressure distillation / separation condenser
146
Ambient air is compressed in progressive stages, and the heat of compression is

removed by cooling with water or refrigerant systems. The air is then purified to remove
contaminants such as carbon dioxide and water vapor and then introduced into a heat
exchanger system, where trace hydrocarbons that are potentially explosive in the
presence of oxygen are removed. During this cycle, the cooled and compressed air is
passed through an expansion turbine to reduce pressure, which results in further
cooling of the expanded air. At this point, the air consists of both liquid and vapor.
While the vapor is recycled in the system, the liquid is passed into a distillation column,
which contains perforated metal trays or structured packing. The liquid passes down
through the column, while the vapor bubbles up through the liquid. The rising vapor
tends to become progressively richer in nitrogen, and the descending liquid becomes
richer in oxygen. To obtain high-purity products, two columns are used, separated by a
reboiler/condenser.
In general, the greater the degree to which air is separated, the more separation stages
are required, and the greater the height of the distillation column. This is particularly true
when argon is to be recovered, because both nitrogen and oxygen must be high-purity
products so that the small amount of argon in each can be recovered. Most ASUs are
built with capacity to recover argon.
While the raw material for an ASU is free, the process is energy-intensive. The industry
is constantly searching for ways of improving operating efficiency. In addition, it has
become common practice for pricing agreements to include a clause for energy
surcharges to apply should the energy costs rise above a certain level.
Noncryogenic
Noncryogenic methods separate air at ambient temperature on the basis of physical
property differences other than boiling points.
Membrane Separation
Membrane systems rely on special polymers, which allow more rapid diffusion of
oxygen, leaving a higher concentration of nitrogen behind. Membranes are normally
used to make only nitrogen from air.
Pressure Swing Adsorption (PSA)

PSA systems use specially tailored adsorbent materials, which preferentially retain
either oxygen or nitrogen as the basis of their operation.
Inert Gas Generation

These systems work via the combustion of natural gas (or other hydrocarbon feedstock)
and the oxygen in air to yield a nitrogen-rich product. The resultant product is not of high
purity, and the popularity of this system has waned now that the majority of nitrogen is
sourced from cryogenic systems, which were originally designed to produce only
oxygen.
147
Ammonia Dissociation
Commercially supplied pure anhydrous ammonia is vaporized and then passed over a
catalyst in a retort heated by gas or electricity. The vaporized ammonia is split into its
component parts (nitrogen and hydrogen [1:3]), either cryogenically, or by burning off
the hydrogen. This process is suitable when small amounts of nitrogen that are less
pure than cryogenically produced nitrogen can be utilized, primarily in some metal-
treating operations.
Nitrogen-Rich Natural Gas Wells

Nitrogen has long been separated and rejected from nitrogen-rich natural gas streams
to achieve the purity of natural gas required for resale. Only recently has this nitrogen
begun to be recovered, as it is useful in oilfield servicing and for enhanced oil recovery
(EOR). In future years, increasing amounts of nitrogen will be produced at the wellhead
as it has been injected into the reservoirs for EOR. Recovery is usually via small
cryogenic units.
Electrolytic Dissociation of Water

This method used to be a significant source of oxygen, particularly in areas where
hydrogen and oxygen are required, but where natural gas is not available. However,
power requirements tend to be costly. More recently, interest in the process has risen
for use in hydrogen-fueled fuel cells, which led to improvements in efficiency.
Argon from Ammonia Plants

It is possible to recover argon from plants that produce ammonia. Argon is a component
of both the natural gas burned to produce hydrogen and the air separated to make
nitrogen for ammonia production. This argon builds up in the purge gas stream and can
be recovered.
148
Industrial Gases Industry Trends and Value Drivers

Five companies worldwide supply the majority of the global industrial gases market. The
industry itself is characterized by the three different methods of distribution—onsite
production, pipeline, and cylinder/tanker delivery—and also by the nature of its
production methods, with some products being produced purely as by-products while
others are the result of capital-intensive processes.
Exhibit 139: Global Industrial Gases Market*—Breakdown by Revenue, 2004
Other
16% Air Liquide
Airgas 25%
3%
Taiyo Nippon
Sanso
4%
BOC
12% Praxair**
15%
Linde
12% Air Products &
Chemicals
13%
*Market: US$43-44 billion—Gases and Services revenues only.

** Pro forma for Messer Acquisition.
Exhibit 140: Industrial Gases—Major Participants End Markets, 2004

Air Liquide Air Products BOC Linde Praxair Average
Healthcare 17% 12% 6% 9% 11% 11%
Electronics 11% 23% 18% 7% 15%
Chemicals 22% 11% 11% 10% 14%
Hydrogen 6% 20% 4% 5% 12% 9%
Food and Beverage 4% 4% 9% 5% 7% 6%
Metal Production/Fabrication 35% 10% 45% 45% 16% 30%
Other 5% 31% 7% 25% 37% 21%
Source: Company data, CSFB estimates
Industry Consolidation
The industrial gases industry has seen a significant amount of M&A activity in recent
years, with the latest being Air Liquide’s acquisition of Messer in 2004 (and PX buying
the portion AL was required to divest.) As a result, at this point we view the
consolidation as largely complete, with the only possible merger candidates being BOC
and Linde—a topic that has been in peoples’ minds for a number of years. With those
possible exceptions, further significant moves are unlikely, as they would most certainly
come up against antitrust obstacles, similar to those encountered by Air Liquide and Air
Products in their failed bid for BOC in 1999. The five major players hold relatively stable
market share and recently demonstrated greater focus toward profitability and returns
than toward further market share gains. We believe that this current industry structure
should remain largely unchanged and that its profitability should benefit as a result.
149
Production
Irrespective of distribution method, the gases industry is highly capital-intensive even in
comparison with the broader chemicals sector. For the atmospheric gases, since the
raw material is free, the major costs are capital costs, power, and distribution. For other
gases, the cost of the feedstock also must be taken into account at times. The cost of
power varies by region and is an important determinant of pricing. However, many long-
term contracts now include clauses allowing for surcharges/rebates to reflect changing
energy prices. This way, gases companies have managed to protect to a large extent
their operating margin against this risk.
Distribution
The supply of industrial gases typically takes place via one of three broad methods—
onsite/long-term contracts, pipeline “over the fence” supply, and smaller-scale
delivery—each attracting different margins and capital requirements.
Onsite/Long-Term Contracts
Long-term contracts typically involve a dedicated plant, high volume, and low prices. To
offset much of the risk undertaken by the gas company in building the plant, the contract
is generally constructed on a take-or-pay agreement over the depreciable life of the
asset. Low variable costs (no distribution) mean that high operating margins are
achievable, but the high capex requirements mean that return on capital measures are
low. The age of a company’s assets plays a part in the level of its returns, because
although plants are typically depreciated over 15 years, they may be operational for
longer. In such an instance, the operator will enjoy a period of high returns once the
capital base has been fully depreciated.
Pipeline “Over the Fence” Supply

To improve returns, many onsite plants are “overbuilt” in terms of capacity. The plants
are then connected to a pipeline network, so that unused output can be sold to
alternative customers also connected to that pipeline. A number of gas plants will
typically supply a pipeline network, which can be hundreds of kilometers in length.
Customers on this network can generally purchase their supply of gas either on a long-
term contract, or on demand, which will typically be at a higher price. In this respect, in
an infrastructure in a key strategic region (such as Air Products’ hydrogen network on
the U.S. Gulf Coast) is able to provide significant incremental returns for relatively low
incremental investment.
Smaller-Scale Delivery
Smaller-scale users buy gas as liquid (to conserve space), normally supplied by road
tanker, but also by ship and rail. Liquid prices are typically significantly higher than
onsite prices because of the smaller volumes and addition of transport costs. In
addition, these transport costs limit the market to around 200 miles from the plant.
Gas is also delivered to small-scale users in cylinder form. The higher variable costs of
supplying much smaller volumes in this way render operating margins much lower.
However, prices can be up to 100 times onsite levels, meaning that respectable returns
are possible, particularly if cylinder rentals are included.
150
Industrial Gases Growth Drivers

Demand for industrial gases has shown resistance to much of the cyclicality that
plagues many other areas of the chemicals sector. A large proportion of the revenue
stream is derived from take-or-pay contracts that provide a level of revenue security. In
addition, an increasing range of applications is being found for gases, in terms of
improving productivity in existing processes, meeting more stringent emissions
regulations, and meeting demand for new applications.
• In the steel industry, furnace atmospheres are being enhanced with oxygen and
hydrogen in place of air to speed up the smelting process.
• In the oil industry, increasing amounts of industrial gases are being used in enhanced
oil recovery techniques, as crude supplies become heavier and more difficult to
extract, and assist in refining.
• Environmental legislation designed to lower the sulfur content in gasoline and diesel is
driving demand from refiners for gases used in its removal, such as hydrogen.
• In addition, many new markets for industrial gases are being discovered, driven by
both new technologies (such as fuel cells) and by lower gas production costs.
• The electronics industry continues to demand greater volumes and greater purity
levels of gases, both bulk and specialty gases. While some of this incremental
demand is from the semiconductor industry as more layers and more complex chip
designs require more gases, some is from relatively new industries—most notably the
LCD flat panel display industry.
• Home healthcare is another area of growth for the industry gas producers.
Demographic trends, as well as a push by hospitals to move patients out and home
faster, have resulted in demand for oxygen in the home.
Industrial Gases Growth

As a result of these trends, we estimate that global industrial gases volume should grow
toward the high end of its long-term historical growth rate of 5-8% over the next few
years, driven in large part by the aforementioned drivers, as well as greater penetration
globally—especially in emerging markets.
Because of its reliance on long-term contracts for the majority of its revenues, the gases
industry has always enjoyed relatively strong growth and lower cyclicality. On average,
volume has grown at around 1.5-2.0 times GDP globally, with more mature markets
such as the U.S. and Western Europe averaging slightly lower growth. In addition, the
improving capital discipline within the industry has led to improving utilization, and
consequently a relatively robust pricing environment over the past two years than had
been the case in the late 1990s.
151
XI. Atmospheric Gases
Nitrogen
Properties
Nitrogen is the world’s most widely used industrial gas as a result of two key properties.
First, it is virtually inert. Under normal conditions, nitrogen is chemically inactive; thus, it
can be used as an inert blanket that prevents most reactions and combustion from
occurring. Second, nitrogen has a low boiling point (-195.8 degrees centigrade). In liquid
form, therefore, it is a highly effective, versatile, and nonpolluting agent for freezing and
chilling.
Applications
Exhibit 141: U.S. Nitrogen Consumption by Market, 2002 Exhibit 142: Western European Nitrogen Consumption by
Market, 2002
Rubber &
Plastics Other
1% 11%
Glass Other
2% 18%
Chemicals
Food Industry 33% Chemicals
5% Glass 38%
3%
Petroleum
Refining Food Industry
10% 8%
Petroleum
Primary Refining
Metals 8%
11% Oil & Gas Oil & Gas
Electronics Extraction Metals
Extraction
13% 14% 15%
10%
Source: SRI, CSFB research. Source: SRI, CSFB research.
Chemicals
Nitrogen is utilized in the production of chemicals and petrochemicals, fats and oils, and
elastomers. It is used primarily as an inerting agent to exclude oxygen and moisture, but
it is also used as a diluent to control reaction rates during processing.
Because of the large quantities of nitrogen required, chemical processing and

manufacturing is generally served by onsite air separation plants, although blanketing
and inerting applications can use noncryogenic nitrogen. We expect demand for
nitrogen in the chemicals industry to continue to grow at approximately 3% per annum
over the long term.
152
Primary Metals and Fabrication

Nitrogen is used primarily for inerting and blanketing applications in the steel industry
and as an atmosphere in fabricated metal products manufacturing. Also, in aluminum
processing, nitrogen is bubbled through the melt to remove hydrogen, which can create
voids in finished castings.
Delivery methods for nitrogen in metal fabrication can take various forms depending on
the location and scale of the production facility. Facilities commonly use pipeline
systems and merchant liquid supply, while the largest contain onsite ASUs and
cryogenic or noncryogenic nitrogen generators. We expect demand in these areas to
remain relatively sedate and in-line with GDP.
Oil and Gas Extraction

Numerous stages of oil and gas production involve the use of nitrogen. The largest use
is for advanced oil recovery (AOR). This uses large amounts of gaseous nitrogen, which
is usually supplied by onsite cryogenic plants, to maintain reservoir pressure. In well
drilling, nitrogen is used to replace air to reduce the risk of ”downhole” fires or
explosions. It is also pumped into the drilling fluid to reduce its pressure during
underbalanced drilling.
Drilling and oil field stimulation and production are comparatively small consumers of
nitrogen, and hence can be supplied with liquid nitrogen. Onsite membrane units are
increasingly meeting this demand. AOR requires large volumes of nitrogen and is
usually fed by onsite cryogenic plants. Demand in this field is somewhat dependent on
the demand for and price of oil. Based on our oil price forecasts, we expect a growth
rate of roughly 10-15% within this market, because the high price of oil is resulting in oil
producers looking for ways to squeeze more oil out of their assets.
Petroleum Refining
The major use for nitrogen in this industry is as an inerting, purging, and blanketing
agent for reactor vessels, tanks, pipelines, and other equipment during startup,
shutdown, and cleaning operations. In addition, during normal petroleum production,
processing, storage, and delivery nitrogen is widely used. Finally, it is used in a number
of additional processes, such as regeneration of catalysts, by carrying oxygen used to
burn off deposited carbon; as a flotation agent for bringing foamed wax to the surface of
waxy oils; as an agitating decolorizing agent; and as a safety agent in preventing fires
and explosions.
Petroleum refining requires significant amounts of nitrogen. This is most commonly
supplied either by onsite air-separation units or, location permitting, via pipeline
systems. We forecast demand from petroleum refineries will outpace GDP growth over
the medium to long term.
153
Electronics
Nitrogen is used primarily as a blanketing and purge gas in the manufacturing of
semiconductors, integrated circuits, single crystals, vacuum tubes, and other devices.
Liquid nitrogen is also used in cryogenic testing and to remove impurities, while
gaseous nitrogen is used as a diluent, or carrier gas, for reactive gases (primarily
etchants), used in the electronics industry.
For semiconductor applications, strict purity requirements have meant that gas suppliers
tend to offer not only the gas itself, but also the design and installation of the gas
distribution system, and to operate it at the customer site. Liquid nitrogen is generally
used because of its purity, and this tends to be delivered in bulk form. In some locations,
however (such as Air Products in Silicon Valley), producers established plants that can
supply a large number of users via a pipeline.
For general inerting and blanketing applications, demand for nitrogen is not directly
reliant on the level of production activity, and thus remains largely constant. However,
the rapid contraction of the semiconductor industry in recent years has meant that
demand for these specialist applications has also contracted. Although demand will
depend largely on the weighting of a company’s activities between general electronics
and semiconductor applications, overall, we expect long-term demand for nitrogen from
the electronics industry to grow approximately 6-10%.
Food Industry
In its liquid form, nitrogen is commonly used to cryogenically freeze some foods. Its
rapid freezing properties mean that the moisture content of the food is frozen rapidly into
small ice crystals. Slower freezing techniques lead to larger crystals, which can rupture
food cells and tissues and also lead to partial dehydration of the product.
Rather than immersing the product directly into liquid nitrogen, which tends to cause
undesirable effects in food and often results in uneven freezing, it is more effective to
use a two-stage process. First, the food is cooled and “crusted” (using carbon dioxide,
as it is cheaper); then it is frozen by spraying with liquid nitrogen in a freezing tunnel.
Although liquid carbon dioxide freezes less quickly than nitrogen, liquid carbon dioxide
competes with nitrogen for all stages in the cryogenic freezing of food because of its
lower cost. Furthermore, cryogenic freezing competes with mechanical freezing and
with newly developed forms of preservative packaging.
Elsewhere in the food and drink industry, nitrogen has further uses. It is used as an inert
atmosphere for the processing, storage, and transport of foods. In addition, it is also
injected into the headspace of aluminum cans that contain noncarbonated drinks. In the
absence of carbon dioxide in the drink, sufficient internal sidewall pressure is created to
prevent implosion or dents.
Supply of nitrogen to the food industry generally takes place in the form of bulk tanker
deliveries, although some applications require gas in cylinders. For food industry uses in
general, such as cryogenic freezing and inerting, we expect demand to grow
approximately 2.5% (per year) over the next five years.
154
Glass
The majority of nitrogen consumed in the glass industry is in gaseous form. It is used as
a blanketing agent in float-glass production, to prevent the oxidization of the bed of
molten tin onto which the molten glass is poured. This nitrogen is usually produced in
small onsite plants. Demand for float glass is driven by activity in the construction and
automotive industries. As a result we forecast demand to grow in-line with GDP over the
long term.
In addition to gaseous nitrogen, liquid nitrogen is used in a number of other glass

applications. It is used as a mold cooler in the container glass industry, as well as for
electrode inerting in both the container and fiberglass industries.
Rubber and Plastics

