Jefferies Chemicals Primer Basic Plastics

Specialty Chemicals
December 16, 2005
Chemicals Primer: Basic Plastics Laurence Alexander

lalexander@Jefferies.com (212) 284-2553
Robert J. Schenosky
rschenosky@Jefferies.com (212) 284-2120
This primer provides a quick introduction to key drivers of the North American plastics industry: demand trends, supply
drivers, and other factors that affect investor sentiment. From an investment standpoint, at this point in the cycle, we
believe commodity shares provide trading opportunities based on near-term shifts in the demand outlook, the
inventory cycle and export demand, but the underlying risk/reward equation is deteriorating. The focus for commodity
investors, in our view, is increasingly on near-term uses of free cash flow (deleveraging, portfolio repositioning). By
mid-2006, commodity valuations will be discounting the downside risk to 2007 and what could evolve into a three- to
five-year rolling trough in the petrochemical cycle starting in 2008–2009. Within the specialty chemical sector, we
remain selective, with an emphasis on companies that combine exposure to late-cycle end markets and structural
improvements in returns on capital. Our top picks are Cytec (CYT-$46.43, Buy) and Airgas (ARG-$32.39, Buy). We
remain cautious on Huntsman (HUN-$19.19, Hold).
• Plastics have a wide range of applications. Key end markets include packaging (30%), consumer and
industrial appliances (22%) and construction (18%). For the North American producers, exports (12%) remain
a significant swing factor.
• With high natural gas prices, U.S. plastics exports are at a disadvantage. The industry was built
predicated on a structural advantage in natural gas prices. Without that advantage, the center of gravity is
shifting to the Middle East. As an estimated 14-plus million tpy of Middle Eastern ethylene equivalents comes
online over the next few years, it will displace North American supply to the Middle East. North America will
increasingly be relegated to the role of swing producer, with greater sensitivity to shifts in demand going
forward.
• Energy costs drive plastics prices; margins reflect supply/demand balances. Plastics prices show tight
(R2=80%-plus) relationships with energy costs, as producers either pass-through input costs or curtail
production. Margins (in cents/lb, not as a % of sales) are driven by supply/demand balances.
• Capacity utilization rates are high, but do not guarantee high margins. Historically, tight capacity
utilization rates facilitate higher margins—but producers also need to see accelerating demand and/or an
inventory build. During the mid-1990s peak, for example, integrated polyethylene margins dropped 70% on
operating rates moving from 90.7% to 90.0% for polyethylene and from 93.9% to 91.7% for ethylene.
• Capital costs drive reinvestment rates. This report includes a summary of capital costs for key plastics and
other petrochemicals. The ethylene chain is the most capital intensive, followed by styrenics and acrylonitrile.
On a per pound basis the most expensive to produce are polyethylene, ABS resins, ethylene oxide,
acrylonitrile, phenol and phthalic anhydride. The main commodities should all remain above reinvestment
levels in 2006, reflecting rolling peaks in the petrochemicals (and persistently tight conditions in North
American ethylene). Nonetheless, we believe global integrated petrochemical margins peaked in 2004, and
most petrochemicals should move below reinvestment levels by 2008.
• Key short-term indicators include chemical railcar loadings and spot prices. Chemical railcar loadings
capture whether demand is strengthening (currently the data is in line with seasonal patterns, no better), while
the spread between spot prices and contracts gives an early signal on the direction of upcoming contract
settlements (currently most commodities appear poised to plateau or move lower in December–January).
• Investment themes balance the industry capex cycle and demand. Commodity shares are demand-
driven, leading the economy by six to nine months, though as we saw in 4Q04 they can decouple ahead of
peak conditions. At this point, the key risks is softening end market demand, which would affect near-term
volumes and margins as well as the shape of the cycle: we estimate 2.5% vs. 3.5% GDP growth in 2006-2008
would suffice to pull forward the petrochemical trough by as much as a year.
Please see important disclosure information on pages 39 - 41 of this report.

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Plastics: What Are They?
Plastics are derived from oil and natural gas. Hydrocarbon feedstocks are cracked to make monomers, which are
usually made of carbon, hydrogen, chlorine, oxygen and/or silicon. Monomers are hooked together, like a chain of
paperclips, to make polymers. The most important plastics—polyethylene, polypropylene, polystyrene—are made of
only carbon and hydrogen. Monomers and their derivatives are called “chains.” The ethylene chain—ethylene and its
derivatives (polyethylene, ethylene oxide, etc.)—is the single most important petrochemical chain.
The United States has less than a third of the global capacity in the key monomers and polymers.
Table 1: Monomer and Polymer Global Capacity (m tpy) and U.S. Share (2005E)
Global capacity U.S. Global capacity U.S.

Monomer (m tpy) (%) Polymers (m tpy) (%) Application
Ethylene 117 30% Polyethylene 73 27% Films, containers, bags
Packaging, carpet, furniture,
Propylene 72 28% Polypropylene 44 21% transportation (e.g. bumpers)
Packaging, housewares,
construction, insulation for
Styrene 27 27% Polystyrene 15 24% electronics
Polyvinyl Chloride Plastic pipe, window frames,
(PVC) 37 23% vinyl siding, wall paper, floors
Packaging, water/drink
containers, automotive,
PET 15 17% apparel, home textiles
Source: ChemData, Jefferies & Company, Inc. estimates
Polymers can be thermoplastics (you can melt them and reuse them) or thermosets (once formed, high temperatures
scorch and distort the material). Polymers are widely used because they offer several advantages:
1. Resistance to corrosive chemicals.

2. Thermal and electrical insulators.
3. Lighter and stronger than rival materials.
4. Wide range of shapes, colors, and densities: fibers, bottles, paints, foam, etc.
Chart 1: Key Plastics Markets, 2004
Electrical &
Other
Furniture & Electronics
5.3%
Furnishings 3.6%
4.0% Packaging
29.9%
Transportation
5.7%
Exports
11.7%
Building &
Consumer &
Construction
Institutional
18.2%
21.6%
Source: American Plastics Council
Please see important disclosure information on pages 39 - 41 of this report. Jefferies & Company, Inc.
Laurence Alexander, CFA , lalexander@Jefferies.com, (212) 284-2553 Page 2 of 41
Specialty Chemicals
North American Demand Faces Risks From Substitution; Customers Migrating Outside U.S.
Plastics demand has historically exceeded GDP, though the multiplier has contracted since the 1980s. Until recently,
low and attractive energy costs (esp. natural gas in the U.S.) supported demand growth. Plastic prices are largely
driven by energy costs, so lower energy costs encouraged the use of plastics instead of other raw materials. Plastics
components are easier to assemble, and deliver comparable or better performance than metal, glass, wood or paper
while occupying less space and weighing less.
With energy costs on the rise, however, plastics are less competitive vs. other materials. Conservation practices, as
well as corporate initiatives to reduce waste (e.g., via lean manufacturing) are also reducing the long-term growth in
plastics demand. In 2004, the United States recycled approximately 1.9 billion lbs of plastic bottles (almost entirely
PET and HDPE), or 23% of total resin used for bottles. We estimate recycling alone trims 25–30 bp from U.S. demand
for new plastics.
Table 2: U.S. and Global Polymer Demand Growth
1996-2005E 2005E-2009E
Global U.S. Global U.S.
Polyethylene 4.8% 3.4% 4.7% 3.4%
Polypropylene 7.2% 5.3% 5.5% 4.3%
Polystyrene 2.6% 0.6% 3.2% 1.8%
Polyvinyl Chloride (PVC) 3.6% 2.6% 3.7% 1.6%
PET 12.8% 9.8% 7.8% 5.3%
Different plastics are more sensitive to different end markets. The most important is packaging, the main application
for polyethylene, polystyrene and PET (soft drink bottles). Other key end markets include carpet/fiber (polypropylene)
and construction (PVC pipe).
Table 3: Plastic Demand Trends by End Market
PE PP PVC PS PET
End markets as % of 2005E demand
Packaging 33% 19% 3% 49% 84%
Construction 8% 1% 61% 5% 0%
Consumer Products 4% 13% 3% 16% 0%
Fibers & Filaments 0% 21% 0% 0% 0%
Other 40% 33% 28% 34%* 21%
Net Exports 15% 13% 5% -5% -5%
Demand Growth 1995-2005 (% CAGR)