Liquid nitrogen is widely used in the cryogenic grinding of molded plastic and rubber
products, a process used to remove imperfections. A similar process is used to grind
down and recycle items such as tires. In addition, gaseous nitrogen is used to provide
an inert atmosphere for a process called reverse polymerization. This process uses
microwaves to break down the molecular bonding in rubber tires to form carbon black,
fuel oil, and steel wire for recycling.
Demand for nitrogen for rubber and plastic manufacturing is reliant on the level of
manufacturing activity in these areas, and is thus cyclical. Over the long term, we expect
growth to be in-line with GDP.
155
Oxygen
Properties
In contrast to nitrogen, oxygen is widely used because of its reactivity. It also possesses
two key properties that drive its use across a number of industries: it supports
combustion and it supports life.
Applications
Exhibit 143: U.S. Oxygen Consumption by Market, 2002 Exhibit 144: W. European Oxygen Consumption by Market,
2002
Health Pulp & Paper

2% Water Water
Services
4% Treatment Pulp & Paper Treatment
Other
1% 3%
Welding & Petroleum 4% 4%
Other
Cutting Refineries
1%
6% 5%
Clay, Glass &
Petroleum Primary
concrete
Refineries Metals
Products
6% Primary Production
5% Health
Metals 40%
Clay, Glass & Services
concrete Production
6%
Products 49%
Fabricated
6%
Metal
Products
Chemicals & 6% Coal
Gasification Gasification Chemicals
25% 8% 19%
Primary Metals Production

By far the greatest consumer of oxygen is the steel industry. Steel manufacturing is
essentially a two-stage process. In the first stage, iron ore, coke, and various fluxes are
combusted in a blast furnace to produce pig iron. In the second stage, molten pig iron
and scrap are converted into steel in a combustion furnace.
In blast furnaces, oxygen is being increasingly used to enrich the air mixture to aid
combustion, and therefore increase efficiency. In addition, the expense and
environmental concerns surrounding coke ovens led to new technologies being
developed that replace coke with coal. As coal absorbs more energy when it burns,
additional oxygen is being used to redress the consequent loss of heat.
The two common types of combustion furnace are the basic oxygen furnace (BOF) and
the electric arc furnace. In the combustion furnace, oxygen is introduced to oxidize the
impurities in the molten pig iron, and thus purify to steel. This oxidization generates
additional heat, which in turn accelerates the combustion of the steel, improving
efficiency. BOFs use approximately 50% more oxygen than electric arc furnaces,
although changes in technology should lead to continuing increases in oxygen by the
latter.
156
Oxygen is also extensively used in the smelting of nonferrous metals such as copper,
zinc, and lead. Again, its primary use is to enrich the air to improve combustion and
reduce energy consumption. In addition, oxygen is being used increasingly both at
facilities that recycle aluminum and at those that recover gold from sulfide ores.
Because of the quantities used, most of the oxygen for the primary metals industry is
delivered from large onsite gaseous oxygen plants via pipelines. The largest companies
have their own onsite facilities. Additional demand is usually met by bulk liquid
deliveries, and these also tend to be the preferred source for small mills.
We forecast oxygen consumption in the steel industry to grow at around twice the rate
of GDP growth in the medium to long term.
Exhibit 145: U.S. Steel Industry Consumption of Oxygen
350000 160
300000 140
120
250000
Cubic feet (m)
100
Tons (m)
200000
80
150000
60
100000
40
50000 20
0 0
19 6
77
19 8
79
19 0
81
19 2
83
19 4
85
19 6
19 7
88
19 9
19 0
91
19 2
19 3
94
19 5
19 6
97
98
7
8
8
8
9
9
9
9
9
19
19
19
19
19
19
19
19
19
19
Oxygen consumed (lhs) Steel produced (rhs)
Chemicals
Oxygen is used in a number of large-volume chemical production processes, principally
as a catalyst in oxidation reactions, although smaller quantities are used for
oxychlorination processes. The advantages of using oxygen over air are that it
generates improved reaction rates and eliminates inert nitrogen. Combined, these
factors increase production capabilities and reduce pollution.
Other applications in the chemical industry include the manufacturing of ozone, injection
into fluidized bed reactors, and injection for fermentation to increase yields.
Much of the oxygen used in the chemical industry is delivered by pipelines, either multi-
or single-user pipeline. However, some of the largest plants produce their own oxygen.
Bulk liquid deliveries are often used to meet fluctuations in demand over and above the
pipeline capacity.
157
Exhibit 146: U.S. Consumption of Oxygen for the Chemicals Industry, 2001
Cubic feet (millions)
Acetylene 16,800
Caprolactam 2,300
Ethylene Oxide 67,000
Propylene Oxide 22,100
Titanium Dioxide 18,000
Vinyl Acetate 8,400
Vinyl Chloride 19,600
Given the strength of the commodity chemical recovery, we would expect demand over
the next few years to remain relatively robust for oxygen and run at a rate a bit better
than the normalized level. Over the long term, we expect growth to be in-line with GDP.
Gasification
This process uses oxygen to partially oxidize hydrocarbons (usually coal) to produce
synthesis gas, which is a mixture of hydrogen and carbon monoxide. This, in turn, is
used to produce substitute natural gas (SNG) or other chemicals, or to generate power
through combustion.
Oxygen used in gasification is generally produced onsite because of the large quantities
required. It can be supplied as air or elemental oxygen, with air-based plants less
capital-intensive but also less efficient than oxygen-based plants. The nitrogen that is
used as a by-product is usually used as a purge gas in the gasification process, but can
also be used in the manufacturing of other chemicals such as ammonia.
More stringent environmental regulations and deregulation of the electricity markets

make it likely that power generation holds the key to further growth in this industry.
Nevertheless, we do not forecast significant growth above 3% over the long term.
Fabricated Metal Products

The principal use of oxygen is for welding and cutting. Oxygen fuel welding (OFW) is the
oldest form of welding, but it is gradually being replaced by electric arc welding in all but
some specialist applications. Oxyfuel gas cutting (OGC), however, is still widely used for
cutting thick sections of material, as it is fast, effective, and inexpensive. For both
applications, purity of oxygen is important, as impurities have a disproportionately large
effect on the efficiency of the operation.
In addition, small quantities of oxygen are used in the electronics industry. In the
manufacturing of semiconductors, it is used for oxidization of silicon, while it is also used
in the manufacturing of optical fibers and electron tubes.
The link to the growth in semiconductors means that we do not expect demand for
oxygen for these applications to grow at more than 2% per year.
158
Clay, Gas, and Concrete Products

Oxygen is used to enrich the atmosphere within the glass melt furnaces, as well as brick
and cement kilns to enhance combustion efficiency. The result is decreased fuel
consumption, increased productivity, and reduced pollutant emissions. It is the last of
these reasons that has become the greatest demand driver.
The majority of companies that have migrated to oxygen enrichment have also moved
to onsite generation of that oxygen. Companies that provide PSA and membrane-based
systems have targeted this market because of the lack of need for absolute purity and
its comparatively small scale.
Use in fiberglass and container glass manufacturing is becoming a significant end use,
while applications in flat glass manufacturing are still emerging.
Petroleum Refineries
Oxygen has two key uses in the petrochemical industry, including regeneration of
cracker catalysts, debottlenecking of sulfur recovery units, and gasification.
1. Oxygen is able to regenerate the catalysts used within catalytic crackers by
oxidizing the carbon that builds up on the catalysts. As heavier crudes are used,
carbon buildup increases, regeneration takes longer, and capacity falls. Oxygen is,
therefore, used in increasing quantities to combat this effect.
2. Demand for this use is seasonal because of the higher demand for auto fuel during
the summer months. As a result, while basic demand is met either with onsite
facilities or pipelines, incremental demand is met using bulk-liquid deliveries.
3. The second major use is for the debottlenecking of Claus sulfur recovery units by
enriching the atmosphere, in which the acid gas feed is combusted. Again, demand
relies on a number of factors, with fluctuations matched by bulk-liquid deliveries.
As many of these uses are still emerging, we expect demand to reflect this, and to grow
at over twice the rate of GDP. However, demand is also heavily reliant on the overall
level of industrial activity, which itself drives demand for oil.
Health Services
Oxygen has a significant number of uses within the medical industry as a result of its
ability to support life. Hospitals account for 75-80% of demand, with the remainder
coming from home treatment.
Large medical centers and hospitals tend to have high-purity oxygen delivered in liquid
form and stored on site before being revaporized for use. Oxygen in cylinders is
generally used by smaller hospitals and to meet additional demand from larger
hospitals. In addition, a few large hospitals produce their own oxygen in onsite oxygen
concentrators (small PSA units).
Growth in demand is generally driven by population growth, although in developing
countries, improving medical facilities drive demand at a faster rate. We expect growth
of around 6-10%.
159
Pulp and Paper

Oxygen is used at an increasing number of stages in pulp and paper manufacturing. Its
use is being driven principally by environmental concerns and tougher regulations in
that field. In particular, oxygen bleaching reduces the need to bleach with chlorine,
which itself has a poor environmental record.
Exhibit 147: Potential Oxygen Requirements for a 1,000-Short-Ton-per-Day Fully Bleached

Kraft Pulp Mill
Potential Oxygen Requirement Use/Benefit
(short tons per day)
Oxygen Delignification 25 Reduced AOX formation
White Liquor Oxidation 3-5 Decreased caustic purchases
Oxidative Extraction 5-10 Decreased chemical cost
Black Liquor Oxidation 60 Environmental odor control
Black Liquor Oxidation Polishing 5
Lime Kiln Enrichment 1-10 Increased production
Wastewater Treatment 15-50 Environmental compliance
Wastewater Treatment Polishing 20
Ozone Generation 60
Hog Fuel Boiler Enrichment 15
Source: CEH estimates, CSFB research.
Oxygen for these processes has traditionally been delivered in bulk-liquid form.
However, as it is being used in increasing quantities throughout the manufacturing
process, so the investment into onsite production becomes justifiable.
Overall, we forecast oxygen consumption in paper mills to grow broadly in-line with
GDP.
Wastewater Treatment
Oxygen is required by bacteria to oxidize organic matter to produce carbon dioxide and
water. When the reaction occurs in nature, the dissolved oxygen content in water is
used. However, if the level of organic matter is such that all of this water is consumed
and not replaced, the fish and plant species in the water that are dependent on oxygen
are harmed.
With increasing amounts of organic waste finding its way into waste systems, the
demand for oxygen to combat this is increasing. Activated sludge systems and oxygen
systems are the two principal methods of providing the oxygen required for this purpose.
Oxygen systems are commonly chosen over air systems as they take up less space.
The oxygen is traditionally supplied by either a cryogenic oxygen plant or by a PSA unit,
depending on the size of the wastewater facility, while liquid oxygen is usually also
stored on site as a backup.
Although additional uses for oxygen exist within wastewater processing, it is essentially
a mature market. As a result, we do not expect growth in excess of 2% over the long
term.
160
Ozone for Drinking Water

Ozone (triatomic oxygen) is a powerful oxidizing agent that is increasingly replacing
chlorine in water treatment applications. Ozone can be generated from ambient air,
liquid oxygen, or oxygen generated on site. As ozone will spontaneously revert to
diatomic oxygen, it is produced at the point of use.
The largest volume applications for ozone are in the processing of water for drinking.
Major applications within this field are disinfection, color, taste, and odor control.
Industrial gas companies tend to have investment interests in ozone-generation

companies, rather than undertaking the production of ozone themselves. Concerns over
the use of chlorine in drinking-water preparation have led to rapid growth in the number
of processors switching to ozone treatments. As a result, growth in recent years,
particularly in the U.S., has been strong. We believe this transition should continue,
albeit at a slower rate, and hence we forecast demand growth of around 5% over the
long term.
161
Argon
Argon is the most abundant truly inert (or noble) gas. While for the majority of
metallurgical applications nitrogen is sufficiently inert, argon is the optimum choice in
extreme conditions.
The argon business operates differently from the oxygen and nitrogen businesses, as
argon can be produced economically only as a by-product of large air separation units.
This means that the construction or closure of these facilities is based on the demand
for oxygen and/or nitrogen, and this can result in a dislocation between supply of and
demand for argon. This situation is made worse, since oxygen and nitrogen are
consumed in a large number of industries, while argon is used almost exclusively in the
steel industry.
Applications
Exhibit 148: U.S. Argon Consumption by Market, 2002
Other
14%
Electronics
4%
Electric Lighting Welding

Equipment 43%
4%
Primary Metals
35%
Primary Metals Industries

The steel industry is the largest user of argon and usage is increasing as processes that
consume argon are more widely adopted and more high quality steels, such as stainless
steel are produced.
Specific uses are as an atmosphere in vacuum-induction furnaces, which are used to

produce special alloys; “bottom blowing,” which is the process of bubbling argon through
molten steel to stir it and aid oxidation of any impurities; ladle metallurgy furnaces where
it is bubbled through to cause impurities to flow to the top; and continuous casting,
during which argon is used to shroud the molten steel to protect it from oxygen as it is
poured into molds.
In addition, the decarburizing of stainless steel involves an argon and oxygen mix, in
which the argon reduces the partial pressure of the carbon monoxide reaction product of
the furnace charge, thus increasing the rate of oxidation of the carbon and decreasing
the rate of oxidation of chromium.
162
Argon is also combined with other gases as an inert blanket for melting, casting, rolling,
and annealing operations, which require high-temperature refining and fabrication
processes.
Finally, argon is used along with nitrogen, chlorine, and carbon monoxide in the
aluminum smelting industry to remove dirt and other imperfections from molten
aluminum. It has taken over this role from chlorine, which produced environmentally
harmful by-products.
We forecast the use of argon in the steel industry to grow at approximately 3.5% per
annum over the long term.
Fabricated Metal Products

• Shielding for gas welding. The major use for argon is as a shielding gas for electric
arc welding of nonferrous and specialty metals. There are two principal welding
processes: tungsten inert gas (TIG) and metal inert gas (MIG).
• TIG is used for welding aluminum, copper, and other metals. The tungsten
electrode is not consumed, and the argon protects the areas between the hot filler
metal and the weld zone. Helium can also be used for this purpose, but argon is
the preferred gas.
• MIG is also used for aluminum and other specialty metals. Argon shields the
molten beads of metal from the electrode as it is passed across the arc onto the
weld joint. This prevents wide dispersal of the beads of filler metal.
• Consumables are only a small part of the cost base of welding (less than 10%). Gas
companies, therefore, try to sell their products to welding companies on the basis of
improvements in efficiencies that they may provide, as the labor savings should have
a far greater effect on profitability.
• Electronics. Argon is also used as a blanketing and inerting agent and in the plasma
processes in semiconductors and integrated circuit manufacturing.
• Electric lighting equipment. Although krypton is more effective, because it is cheaper,
argon is used as a fill gas to protect the tungsten filament within incandescent lighting
bulbs and fluorescent tubes.
Overall, we expect long-term growth in demand for argon to be slightly above GDP
growth within these applications.
163
Other Noble Gases

Other noble gases such as neon, xenon, and krypton together account for less than two
thousandths of 1% of air. Like argon they are truly inert and are used almost exclusively
by the lighting industry. High-powered lights, such as those in lighthouses, use xenon
and krypton, while fluorescent tubes use a mixture of argon and krypton. Neon is used
in lighting tubes and signs. Bar code readers containing continuous lasers are also filled
with neon, while lasers that use krypton have recently found a niche in corrective eye
surgery.
164
XII. Nonatmospheric Gases

As the name implies, none of these gases is extracted from the atmosphere although
some are present in very small quantities.
Hydrogen
Production
Hydrogen is produced in large quantities, both as a principal product and as a by-
product. Hydrogen producers may consume the product captively, sell it to end users,
sell it to a company that specializes in marketing industrial gases, burn it for fuel, or vent
it into the atmosphere.
Steam Reforming of Hydrocarbons

This is the primary method of intentionally manufacturing large volumes of hydrogen.
The most common feedstock is natural gas, although ethane, propane, butane, and light
and heavy naphtha are also less commonly used. The resulting mixture of hydrogen
and carbon monoxide is known as syngas, and can be used as it is, or separated into its
component parts. The cost of manufacturing depends largely on the cost of the
feedstock, and therefore of natural gas.
Dissociation of Hydrocarbons
This process is generally used to produce smaller quantities of hydrogen that are to be
used captively. Dissociation of methanol or ammonia result in mixed gas streams
(hydrogen and nitrogen) that are primarily used as atmospheres for metal treating.
Electrolysis
This process accounts for only a small proportion of hydrogen generated in developed
countries. Electrolyzers are best suited for producing small volumes of relatively high-
purity hydrogen and oxygen for specialized applications or in countries without a well-
developed transport system, and with limited local supplies of natural gas or merchant
hydrogen.
By-Product Generation
In addition to intentionally produced hydrogen, large volumes of by-product hydrogen
are generated from a variety of production processes. This hydrogen often requires a
certain amount of purification. Processes that produce hydrogen as a by-product include
catalytic reforming in refineries, production of chlorine and sodium hydroxide, and the
manufacturing of carbon black.
New Developments
Research into hydrogen-fueled fuel cells has triggered improvements in the technology
of hydrogen production. In addition, this new technology may mold the economics of
small-scale hydrogen production in the coming years.
165
Properties
Hydrogen is a key chemical reagent and reducing agent. It is highly combustible and is
even colder than nitrogen in the liquid phase, with a boiling point of minus-252.8
degrees centigrade.
Applications
Exhibit 149: Global Hydrogen Demand, 2002 Exhibit 150: Outsourcing of Hydrogen Demand, 2002
Current Annual Global Hydrogen Consumption 540bn m3 Global Hydrogen production (excluding ammonia) 270bn m3
Chemicals Other
3% 1% Chemicals
20%
10% Outsourced to
gases industry Other
Refineries (27bn m3) 10%
46%
Ammonia *
50% Refineries
Hydrogen 70%
generated
internally
90% (243bn m3)
* 100% of production consumed within industry, no external market. Industry estimates of % outsourced range from 6% to 10%.
Source: Company data, CSFB estimates. Source: Company data, CSFB estimates.
Exhibit 151: Additional Hydrogen Applications