Packaging 3.9% 5.6% 0.8% 3.3% 10.1%
Construction 8.5% 4.6% 3.6% 3.9% nmf
Consumer Products 0.6% 8.1% 2.8% -3.4% nmf
Fibers & Filaments nmf -2.9% nmf 0.0% nmf
Other 2.1% 15.2% 2.8% -0.6% 15.2%
Exports (swing in m lbs) 1,705 1,705 (623) (389) (686)
Source: ChemData, Jefferies & Company, Inc. estimates * PS “Other” includes 10% for recreational equipment and toys, 8% for furniture, 6% for healthcare
Construction made an outsized contribution in the past couple of years. Going forward, we expect packaging to carry
more weight as a growth driver.
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Table 4: Plastic Demand Trends by End Market: 2003-2005 % CAGR vs. 2005E-2007E % CAGR
PE PP PVC PS PET
Demand Growth 2003-2005 (%)
Packaging 1.9% 3.3% 0.3% 1.6% 3.6%
Construction 13.4% 5.7% -1.7% 6.6%
Consumer Products -3.4% 1.1% -1.3% -2.8%
Fibers & Filaments nmf 3.2% nmf 0.0%
Other 3.7% 0.7% -3.1% -4.3% 8.9%
Exports (swing in m lbs) 545 545 (74) (251) (432)
Demand Growth 2005-2007E

Packaging 5.4% 6.7% 0.6% 3.7% 5.6%
Construction 6.8% 4.9% 4.6% 4.2%
Consumer Products -0.7% 5.8% -1.4% 3.8%
Fibers & Filaments nmf 6.5% 0.0%
Other 5.5% 5.9% 5.3% 4.8%
Exports (swing in m lbs) (400) (400) (750) 180 190
Export demand has deteriorated over the past decade, and we expect this trend to continue, particularly for
polyethylene and polypropylene. China is becoming more self-sufficient, supplying an estimated 35% of ethylene-
equivalent supply by 2010 vs. 20% in 2005 and less than 10% in 1995. At the same time, the bulk of new capacity
additions are occurring in the Middle East (14.1 m tpy of ethylene equivalent capacity in 2004–2010), most of which is
expected to displace North American producers. Reflecting the shifting trade balance, domestic production has
lagged domestic consumption growth. We expect this trend to continue. With North America and Europe increasingly
acting as swing producers around core (lower-cost) Middle Eastern capacity, this implies greater downside risk for
companies with excessive U.S. exposure heading into the next trough.
Table 5: As Exports Demand Shrinks, U.S. Production Lags Consumption Growth
U.S. Consumption Domestic Production Exports % of Exports % Exports %

CAGR ’96-‘05 CAGR ’96-‘05 Production (1996) (2005E) (2009E)
Polyethylene 3.4% 2.3% 10% 15% 11%
Polypropylene 5.3% 5.0% 8% 13% 8%
Polystyrene 0.6% 0.5% 7% 5% 4%
Polyvinyl Chloride (PVC) 2.6% 2.2% 7% 5% 4%
PET 9.8% 9.6% 11% -5% -5%
Source: ChemData, CMAI, Jefferies & Company, Inc. estimates
The other critical factor is inventory accumulation and destocking. Periods of extended inventory accumulation, as we
saw in late 2004, can lead to an exaggerated sense of the strength of demand.
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Chart 2: Polyethylene Producer Inventory Change (m lb, MoM) and Days Supply
600 60
55
400
50
200
45
0 40
35
-200
30
-400
25
-600 20
Jan-93
Jan-94
Jan-95
Jan-96
Jan-97
Jan-98
Jan-99
Jan-00
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
Inventory Change (m lbs) Days Supply (RHS)
Source: ChemData
Looking at cumulative inventory change captures the extended destocking ahead of the 1995 peak. The destocking in
2005 started out as a correction of the 4Q04 overshoot, but was then exaggerated by the hurricane-related capacity
shutdowns. The most recent data suggests inventory restocking is contributing to demand in 4Q05.
Chart 3: Cumulative Polyethylene Producer Inventory Change (m lb, MoM) and Days Supply
3000 60
2500 55
2000 50
1500 45
1000 40
500 35
0 30
-500 25
-1000 20
Jan-93
Jan-94
Jan-95
Jan-96
Jan-97
Jan-98
Jan-99
Jan-00
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
Inventory Change (m lbs) Days Supply (RHS)
Source: ChemData
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Supply Considerations
The pace of capacity additions slowed earlier this decade due to petrochemical margins well below reinvestment
economics. With margins for most commodities now above reinvestment levels, the industry is adding capacity more
quickly. In a solid growth environment (3%–4% global GDP), these additions will lead to only a slow deterioration in
global integrated chemical margins, with a return below reinvestment levels postponed until 2008 — but North
American producers will be at a disadvantage due to higher-cost feedstocks and increased vulnerability to slower end
market demand.
Table 6: Monomer and Polymer Supply Growth (% CAGR)
1996-2005E 2001-2005E 2005E-2009E