Industry Application Delivery method
Food Starch Pipeline
Electronics Bulk Liquid
Glass Optical fiber Bulk Liquid
Space Rocket fuel Bulk Liquid
Food Hydrogenation of fats and oils Bulk Liquid
Laboratory Cylinders
Heat Treatment Cylinders
Glass Float Glass Cylinders
Glass Polishing Cylinders
Chemicals Industry
Ammonia production is the single-largest consumer of hydrogen in the chemicals
industry, although many other chemical products also consume hydrogen during their
manufacturing. As the production of hydrogen from natural gas tends to be integrated
into the ammonia plant, most producers consider themselves to be consumers of
natural gas, rather than hydrogen. In addition, syngas, a mixture of hydrogen and
carbon monoxide, is also used in the production of a wide variety of chemicals.
166
Significant quantities of both merchant and captive hydrogen are consumed by the
chemicals industry. The merchant gas is usually delivered in either single or multi-user
pipelines, while bulk-liquid deliveries satisfy the needs of both small-scale users and of
users whose regular production fails to meet peaks in demand.
Petroleum Refining
Petroleum refining both produces and consumes large amounts of hydrogen.
• Production. The largest source of hydrogen is catalytic reforming of naphtha, which

produces a gas that is typically 85% hydrogen. The gas is usually routed directly to
hydrogen-consuming units of the refinery, where it is passed through once and then
generally burned as fuel. In addition, fluid catalytic cracking and thermal processes
both produce significant amounts of hydrogen.
• Consumption. The principal use of hydrogen in refineries is in the removal of sulfur
and other contaminants from various petrochemical products. More stringent
emissions regulations, combined with the increasingly high sulfur content of many
remaining crude reserves, are expected to drive demand for the gas. The regulations
aim to reduce the parts per million (ppm) of sulfur in gasoline and diesel. In the U.S.,
the maximum permissible sulfur content will be reduced from the current 350 ppm for
gasoline and 500 ppm for diesel to 30 ppm and 15 ppm, respectively. (The deadline
for this legislation is 2004 for gasoline and June 2006 for diesel.) In Europe, the
maximum will be reduced to 50 ppm by 2005 and to 10 ppm by 2008, for both
gasoline and diesel, which currently stand at 150 ppm and 350 ppm, respectively.
Exhibit 152: U.S. Emissions Legislation Exhibit 153: EU Emissions Legislation
500 350
450 500 350
300
400
350 250
350
300
Sulphur content Sulphur content 200
250 ppm
ppm 150
200
150
150 100
100
50
50 30 50 10 50 10
15
0 0
2001
2001 2005 2001 2006 2001 2005 2008 2001 2006 2008
Gasoline Diesel Gasoline Diesel
Source: Company data. Source: Company data.
167
Chemical Industry Primer, 2005–2006
Exhibit 149: Hydrogen—Production/Consumption in the Refining Industry
Acid gas from conversion
units
GAS SEPARATION AMINE WASH CLAUS SULFUR
FUEL GAS
nC4 MEROX LPG
H2 H2
Light Naphtha Hydrotreating Isomerization
Heavy Naphtha Hydrotreating Catalytic reformer Gasoline
ATMOSPHERIC
DISTILLATION
Desalted H2
H2
Kerosene MEROX JET FUEL
H2
Diesel
168
Light Atm. Gasoil Hydrotreater

H2 H2
nC4 ISOMERIZATION ALKYLATION
CRUDE OIL Heavy Atm. Gasoil
VGO Hydrotreater H2
FCC ETHERIFICATION
FCC Gasoline
H2 HYDROCRACKING HEATING OIL
VACUUM
H2
DA SOLVENT DEWAXIN HYDROFINISHING LUBE OIL
O EXTRACTION G H2
DEASPHALTING ASPHALT
AR/VR DESULFURISATION LS FUEL OIL
VISBREAKING HS FUEL OIL

H2
COKING PETROLEUM
COKE
= Hydrogen Production = Hydrogen Consumption
14 June 2005
Edible Fats and Oils

Hydrogen is used in the hydrogenation of unsaturated fats and oils. Hydrogenation is a
process that is used to raise the melting point of oils and fats, so that they remain solid
at room temperature.
Many hydrogenators have captive or onsite hydrogen units, while the rest generally
purchase their hydrogen in bulk liquid form. The hydrogen used needs to be of a
relatively high purity (99.5%) to prevent damage to the nickel catalyst that is used during
the hydrogenation process.
Metals
Hydrogen is used in both primary metals production and secondary metals processing,
although the majority of the demand comes from processing. Primary production of
tungsten, tungsten carbide, and molybdenum powder all involve the use of hydrogen,
while heat treating, sintering, and brazing are all secondary processes that consume the
gas.
Hydrogen consumption in the metals industry has increased significantly in recent

years, primarily because of the increased demand from annealing furnaces. The
hydrogen content of the atmosphere in these furnaces has increased from 6% to 100%.
Bulk-liquid, pipeline, and onsite hydrogen are all consumed by the industry. The industry
produces its captive hydrogen in a number of ways, including generation from natural
gas and dissociation of ammonia or methanol.
Electronics
Hydrogen is widely used during integrated circuit manufacturing, optical fiber
manufacturing, and fused quartz manufacturing. The majority of hydrogen consumption
is within the first of these processes, for polysilicon manufacturing, and in wafer
production.
Because of the high purity required in these applications, bulk hydrogen sold to the
electronics industry is usually in liquid form, or as gas vaporized from liquid.
169
Float Glass
Hydrogen typically forms around 5% of the atmosphere (the remainder being nitrogen)
for float-glass manufacturing. (See also the “Float Glass” section within the nitrogen
uses discussion.) Hydrogen acts as a scavenging agent, to ensure an oxygen-free
environment, because the molten tin bed is highly sensitive to oxidation. Glass quality is
also affected by oxygen, which can cause a residue to form on the glass, making it
hazy.
As purity and reliability of supply are vital, and quantities required are comparatively
limited, flat-glass producers do not generally produce their own hydrogen but prefer to
purchase bulk hydrogen in liquid form.
Utilities
Hydrogen is used by utilities companies for two main reasons:
1. As it has greater thermal conductivity and generates less friction than air, it can
provide more efficient cooling, and as a result, it is used to cool some forms of
generator.
2. In addition, hydrogen is often added to the cooling water of nuclear power plants
with boiling water reactors to prevent corrosion and cracking. The majority of such
plants purchase their hydrogen in liquid form, although some produce their own.
Fuel Cells
Industrial gases companies are currently investigating the potential for hydrogen as a
feedstock for fuel cell technology. However, not only does the large-scale commercial
development of fuel cells still appear to be a distant reality (according to Air Liquide, it is
at least ten years away), but also there is no guarantee that hydrogen will become the
chosen fuel over methanol or gasoline. If methanol or gasoline (because of its easier
storage and increased safety) becomes the preferred course of development, hydrogen,
and hence gases companies, will play no part in this market. That said, the stationary
market might be a significant growth driver, again depending upon the fuel infrastructure
adopted.
Other
Hydrogen is also used in the space industry as rocket fuel, in instrumentation as a
calibration gas, and in a variety of environmental applications.
170
Helium
Production
Helium is extracted from helium-rich natural gas deposits. Only a few sources in the
world contain a sufficient proportion of helium (at least 0.3% helium) to justify its
separation. It is most commonly separated using a low temperature process that
removes the crude helium from the natural gas. Further purification can also be
undertaken using cryogenic separation, although technology is moving toward using a
pressure swing adsorption (PSA) process, which requires less upfront investment and
fewer personnel for operation. About 80% of world production is in the U.S., with the
majority of the remainder located in Algeria, Russia, and Poland.
Natural gas companies tend to recover crude helium during their processing of natural
gas. The prime objective is to remove impurities (including helium, carbon dioxide, and
nitrogen), which reduce the value of the natural gas. A small number of these
companies also refine the helium, but most send it to an industrial gas company for
further refining.
Properties
Helium is totally inert, lighter than air, and the coldest of all the nonatmospheric gases in
liquid form. It has a small molecular size, is highly mobile, and has a low solubility in
water.
Because of its high value, helium is the only major industrial gas to be traded
internationally.
Applications
Exhibit 150: U.S. Consumption of Refined Helium—Gas, 2000 Exhibit 151: U.S. Consumption of Refined Helium—Liquid, 2000
Other
Other 9%
Preco o l
14% Welding
Nuclear M agnetic 2%
Fibre Optics 25%
Reso nance
3% 6%
B reathing M ixture
4%
Superco nducto r
Inert A tmo sphere Bath
5% 8%
Heat Transfer
6%
Lift Gas
Leak Detectio n 18%
8% M RI
75%
Chro mato graphy P ressure Purging
8% 9%
171
Applications—Gas
• Welding. The largest use for gaseous helium is in welding, where it provides an inert
gas shield to protect the weld zone from the atmosphere. The susceptibility of many
metals to oxidation means that many metals cannot be joined without such a shield.
• Lift gas. Helium has been used as a nonflammable substitute for hydrogen in balloons
and lighter-than-air craft. It is used for lifting weather balloons, as well as for filling
blimps and decorative balloons.
• Leak detection. In products that require leak-proof systems for safety or long-service
life. Helium is used because it is capable of escaping through tiny gaps, and is easily
detected in minute amounts.
• Breathing mixtures. Helium and oxygen are combined and used as a synthetic
breathing mixture for deep-sea divers working underwater for long periods. The
increase in offshore exploration and production within the oil industry in the 1980s
fueled demand for this application.
• Pressure purging. Purging of air and spacecraft used to be a major use of helium.
Now it is also used for purging cold boxes and gas storage equipment.
• Heat transfer. Because it remains gaseous under normal operating conditions, is
chemically inert, and has a high thermal conductivity, helium is a useful heat-transfer
medium, and is therefore used in gas-cooled nuclear reactors.
• Chromatography. Helium’s low solubility, inertness, and high thermal conductivity

mean that it is a popular carrier gas during a technique used for separating mixtures
of gases, liquids, or dissolved substances.
Applications—Liquid
• Magnetic resonance imaging (MRI). MRI use became popular in the late 1980s, as it
proved to be a useful diagnostic tool. The liquid helium is used to cool the magnets
within the machine.
172
Carbon Dioxide
Production
Rather than being manufactured, carbon dioxide tends to be a by-product of other
processes, both industrial and natural. The majority of carbon dioxide is recovered from
industrial processes, although some is also recovered from natural deposits.
Industrial By-Product
• Hydrogen. Most carbon dioxide is recovered from plants that produce hydrogen or
syngas through steam reforming of natural gas. These plants are typically used in the
production of ammonia and other chemicals for hydrogenation. (See the “Hydrogen”
section.) Syngas is composed mainly of hydrogen and carbon monoxide, with a small
proportion of carbon dioxide. However, if more hydrogen is desired, the carbon
monoxide is catalytically oxidized, also creating more carbon dioxide.
• Ethyl alcohol. Carbon dioxide is produced as a by-product of the fermentation process
that produces ethanol. Some countries encourage the use of ethyl alcohol as a fuel,
and as a result, its production is likely to be a growing source for carbon dioxide.
• Other. A number of other chemical production processes give rise to carbon dioxide.
Substitute natural gas (SNG), ethylene oxide, sodium phosphate, and calcium
carbonate operations all give rise to carbon dioxide in quantities sufficient for
recovery.
Natural Deposits
Significant amounts of carbon dioxide are recovered from natural deposits, either as a
proportion of natural gas or sometimes as pure carbon dioxide. Rather than being
considered an impurity and vented into the atmosphere, carbon dioxide content in
natural gas is now recovered for future use. As its use in oil-field applications has
increased (principally for EOR), the amount of carbon dioxide recovered from oilfields
has also grown.
In addition, a relatively limited number of pure carbon dioxide deposits exist naturally
that can be recovered for processing and further use.
Properties
Carbon dioxide is heavier than air, and when concentrated, can be compressed and
cooled to form a colorless odorless liquid. If the liquid is exposed to atmospheric
pressure, it converts into a mixture of gas and solid, which can be compressed to form
blocks (dry ice). Carbon dioxide dissolves readily in most liquids, and forms a mildly
acidic solution when dissolved in water. In addition, carbon dioxide does not support
combustion.
Carbon dioxide can be transported in cylinders, road or rail tankers, or as dry ice in
insulated trucks.
173
Environmental Issues
The widely held belief that atmospheric carbon dioxide is responsible for global warming
has led to an increased focus on reducing emissions. The European Union has imposed
a tax on carbon dioxide emissions, while globally there is an increasing interest in
capturing emissions.
Applications
The balance between supply and demand for carbon dioxide is not necessarily an even
one, as its principal source is as a by-product of other processes. Production of carbon
dioxide is driven by demand for the primary product, which may not match demand for
carbon dioxide itself. For example, supply of carbon dioxide is at a peak in the autumn
and winter months as a by-product of ammonia production, which is at its highest level
during this period in preparation for the spring fertilizer requirements. Demand, driven by
food refrigeration and beverage carbonation on the other hand, is highest during the
summer months.
Applications—Solid and Liquid

• Food industry. Liquid and solid carbon dioxide is used in the preparation, packaging,
and preservation of a wide variety of food products. In a number of areas, it competes
directly with nitrogen and holds an advantage in some situations because of its lower
cost. A large proportion is used to keep food cool while it is being handled, processed
(such as dough mixing), or transported. Liquid carbon dioxide is widely used as a
direct refrigerant that is sprayed onto food for freezing. (See our discussion on
nitrogen applications in the food industry.) Solid carbon dioxide, or dry ice, is widely
used to lower the ambient temperature during food transportation.
Other uses within the food industry include creating an inert atmosphere for packaging
to prevent food spoilage. Carbon dioxide is frequently used during two processes,
controlled atmosphere packaging (CAP) and modified atmosphere packaging (MAP),
because of its ability to inhibit growth of bacteria that cause spoilage. In addition,
carbon dioxide is now being injected into some dairy products such as milk and ice
cream to prevent the growth of microorganisms, and hence extend the shelf life.
• Beverage carbonation. Carbon dioxide’s primary use in the beverage market is for soft
drinks. Not only does it generate “fizz,” but it also inhibits the growth of mold and
bacteria. This is a mature market, and we do not expect growth to significantly exceed
the historical average of around 3.5%.
In addition, the beer-brewing industry consumes significant amounts of carbon

dioxide, principally for carbonation, to prevent oxygen coming into contact with the
beer, or as a purge gas. The majority of this carbon dioxide is produced captively
through fermentation, although some is also purchased over the fence.
We estimate that approximately 80% of the carbon dioxide used for this purpose is
directed toward soft drinks, with virtually all of the remainder used for beer.
174
• Oil and gas recovery. Carbon dioxide is used in oil and gas recovery for both
fracturing and in enhanced oil recovery (EOR). During fracturing, liquid carbon dioxide
containing proppants, which open the pores of the rock, is injected into the well to aid
the release of the hydrocarbons. Its principal use is in gas wells, although it is
occasionally used in oil wells. For EOR, because of the quantities required, gaseous
carbon dioxide is generally piped in. This is discussed in further detail below.
• Other. Exhibit 152 contains a brief summary of some of the wide variety of other uses
for merchant liquid carbon dioxide.
Exhibit 152: Carbon Dioxide—Miscellaneous Uses

Use Description
Chemical manufacturing As a raw material, for inerting and pressurizing and for cooling. The majority of carbon dioxide consumed for this purpose is
in gaseous form (see below).
Metal working As a shield gas in gas metal arc welding (GMAW) and flux core arc welding (FCAW). Also as a stirring gas in steel
manufacturing (see nitrogen section).
Inerting and pressurizing In a wide variety of applications, such as oil refining, as a blanketing and inerting atmosphere, to shut out oxygen. It is also
used in some types of fire extinguishing equipment.
Solvent and supercritical Extractions (such as caffeine from coffee, flavors from spices), cleaning, solvent recovery, chemical reactions, particle
fluid applications formation, and chromatographic separation.
Water treatment To adjust the PH of drinking water (usually as a replacement to lime to soften water). Also to neutralize alkaline wastewater
streams, replacing sulfuric acid as it is less toxic.
Fumigation Particularly at grain stores and flourmills. Use is on the increase as one by one alternatives are withdrawn for environmental
and health reasons, although it is not suitable for soil fumigation.
Foam blowing Replacing chlorofluorocarbons, many of which have been banned under the Clean Air Act. It does not have the insulating
properties of some gases, and hence use in some applications is limited. Used mainly for polyurethane and polystyrene
foams.
Aerosol packaging Replaced CFC-12 during 1970s. Currently mixed with hydrocarbons for propellant use, although we expect demand from
this source to decline as hydrocarbon-based propellants are replaced with emulsions of water and an organic solvent to
reduce VOCs.
Pulp mills To treat acid wastewater, also as a reactant to manufacture precipitated calcium carbonate. Also for brownstock washing.
Dry ice Compressed liquid carbon dioxide. Primarily used to keep items cold, but also in pellets for blasting, to clean surfaces by
thermal shocking.
Applications—Gas
• Captive for chemical manufacturing. Large quantities are produced and consumed
captively in chemical manufacturing, principally in the manufacturing of synthetic urea,
sodium carbonate, and calcium carbonate.
Urea is the primary consumer, and hence demand for fertilizer is the principal driver
for this source. Carbon dioxide is produced as a by-product of ammonia production.
The ammonia and carbon dioxide are then reacted under high temperature and
pressure to form ammonium carbamate. This is then dehydrated to form urea and
water. Most urea is produced at plants that recover and recycle excess ammonia
feed.
175
Carbon dioxide is commonly reacted with milk of lime to produce precipitated calcium
carbonate, demand for which has increased rapidly in recent years for use in
manufacturing paper. The gas is usually recovered as a by-product of other
processes, such as the decomposition of limestone, although some plants purchase it
in bulk-liquid form.
Carbon dioxide is also used in the production of sodium carbonate (soda ash), which
is used both as a chemical reagent and in glass manufacturing.
• Pipelined for oil and gas recovery. As crude reserves in oil fields become depleted
EOR techniques are implemented more frequently. The three principal methods are
thermal (59% of EOR in 1998), gas (41%), and chemical (less than 1%) methods.
Carbon dioxide is the most commonly used gas for EOR, accounting for
approximately 25% of all U.S. EOR in 1998, because at temperatures and pressures
above its critical point, it is an effective solvent for oil. It, therefore, picks up the lighter
carbon components, increasing the volume and reducing the viscosity of the oil,
making extracting easier. Industry estimates of the extent to which recovery is
enhanced range between 8% and 16%.
Over time, as some of the injected carbon dioxide will break through with the
recovered oil, and this can be recovered and reinjected, demand for purchased
carbon dioxide falls. At the end of the oil field’s useful life, the remaining carbon
dioxide can in theory be recovered and used to flood another field.
The economics of using carbon dioxide depend on several factors: the price of oil, the
unique characteristics of the field, the price and availability of carbon dioxide, and the
level of government intervention (if any). However, once the decision has been made
to inject a field with gas, the majority of the costs are sunk in the infrastructure, and
the flood cannot be easily stopped.
EOR using carbon dioxide appears to become economically viable when the oil price
reaches US$20/barrel, although companies that produce their own carbon dioxide will
probably consider a lower oil price as their threshold. In addition, the amount of oil in
the field will naturally play a part, because the fixed-asset costs can then be spread
over a longer period.
As EOR requires large quantities of carbon dioxide, the gas can only economically be
delivered by pipeline. Some oil fields are fortunate enough to be located near
ammonia plants that produce large amounts of by-product carbon dioxide, but the
majority used for EOR occurs naturally in fields developed for their carbon dioxide (or
methane, which may include carbon dioxide) content.
176
XIII. Specialty Chemicals
Background
What Are Specialty Chemicals?
Specialty chemicals is a loosely defined term. The companies within this subsector are
defined more by the general characteristics of the products that they manufacture,
rather than by any technical function of those products. It is these broad features that
distinguish specialty chemicals companies from the more commodity-oriented
operations. It is possible, however, to bracket specialty chemicals companies into a
number of broad categories based on the end use of their products.
Exhibit 153: Specialty Sales League*, 2004

US$ in millions, unless otherwise stated
Company 2004 Sales

3M 20,014
Degussa 14,584
Clariant 11,006
DSM 9,826
Ciba Specialty Chemicals 9,095
Lanxess 8,462
ICI 7,155
Rhodia 6,757
Avery Dennison 5,341
Engelhard 4,169
Ecolab 4,131
Sealed Air 3,798
Givaudan 3,553
Lonza 2,824
Valspar 2,441
Ferro 1,801
Cytec 1,721
Johnson Matthey 1,584
British Vita 1,262
Yule Catto 698
Croda 376
* Excludes PMD division and auto catalysts.

Specialty Chemicals Industry Trends and Value Drivers

Overview
Over the last decade, the global chemicals sector has seen a number of major
diversified players trimming their portfolios, focusing operations on specialty products
and consolidating to gain scale. Clariant was formed in 1995 from an IPO of the
chemical operations of Sandoz, and acquired the specialty chemical businesses of
Hoechst in 1996 in a transaction that propelled it into the top echelons of the specialty
chemical industry. American Cyanamid spun off its specialty chemical operations into
Cytec Industries in 1997, while ICI’s reinvention as a specialty chemical company began
in the same year with the purchase of Unilever’s chemical businesses. Rhodia was
177
created from the chemicals, fibers, and polymers businesses of Rhône-Poulenc in 1998.
More recently, Lonza (1999), Givaudan (2000), and Degussa (2001) have all emerged
as prominent players on the specialty scene. Most recent, at the start of 2005, Bayer
demerged a number of its downstream chemicals businesses to create Lanxess.
As the revenues and market capitalizations of these groups have grown, so have their
importance as investment vehicles within the chemicals industry. Historically, this
segment of the industry has been represented by a large number of small- to mid-sized
producers. However, more recently, consolidation and restructuring within the industry
has produced a league of larger manufacturers, which now dominate the specialty
chemical landscape to the extent that specialties now make up around 20% of the
market cap of the global sector.
One of the defining features of these companies is the immensely broad range of
activities included within their portfolios. However, there are a number of key drivers,
both positive and negative, behind the industry that are worth highlighting.
Effect More Important than Price

Traditionally, the essential difference between commodity and specialty chemicals has
been that the former are sold on price, while the latter are sold on effect; however, the
distinction between the two categories is increasingly blurred. In general terms,
specialty chemical businesses tend to form a low proportion of the cost of the end
application in which they are used (typically a few percent). They provide important
characteristics that enhance products with such elements as texture and color or
provide key product qualities, such as high absorbency or anti-icing properties, to name
just two. Competition within the industry is based upon product differentiation and
innovation, and certain logistical issues such as distribution capacity. Specialty chemical
producers often supply not just a product, but also a much broader range of services to
their customers, including research, problem solving, bespoke product development,
and storage solutions. As the specialty industry has matured, however, many of these
distinctive features have become less clear, and the line between specialty and
commodity chemicals is sometimes blurred.
178
Exhibit 154: Specialty Chemicals Value Drivers

External to the Chem ical Industry Internal to the C hemical Industry
• Dow nsizing
• S earch for V alue-Added
• Focus
• Supplier Relationships
• Benchmarking
• Higher S ervice Levels
• Outsourcing
• Pricing P ressures
• Supplier C oncentration
• Focussed Core Com petencies
• Reduced Com petitive
• Hunting for Growth
Advantage
• Risk/Rew ard
• Volume Grow th S low down
• Increasing comm oditisation
• Deflationary P rice P ressure Strategic Drivers
G eographic
• Regional vs Global
• Structural E uropean W eakness
• Globalized C ustomers
• Globalized S uppliers
• Globalized C ompetitors
• Global Positions Key
Greater Profit Stability

Pricing trends for specialty chemical companies tend to be more stable than for
commodities, although that is not to say that specialty chemicals companies necessarily
enjoy pricing power. The high price elasticity of a commodity chemical often leads to
significant levels of volatility across the cycle. This tends to be less pronounced in
specialty chemicals, which tend to be further down the chemical processing chain (and
thus further away from inputs such as crude oil), and also tend to display a greater
degree of product differentiation. As a result, while demand generally varies in-line with
trends in the economy as a whole, growth rates tend to be at or slightly above prevailing
GDP growth, boosted by new applications and new product development.
Although these factors do not mean that specialties will necessarily command higher
selling prices or generate higher margins than commodities across the cycle, they
create an environment in which both margins and prices display comparatively higher
levels of stability across the business cycle. This has in the past tended to lead to higher
stock market valuations for specialties than commodity stocks because of a lower
perceived risk in specialty production, stemming from a less volatile earnings stream.
Obviously, this premium will vary from company to company dependent on the product
portfolio.
Demand, Not Supply-Driven—A Stable Pricing Environment

A true specialty chemical product is typically characterized by a small number of global
producers. Production of many specialties is on a relatively small scale and can be
measured in terms of kilograms. In contrast, the production of many commodity
chemicals is on an extremely large scale. These volumes apply particularly to products
such as bulk actives for pharmaceutical or agrochemical products.
179
Prices for specialty chemicals tend to be more stable than for commodities. The
relatively small number of competitors within each product area of the specialty
chemical sector, on the whole, reduces the cyclical overcapacity problems that
characterize the commodity chemical industry. As incremental additions to capacity tend
to reflect increases in demand, the fundamental imbalance between supply and demand
that exists within the commodity chemical industry is less of a feature of the specialty
chemical industry. However, the features of the specialty industry that we have just
outlined have attracted increasing numbers of participants in recent years. As a result
many specialty categories now suffer from oversupply and price deflation. Moreover,
consolidation among customers has in many cases increased their bargaining power,
leading to further downward pressure on prices.
Barriers to Entry Higher than for Commodity Chemicals

The high levels of technical expertise and the close nature of the supplier/customer
relationship that typify the production of some specialty chemicals mean that some
technical barriers to entry to the industry are often higher than for many commodity
chemicals. Specialties tend to include a high level of intellectual property content, and
some will be sold under patent (although these patents are more often than not
superceded by advances in technology). In some end markets, once a strong
relationship is established with a customer, the need for an assured supply of product of
a consistently high quality means that customers are unlikely to switch supplier. (Good
examples of such relationships are Lonza in some areas of the fine chemicals industry,
Givaudan in the flavors and fragrances industry, and Engelhard in the gas-to-liquids
catalyst industry.) Commodities, on the other hand, have very few comparable barriers
to entry—customers will buy from the producer that can meet their requirements at the
lowest cost.
General Portfolio Shifts and Downstream Consolidation

Over the past few years, much of the chemical industry has made significant efforts to
reposition their portfolios and reduce their exposure to the highly cyclical commodity end
of the chemicals industry. The high cost of doing business globally is more suited to
production of goods that carry higher levels of intellectual content and service. As a
result, specialty chemicals often have lower levels of capital investment than are
typically found in commodity chemicals. The chemical industry has, therefore, shifted
the balance of its portfolios downstream, where it can compete on areas other than cost
alone. Meanwhile, much of the world’s commodity chemical production resides within oil
and gas companies
In the majority of cases, this portfolio shift has involved a wholesale reorientation of a
company’s activities, for example ICI. A dwindling number of companies have
maintained their presence in their traditional commodity markets while also diversifying
into more specialty oriented businesses. DSM, which expanded its life sciences
operations substantially with the acquisition of Gist-Brocades in 1998, initially continued
to operate its more commodity-based operations in tandem with the new businesses.
However, DSM sold its commodity operations in 2001. In addition, the company has
accelerated the transition downstream with the acquisition of Catalytica in 2002, and
Roche vitamins and Fine Chemicals in 2004.
180
Commoditization
Increasingly high levels of competition within certain product areas have, perhaps
inevitably, brought with them a degree of commoditization. Some product lines, which
were once true specialties, are now only semi-specialties at best, and some, such as
textile dyes and some plastic additives, would certainly now better be described as
commodities. The commoditization of a product line implies that pricing declines will
intensify over time. While this price deflation may put returns under pressure in the short
term, increasingly this is driving out weaker competitors, leaving those who remain with
prospects for improved profitability. The extent to which this is an issue for any given
company depends entirely on the business portfolio and, hence, overall business trends
between two different specialty producers could be completely different.
Customer Consolidation
If consolidation was a defining feature of the specialty chemical industry in the 1990s,
then the same is true, to an even greater extent, of the industries that it services.
Examples of the trend toward consolidation can be found in the auto industry (Daimler
Benz and Chrysler), the pulp and paper industry (Enso and Stora), paints (Akzo Nobel
and Courtaulds), and pharmaceuticals (Hoechst and Rhône-Poulenc, Pfizer and Warner
Lambert, Glaxo Wellcome and SmithKline Beecham). Industry worldwide is reacting to
the need to globalize and pursue purchasing and operating synergies in a drive to
improve returns.
Consolidation within the customer base has, to a certain extent, driven further
consolidation activity within the chemicals industry—global customers want to be
serviced by global suppliers. As the power of the customer has increased, so too have
the pricing pressures faced by chemical producers. When combined with the trend
toward commoditization that we have outlined, the pricing power that was once firmly in
the hands of the chemical manufacturers is, in many areas, now shifting in favor of the
customer. Price deflation within the industry looks set to remain a defining feature of the
specialty chemical landscape from this point onward. From this point of view, we believe
it is absolutely key for specialty chemical companies to pare their cost structure to the
bone wherever possible, to find critical mass in their area of core competency, and to
locate production assets in areas of lower production cost.
181
Specialty Product Categories

The definition of what constitutes a specialty chemical is a loose one and the line
between specialty and commodity is sometimes blurred. However, we have attempted
to bracket the vast array of operations of the companies within this subsector into a
number of broad categories. In addition to the categories outlined below, we examine
the agricultural chemicals and industrial gases industries, which are sometimes
considered specialty chemicals industries, as separate sections later in this report.
Specialty chemicals can be categorized either as market oriented or functional product

oriented. Market-oriented products are groups of chemicals that are utilized by a specific
industry or market such as oil field chemicals. Functional specialty chemicals are groups
of products that serve the same defined function, such as adhesives, antioxidants or
biocides. Naturally, therefore, there is considerable overlap in this categorization.
Exhibit 155: Global Specialty Chemicals Market Size, 2003
60000
50000
40000
$ Millions
30000
20000
10000
0
Active Pharmacuetical Ingrdients
Pesticides
Electronic Chemicals
Advanced Ceramic Material
Specialty Polymers
Flavors & Fragrances
Industrial & Institutional Cleaners
Specialty Surfactants
Catalysts
Printing Inks
Specialty Coatings
Food Additives
Specialty Paper Chemicals
Water-soluable Polymers
Cosmetic Chemicals
Synthetic dyes
Plastic Additives
Textile Chemicals
Adhesives & Sealants
Image Chemicals & Materials
Water Management Chemicals
Oil Field Chemicals
Seperation Membranes
Nanoscale Chemicals
Lubricating Oil Additives
Biocides
Anti Oxidents
Enzymes
182
Paints and Coatings

Paints and coatings are used to create a decorative and/or protective layer. The
substances from which they are made include resins, solvents, additives, pigments, and
in some products, dilutants.
Paints and Coatings Industry Trends and Value Drivers

Recently, the industry has been under pressure to reduce the amounts of solvents used
in paint and to limit the emission of volatile organic compounds (VOCs). This has led to
an increase in the use of water-based and solventless paints. Manufacturers have also
been focusing on the development of new paints and process techniques to increase
application efficiency. Somewhat ironically, this has in turn led to a decrease in paint
consumption.
The industry breaks down into four main categories:
Architectural Coatings
This is the largest market by volume. Used on residential, commercial and industrial
buildings and sold through wholesalers and retailers, the majority (80%) is water-based.
The market is considered mature, and we expect long-term growth to remain in-line with
GDP.
Short-term swings in sales growth tend to reflect the level of home redecorating, and
therefore are driven by general activity in the housing market. The usage ratio is
approximately 60:40 interior to exterior use.
Competition comes from alternative materials such as interior wall coverings and wood
paneling.
OEM Coatings
Original equipment manufacturer (OEM) coatings are applied to equipment and objects
during manufacturing. Such objects include cars and trucks, appliances, furniture and
building products, and machinery.
The coatings are manufactured to each customer’s specifications and include powder
coatings, which are dry solventless coatings, usually applied using heat.
Special-Purpose Coatings
These products are formulated for special conditions such as extreme temperatures or
corrosive conditions. Major markets include industrial construction and maintenance,
automotive and machinery refinishing, road markings and traffic signs, roof coatings and
marine applications. Demand for these products is closely allied to the level of industrial
activity.
Other
This final category includes products such as paint thinners and removers, wood fillers
and sealants such as putty and other glazing compounds, as well as solvent cleaners.
Demand for these products follows the fortunes of the architectural coatings market
closely, as they are also used during decoration.
183
Adhesives and Sealants

Adhesives are materials used to attach or bond two solids together. Sealants are
materials used to fill the gap between two materials and prevent the passage of liquids
and gases between them.
Adhesives and Sealants Industry Trends and Value Drivers

The adhesive sector comprises approximately 80% of global sales, while sealants
generate roughly 20%. Adhesives make up a very small proportion of the fastening
market, but they are the fastest-growing of all methods. However, it is unlikely that they
will ever replace traditional fastening methods such as welding or rivets, because of
continuing concerns about the long-term reliability of adhesive bonds. The largest end
markets for adhesives are packaging, construction, and furniture/woodworking, although
the increased use of plastic parts in engineering is fueling demand from this industry. In
both the adhesives and sealants markets, synthetic materials continue to replace
natural ones despite a strong move to reduce the emission of solvents and other VOCs
within the industry.
Natural Adhesives
Animal Glues
These are made from animal bone, fish products, or milk derivatives. They are the oldest
form of glues, but their popularity is waning because of the superior performance of
synthetic substitutes and also because of their strong odors. Despite this, milk-derived
glues are still widely used for woodworking and in the manufacturing of paper cups.
Starch Adhesives
These adhesives are manufactured from a variety of natural starches, including potato
starch, cornstarch, tapioca flour, and wheat flour. The main uses for starch adhesives
are in woodworking for veneers and plywood, as well as for postage stamps. They have
the advantage of being cheap to produce, but their relatively low strength and poor
resistance to water mean that they are being replaced by synthetics.
Synthetic Adhesives
Synthetic adhesives use a broad range of raw materials, but many are derived from
ethylene, formaldehyde, and urea. Their continuing substitution for natural adhesives
means that they now account for over 70% of the adhesives market.
The use of solvent provides the adhesive with excellent wetting properties, and thereby
gives very good penetration of the adhesive. However, the use of solvent-based
adhesives is declining at approximately 2% per year. Other types of synthetic adhesives
are reactive, hotmelt, and water-soluble.
Sealants
Silicone sealant is the largest product type, followed by sealants made from urethanes.
The major source of demand comes from the construction and transport equipment
markets. Manufacturing assembly and consumer use comprise other important markets.
Synthetic sealants continue to replace natural materials, which now make up a very
small proportion of the market.
184
Water Treatment
We define this category as those chemicals that are added to water to improve its purity
before, during, and after its use in industrial, commercial, and municipal applications.
Water Treatment Uses