Global U.S. Global U.S. Global U.S.
Ethylene 9.1% 2.2% 6.7% 1.1% 8.2% 0.8%
Styrene 4.6% 1.0% 2.9% 1.2% 4.9% 0.6%
Polyethylene 4.9% 2.0% 3.5% 0.6% 5.3% -0.6%
Polypropylene 7.1% 5.0% 4.2% 1.9% 7.4% 4.7%
Polystyrene 3.3% 1.3% 2.2% 0.5% 2.5% 0.8%
Polyvinyl Chloride (PVC) 3.8% 1.5% 3.0% -0.1% 3.3% 2.4%
PET 12.6% 7.4% 10.9% 4.9% 6.1% 6.0%
Chart 4: Global Ethylene Supply Additions vs. Consumption Growth
8%
7%
6%
5%
4%
3%
2%
1%
0%
1997
1998
1999
2000
2001
2002
2003
2004
2005E
2006E
2007E
2008E
2009E
2010E
2011E
2012E
Capacity Growth (% YoY) Consumption Growth (% YoY)
Source: CMAI, Jefferies & Company, Inc. estimates
In the ethylene, propylene and styrene chains, the center of gravity is migrating to the Middle East and Asia.
Historically capital additions in North America were justified by structurally lower natural gas prices. This structural
advantage has ended. New capacity is being positioned to benefit from lower feedstock costs in the Middle East or
lower freight costs due to proximity to the growing Asian manufacturing base. We expect these trends to continue.
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Table 7: US Capacity Additions as % of Total Additions
1996-2000 2000-2005E 2006-2009E

Ethylene 28.0% 10.1% 3.9%
Styrene 3.7% 11.7% 3.3%
Polyethylene 18.7% 5.0% 8.2%
Polypropylene 21.1% 10.2% 13.0%
Polystyrene 14.0% 5.7% 7.5%
Polyvinyl Chloride (PVC) 20.3% -0.6% 16.2%
PET 26.7% 13.6% 25.6%
A separate risk is that slower demand growth leads to a faster build-up of surplus capacity. We estimate that a 100
basis point slowdown in the economy (to 2.5%) could pull forward trough conditions in North America by as much as a
year.
Chart 5: North American Ethylene Utilization (%): Slower Demand Pulls Forward Trough
98%
96%
94%
92%
90%
88%
86%
84%
82%
80%
2005E
2006E
2007E
2008E
2009E
1996
1997
1998
1999
2000
2001
2002
2003
2004
North America Utilization (%)

North America - Real GDP slows to 2.5% or less
Source: CMAI, Jefferies & Company, Inc. estimates
Some chemicals cost more to manufacture. The ethylene chain is the most capital intensive, followed by styrenics and
acrylonitrile.
Debottlenecking can reduce the capital cost of new capacity significantly. Debottlenecks, however, typically account
for only 1%–3% annual capacity expansion in each petrochemical chain.
The following table summarizes the capital costs for the plastics and other petrochemicals. Actual costs will vary
depending on the size and complexity of a plant, whether the new facility can be attached to existing infrastructure
(roads, energy supplies) and so on.
Focusing on capital required per pound of chemical makes it easier to compare the difficulty of making different
products as well as the returns on capital available in different value chains.
The most expensive chemicals on a per pound basis include polyethylene, ABS resins, ethylene oxide, acrylonitrile,
phenol and phthalic anhydride.
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Table 8: Petrochemical Capital Costs (including working capital)
Worldscale Plant Working Total Capital* Debottlenecking * Includes Working Capital

Cost ($m) Capital $/lb of capacity $/lb $/lb
Monomers
Ethylene (via ethane) $520 $40 $0.37 $0.21 $0.03
Styrene $269 $55 $0.32 $0.14 $0.06
Benzene $45 $12 $0.31 $0.13 $0.06
VCM $279 $27 $0.31 $0.14 $0.03
Cumene $67 $31 $0.12 $0.04 $0.04
Plastics
HDPE $186 $32 $0.40 $0.17 $0.06
LDPE $240 $40 $0.51 $0.22 $0.07
LLDPE $191 $36 $0.41 $0.18 $0.07
PVC $158 $26 $0.37 $0.17 $0.05
Polystyrene $54 $17 $0.28 $0.11 $0.07
Polypropylene $141 $42 $0.31 $0.12 $0.07
PET resin (from PTA) $88 $17 $0.35 $0.16 $0.06
ABS $93 $10 $0.69 $0.33 $0.07
Others
Methanol $330 $25 $0.19 $0.09 $0.01
Phenol $240 $31 $0.54 $0.24 $0.06
Acrylonitrile $353 32 $0.70 $0.35 $0.06
Cyclohexane $21 $8 $0.13 $0.05 $0.04
Ethylene oxide $260 $27 $0.48 $0.22 $0.04
Ethylene glycol $70 $16 $0.14 $0.06 $0.03
Propylene glycol $58 $21 $0.32 $0.12 $0.09
Ortho-xylene $34 $5 $0.26 $0.12 $0.03
Phthalic Anhydride $146 $11 $0.65 $0.31 $0.05
Source: Chemdata, Jefferies & Company, Inc.
We have also estimated reinvestment economics for these chemicals. We assume that reinvestment projects require
at least a 14% pre-tax return on investment.
Only acrylonitrile, methanol and phthalic anhydride are expected to remain well below reinvestment economics in
2006.
Besides raw materials, petrochemical producers need to recoup the cost of utilities, maintenance, labor, freight,
catalysts, and so forth. The table below details these operating costs. Note that this estimate excludes raw materials
and “corporate” items such as depreciation, taxes, interest, or corporate allocated overhead.
Also note that our estimate assumes plants run at 100%. Plants run at lower utilization rates—often much lower—and
the relationship with the operating costs is usually (but not always) almost linear. In other words, a plant operating at
an 80% operating rate will likely see per pound operating costs that are 20%–25% higher.
Raw material costs, of course, do not vary with utilization rates. In the current environment, high feedstocks
increasingly dwarf any variation in other variable costs due to utilization rates. For ethylene, for example, feedstock
costs represent approximately 55% of total manufacturing costs. Raw materials as a percentage of total operating
costs typically increases as one moves downstream (e.g., 96% for cumene as of the end of November).
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Table 9: Chemical Reinvestment Margins and 2006E Forecasted Average Margin ($/lb)
Grassroots Debottleneck Non-feedstock Operating Cost* 2006E average margin

Monomers (100% utilization)
Ethylene (via ethane) $ 0.07 $ 0.05 $0.29 $0.14

Styrene $ 0.06 $ 0.04 $0.07 $0.13
Benzene $ 0.06 $ 0.04 $0.22 $0.09
VCM $ 0.06 $ 0.03 $0.05 $0.06
Cumene $ 0.02 $ 0.02 $0.02 $0.01
Plastics
HDPE $ 0.08 $ 0.05 $0.10 $0.10
LDPE $ 0.10 $ 0.06 $0.12 $0.12
LLDPE (Octene) $ 0.08 $ 0.05 $0.11 $0.11
PVC $ 0.07 $ 0.04 $0.09 $0.15
Polystyrene (GP) $ 0.06 $ 0.04 $0.09 $0.10
Polypropylene (G.P., gas phase) $ 0.06 $ 0.04 $0.09 $0.15
PET resin $ 0.07 $ 0.04 $0.11 $0.09
ABS $ 0.14 $ 0.08 $0.19 $0.06
Other
Methanol $ 0.04 $ 0.02 $0.02 ($0.03)
Phenol $ 0.11 $ 0.06 $0.14 $0.16
Acrylonitrile $ 0.14 $ 0.08 $0.08 $0.05
Cyclohexane $ 0.03 $ 0.02 $0.01 $0.17
Ethylene oxide $ 0.10 $ 0.05 $0.07 $0.14
Ethylene glycol $ 0.03 $ 0.02 $0.03 $0.06
Propylene glycol $ 0.06 $ 0.04 $0.80 $0.24
Ortho-xylene $ 0.05 $ 0.03 $0.04 $0.06
Phthalic Anhydride $ 0.13 $ 0.07 $0.11 $0.01
* Includes fixed costs, utilities, and other non-feedstock related variable costs (e.g. labor, catalysts). To justify reinvestment, chemical prices need to equal or exceed reinvestment
margins (based on capital) + raw materials + non-feedstock operating costs.
Source: Chemdata, Jefferies & Company, Inc.
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Supply/Demand Balances Set the Tone
The single most important metric for investor sentiment is capacity utilization. Capacity utilization rates set the tone for
commodity profitability.
The underlying intuition is simple: molecules that are in short supply have more value to the marginal buyer. This
makes it easier to pass through (increasingly volatile) raw materials—basically derivatives of crude oil and natural gas.
The following table summarizes the levels that are typically considered “tight” for different petrochemicals in different
regions.
Table 10: What Counts as “Tight” Operating Rates: Tight Conditions Hinge on Unexpected Outages
North America West Europe Asia 2005E (N. Am.)

Ethylene 92%+ 92%+ 92%+ 90.9%
Propylene 92%+ 92%+ 92%+ 78.2%
HDPE 92+% 92+% 92%+ 87.1%
LDPE 92+% 92+% 92%+ 92.4%
LLDPE 92+% 92+% 92%+ 89.5%
Polypropylene 92+% 92+% 92%+ 92.8%
PVC 91% 90% 85%+ 92.4%
VCM 92% 91% 85% 91.2%
Styrene 92+% 90+% 98% 85.7%
Polystyrene 88+% 88+% 92% 87.5%
PET Resin 90+% 90+% 90% 90.6%
MEG 95+% 95+% 95% 70.2%
Phenol 95+% 92+% 90% 90.8%
Ethylene oxide 88+% 88+% 90% 85.4%
Source: CMAI, ChemData
This does not mean, however, that tight supply/demand conditions coincide or predict high margins. The vagaries of
monthly contract settlements can lead to producer margins being squeezed by raw materials even in tight operating
markets—or leading to unusual windfalls in slack markets. Peak operating rates need to be augmented by
accelerating demand and/or an inventory build to deliver peak margins.
Table 11: Ethylene Cash Margins and Operating Rates: Tighter Supply/Demand Has Bias Toward Higher Margins
Operating Rate (%) Average Cash Margin (cents/lb)

Minimum Maximum Average High Low
0 86 5.02 7.41 2.62
86 88 6.04 11.13 3.03
88 90 4.47 5.46 3.32
90 92 5.14 7.83 2.35
92 94 4.69 7.99 2.44
94 96 7.42 15.77 2.90
96 98 8.04 12.90 4.65
98 100 10.75 18.44 4.33
100 Above 100 8.76 13.26 5.01
Broad ranges
0 92 5.24 11.13 2.35
92 96 6.55 15.77 2.44
96 Above 100 9.49 18.44 4.33
0 95 5.87 15.77 2.35
95 Above 100 9.05 18.44 3.37
Source: CMAI, Jefferies & Company, Inc.
The following charts, which use ethylene as an example, indicate two other important points: petrochemical prices are
mostly driven by underlying feedstock costs, and margins show a limited sensitivity to feedstock costs. For a look at
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historical prices, operating rates, margins, and returns on investment for ethylene, HDPE and polypropylene, please
see Appendices 1–3.
Chart 6: Ethylene Prices Driven by Energy Costs (combined R2=88%)
$60 $12
Natural Gas ($/MMBTU)

$50 $10
R2 = 60%
WTI Oil ($/bbl)
$40 $8
R2 = 48%
$30 $6
$20 $4
$10 $2
$- $-
10 15 20 25 30 35 40 10 15 20 25 30 35 40
Ethylene Price (cents/lb) Ethylene Price (cents/lb)
Chart 7: Petrochemical Margins Independent of Energy Costs
$60 $12
Natural Gas ($/MMBTU)