The major industrial consumers of these chemicals are the pulp and paper, chemical
processing, petroleum refining, metal finishing electronics, and paint industries. Water
softening and purification chemicals are widely used commercially in food and
beverages manufacturing, while treatment chemicals for swimming pools also generate
significant demand. Municipal applications consist of treatments for drinking and for
waste water.
Water Treatment Industry Trends and Value Drivers

The broad definition and the consequent wide range of applications mean that a wide
range of factors drive demand. Environmental regulation is a key factor, as are industrial
and consumer health and population growth. Industrial markets consume approximately
75% of water treatment chemicals, with cooling water the largest application and pulp
and paper the largest market.
Corrosion inhibitors
These chemicals are added to water used in industrial applications to prevent the
formation of lime scale and to prevent corrosion of metal parts caused by dissolved
salts. They account for the largest category of water treatment chemicals by volume.
Growth in demand for corrosion inhibitors is, therefore, closely tied to the level of
industrial activity.
Coagulants and Flocculants

Used principally in the municipal water treatment industry, these chemicals help to
separate suspended matter and contaminants, including solid waste, from water. The
chemicals used include water-soluble polymers, such as polyacrylamides and acrylic
acid polymers, and aluminum compounds.
Demand growth for the most part is allied to population growth and is, therefore, unlikely
to exceed 1-2% per annum in developed economies. However, the developing
economies of Latin America and Asia, with their improving living standards, offer the
greatest potential for growth, in our view.
Oxidizers and Biocides

This category of chemicals includes the bulk commodity chemicals of chlorine and
hydrogen peroxide, as well as their derivatives. They are used as disinfectants in a wide
variety of industrial and commercial applications. Smaller volume specialty products in
this category include biocides and bromine compounds, which combat bacteria in water.
As specialty applications constitute a very small proportion of the demand for these
major chemicals, demand growth is driven by alternative applications such as the health
of the pulp and paper industry.
185
pH Adjusters and Water Softeners

These chemicals also tend to be at the commodity, rather than the specialty, end of the
production scale. They are used to maintain pH levels in both industrial and household
water by eliminating the effects of calcium and magnesium. The chemicals used
themselves include lime, sodium derivatives, and sulfuric and hydrochloric acid.
Other Uses
Specialty chemicals are used in a number of other capacities in the treatment of water:
defoamers and sequestering agents, as well as filter media and adsorbents, which
provide another means of separating suspended matter and contaminants from water.
Combined, these uses account for approximately 15% of the market for water-treatment
chemicals.
186
Flavors and Fragrances

Industry Overview
The global flavors and fragrances industry was, we estimate, worth around US$16
billion in 2003. However, the industry is by no means homogeneous and is an umbrella
term for three differentiated business sectors:
1. Essential oils and natural extracts, which are derived from a multitude of botanical
sources. Many of the suppliers of these products are from developing countries,
relatively small-scale, and often privately owned.
2. Aroma chemicals, which are produced by the synthesis of naturally occurring
essential oils for direct use in compounding and for chemical conversion to other
aroma compounds.
3. Flavor and fragrance compounds, which are a reasonably complex mix of aromatic
materials. These comprise a blend of the first two groupings of essential oils and/or
aroma chemicals.
Exhibit 156: Flavors and Fragrances Market, 2003: $16 billion
Aroma chemicals
13%
Flavor
Essential Oil/ Compositions
Natural Extracts 43%
17%
Fragrance
Compositions
27%
Although flavors and fragrances are two quite distinct product groups, using different
chemical reactions and techniques and with different market dynamics, most major
players in the industry are involved in the production of both flavors and fragrances, and
the terms tend to be used together to describe a single segment of the chemical
industry.
187
Exhibit 157: Structure of the Flavors and Fragrances Industry

Natural Synthetic
Raw Chemical
Material Animals Plants Intermediates
Aroma Chemicals
Odoriferous
Secretions Exudates Essential Oils (natural and synthetic
Substances
Merchant Compounds
Flavor and Captive Compounds (compounding by the
Fragrance (compounding by flavour and fragrance
Compounds end users) industry
Finished
Soaps and Cosmetics Foodstuff, Beverages Industrial
Goods
Detergents and Toiletries Tobacco, Pharmaceuticals Uses
(End Users)
Flavors and Fragrances Uses

Fragrance products are sold principally to manufacturers of perfumes, cosmetics,
detergents, and other personal and household care products.
Flavors are used in small quantities to enhance the taste and texture of all manner of
processed food and beverages. Both flavors and fragrances may be derived from
naturally occurring essential oils and plant extracts or from chemicals produced from
organic synthesis.
Exhibit 158: Flavor Market End Uses, 2004 Exhibit 159: Fragrances Market End Uses, 2004
Confectionery
Aroma/Flavor 16%
24%
Fragrance
ingredients
34%
Consumer
Dairy
products
19%
50%
Beverages
28% Others Fine
13% Fragrances
16%
Source: Givaudan, CSFB research. Source: Givaudan, CSFB research.
188
Flavors and Fragrances Manufacturers

Worldwide, three types of chemical companies produce flavors and fragrances
chemicals:
1. The traditional flavor and fragrance houses produce chemicals as needed for their
own compounding and also for sale in the open market. Their competitive
advantage is a very specialized technical know-how for manufacturing certain
classes of chemical (such as IFF and Givaudan).
2. Large chemical companies participate in these markets by upgrading small portions
of their large-scale chemical production to flavor and fragrance specification (such
as Rhodia, BASF, Eastman and Cognis). The influence of such companies is
dwindling as purified chemicals shift to less-profitable commodity status.
3. Small- to medium-sized custom synthesis houses with a specialized technical know-
how.
Exhibit 160: Major Manufacturers of Flavors and Fragrances, 2003

Other
40%
Danisco
2%
Mane
2%
Ogaw a & CO
2% Givaudan
T. Hasegaw a 12%
2%
Sensient
3% IFF
Takasago 11%
5% Symrise
Quest Firmenich
7%
5% 9%
Source: Givaudan, CSFB research.
Flavors and Fragrances Industry Trends and Value Drivers

Although few major flavor and fragrance manufacturers are involved directly in the
sourcing of essential oils and natural extracts, a number are back-integrated into the
production of aroma chemicals.
Biotechnology is playing an increasingly important role in the aroma chemicals industry,

despite well-publicized fears over GMOs in Europe. However, since the process is more
costly than synthesis, it remains restricted to a relatively limited range of aroma
chemicals at present, with organic synthesis remaining the primary production method.
189
The flavors and fragrances industry is increasingly moving toward a two-tier structure,
dominated by a handful of major players, with a large number of significantly smaller
companies operating in niche markets. Despite the industry’s fragmented structure,
significant consolidation has taken place over the past few years. In 1985, 23
companies accounted for around 55% of the total market for flavors and fragrances. By
1999, the pace of consolidation had been such that the combined sales of just five
manufacturers accounted for around 55% of the total market.
Industrialization and higher disposable income lie at the heart of the demand for flavors
and fragrances. The “money rich, time poor” society means that convenience foods and
high-performance household products are high on most consumers’ shopping lists. In
the developing world, as income rises so does demand for processed food and higher
quality personal and household care products, as well as for luxury goods such as fine
fragrances.
Flavor and Fragrances Growth Prospects

The number of applications in which flavors and fragrances products are used has
grown rapidly in recent years. In the fragrances market, demand for products such as
male toiletries and deodorants has grown significantly, as has the market for designer
fragrances. Meanwhile, the industry continues to find new and innovative uses for
fragrances, such as aromatherapy. In the field of flavors, products such as convenience
foods, soft drinks, and low-cholesterol, low-fat foods have all boomed in popularity,
while new markets are constantly emerging.
Recently, however, product lines have been rationalized, while customer consolidation
has led to increased buyer power. Consequently, demand has slowed, and pricing
power has become less significant. We expect medium- to long-term growth in this
industry to settle at around twice the rate of GDP growth.
190
Catalysts
Catalysts are substances that alter the rate at which other chemicals react, while they
undergo no reaction themselves. In theory, catalysts can be recovered in their original
form following the reaction, but in practice, they have a useful life that varies according
to the application.
Exhibit 161: Catalyst Markets by Type, 2001

Chemical
Processing
Catalysts
20%
Petroleum Refining
Catalysts
41%
Emmison control
Catalysts
39%
Petroleum Catalysts
Petroleum refining, which is the source of by far the largest share of industrial products,
consists almost entirely of catalytic processes. Used principally for the production of
fuels and other petroleum derivatives, there are three types:
• Fluid cracking catalysts (FCCs) comprise roughly 50% of overall demand and are
used to assist in the conversion of petroleum in gasoline and other fuels. Engelhard
and Grace (which bought Akzo Nobel’s business in 2004) are the major
manufacturers of FCC catalysts in the world.
• Hydroprocessing catalysts are used for the removal of impurities from crude oil prior
to its distillation.
• Reforming catalysts are used to further refine and enhance petroleum components to
create gasoline and petrochemical feedstocks. Johnson Matthey-owned Synetix is
Europe’s principal producer of hydroprocessing catalysts.
Demand for these chemicals relies largely upon the health of the oil refining industry,
which in recent years has not been good. We expect longer-term growth rates to be in
the region of 2-3% per annum, although upside could be driven by a major expansion in
gas-to-liquid (GTL) technology.
Chemical Catalysts
Chemical catalysts are used in a variety of different industries, including chemicals,
pharmaceuticals, polymers, and food. The vast majority of chemical processes involve a
catalyst of some sort.
The greatest demand comes from manufacturers of polymers. Other large markets are
for oxidization (in the production of ethylene oxide), organic synthesis, hydrogenation
191
and dehydrogenation, and gas synthesis (used in the manufacturing of hydrogen,

ammonia, and methanol).
Recently, polymer catalysts have been developed that not only affect the rate of
polymerization, but also increase the output of a polymer of a certain molecular weight,
with certain properties and advantages.
Demand for these catalysts reflects a wide range of drivers but broadly follows overall
industrial activity. We estimate long-term demand growth in this area of approximately
2-3% per year.
Environmental Catalysts
Environmental catalysts are used to control pollutant emissions from a number of
sources such as auto engines (in catalytic converters), power stations, and other
industrial plants. They reduce the levels of substances such as carbon monoxide and
volatile organic compounds (VOCs) and sulfurous substances within waste gases.
The auto market is the key driver of the environmental catalysts industry. As a result,
tougher emissions legislation around the world has driven demand growth in recent
years, and is likely to continue to do so. Demand stems from both OEM manufacturers
and from retrospective fitting of catalysts to vehicles already in circulation. In addition,
industrialization of developing economies offers further potential for growth, as
emissions from industrial plants and other nonauto-related industries (construction
vehicles, lawn care, snow mobiles, etc.) come under scrutiny. Growth in the industry has
historically been in the region of 3%. However, we expect tightening emissions
legislation to lead to growth of around 6.5% over the next five years, falling to 5.0%
beyond this period.
Exhibit 162: Vehicle-Emissions Legislation
Source: Johnson Matthey.
192
Exhibit 163: HDD: World Diesel Fuel Standards
Source: Johnson Matthey.
193
Additives
Additives are chemicals that are added to materials such as plastics to provide them
with certain qualities, and thereby improve their functionality or processability. The
overwhelming majority of additives are used in the manufacturing and processing of
plastics. The range of additives is broad and includes modifiers, property extenders,
plasticizers, flame-retardants, colorants, lubricants, detergents, and many others.
Approximately 75% of plastics additives are sold to the manufacturers of plastics
products, while the remainder is sold to the manufacturers of plastics resins. As the
majority of plastics consumption is in Asia/Pacific (for electronics products), the majority
of additives are also consumed in this region. PVC is the resin that consumes the
majority of polymer additives, particularly modifiers and processing aids.
The wide range of additives is manufactured along product lines by a large number of
different manufacturers. As a result, the industry is viewed as largely fragmented.
However, as with many areas within the specialty sector, consolidation is an ongoing
theme.
The diversity of uses for plastics means that demand for the products is driven by a
number of different factors. Overall manufacturing activity is the main driver that has
seen the additives industry grow at around 4% in recent years. We expect the
increasing substitution of polymers for other materials in manufacturing to continue to
support growth of a similar level in the medium to long term.
Modifiers
These are products that change the physical properties of the plastic resin. The greatest
demand is for plasticizers, which increase a material’s flexibility. Demand is largely
driven by demand for flexible PVC resins, for which the most common plasticizer is
phthalate, a commodity derivative of phthalic anhydride.
In addition, rubber-based impact modifiers are used to improve plastic’s resistance to

stress by absorbing force.
Property Extenders
This category includes heat and light stabilizers, flame-retardants antioxidants and
antistatic agents. They are used to ensure the stability of resins during use, or in some
instances, during processing.
• Heat stabilizers are used to maintain plastics resins throughout their processing and
service life. The most significant demand comes from PVC manufacturing, because of
the high temperatures at which the resins are processed.
• Light (UV) stabilizers are used in plastics, but also in other products such as paints.
They absorb or deflect UV radiation that would otherwise cause the plastic to degrade.
• Flame retardants help the material to which they are added to resist combustion when
exposed to extreme temperatures. The majority of these chemicals are utilized in the
production of plastics, but they are also widely used in furniture and textile
manufacturing. Of the plastics applications, the vast majority of flame retardants are
used in products for the construction, electronics, and transport markets.
194
Because of medical and environmental concerns, demand is growing for nonhalogen

products to replace chlorinated and bromine-based products that currently dominate
the market.
• Antioxidants prevent or delay the oxidization of plastics that would otherwise lead to
their breakdown. The greatest demand comes from polyolefins (polyethylene,
polypropylene, and polystyrene), while the major types of antioxidants are alkylated
phenols, amines, phosphates, and esters.
Processing Aids
This broad term covers chemicals that improve the compounding or molding of resins.
Processing aids include lubricants, mold-release, antiblocking, and slip agents.
• Lubricants include metallic stearates, hydrocarbons, fatty acids, and alcohols. They
assist resin flow during production, and also enhance mold release by compensating
for any imperfections in machinery and materials.
• Antiblocking agents include talc, calcium carbonate, and silica. The most common use
for antiblocking agents is to prevent two contacting layers of plastic film (such as
kitchen film) from sticking together.
Colorants
Colorants are pigments and dyes that are used to give color to plastics. Pigments and
dyes are examined in more detail later in the report. The two largest volume pigments
used in plastics are titanium dioxide (white) and carbon black (black). Additional colors
are achieved using a variety of metal oxides, chromates, and cadmiums.
Other Additives
Food Additives
We use food additives as the generic term for a wide range of specialty chemicals that
are added to foodstuffs for a variety of reasons, including preservative, fermentation,
sweetening, and health benefits. These are distinct from products in the flavors and
fragrances segment.
195
Exhibit 164: Global Food Additives Sales by Value, 2004
Flavor enhancers
Yeast
Hydrocolloids
Functional Proteins
Intense Sweeteners
Acidulants
Emulsifiers
Colors
Starch
Vitamins
Fat replacers
Enzymes
Antimicrobial agents
Antioxidants
Cultures and media
Functional Food ingredients
Other Food ingredients
0 1 2 3 4 5 6
US$ bn
Source: DSM.
Increasing demand for food to contain not only nutritional benefits but also added health
value has driven growth for highly developed food additives. In addition, the aging
population is fueling demand for foods that can provide circulatory, immune system, and
even anticancer benefits.
The increasingly close fit with life sciences activities is attracting many of the same
players to the food additives market, while the increasing R&D costs of these activities
have led to industry consolidation in recent years.
Demand in the food additives market has grown at approximately 5% in recent years,
and we expect this to be a good indication for future growth.
Cosmetic Additives
Cosmetic additives are the active ingredients in shampoos, conditioners, soaps, and
moisturizers, among other things. They include vitamins, amino acids, minerals, and
silicone oils.
Conditioning polymers are the largest raw material sector by volume and are used in
hair conditioners and skin moisturizers. Specialty surfactants are also widely used,
principally in soaps and shampoos. Ingredients from plant and vegetable origins are
playing an increasingly important role. Products that mitigate the effects of aging are
particularly sought after by consumers.
196
Exhibit 165: Cosmetic Additive Sales by Volume, 2004 Exhibit 166: Cosmetic Additive Sales by Value, 2004
UV
Fixative
absorbers Actives
Polymers
5% 1% Actives
5% UV
6%
absorbers
Antimicrobials 9% Conditioning
Conditioning Polymers
7% Fixative
Polymers 30%
34% Polymers
Specialty 6%
emolients
11%
Antimicrobials
16%
Thickeners
13% Specialty
Specialty
Specialty Surfactants
emolients Thickeners
Surfactants 15%
7% 11%
24%
Source: CSFB estimates. Source: CSFB estimates.
Demand growth for cosmetic chemicals has been rapid in recent years and has even
outpaced the growth of the cosmetics industry as a whole. However, fierce competition
has meant that few companies have been able to generate significant profit growth in
this field. Rather than purely functional products, the trend has moved toward providing
perceived added value within cosmetic products. In addition, environmental laws have
played an important role in shaping new formulations.
We expect demand growth to continue at around 3.5% but to vary between

approximately 1.5% and 6.0% for different categories of additive.
197
Fine Chemicals
The term fine chemical is now used almost exclusively in reference to life science
intermediates. Fine chemicals are manufactured to an exact chemical specification and
utilized for their medicinal or agricultural effect. The broad categories within this
definition are pharmaceutical intermediates, bulk medicinals and pesticides, biocides
(antibacterial or disinfectant agents that are added to a wide range of products and
processes), and laboratory chemicals.
Fine Chemicals Manufacturers
Exhibit 167: Major Manufacturers of Life Science Ingredients, 2002
1400
1200
1000
800
600
400
200
0
M sa ical za SF ant im rex nth yer dia al l
lly lo h d a m is le M s m is el G
DS gus em Lon BA lari lhe mb osy Ba ho ei der ldric frie Fin he hes ar LS ake che hes mic yw PP
R n g to oc nt m ia L y t e e
De Ch C nge Ca Di R e a- A
Si
e A Is y b e c t x yn h n
rI ss 's ic S Al ve rea O d S n C Ho
ow e Te igm E A G r a
D in
g S P am aa tm
hr SN yn reg E as
e D r
Bo Bo
Source: Company data, CSFB research.
Fine Chemicals Industry Trends and Value Drivers

• In the early-to-mid-1990s, the trend within life sciences was toward outsourcing of key
functions such as drug discovery, clinical trials, and manufacturing. In particular,
pharmaceutical majors were increasingly relying on third parties to produce and
supply active ingredients and bulk intermediates, rather than on in-house
manufacturing capabilities. Outsourcing allowed life sciences companies to focus their
resources on core competencies, such as drug development and marketing, while
freeing up capital and consequently improving returns.
• In recent years, costs of drug production have risen significantly, pushed up by more
stringent regulatory requirements and more complex R&D procedures—the
proliferation of technologies applied in drug manufacturing has made it increasingly
less efficient for life sciences companies to invest in and maintain a complete
“toolbox.” It has become essential to minimize time to market for new drugs or
agrochemicals to keep down costs and maintain or improve margins, particularly
given increasing levels of generic competition and intensification in the overall
competitive environment.
198
• The consequence of this trend toward outsourcing was that operating margins and
growth rates were generally higher than those experienced elsewhere in the specialty
chemical industry. This trend attracted many of the more traditional broad-based
specialty chemical companies to expand into the fine chemicals area. The
consequence was that much of the industry became rapidly oversupplied at the same
time as demand was waning. (Dwindling pipelines at large pharma houses, increased
challenges from generic producers and increased FDA scrutiny meant that in recent
years a reversal in the outsourcing trend has taken place.)
• In addition, the volatility and poor visibility associated with life sciences contracts
present a clear risk, in our view. The growth of individual fine chemical players is likely
to be tied to a handful of major products, whose success or failure is much harder to
predict than that of the life sciences industry as a whole. In addition, the timing of the
launch of new pharmaceutical products means that the revenue stream from
pharmaceutical intermediates is inherently lumpy and difficult to predict. While
increased scale helps combat this by reducing reliance on any individual contract, few
fine chemicals producers have managed to survive.
• Furthermore, many Western producers of fine chemicals have found themselves

increasingly subject to significant cost competition from Asian (particularly Indian and
Chinese) producers. Because of the high proportion of personnel cost involved in the
production of these chemicals, many Asian competitors have been able to offer the
products at a greatly reduced cost.
• Fine chemicals businesses tend to have comparatively high capital intensity and R&D
requirements. While the outsourcing argument has clear cash flow benefits for the
pharmaceutical and agrochemicals industries, the burden of investment inevitably falls on
the contract manufacturers. Significant R&D expenditure needs to be directed toward
the development of new products and processes, as well as on improving existing
processes.
• Production of active ingredients for pharmaceuticals must take place in highly sterile, FDA-
certified plants designed to meet current good manufacturing process (cGMP) standards.
Furthermore, customers must be convinced that the manufacturer is capable of providing
a consistent, high-quality product in a reliable manner. As a result, large amounts of
capital expenditure are required to build plants that meet cGMP standards (around 30%
more than the cost of a non-cGMP fine chemical plant).
• Fine chemical companies, as a result, tend to be highly operationally geared, with

high levels of fixed costs. It is, therefore, increasingly important to run plants as close
to maximum capacity as possible, and this has become increasingly difficult for many
of the leading listed fine chemical producers. However, the rewards can be significant
if capacity utilization rates remain healthy. (We forecast that Lonza will generate an
EBITDA margin of over 40% on its new, fully loaded capacity in Portsmouth, New
Hampshire, in 2005.)
199
Fine Chemicals Growth Prospects

According to SRI, the fine chemicals industry should deliver top-line growth of around
5-8% in the long term. This is driven by the growth of the end markets (7-10% for
pharmaceuticals and 1-2% for agrochemicals, on our estimates), as well as by the
increasing trend among life sciences companies to outsource production of key
intermediates. Whether or not those listed players within the chemicals sector are able
to meaningfully compete with the numerous Asian competitors over the long term and
therefore take advantage of this growth rate remains far less certain, in our view.
According to DSM, the global market for pharmaceutical manufacturing is estimated at

around US$120 billion, of which around 25% is currently outsourced. This includes both
primary manufacturing (the manufacturing of active ingredients) and secondary
manufacturing (the production and formulation of the final dosages). The manufacturing
of active intermediates for the agrochemicals industry forms a smaller, although still
substantial market.
200
Colorants
Colorants are substances used to alter the color of a product. They include dyestuffs,
pigments, printing inks, and masterbatches. Bayer, BASF, Ciba Specialty Chemicals,
Clariant, and Engelhard all hold significant colorant operations.
Dyestuffs
Dyes are used principally on textiles, but also on paper and leather and are soluble in
water (whereas pigments are insoluble). There are a number of different chemical
varieties of dyes, and these can be broadly classified according to their application.
Exhibit 168: Different Applications of Dyes

Dye type Characteristics Uses
Acid Dyes Insoluble in acid baths. Used for dyeing protein fibers, wool, silk, leather, paper, nylon.
Azoic Dyes Made using ice to keep the chemicals at low temperature Long lasting, bright and very versatile, used principally on cotton.
Basic Dyes Soluble in acid, insoluble once alkali is added. Used for duplicator inks (carbon paper, typewriter ribbons)
Direct Dyes Soluble in water, used on paper, cotton, rayon and linen. Used to dye cotton and mixed cotton, wool and silk
Disperse Dyes Hardly soluble in water. Used to dye synthetics, mainly polyester
Reactive Dyes React to form chemical link between dye and fiber. Very fade resistant Used for dyeing cellulose fibers and some nylons
Sulfur Dyes Large low-cost category Used for 'natural' shades on cotton.
Growth rates of dyes are directly linked to the demand for the fiber on which they are
used. As a result, the growth of synthetic fiber dyes (especially for polyester) should be
strongest. In addition, fashion plays an important role in demand for pigments, as darker
colors require significantly more dye.
The emergence of a significant number of Asian producers has led to a period of

oversupply, and as a result operating rates and margins have declined. The industry
has addressed this with a period of consolidation and restructuring, although overall we
do not expect demand growth much ahead of the historical rate of 2-3%, with pricing
trends remaining negative for the foreseeable future.
Pigments
Titanium dioxide (white) and carbon black (black) are the two largest volume pigments.
Color pigments are iron oxides (red, yellow, brown, and black), chromates (yellow and
orange), cadmiums (red, yellow, orange, and maroon) and chromium oxides (green).
The principal uses for pigments are in paints and coatings and in printing inks. Carbon
black’s principal use is in the manufacturing of rubber goods, especially tires. Titanium
dioxide’s main use is in paper manufacturing, as well as in paints.
The pigments industry is viewed as mature and is reliant on the level of industrial
production for its wellbeing. Global capacity has grown rapidly in recent years, operating
rates have therefore fallen, and with them, margins. We expect demand growth for the
pigments industry to remain broadly in-line with GDP%.
201
Printing Inks
Printing inks comprise pigments, resins, solvents, and oils. They are used not only in
publishing, but also in printing for packaging as well as commercial printing.
Demand is, therefore, largely driven by a wide variety of end-market factors, including
the level of magazine advertising and demand for consumer goods.
We expect the printing ink market to grow faster than its end markets because of the
increased popularity of improved graphics, which require higher-priced and better-
quality inks. Digital inks for screen-printing have been the fastest-growing segment in
recent years, followed by flexographic inks for packaging. Overall, we expect demand
for printing inks to grow marginally ahead of GDP growth over the medium term.
Masterbatches
Masterbatches are the pelletized colorants and additives that plastics producers
combine with resins. Ingredients may include pigments, titanium dioxide, UV blockers,
antistatic agents, and agents for effects such as pearlescence.
Demand from plastics producers is for less masterbatch concentrate per unit of resin,
producers are therefore tending to load more ingredients into their masterbatches.
However, the trend is toward price inelasticity in the industry, and as a result, many
producers are pursuing higher-value niches. In addition to trying to pass on ingredients
costs to the customer, masterbatch makers charge for technical support.
In particular, the boom in PET bottles for soft drinks has driven demand for
masterbatches in recent years. In addition, a trend toward brighter colors for consumer
goods such as computers and their peripherals has fueled demand.
Long term, the market for masterbatches has been growing at 3-4% per year; however,
faster growth is likely in regions such as Asia and South America as the pace of
industrialization picks up and living standards rise.
202
XIV. Pharmaceutical Hybrid Companies
Introduction
The final section of this sector overview is not intended to deal with a particular part of
the chemicals sector, but rather examines those companies that have significant
pharmaceutical operations in addition to their chemicals businesses and considers the
issues that are related to this structure. We do not propose to provide a synopsis of the
pharmaceutical industry.
Within European chemicals, the three companies under our coverage that fall within the
“hybrid” definition are Akzo Nobel, Bayer, and Solvay.
Undoubtedly the biggest challenges to these companies are:

1. The consolidation of the life sciences industry, which is raising a number of issues
that bring into question the competitiveness of a pharmaceutical business within the
hybrid structure.
2. The relatively slim pickings in the product pipelines.
Company Overviews
Akzo Nobel
Exhibit 169: Akzo Nobel: Sales by Division, 2004
Chemicals
31%
Coatings
43%
Pharmaceuticals
26%
Source: Company data, CSFB research.
The three main business units within Akzo’s pharma division are human healthcare
(Organon), animal healthcare (Intervet), and fine chemicals (Diosynth). Other healthcare
businesses, OTC products and diagnostics, were sold in 2001. Akzo has a broad
coatings portfolio, ranging from industrial coatings to decorative paints to automotive
refinishing. This puts Akzo Nobel Coatings in one of the strongest positions globally, in
our view. However, the coatings market remains fragmented, with less than 50% in the
203
hands of ten players in a market worth US$65 billion. Chemicals is the group’s third leg,
consisting of nine different business units, the largest being pulp and paper chemicals,
functional chemicals, and surfactants. The main strategic thrust here is to reduce capital
intensity and sell off noncore assets.
Bayer
Exhibit 170: Bayer: Sales by Division, 2004
Healthcare
37%
Material Sceince
37%
Crop Science
26%
Bayer has recently reorganized its structure, and there are four new elements to the
Bayer structure relative to the shape of the group in 2003.
1. Bayer spun off Lanxess, a blend of some activities in its former Chemical and
Polymer divisions.
2. Bayer agreed to buy Roche’s OTC consumer-care franchise for a total of €2.38
billion.
3. Bayer agreed to sell the Blood Plasma business to Cerebrus and Ampersand for
€450 million.
4. Bayer agreed to form a strategic alliance with Schering-Plough in certain parts of its
Pharmaceutical business.
While these changes do not affect the status of Bayer as a hybrid conglomerate, we
believe this strategy will lead to stable cash flow. Also, in our view, Healthcare will be
more critical for Bayer’s future performance.
204
Solvay
Exhibit 171: Solvay: Sales by Division, 2004
Chemicals
32%
Plastics
46%
Pharmaceuticals
22%
Solvay operates through the following divisions: chemicals, plastics, and

pharmaceuticals. The company's key strategic aim is to accelerate growth in the
pharmaceuticals division via organic growth, the acquisition of new products, and the
acquisition of companies. The Solvay family shareholding (55%), we believe, will
continue to preclude any major strategic change over the short term. That said, the
company has been successful in divesting some of the more commodity operations
(polypropylene) and acquiring more stable downstream assets (Ausimont specialty
chemicals).
Industry Trends and Value Drivers

The life sciences industry has seen significant consolidation in recent years, fueled by
the ever-increasing requirement for R&D resource and marketing and sales support.
Against this backdrop, a hybrid strategy is, we believe, likely to continue to be
increasingly questioned by investors, because the potential growth of the
pharmaceuticals businesses might be compromised by focus on the chemical divisions.
In theory, conglomerate companies could release significant value for their shareholders
by disposing of their pharma businesses and reinvesting the proceeds into their core
operations. BASF and DuPont did exactly this in 2000 and 2001. That said, given the
current growth prospects in healthcare of both Akzo Nobel and Bayer, there is probably
only limited potential for management to successfully add value through M&A. In other
words, BASF and DuPont have, in hindsight, proved shrewder in strategic timing than
any of the existing hybrids.
205
Lack of Pharmaceutical Scale

Despite impressive market positions in a number of therapeutic areas, the pharma
divisions of the hybrid companies are becoming increasingly small within the context of
the overall pharmaceuticals market. A raft of M&A activity has taken place in recent
years: Astra merged with Zeneca; Rhône-Poulenc with Hoechst to form Aventis; Glaxo
Wellcome with SmithKline Beecham; and Pfizer with Warner Lambert. GlaxoSmithKline
had (based on 2000 sales) a combined 7.3% share of the total global market. By
contrast, we estimate that both Bayer and Akzo Nobel rank 16th and 29th, respectively,
in global pharmaceuticals (although both have more significant market positions in other
healthcare industries such as animal health).
We believe that, among other things, two major factors are playing a part in this process
of consolidation: an ambition to increase each entity’s overall R&D budget and the
creation of a powerful sales and marketing network on a global basis.
Questions Surrounding the Hybrid Model

Structurally, the radical change in the industry is likely to leave the hybrids at a
competitive disadvantage for two reasons: a limited R&D budget and a smaller-than-
average sales network. As a result, some investors are questioning whether or not these
pharmaceutical businesses are meeting their full potential as part of a chemical
company, or whether more value could be released by a sale of these businesses
before they cease to be competitive.
Limited R&D Budget

We believe a major driver behind the industry consolidation is the requirement to
increase R&D firepower to diversify the risk associated with a drug product pipeline.
With the chemical businesses also making significant demands on their capital, hybrid
companies cannot realistically devote the funds to match the industry leaders in terms of
scale. As a result, their narrower portfolios become more reliant on individual products
and more exposed to the risk of failure of one of those products. The withdrawal of
Bayer’s Baycol/Lipobay in August 2000 is an example of this risk.
Small Sales Network

The risk exists that the competitive advantage of individual drugs will be eroded by
these industrywide developments. The U.S. sales force of Akzo’ Nobel’s pharmaceutical
division, Organon, currently numbers approximately 1,300. This compares with AHP’s
3,800, and Pfizer’s 8,000, Novartis’ 4,000, and GlaxoSmithKline’s 6,800. (These
numbers are pharmaceutical-related only.) This lack of scale can have a direct effect on
profitability, as hybrid companies are forced to share profits within joint venture
agreements, which are the only way to market and distribute their drugs.
206
Releasing Value
Superior profitability, sales growth potential, and higher ROIC have made the
pharmaceutical divisions the key driver of the hybrid company’s share price
performance over the long term. For this reason, and because of the defensive qualities
of pharmaceutical businesses, management of hybrid companies historically tended to
be keen to hold on to this prized asset. For now, especially with Akzo Nobel and Bayer,
management has a very different proposition—the improvement of both their healthcare
franchises represents one of the greatest challenges.
207
XV. Sources
American Chemistry Council; www.americanchemistry.com
Asian Chemical News (ACN); A Reed Business Publication
Chemical Market Associates, Inc. (CMAI); www.cmaiglobal.com
Chemical News Intelligence (CNI); www.cnionline.com