$50 $10
2 2
R = 0% R = 0%
WTI Oil ($/bbl)
$40 $8
$30 $6
$20 $4
$10 $2
$- $-
0 5 10 15 20 25 0 5 10 15 20 25
Ethylene Margin (cents/lb) Ethylene Margin (cents/lb)
Source: CMAI
In Tight Markets, Inventory Accumulation Can Precipitate Peak Margins
Plastic prices often trough one to two quarters ahead of an industry shift from inventory destocking to inventory
accumulation. The best environment for peak margins (above 15 cents/lb) combines an inventory build with 4%-plus
demand growth. In such situations the value is sometimes captured upstream. For example, at the 1995 peak 55% of
the integrated margin for HDPE was captured by ethylene producers.
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Chart 8: HDPE Price vs. Integrated Margin, 1979-2005 (cents/lb)
70 30
60 25
50 20
40 15
30 10
20 5
10 0
0 (5)
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
Margin (cents/lb, RHS) Price (cents/lb)
Historical inventory data for polyethylene suggests that peak margins—in 1995–1997 as well as late 2004—have
coincided with inventory restocking. In 1H96, for example, a brief bout of destocking led to margins contracting to 8.4
cents/lb in 1Q96, down from a peak margin of 26.9 cents/lb in 1Q95 and a subsequent peak of 21.5 cents/lb in 2Q97.
That said, as Chart 10 shows, in a tight market a commodity chain can generate an attractive ROI across 12-18
months even with such sharp inventory-driven swings in margins.
Chart 9: Cumulative Polyethylene Inventory Change (m lb, MoM) and HDPE Price ($/lb)
3000 $0.80
2500
$0.70
2000
$0.60
1500
1000 $0.50
500
$0.40
0
$0.30
-500
-1000 $0.20
Jan-93
Jan-94
Jan-95
Jan-96
Jan-97
Jan-98
Jan-99
Jan-00
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
Inventory Change (m lbs) HDPE ($/lb)
Source: ChemData
Another way to look at this is that when industrial production slows, producers (and their customers) work down
inventory. As a result, plastics margins typically soften when demand is decelerating.
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Chart 10: HDPE Integrated Margins (cents/lb) vs. Manufacturing Industrial Production (% YoY)
$0.30 12%
$0.25 10%
8%
$0.20
6%
$0.15 4%
$0.10 2%
$0.05 0%
-2%
$-
-4%
$(0.05) -6%
$(0.10) -8%
Jan-91
Jan-92
Jan-93
Jan-94
Jan-95
Jan-96
Jan-97
Jan-98
Jan-99
Jan-00
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
Mfg HDPE
Source: Bloomberg, CMAI, Jefferies & Company, Inc. estimates
Specialty Chemicals
Short-Term Indicators: Chemical Railcar Loadings, Spot Prices
Besides tracking end market indicators, a useful short-term check on whether the inventory cycle is turning is the
weekly chemical railcar data.
In early 1Q05, softer-than-expected railcar shipments—basically in line with seasonal trends rather than significantly
stronger—were an early signal that demand was weaker than expected and destocking could be on its way. More
recently, chemical railcar loadings have returned to their seasonal trends after the hurricane-related disruptions. That
activity is not significantly stronger than normal is grounds for caution on the near-term outlook for commodity
volumes.
Chart 11: Chemical Railcar Loadings: Sequential Change in 4-Week Moving Average, 2003-2005
25%
20%
15%
Sequential Change
10%
5%
0%
(5%)
(10%)
(15%)
(20%)
(25%)
1 5 9 13 17 21 25 29 33 37 41 45 49 53
Week
2003 2004 2005
Source: AAR, Jefferies & Company, Inc. estimates
Chart 12: Chemical Railcar Loadings: % YoY Change in 4-Week Moving Average, 2000-2005
15%
10%
5%
0%
(5%)
(10%)
Jan-00
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
Source: AAR, Jefferies & Company, Inc. estimates
Specialty Chemicals
While North American spot markets are fairly illiquid, any significant deviation from normal practice can provide an
early signal of a shift in trend. Following the recent hurricanes, spot prices moving above contract prices were an early
indicator that contract prices were moving sharply higher. Similar signals were seen in the run up to the 1995 peak and
the 4Q04 surge in petrochemical margins. In recent weeks spot prices have pulled back from $0.73/lb to around
$0.61/lb, and we expect them to converge on contract prices by early January. Margins, particularly in ethylene,
remain elevated.
At the other extreme, spot prices significantly lower than contract prices have often signaled that attempted increases
in the monthly contract prices were unsustainable. Such signals occurred in 1993, 1996, 1998, 2002–2003, and most
recently in the summer of 2005.
Chart 13: Ethylene Spot vs. Contract Settlements ($/lb), 1991-2005
$0.80
$0.70
$0.60
$0.50
$0.40
$0.30
$0.20
$0.10
$-
Jan-91
Jan-92
Jan-93
Jan-94
Jan-95
Jan-96
Jan-97
Jan-98
Jan-99
Jan-00
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
Ethylene Contract Ethylene Spot
Chart 14: Ethylene Spot Typically Lower Than Contract ($/lb)
$0.25
$0.20
$0.15
$0.10
$0.05
$-
$(0.05)
$(0.10)
$(0.15)
$(0.20)
Jan-91
Jan-92
Jan-93
Jan-94
Jan-95
Jan-96
Jan-97
Jan-98
Jan-99
Jan-00
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
Specialty Chemicals
Implications for Share Prices

The market tends to look through the peaks and valleys in commodity chemical earnings with an eye on some notion
of normalized or full-cycle earnings power, peak earnings potential, or peak-to-peak earnings growth. In practice,
bellwether commodity names such as Dow (DOW-$44.73, NC) usually see changes in near-term valuations almost
entirely offset swings in earnings estimates. The shares do best as trough margins improve to reinvestment levels.
As a result, the commodity names trade as leading indicators for industrial production, only to outperform sharply
when tightening capacity utilization rates and accelerating industrial production suggest a petrochemical peak is
plausible.
Chart 15: Dow NTM Earnings (% YoY) vs. NTM P/E Multiple (% YoY) (R2=77%)
175% 2
y = 81%x - 134%x + 12%
150% 2
R = 77%
125%
100%
Earnings % YoY
75%
50%
25%
0%
-25%
-50%
-75%
-100%
-50%
100%
150%
50%
0%
Multiple Expansion % YoY
Source: Factset
Chart 16: Dow Chemical vs. Industrial Production: Commodity Chemicals Lead Industrial Demand, Decouple
Ahead of Commodity Peaks
125% Dow decouples ahead 20%