European Chemical Industry Council (CEFIC); www.cefic.be
European Chemical News (ECN); A Reed Business Publication
Handbook of Petrochemicals and Process; G. Margaret Wells
Phillips McDougall; www.phillipsmcdougall.com
Oxford Dictionary of Chemistry; Oxford University Press
Shreves Chemical Process Industries Handbook; George T. Austin, Nicholas Basta
SRI Consulting (SRI); www.ecom.sric.sri.com
208
Appendix 1
Exhibit 172: Abbreviations Found in This Report
ABS Acrylonitrile Butadiene Styrene
ASU Air Separation Unit
CAP Common Agricultural Policy
DMT Dimethyl Terephthalic Acid
ECU Electrochemical Unit
EOR Enhanced Oil Recovery
EPS Expandable Polystyrene
FCCs Fluid Cracking Catalysts
GMO Genetically Modified Organisms
HDPE High-density Polyethylene
LDPE Low-density Polyethylene
LLDPE Linear low-density Polyethylene
LPG Liquid Petroleum Gas
MDI Methylene-di-para phenylene Isocyanate
MMA Methyl Methacrylate
MTBE Methyl Tertiary Butyl Ether
PBT Polybutylene Terephthalate
PE Polyethylene
PET Polyethylene Terephthalate
PP Polypropylene
PS Polystyrene
PSA Pressure Swing Adsorption
PU Polyurethane
PVC Polyvinyl Chloride
SB Styrene Butadiene
TDI Toluene Di-isocyanate
TPA Terephthalic Acid
UAN Urea Ammonium Nitrate
VCM Vinyl Chloride Monomer
VOCs Volatile Organic Compounds
209
Appendix 2
Exhibit 173: Listed Stocks Mentioned in This Report
prices are as of June 10, 2005
N O R T H A M E R IC A T ic k e r S to c k C u rre n t S to c k Target
C u rre n c y P r ic e R a t in g P r ic e
3M M M M .N USD 7 5 .7 9 O u tp e r f o r m USD 99
A g r iu m A G U .N USD 1 9 .1 3 O u tp e r f o r m USD 23
A ir P r o d u c ts a n d C h e m ic a ls A P D .N USD 6 1 .2 0 O u tp e r f o r m USD 67
A v e r y D e n n is o n C o r p A V Y .N USD 5 3 .6 2 O u tp e r f o r m USD 59
C o m p a s s M in e r a l C M P .N USD 2 3 .3 7 U n d e rp e rfo rm USD 24
C y te c C o r p C Y T .N USD 4 0 .8 3 O u tp e r f o r m USD 62
D e lta a n d P in e L a n d D L P .N USD 2 5 .8 8 U n d e rp e rfo rm USD 29
D o w C h e m ic a l D O W .N USD 4 5 .4 1 O u tp e r f o r m USD 63
D u P ont D D .N USD 4 7 .2 5 N e u tr a l USD 52
E a s tm a n C h e m ic a l E M N .N USD 5 6 .9 6 O u tp e r f o r m USD 77
E c o la b E C L .N USD 3 2 .4 2 O u tp e r f o r m USD 38
E n g e lh a r d C o r p E C .N USD 2 8 .9 3 U n d e rp e rfo rm USD 34
F e rro C o rp F O E .N USD 1 9 .6 9 O u tp e r f o r m USD 24
FMC F M C .N USD 5 5 .9 9 U n d e rp e rfo rm USD 53
G e o r g ia G u lf G G C .N USD 3 4 .9 0 O u tp e r f o r m USD 54
L y o n d e ll C h e m ic a l L Y O .N USD 2 4 .0 7 O u tp e r f o r m USD 36
M o n s a n to M O N .N USD 6 3 .7 6 U n d e rp e rfo rm USD 63
N o v a C h e m ic a ls N C X .N USD 3 0 .6 9 O u tp e r f o r m USD 51
P o ly o n e C o r p P O L .N USD 6 .5 8 N e u tr a l USD 9
P P G In d u s tr ie s P P G .N USD 6 5 .1 4 O u tp e r f o r m USD 77
P r a x a ir P X .N USD 4 6 .5 1 N e u tr a l USD 49
P o ta s h P O T .N USD 9 1 .2 0 U n d e rp e rfo rm USD 85
R ohm and H aas R O H .N USD 4 7 .1 8 N e u tr a l USD 53
S e a le d A ir C o r p S E E .N USD 5 1 .4 2 O u tp e r f o r m USD 57
U A P H o ld in g U A P H .N USD 1 6 .2 6 N e u tr a l USD 17
V a ls p a r V A L .N USD 4 7 .2 6 N e u tr a l USD 49
W e s tla k e C h e m ic a ls W L K .N USD 2 4 .5 2 O u tp e r f o r m USD 35
EURO PE T ic k e r S to c k C u rre n t R a t in g Target
C u rre n c y P r ic e P r ic e
A ir L iq u id e A IR P .P A EUR 1 4 3 .4 0 N e u tr a l EUR 1 3 5 .0 0
A kzo N obel A K Z O .A S EUR 3 2 .5 2 U n d e rp e rfo rm EUR 3 0 .0 0
BASF B A S F .D E EUR 5 6 .1 3 O u tp e r f o r m EUR 6 6 .0 0
B ayer B A Y G .D E EUR 2 8 .4 9 N e u tr a l EUR 2 8 .0 0
B r itis h V ita B V IT .L GBP 3 .5 9 N e u tr a l GBP 3 .3 0
BOC B O C .L GBP 1 0 .7 3 N e u tr a l GBP 9 .0 0
C ib a C IB N n .V X CHF 7 7 .7 5 U n d e rp e rfo rm CHF 6 8 .0 0
C la r ia n t C L R Z n .V X CHF 1 7 .7 0 N e u tr a l CHF 1 9 .0 0
C ro d a C R D A .L GBP 3 .8 5 N e u tr a l GBP 3 .7 5
D eg ussa D G X G .D E EUR 3 3 .2 1 N e u tr a l EUR 2 9 .0 0
DSM D S M N .A S EUR 5 7 .7 5 O u tp e r f o r m EUR 6 7 .0 0
G iv a u d a n G IV Z n .V X CHF 7 5 4 .5 0 U n d e rp e rfo rm CHF 7 1 0 .0 0
IC I IC I.L GBP 2 .6 5 U n d e rp e rfo rm GBP 2 .4 5
J o h n s o n M a tth e y J M A T .L GBP 1 0 .3 1 N e u tr a l GBP 1 1 .4 5
L a n xe ss L X S G .D E EUR 1 8 .5 0 U n d e rp e rfo rm EUR 1 1 .5 0
L in d e L IN G .F EUR 5 8 .8 6 N e u tr a l EUR 4 7 .0 0
L o n za L O N Z n .V X CHF 7 6 .8 5 U n d e rp e rfo rm CHF 5 4 .0 0
R h o d ia R H A .P A EUR 1 .4 5 U n d e rp e rfo rm EUR 0 .8 0
S o lv a y S O L B t.B R EUR 8 6 .7 0 O u tp e r f o r m EUR 1 0 2 .0 0
S y n g e n ta S Y N Z n .V X CHF 1 3 4 .0 0 O u tp e r f o r m CHF 1 5 0 .0 0
Y a ra Y A R .O L NOK 9 9 .2 5 N e u tr a l NO K 9 5 .0 0
Y u le C a tto Y U L C .L GBP 2 .5 2 N e u tr a l GBP 2 .4 0
A S IA Target
P ric e
F o rm o s a P la s tic s 1 3 0 1 .T W NT$ 5 3 .9 0 U n d e rp e rfo rm NT$ 45
H a n w h a C h e m ic a l 0 9 8 3 0 .K S W ON 1 1 ,9 0 0 .0 0 O u tp e rfo rm W ON 1 7 ,0 0 0
H o n a m P e tro c h e m ic a l 1 1 1 7 0 .K S W ON 4 3 ,7 0 0 .0 0 U n d e rp e rfo rm W ON 4 6 ,0 0 0
L G P e tro c h e m ic a l 1 2 9 9 0 .K S W ON 2 5 ,3 5 0 .0 0 U n d e rp e rfo rm W ON 2 5 ,0 0 0
N a n Y a P la s tic s 1 3 0 3 .T W NT$ 4 3 .2 5 U n d e rp e rfo rm NT$ 40
O ric a O R I.A X AUD 1 6 .7 3 O u tp e rfo rm AUD 19
R e lia n c e In d u s trie s R E L I.B O IR 5 6 6 .7 5 O u tp e rfo rm IR 475
S in o p e c B e ijin g Y a n h u a 0 3 2 5 .H K HK$ 3 .7 7 U n d e rp e rfo rm HK$ 2
S in o p e c S h a n g h a i P e tro c h e m ic a l 0 3 3 8 .H K HK$ 2 .6 3 U n d e rp e rfo rm HK$ 3
S in o p e c Y iz h e n g C h e m ic a l 1 0 3 3 .H K HK$ 1 .2 9 N e u tra l HK$ 1
JAPAN Target
P ric e
A sahi Kasei 3407 JP Y 528 N e u tra l 500

S howa Denko 4004 JP Y 260 N e u tra l 280
S u m ito m o C h e m ic a l 4005 JP Y 503 N e u tra l 550
M its u b is h i C h e m ic a l 4010 JP Y 309 O u tp e rfo rm 470
T osoh 4042 JP Y 438 N e u tra l 500
M its u i C h e m ic a l 4183 JP Y 618 N e u tra l 650
U b e In d u s trie s 4208 JP Y 214 O u tp e rfo rm 270
M its u b is h i G a s C h e m ic a l 4182 JP Y 563 O u tp e rfo rm 700
T okuyam a 4043 JP Y 818 O u tp e rfo rm 950
S h in -E ts u C h e m ic a l 4063 JP Y 3970 O u tp e rfo rm 4500
S u m ito m o B a k e lite 4203 JP Y 702 O u tp e rfo rm 790
JS R 4185 JP Y 2240 N e u tra l 2300
Zeon 4205 JP Y 957 N e u tra l 930
H ita c h i C h e m ic a l 4217 JP Y 2025 O u tp e rfo rm 2300
R a s a In d u s trie s 4022 JP Y 351 O u tp e rfo rm 420
M im a s u S e m ic o n d u c to r 8155 JP Y 1586 O u tp e rfo rm 2000
210
Companies Mentioned (Price as of 10 Jun 05)

3M (MMM, $75.79, OUTPERFORM, TP $99.00, MARKET WEIGHT)
Agrium Inc. (AGU, $19.13, OUTPERFORM, TP $23.50, OVERWEIGHT)
Air Liquide (AIRP.PA, Eu143.40, NEUTRAL, TP Eu135.00, UNDERWEIGHT)
Air Products and Chemicals, Inc. (APD, $61.20, OUTPERFORM, TP $67.00, MARKET WEIGHT)
Akzo Nobel (AKZO.AS, Eu32.52, UNDERPERFORM, TP Eu30.00, UNDERWEIGHT)
Asahi Kasei (3407, ¥528.00, NEUTRAL, TP ¥500.00, MARKET WEIGHT)
Avery Dennison Corp. (AVY, $53.62, OUTPERFORM, TP $59.00, MARKET WEIGHT)
BASF (BASF.DE, Eu56.22, OUTPERFORM, TP Eu66.00, UNDERWEIGHT)
Bayer (BAYG.DE, Eu28.58, NEUTRAL, TP Eu28.00, UNDERWEIGHT)
BOC Group (BOC.L, 1073.00 p, NEUTRAL, TP 900.00 p, UNDERWEIGHT)
British Vita (BVIT.L, 358.75 p, NEUTRAL, TP 330.00 p, UNDERWEIGHT)
Ciba Specialty Chemicals (CIBN.VX, SFr77.75, UNDERPERFORM, TP SFr68.00,
UNDERWEIGHT)
Clariant (CLN.VX, SFr17.70, NEUTRAL, TP SFr19.00, UNDERWEIGHT)
Compass Minerals International (CMP, $23.37, UNDERPERFORM, TP $24.00, OVERWEIGHT)
Croda International (CRDA.L, 385.00 p, NEUTRAL, TP 375.00 p, UNDERWEIGHT)
Cytec (CYT, $40.83, OUTPERFORM, TP $62.00, MARKET WEIGHT)
Degussa (DGXG.DE, Eu33.35, NEUTRAL, TP Eu29.00, UNDERWEIGHT)
Delta and Pine Land (DLP, $25.88, UNDERPERFORM, TP $25.00, OVERWEIGHT)
Dow Chemical Company (DOW, $45.41, OUTPERFORM, TP $63.00, OVERWEIGHT)
DSM (DSMN.AS, Eu57.75, OUTPERFORM, TP Eu67.00, UNDERWEIGHT)
E.I. Du Pont (DD, $47.25, NEUTRAL, TP $52.00, OVERWEIGHT)
Eastman Chemical (EMN, $56.96, OUTPERFORM, TP $71.50, OVERWEIGHT)
Ecolab (ECL, $32.42, OUTPERFORM, TP $38.00, MARKET WEIGHT)
Engelhard Corporation (EC, $28.93, UNDERPERFORM, TP $34.00, MARKET WEIGHT)
Ferro (FOE, $19.69, OUTPERFORM, TP $24.00, MARKET WEIGHT)
FMC Corporation (FMC, $55.99, UNDERPERFORM, TP $53.00, OVERWEIGHT)
Formosa Chemical & Fibre (1326.TW, NT$60.00, UNDERPERFORM, TP NT$51.00)
Formosa Plastics (1301.TW, NT$53.90, UNDERPERFORM, TP NT$45.00)
Georgia Gulf Corp. (GGC, $34.90, OUTPERFORM, TP $54.00, OVERWEIGHT)
Givaudan (GIVN.VX, SFr754.50, UNDERPERFORM, TP SFr710.00, UNDERWEIGHT)
GlaxoSmithKline (GSK.L, 1356.00p, RESTRICTED, OW)
Hitachi Chemical (4217, ¥2025.00, OUTPERFORM, TP ¥2300.00, MARKET WEIGHT)
Huntsman Corporation (HUN, $18.90, OUTPERFORM [V], TP $33.00, OVERWEIGHT)
ICI (ICI.L, 264.75 p, NEUTRAL, TP 245.00 p, UNDERWEIGHT)
Johnson Matthey (JMAT.L, 1031.00 p, OUTPERFORM, TP 1145.00 p, UNDERWEIGHT)
JSR (4185, ¥2240.00, NEUTRAL, TP ¥2300.00, MARKET WEIGHT)
Lanxess (LXSG.DE, Eu18.51, UNDERPERFORM [V], TP Eu11.50, UNDERWEIGHT)
Linde (LING.F, Eu58.86, NEUTRAL, TP Eu47.00, UNDERWEIGHT)
Lonza Group Ltd (LONN.VX, SFr76.85, UNDERPERFORM, TP SFr54.00, UNDERWEIGHT)
Lyondell Chemical Company (LYO, $24.07, OUTPERFORM, TP $36.00, OVERWEIGHT)
Mimasu Semiconductor Industry (8155, ¥1586.00, OUTPERFORM, TP ¥2000.00, MARKET
WEIGHT)
Mitsubishi Chemical (4010, ¥309.00, OUTPERFORM, TP ¥470.00, MARKET WEIGHT)
Mitsubishi Gas Chemical (4182, ¥563.00, OUTPERFORM, TP ¥700.00, MARKET WEIGHT)
Mitsui Chemicals (4183, ¥618.00, NEUTRAL, TP ¥650.00, MARKET WEIGHT)
Monsanto Company (MON, $63.76, UNDERPERFORM, TP $63.00, OVERWEIGHT)
Nan Ya Plastics (1303.TW, NT$43.25, UNDERPERFORM, TP NT$40.00)
Nova Chemicals (NCX, $30.69, OUTPERFORM, TP $51.00, OVERWEIGHT)
Orica Limited (ORI.AX, A$16.73, OUTPERFORM, TP A$19.10, OVERWEIGHT)
PolyOne Corp. (POL, $6.58, NEUTRAL, TP $9.00, OVERWEIGHT)
Potash Corporation of Saskatchewan (POT, $91.20, UNDERPERFORM, TP $85.00,
OVERWEIGHT)
PPG Industries, Inc. (PPG, $65.14, OUTPERFORM, TP $77.00, OVERWEIGHT)
Praxair Inc. (PX, $46.51, NEUTRAL, TP $49.00, MARKET WEIGHT)
Rasa Industries (4022, ¥351.00, OUTPERFORM, TP ¥420.00, MARKET WEIGHT)
Reliance Industries (RELI.BO, Rs566.75, OUTPERFORM, TP Rs475.00)
Rhodia (RHA.PA, Eu1.45, UNDERPERFORM [V], TP Eu0.80, UNDERWEIGHT)
Rohm and Haas Company (ROH, $47.18, NEUTRAL, TP $53.00, OVERWEIGHT)
Sealed Air Corp. (SEE, $51.42, OUTPERFORM, TP $57.00, MARKET WEIGHT)
Shin-Etsu Chemical (4063, ¥3970.00, OUTPERFORM, TP ¥4500.00, MARKET WEIGHT)
Showa Denko K.K. (4004, ¥260.00, NEUTRAL, TP ¥280.00, MARKET WEIGHT)
211
Sinopec Beijing Yanhua - H (0325.HK, HK$3.78)