of ethylene peaks as
100% tight supply magnifies 16%
strength of demand
75%
12%
50%
8%
25%
4%
0%
Asian 0%
-25%
Crisis
-50% -4%
-75% -8%
Jan-81
Jan-83
Jan-85
Jan-87
Jan-89
Jan-91
Jan-93
Jan-95
Jan-97
Jan-99
Jan-01
Jan-03
Jan-05
Jan-07
Dow (% YoY), pushed forward 6 months Ind. Prod., mfg. (% YoY, RHS)
Source: Factset, Bloomberg
Specialty Chemicals
Appendix 1: Ethylene Historical Pricing, Margins, Utilization Rates, and Before-Tax Returns
Chart 17: Ethylene Pre-Tax ROI vs. Operating Rate, 1979-2005 (%)
110 70
100 60
50
90 40
80 30
20
70 10
60 0
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
Pre-tax ROI (%, RHS) Operating Rate (%, LHS)
Chart 18: Ethylene Price vs. Margin, 1979-2005 (cents/lb)
60 25
50 20
40
15
30
10
20
10 5
0 0
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
Chart 19: Ethylene Prices vs. Cash Costs, 1979-2005 (cents/lb)
60
R2 = 71%
50
40
Prices
30
20
10
0
0 10 20 30 40 50
Cash Costs
Specialty Chemicals
Chart 20: Ethylene Margins vs. Prices, 1979-2005 (cents/lb)
25
20 R2 = 46%
Margins
15
10
0
0 10 20 30 40 50 60
Price
Chart 21: Ethylene Margins (cents/lb) vs. Operating Rates (%), 1979-2005
25
20 R2 = 7%
Margins
15
10
5
0
60 70 80 90 100 110
Operating Rate
Specialty Chemicals
Appendix 2: HDPE Historical Pricing, Margins, Utilization Rates, and Before-Tax Returns
Chart 22: HDPE Pre-Tax ROI vs. Operating Rate, 1979-2005 (%)
110 40
100 30
90 20
80 10
70 0
60 (10)
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
Chart 23: HDPE Price vs. Margin, 1979-2005 (cents/lb)
70 12
60 10
50 8
40 6
4
30 2
20 0
10 (2)
0 (4)
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
Chart 24: HDPE Price vs. Integrated Margin, 1979-2005 (cents/lb)
70 30
60 25
50 20
40 15
30 10
20 5
10 0
0 (5)
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
Specialty Chemicals
Chart 25: HDPE Prices vs. Cash Costs, 1979-2005 (cents/lb)
70
60
50
Prices 40
30 R2 = 80%
20
10
0
20 25 30 35 40 45 50 55 60
Cash Costs
Chart 26: HDPE Margins vs. Prices, 1979-2005 (cents/lb)
15
10
Margins
(5) R2 = 26%
(10)
20 30 40 50 60 70
Price
Chart 27: HDPE Margins (cents/lb) vs. Operating Rates (%), 1979-2005
15
R2 = 26%
10
Margins
5
0
(5)
(10)
60 70 80 90 100 110 120
Operating Rate
Specialty Chemicals
Appendix 3: Polypropylene Pricing, Margins, Utilization Rates, and Before-Tax Returns
Chart 28: Polypropylene Pre-Tax ROI vs. Operating Rate, 1979-2005 (%)
100 70
95 60
90 50
85 40
80
75 30
70 20
65 10
60 0
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
Chart 29: Ethylene Price vs. Margin, 1979-2005 (cents/lb)
80 20
70
60 15
50
40 10
30
20 5
10
0 0
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
Chart 30: Polypropylene Prices vs. Cash Costs, 1979-2005 (cents/lb)
80
70 R2 = 84%
60
50
Prices
40
30
20
10
0
0 10 20 30 40 50 60
Cash Costs
Specialty Chemicals
Chart 31: Polypropylene Margins vs. Prices, 1979-2005 (cents/lb)
20
15
Margins
10
R2 = 54%
5
(5)
20 30 40 50 60 70 80
Price
Chart 32: Polypropylene Margins (cents/lb) vs. Operating Rates (%), 1979-2005
20
15
R2 = 40%
10
Margins
5
0
(5)
(10)
40 50 60 70 80 90 100 110
Operating Rate
Specialty Chemicals
Appendix 4: Exports as % of North American Plastics Production, 1981-2009E
Table 12: Exports as % of North American Production, 1981-2009E
PE PP PS PVC PET
1981 11.8% 17.6% 4.2% 7.8%
1982 14.3% 20.3% 3.0% 10.4%
1983 14.0% 17.9% 2.1% 8.7%
1984 11.6% 16.2% 2.6% 5.6%
1985 13.0% 16.6% 2.0% 4.3%
1986 11.8% 19.4% 2.6% 5.0%
1987 10.6% 18.5% 2.3% 5.3%
1988 8.2% 16.6% 3.2% 6.2%
1989 10.8% 16.4% 4.4% 10.8%
1990 9.1% 19.8% 3.7% 10.6%
1991 13.4% 19.1% 5.3% 16.6%
1992 12.6% 11.2% 6.1% 13.6% 18.3%
1993 12.2% 8.5% 6.2% 13.6% 13.5%
1994 12.6% 6.5% 5.6% 9.5% 14.3%
1995 8.7% 6.5% 5.0% 11.2% 13.0%
1996 10.3% 8.4% 6.7% 7.0% 11.3%
1997 10.1% 9.5% 8.6% 9.5% 11.4%
1998 9.3% 7.7% 9.6% 9.3% 5.9%
1999 9.3% 7.7% 8.7% 4.2% 2.7%
2000 11.1% 8.9% 4.9% 1.6% 2.9%
2001 14.0% 11.7% 4.2% 7.3% 4.5%
2002 15.9% 9.8% 4.9% 6.1% 0.9%
2003 14.3% 10.6% 5.4% 5.9% 1.0%
2004 14.7% 10.6% 5.2% 5.0% 1.8%
2005E 14.8% 12.9% 4.9% 4.8% -4.6%
2006E 14.3% 11.2% 4.5% 3.9% -1.2%
2007E 14.1% 9.8% 4.3% 3.0% -1.6%
2008E 12.7% 9.1% 4.9% 5.0% -3.8%
2009E 11.0% 8.0% 4.0% 4.0% -5.0%
Specialty Chemicals
Appendix 5: Commodity Forecasts, 2006E-2008E
Table 13: Commodity Forecasts 2006E-2008E ($/lb)
Chemical 1Q06E 2Q06E 3Q06E 4Q06E 2005E 2006E 2007E

Acrylonitrile $0.575 $0.620 $0.630 $0.610 $0.589 $0.609 $0.578
(export)
Benzene $2.500 $3.150 $3.300 $2.800 $2.900 $2.940 $2.800
($/gal)
Ethylene $0.520 $0.550 $0.510 $0.480 $0.443 $0.515 $0.465
Ethylene $0.420 $0.390 $0.340 $0.320 $0.449 $0.368 $0.313

Glycol
LDPE $0.860 $0.820 $0.760 $0.780 $0.715 $0.805 $0.718
LLDPE $0.810 $0.770 $0.710 $0.730 $0.665 $0.755 $0.667
HDPE $0.790 $0.750 $0.690 $0.710 $0.642 $0.735 $0.648
PET $0.760 $0.790 $0.720 $0.660 $0.775 $0.733 $0.620
Propylene $0.390 $0.470 $0.480 $0.430 $0.408 $0.443 $0.415
Polypropylene $0.680 $0.760 $0.790 $0.750 $0.670 $0.745 $0.730
Styrene $0.610 $0.690 $0.690 $0.630 $0.621 $0.655 $0.613
Polystyrene $0.850 $0.900 $0.880 $0.830 $0.808 $0.865 $0.820
Vinyl Chloride $0.468 $0.465 $0.442 $0.416 $0.412 $0.448 $0.400
Specialty Chemicals
Appendix 5: The Chemical Value Chains
Chart 33: What Is Chemistry?
Inorganic Organic Raw Materials, Oil Gas

Mining Raw Materials Coal, Biomass Production
Heat
Chemical
Air
Processing
Water
Chemicals
Building Blocks
Heat
Chemical
Air Processing
Water
Chemical Intermediate & Finished Products
Other Manufacturers Consumers Exports
Source: American Chemistry Council, Jefferies & Company, Inc. estimates
Specialty Chemicals
Chart 34: The Ethylene Chain
Low Density
Polyethylene Food Packaging,
(LDPE) & Film
Linear Trash Bags, Diapers,
Low Density Toys, Housewares
Polyethylene
(LLDPE)
High Density Housewares, Crates,

Polyethylene Drums, Food
(HDPE) Containers, Bottles
Sliding, Window
Ethylene Vinyl PVC Frames, Swimming
Dichloride Chloride Pool Liner, Pipes
Automotiv
Ethylene Ethylene Glycol
eAntifreeze
Oxide
Crude
Oil/ Pantyhose,
Ethylene Fibers Carpets,
Natural
Gas Clothing
Polyester Bottles
Resin Film
Miscellaneous
Insulation,
Polystyrene Cups,
Models
Ethylbenzene Styrene
Styrene Instrument
Acrylonitrile Lenses,
Resins Houseware
Liquor
Styrene Tires
Alcohols Detergents
Butadiene Footwear,
Rubber Sealants
Vinyl Adhesives, Styrene

Acetate Butadiene Carpet
Coatings,
Latex Backing,
Textile/Paper
Paper
Coatings
Miscellaneous Miscellaneous
Specialty Chemicals
Chart 35: The Propylene Chain
Auto Patch
Propylene Propylene Glycol Polyesters Compounds,
Oxide Furniture Parts,
Boats, Fibers
Foams,
Polyols Polyurethane Coatings,
Lacquers
Auto Steering Wheels,

Knobs, Auto Grills, Pipe,
Resins Film, Shirt Packages,
Polypropylene Strapping, Rope & Twine
Fibers
Indoor/Outdoor
Carpets, Matting
Plastics, Signs,
Crude Oil Propylene Isopropyl Alcohol Acetone Methyl Plexiglass,
Methacrylate Paints, Tail-
Light Lenses,
Lighting Panes
Solvents, Coatings,
Cosmetics, Heath Care
Oxo- PVC Rain,

alcohols Plasticizers Plastics Coats,
Inflatable
Toys
Solvents Coatings
Acrylonitrile Polyacrylonitrile
Acrylic Carpets Sweaters,

Fiber Draperies,
Dresses, Coats
Acrylic
Resins Lenses, Light
Fixtures, Coatings
Domestic
Modacrylic
Fiber Synthetic Furs, Coatings
Cumene ABS Resins Telephones, Auto

Parts, Bathtubs
Phenolic Resins, Nylon

Phenol
Fibers, Solvents
Acrylic Acid,
Super Absorbent
Acrylates
Polymers, Coatings,
Adhesives, Detergents
Miscellaneous
Specialty Chemicals
Chart 36: The Chlor-alkali Chain
Polyvinyl
Ethylene Vinyle Chloride Siding
Dicholoride Chloride Resins Pipe,
(PVC) Flooring
Methyl Chloride,
Methylene Miscellaneous
Chloride,
Chloroform,
Carbon
Solvents, Metal Cleaning,
Tetrachloride, &
Electronics, Polymers
Other Chlorinated
Methanes
Chlorine
Ethylene PVC
Dichloride, & Siding, Flooring, Pipe,
Resins
Other Shower Curtains
Chlorinated
Ethanes
Solvents
Dry Cleaning, Metal
Chlor-Alkali Cleaning, Degreasing
Chlorinated
Benzene Pesticides, Dyes
Epoxy Coatings,
Resins Adhesives, Printed
Circuit Board
Epichlorohydrin
Glycerin
Other Chemicals Toothpaste,
Cosmetics,
Food
Miscellaneous
Pulp Bleaching
Other
Chemicals
Water Treatment
Pulp & Paper
Soaps, Detergents,
Caustic Soda Cleaners
Water Treatment
Miscellaneous
Oil Refining
Miscellaneous
Specialty Chemicals
Chart 37: The Benzene Chain
Insulation,
Polystyrene Cups,
Resins Models
Styrene Instrument
Acylonitrile Lenses,
Resins Houseware
Styrene Tires,
Ethylbenzene Styrene Butadiene Footwear,
Rubber Sealants
Carpet
Styrene Backing,
Butadiene Paper
Latex Coatings
Miscellaneous
Crude Football
Oil Helmets,
Acetone Polycarbonate Eyeglasses
Reins Computers
Benzene Cumene
Bisphenol Epoxy
A Resins
Phenol Protective
Coatings,
Ethylene Adhesives
Cracker
Miscellaneous
Phenolic Plywood,
Resins Coatings,
Housings
Adipic Nylon Fibers

Acid & Resins
Cyclohexane
Miscellaneous
Isocyanates
Caprolactam
Nylon Fibers
Rubber Chemicals & Resins
Miscellaneous
Aniline Pesticide
Dyes
Miscellaneous
Chlorobenzenes
Miscellaneous Pesticides, Dyes
Specialty Chemicals
Chart 38: The Ammonia Chain
Ammonium Sulfate
Fertilizer,
Natural Gas Ammonia Feeds,
Ammonium Phosphates
Explosives,
Chemicals
Nitric Acid
Urea
Nylon Carpet,
Fibers Home
Caprolactam
Furnishing,
Apparel
Acrylic Apparel,
Acrylonitrile Fibers Home
Furnishings
Miscellaneous
Chemicals
Specialty Chemicals
Chart 39: The Methanol Chain
Methyl-Tertiary Gasoline
Butyl Ether
Phenol
Formaldehyde
Plywood,
Particle
Board,
Insulation
Natural Gas Methanol Formaldehyde
Urea
Urea Formaldehyde
Carbon
Monoxide
Acetic Acid
Chlorine
Electronics, Metal Cleaning,
Paint
Remover, Silicones, Insulation
Chloromethanes
Acetone
Glazing, Signs,
Methyl- Other Acrylics
Methacrylate
Miscellaneous
Chemicals
Specialty Chemicals
Chart 40: The C-4 Chain
Styrene-Butadiene Tires, Footwear
Polybutadiene Tires, Golf Balls

Rubber
Styrene-Butadiene Carpet Backing,

Adhesives
Latex
Automotive Parts,
ABS Resins Spas
Butadiene
Chloroprene Gaskets, Seals,
Rubber Hoses
Shoe Soles, Kitchen

Nitrile Rubber
Mats, Hoses, Gaskets
Crude Oil C-4
Miscellaneous
Auto Tires,
Isobutylene Synthetic Rubber
Plastic Compounds
Gasoline
Miscellaneous
Butylene Oxide Polyurethanes Foams, Insulation
Unsaturated
Polyesters
Malaeic Anhydride
Alkyd Resins
Specialty Chemicals
Chart 41: The Toluene Chain
Ethylbenzene Styrene
Cumene
Benzene
Cyclohexane
Aniline
Other
o-Xylene
Crude Oil Toluene Xylene

p-Xylene
m-Xylene
Urethane Bedding,
Foams Insulation
Toluene
Diisocyanate Varnishes, Adhesives
Urethane
Coatings
Urethane Footwear
Elastomers
Solvents
Miscellaneous
Specialty Chemicals
Chart 42: The Xylene Chain
o-Xylene Phthalic Plasticizer Plastic