Sinopec Shanghai Petrochem - H (0338.HK, HK$2.65, UNDERPERFORM [V], TP HK$2.75)
Sinopec Yizheng Chm.Fibre - H (1033.HK, HK$1.29, NEUTRAL, TP HK$1.40)
Solvay (SOLBt.BR, Eu86.70, OUTPERFORM, TP Eu102.00, UNDERWEIGHT)
Sumitomo Bakelite (4203, ¥702.00, OUTPERFORM, TP ¥790.00, MARKET WEIGHT)
Sumitomo Chemical (4005, ¥503.00, NEUTRAL, TP ¥550.00, MARKET WEIGHT)
Syngenta (SYNN.VX, SFr134.00, OUTPERFORM, TP SFr150.00, UNDERWEIGHT)
Tokuyama (4043, ¥818.00, OUTPERFORM, TP ¥950.00, MARKET WEIGHT)
Tosoh (4042, ¥438.00, NEUTRAL, TP ¥500.00, MARKET WEIGHT)
UAP Holding Corp. (UAPH, $16.26, RESTRICTED [V], OVERWEIGHT)
Ube Industries (4208, ¥214.00, OUTPERFORM, TP ¥270.00, MARKET WEIGHT)
Valspar (VAL, $47.26, NEUTRAL, TP $49.00, MARKET WEIGHT)
Westlake Chemical (WLK, $24.52, OUTPERFORM [V], TP $35.00, OVERWEIGHT)
Yara International ASA (YAR.OL, NKr99.25, NEUTRAL, TP NKr95.00, UNDERWEIGHT)
Yule Catto (YULC.L, 252.00 p, NEUTRAL, TP 240.00 p, UNDERWEIGHT)
Zeon (4205, ¥957.00, NEUTRAL, TP ¥930.00, MARKET WEIGHT)
Disclosure Appendix
Important Global Disclosures
I, William R. Young, Ph.D., certify that (1) the views expressed in this report accurately reflect my personal
views about all of the subject companies and securities and (2) no part of my compensation was, is or will
be directly or indirectly related to the specific recommendations or views expressed in this report.
The analyst(s) responsible for preparing this research report received compensation that is based upon
various factors including CSFB's total revenues, a portion of which are generated by CSFB's investment
banking activities.
Analysts’ stock ratings are defined as follows***:
Outperform: The stock’s total return is expected to exceed the industry average* by at least 10-15% (or
more, depending on perceived risk) over the next 12 months.
Neutral: The stock’s total return is expected to be in line with the industry average* (range of ±10%) over
the next 12 months.
Underperform**: The stock’s total return is expected to underperform the industry average* by 10-15% or
more over the next 12 months.
*The industry average refers to the average total return of the analyst's industry coverage universe
(except with respect to Asia/Pacific, Latin America and Emerging Markets, where stock ratings are
relative to the relevant country index, and CSFB HOLT Small and Mid-Cap Advisor stocks, where stock
ratings are relative to the regional CSFB HOLT Small and Mid-Cap Advisor investment universe.
**In an effort to achieve a more balanced distribution of stock ratings, the Firm has requested that
analysts maintain at least 15% of their rated coverage universe as Underperform. This guideline is
subject to change depending on several factors, including general market conditions.
***For Australian and New Zealand stocks a 7.5% threshold replaces the 10% level in all three rating
definitions.
Restricted: In certain circumstances, CSFB policy and/or applicable law and regulations preclude certain
types of communications, including an investment recommendation, during the course of CSFB's
engagement in an investment banking transaction and in certain other circumstances.
Volatility Indicator [V]: A stock is defined as volatile if the stock price has moved up or down by 20% or
more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going
forward. All CSFB HOLT Small and Mid-Cap Advisor stocks are automatically rated volatile. All IPO stocks
are automatically rated volatile within the first 12 months of trading.
Analysts’ coverage universe weightings* are distinct from analysts’ stock ratings
and are based on the expected performance of an analyst’s coverage universe**
versus the relevant broad market benchmark***:
Overweight: Industry expected to outperform the relevant broad market benchmark over the next 12
months.
Market Weight: Industry expected to perform in-line with the relevant broad market benchmark over the
next 12 months.
Underweight: Industry expected to underperform the relevant broad market benchmark over the next 12
months.
212
*CSFB HOLT Small and Mid-Cap Advisor stocks do not have coverage universe weightings.
**An analyst’s coverage universe consists of all companies covered by the analyst within the relevant
sector.
***The broad market benchmark is based on the expected return of the local market index (e.g., the S&P
500 in the U.S.) over the next 12 months.
CSFB’s distribution of stock ratings (and banking clients) is:
Global Ratings Distribution
Outperform/Buy* 39% (54% banking clients)
Neutral/Hold* 43% (54% banking clients)
Underperform/Sell* 15% (44% banking clients)
Restricted 3%
*For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and
Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock
ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be
based on investment objectives, current holdings, and other individual factors.
Important Regional Disclosures
Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting
shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares.
Individuals receiving this report from a Canadian investment dealer that is not affiliated with CSFB should
be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment
dealer would be required to make if this were its own report.
For Credit Suisse First Boston Canada Inc.'s policies and procedures regarding the dissemination of equity
research, please visit http://www.csfb.com/legal_terms/canada_research_policy.shtml.
Credit Suisse First Boston (Europe) Limited (CSFB) acts as broker to JMAT.L.
The following disclosed European company/ies have estimates that comply with IFRS: BASF.DE,
BAYG.DE, BOC.L, CLN.VX, DSMN.AS, GIVN.VX, ICI.L, JMAT.L, LXSG.DE, RHA.PA, SOLBt.BR,
SYNN.VX, YAR.OL.
Important CSFB HOLT Disclosures
With respect to the analysis in this report based on the CSFB HOLT methodology, CSFB certifies that (1)
the views expressed in this report accurately reflect the CSFB HOLT methodology and (2) no part of the
Firm’s compensation was, is, or will be directly related to the specific views disclosed in this report.
The CSFB HOLT methodology does not assign ratings to a security. It is an analytical tool that involves use
of a set of proprietary quantitative algorithms and warranted value calculations, collectively called the CSFB
HOLT valuation model, that are consistently applied to all the companies included in its database. Third-
party data (including consensus earnings estimates) are systematically translated into a number of default
variables and incorporated into the algorithms available in the CSFB HOLT valuation model. The source
financial statement, pricing, and earnings data provided by outside data vendors are subject to quality
control and may also be adjusted to more closely measure the underlying economics of firm performance.
These adjustments provide consistency when analyzing a single company across time, or analyzing
multiple companies across industries or national borders. The default scenario that is produced by the
CSFB HOLT valuation model establishes the baseline valuation for a security, and a user then may adjust
the default variables to produce alternative scenarios, any of which could occur. Additional information
about the CSFB HOLT methodology is available on request.
The CSFB HOLT methodology does not assign a price target to a security. The default scenario that is
produced by the CSFB HOLT valuation model establishes a warranted price for a security, and as the third-
party data are updated, the warranted price may also change. The default variables may also be adjusted
to produce alternative warranted prices, any of which could occur. Additional information about the CSFB
HOLT methodology is available on request.
For disclosure information on other companies mentioned in this report, please visit the website at
www.csfb.com/researchdisclosures or call +1 (877) 291-2683.
Disclaimers continue on next page.
213
Disclaimers
Credit Suisse First Boston is the trade name for the investment banking business of Credit Suisse, a Swiss bank, and references in this report to Credit Suisse First
Boston or CSFB herein include all of the subsidiaries and affiliates of Credit Suisse operating under the Credit Suisse First Boston division of Credit Suisse Group
(“CSG”). For more information on our structure, please follow the below link: http://www.creditsuisse.com/en/who_we_are/ourstructure.html.
This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other
jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would subject Credit Suisse or its subsidiaries or its
affiliates (“CS”) to any registration or licensing requirement within such jurisdiction. All material presented in this report, unless specifically indicated otherwise, is under
copyright to CS. None of the material, nor its content, nor any copy of it, may be altered in any way, transmitted to, copied or distributed to any other party, without the
prior express written permission of CS. All trademarks, service marks and logos used in this report are trademarks or service marks or registered trademarks or service
marks of CSG or its affiliates.
The information, tools and material presented in this report are provided to you for information purposes only and are not to be used or considered as an offer or the
solicitation of an offer to sell or to buy or subscribe for securities or other financial instruments. CS may not have taken any steps to ensure that the securities referred to in
this report are suitable for any particular investor. CS will not treat recipients as its customers by virtue of their receiving the report. The investments or services contained
or referred to in this report may not be suitable for you and it is recommended that you consult an independent investment advisor if you are in doubt about such
investments or investment services. Nothing in this report constitutes investment, legal, accounting or tax advice or a representation that any investment or strategy is
suitable or appropriate to your individual circumstances or otherwise constitutes a personal recommendation to you. CS does not offer advice on the tax consequences of
investment and you are advised to contact an independent tax adviser. Please note in particular that the bases and levels of taxation may change.
CS believes the information and opinions in the Disclosure Appendix of this report are accurate and complete. Information and opinions presented in the other sections
of the report were obtained or derived from sources CS believes are reliable, but CS makes no representations as to their accuracy or completeness. Additional information
is available upon request. CS accepts no liability for loss arising from the use of the material presented in this report, except that this exclusion of liability does not apply to
the extent that liability arises under specific statutes or regulations applicable to CS. This report is not to be relied upon in substitution for the exercise of independent
judgment. CS may have issued, and may in the future issue, a trading call regarding this security. Trading calls are short term trading opportunities based on market events
and catalysts, while stock ratings reflect investment recommendations based on expected total return over a 12-month period relative to the relevant coverage universe.
Because trading calls and stock ratings reflect different assumptions and analytical methods, trading calls may differ directionally from the stock rating. In addition, CS may
have issued, and may in the future issue, other reports that are inconsistent with, and reach different conclusions from, the information presented in this report. Those reports
reflect the different assumptions, views and analytical methods of the analysts who prepared them and CS is under no obligation to ensure that such other reports are
brought to the attention of any recipient of this report. CS is involved in many businesses that relate to companies mentioned in this report. These businesses include
specialized trading, risk arbitrage, market making, and other proprietary trading.
Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding
future performance. Information, opinions and estimates contained in this report reflect a judgement at its original date of publication by CS and are subject to change
without notice. The price, value of and income from any of the securities or financial instruments mentioned in this report can fall as well as rise. The value of securities
and financial instruments is subject to exchange rate fluctuation that may have a positive or adverse effect on the price or income of such securities or financial
instruments. Investors in securities such as ADR’s, the values of which are influenced by currency volatility, effectively assume this risk.
Structured securities are complex instruments, typically involve a high degree of risk and are intended for sale only to sophisticated investors who are capable of
understanding and assuming the risks involved. The market value of any structured security may be affected by changes in economic, financial and political factors
(including, but not limited to, spot and forward interest and exchange rates), time to maturity, market conditions and volatility, and the credit quality of any issuer or
reference issuer. Any investor interested in purchasing a structured product should conduct their own investigation and analysis of the product and consult with their own
professional advisers as to the risks involved in making such a purchase.
Some investments discussed in this report have a high level of volatility. High volatility investments may experience sudden and large falls in their value causing losses
when that investment is realised. Those losses may equal your original investment. Indeed, in the case of some investments the potential losses may exceed the amount
of initial investment, in such circumstances you may be required to pay more money to support those losses. Income yields from investments may fluctuate and, in
consequence, initial capital paid to make the investment may be used as part of that income yield. Some investments may not be readily realisable and it may be difficult
to sell or realise those investments, similarly it may prove difficult for you to obtain reliable information about the value, or risks, to which such an investment is exposed.
This report may provide the addresses of, or contain hyperlinks to, websites. Except to the extent to which the report refers to website material of CSG, CS has not
reviewed the linked site and takes no responsibility for the content contained therein. Such address or hyperlink (including addresses or hyperlinks to CSG’s own website
material) is provided solely for your convenience and information and the content of the linked site does not in any way form part of this document. Accessing such
website or following such link through this report or CSG’s website shall be at your own risk.
This report is issued and distributed in Europe (except Switzerland) by Credit Suisse First Boston (Europe) Limited, One Cabot Square, London E14 4QJ, England, which
is regulated in the United Kingdom by The Financial Services Authority (“FSA”). This report is being distributed in the United States by Credit Suisse First Boston LLC; in
Switzerland by Credit Suisse; in Canada by Credit Suisse First Boston Canada Inc.; in Brazil by Banco de Investimentos Credit Suisse First Boston S.A.; in Japan by
Credit Suisse First Boston Securities (Japan) Limited; elsewhere in Asia/Pacific by whichever of the following is the appropriately authorised entity in the relevant
jurisdiction: Credit Suisse First Boston (Hong Kong) Limited, Credit Suisse First Boston Australia Equities Limited, Credit Suisse First Boston (Thailand) Limited, CSFB
Research (Malaysia) Sdn Bhd, Credit Suisse Singapore Branch and elsewhere in the world by the relevant authorised affiliate of the above. Research on Taiwanese
securities produced by Credit Suisse Taipei Branch has been prepared by a registered Senior Business Person.
In jurisdictions where CS is not already registered or licensed to trade in securities, transactions will only be effected in accordance with applicable securities legislation,
which will vary from jurisdiction to jurisdiction and may require that the trade be made in accordance with applicable exemptions from registration or licensing
requirements. Non-U.S. customers wishing to effect a transaction should contact a CS entity in their local jurisdiction unless governing law permits otherwise. U.S.
customers wishing to effect a transaction should do so only by contacting a representative at Credit Suisse First Boston LLC in the U.S.
Please note that this report was originally prepared and issued by CS for distribution to their market professional and institutional investor customers. Recipients who are
not market professional or institutional investor customers of CS should seek the advice of their independent financial advisor prior to taking any investment decision
based on this report or for any necessary explanation of its contents. This research may relate to investments or services of a person outside of the UK or to other matters
which are not regulated by the FSA or in respect of which the protections of the FSA for private customers and/or the UK compensation scheme may not be available, and
further details as to where this may be the case are available upon request in respect of this report.
Copyright 2005 CREDIT SUISSE and/or its affiliates. All rights reserved.
ASIA/PACIFIC: +852 2101-6000 EUROPE: +44 (20) 7888-8888 UNITED STATES OF AMERICA: +1 (212) 325-2000
CH0275.doc
CH0275.doc

Chemicals Primer

Hochgeladen von

Dokumentinformationen

Copyright

Verfügbare Formate

Dieses Dokument teilen

Dokument teilen oder einbetten

Freigabeoptionen

Stufen Sie dieses Dokument als nützlich ein?

Sind diese Inhalte unangemessen?

Copyright:

Verfügbare Formate

Chemicals Primer

Hochgeladen von

Copyright:

Verfügbare Formate

14 June 2005

John McNulty, CFA

Nancy F. Traub, CFA

Keith Siegner, CFA

Rubber Gloves When Nils-Bertil Wallin

Chemical Industry Primer, Neil Tyler

2005–2006 Catherine Haynes

. . . Making Chemicals Less Hazardous to Fraser Hill

WE HAVE INCLUDED A SECTION DESCRIBING OUR GLOBAL INVESTMENT Jim Hung

CSFB GLOBAL CHEMICAL TEAM

I. Executive Summary .......................................................................................................6

II. Investment Methodology.............................................................................................11

III. Commodity Chemicals ...............................................................................................26

IV. Inorganic Chemicals ..................................................................................................28

V. Organic Chemicals .....................................................................................................40

VI. Thermoplastics and Thermoset Resins .....................................................................88

IX. Agricultural Chemicals (Crop Protection, GMOs)...................................................130

XII. Nonatmospheric Gases ..........................................................................................165

XIII. Specialty Chemicals ..............................................................................................177

XIV. Pharmaceutical Hybrid Companies.......................................................................203

XV. Sources ..................................................................................................................208

Purpose of This Report

The Chemicals Sector

*Excluding pharmaceuticals. Source: CSFB research.

Six Main Subsectors

Exhibit 3: Global Chemicals by Segments

companies to dominate the industry globally. In addition, the discovery and

Source: Company data, CSFB estimates.

Rohm and Haas

Source: Company data, CSFB estimates.

II. Investment Methodology

U.S. Major Chemicals

Exhibit 6: Relative EPS: S&P Chemicals versus S&P Industrials

Exhibit 7: U.S. Ethylene Operating Rates

Exhibit 8: U.S. Chlorine Operating Rates

Source: Company data, CSFB estimates.

Exhibit 9: U.S. Chemical Industry Shipment Rates (Shipments/Capacity)

RELATIVE STOCK PRICE

Source: Company data, CSFB estimates.

• An economy that is relatively sluggish;

• Low operating rates in the chemical industry;

• Low EBIT margins in the chemical industry;

• Relatively little capacity expansions expected to come onstream; and

U.S. Specialty Chemicals

Exhibit 11: EV/Sales by Subsector for European Chemicals

Commodities Pharma hybrids Specialties Gases Sector

Source: Company data, CSFB estimates.

We propose to split our driver categories into five sections:

Exhibit 12: Euro Strengthening Correlates with Sector Relative De-Rating

120.0 Significant strengthening of Euro

$ to € Chemical sector relative to DJSTOXX (RHS)

Oil Chemical sector relative to DJSTOXX

3. Mergers and Acquisitions/Consolidation

Exhibit 14: Capex/Depreciation Ratios for European Subsectors

Source: Company data, CSFB estimates.

Exhibit 15: CFROI Spread from Median to 2004

2004 CFROI less -5Y Median CFROI

Source: Company data, CSFB estimates.

Source: Company data, CSFB estimates.

Exhibit 17: What Does the Market Expect in the Future?

2004 CFROI -5Y median CFROI Market Implied T+5 CFROI

Source: Company data, CSFB estimates.

Exhibit 18: Upside/Downside if T+5 Returns Equal Cost of Capital

Upside/Downside if t+5 CFROI is Equal to Cost of Capital