Anhydride D.O.P Products
Solvents &
Auto Parts,
Alkyd Coatings,
Resins Furniture
Polyester Foams,
Polyol Urethanes Insulation
Dyes
Isophthalic
Crude Oil Xylene m-Xylene Alkyd TV
Acid
Resins Parts
Polyamide Adhesives
Resins
Solvents
Unsaturated
Polyesters
Polyester Fibers
For Apparel, PET
Resins for Bottles,
p-Xylene Terephthalic Acid/Dimethyl Terephthalate Tapes & Films
Specialty Chemicals
Appendix 6: Chemicals Glossary
Absorption A process in which a gaseous stream containing a separable chemical is placed in contact with a
liquid solvent flowing down a column containing trays or packing. The solvent absorbs the
chemical from the gas. The collection of the compound takes place inside the other substance
(e.g., solvent).
Acid A substance that produces hydrogen ions when dissolved in water.
Active Pharmaceutical The chemical compound in a drug formulation that imparts the desired biological effect.
Ingredient (API)
Adsorption The adhesion of substances (e.g., gases, liquids) on the surface of solids.
Alcohols Organic compounds (usually liquids) containing a hydroxyl group
(-OH), made of one oxygen and one hydrogen atom, attached to a carbon atom.
Aldehydes Oxygenated organic compounds (e.g., formaldehyde, acetaldehyde) that have a tail and
consisting of carbon (double-bonded oxygen and hydrogen, both attached to the same carbon
atom.
Aliphatics Compounds characterized by having an open-chain structure of carbon atoms.
Alkanes Straight-chain hydrocarbon without double bonds. These contain single bonds, which makes
them less reactive. The simplest alkane is methane. Also referred to as paraffin. Alkenes also
referred to as olefins, unsaturated hydrocarbons that contain double bonds, which makes them
reactive.
Alkylation This process involves the reaction of hydrocarbons with an olefin by using a catalyst. This can
increase the octane number of the compound.
Anion A negatively charged ion.
Aromatics Hydrocarbons containing a 6-carbon ring structure. Benzene is the simplest aromatic. Toluene
and xylenes are also aromatics.
Atom The smallest, most basic unit of an element.
Base A substance that produces hydroxyl ions (OH) when dissolved in water.
Batch Chemical processing technology consisting of sequential steps (e.g., extraction) that must be
repeated batch after batch. Set-up is required between each batch (versus continuous process).
Capital requirements tend to be low but require greater labor input.
BTX Not a mountain bike brand but rather the acronym for benzene, toluene and xylenes.
Butane A straight-chain hydrocarbon containing four carbon atoms.
Catalyst A substance used in very small quantities to increase the rate of a desirable chemical reaction
without itself being changed chemically.
Catalytic Process A process using a catalyst to increase the rate of a chemical reaction. This can increase overall
efficiency, quality and other favorable attributes.
Cation A positively charged ion.
Commodity Chemical High-volume, low-value, homogenous compounds produced in dedicated continuous plants often
used in a variety of applications. These are sold on the basis of what they are, not what they do.
That is, their composition. Most specialties evolve into commodities.
Compound A substance composed of two or more different elements that are chemically bound. Water (H20)
is an example of a compound comprised of two atoms of hydrogen (H) and one atom of
oxygen (O).
Conversion The portion of raw materials in a chemical process that actually undergoes reaction. That is, the
raw material that is consumed or feed that disappears in a chemical reaction. It is usually
measured as a percent, primarily around a reaction step, not the whole plant.
Cracking A process in which a long-chain molecule (or mixture of longer chain molecules) is broken down
into smaller molecules to produce more useful chemicals. High-temperature cracking of
hydrocarbons to produce olefins is referred to as steam cracking. When molecules are broken
down in the presence of a catalyst. It is sometimes referred to as catalytic cracking.
Source: American Chemistry Council
Specialty Chemicals
Chemicals Glossary (cont’d)
Crystallinity A property of polymers in which the molecule attract each other and line up next to the other, thus
engendering strength. Crystalline polymers (polyethylene, nylon, etc) are opaque.
Crystallization A process in which a mixture of chemicals contained in a solution are separated by chilling and a
filter or centrifuge are used to recover solid crystals.
Dealkylation A process removing a methyl or ethyl group from an organic compound.
Dehydration Chemical processes removing one or more hydrogen atoms from a compound. By adding a
hydrogen atom, hydrogenation is the opposite process.
Distillation Process in which two or more components of a liquid compound are separated through the use of
successive vaporization and condensation. This process is employed to purify or separate the
components of a mixture.
Elastomer Synthetic polymers with rubber-like properties that can be stretched and will retract to their
original form.
Electrolysis A process in which the passage of electric current through an aqueous solution causes a
chemical reaction to occur.
Element A substance that cannot be decomposed into simpler substances by any chemical or physical
reaction. Elements are found on the periodic table. Hydrogen and oxygen are examples of two
elements.
Endothermic A reaction or process that occurs with the absorption of heat.
Engineering Plastics High-strength polymers that can be used to replace metals or glass. Favorable properties can
include high thermal stability, good chemical and weather resistance, transparency, self-
lubrication, or good electrical properties.
Ester Not your aunt, but a simple oxygenated organic compound usually formed by the chemical
reaction between an acid and an alcohol.
Esterification A process in which an alcohol is reacted with an organic acid to produce.
Ethane Gaseous straight-chain hydrocarbon (or alkane) containing two carbon atoms.
Ethene See ethylene.
Ethyl A chemical grouping with two carbon atoms attached to an element or group.
Ethylene An olefin compound with two carbon atoms and one double bond. It is a basic “building block” for
other chemicals. Also called ethene.
Exothermic A reaction or process that gives off heat.
Extraction A process in which the component in a solution or some other mixture is separated using a liquid
(typically a solvent) with selective solvent characteristics.
Fatty Alcohols Primary alcohols with 6 to 40 carbon atoms. They are manufactured in a variety of ways including
synthetically and from natural oils.
Fine Chemical Low-volume, high-value, homogenous compounds sold on the basis of specific, high-purity
composition. Generally used to produce pharmaceuticals and to a lesser extent pesticides and
dyes.
Formulation The mixing of chemical products by blending, emulsification or other physical means to create
new chemical compounds with desired properties, or to perform a desired function
Gas Compounds in a vapor state.
Gas Oil A petroleum distillation faction containing hydrocarbons. It is used as feedstock for steam
cracking and as fuel.
Group Elements that make up a column in the periodic table.
Hydrocarbons Chemicals containing only carbon and hydrogen atoms.
Intermediate Obtained from bulk petrochemicals as the middle step in a series of chemical reactions,
intermediates can be transformed into different end products.
Ion An atom or group of chemically bound atoms that have either a positive or negative electrical
charge.
Specialty Chemicals
Isomerization The process of transforming a compound into one of its isomeric forms. Isomers of a compound
have the same molecular arrangement. Depending on the molecular arrangement, isomers may
possess more or less desirable properties.
Ketones Not a 1950s male vocal group but oxygenated organic compounds (e.g., acetone) derived from
secondary alcohols. These compounds contain carbonyl groups that are bonded to alkyl groups.
Methane A gaseous straight-chain hydrocarbon containing one carbon atom.
Methyl A chemical grouping with one carbon atom attached to an element or group.
Molecule Atoms of the same element or a combination of elements that are chemically bound together in a
fixed proportion.
Monomer A molecule or groups of molecules that may be reacted by itself or with other chemicals to form
various types and molecular chains known as polymers or co-polymers. Monomers tend to be
rather simple, low weight molecules.
Naphtha Derived from crude oil, naphtha is a “basic building block” in the petrochemical industry. In
addition to being the basis for gasoline, it is used as feedstock for steam cracking.
Nucleus The central of an atom that contains all its positive charge and most of its mass
Olefins Hydrocarbons containing one double bond in its structure. Double bonds are more reactive than
the single bonds found in most fractions of crude oil and natural gas. Ethylene is the simplest
olefin, with two carbon atoms. It is followed by propylene, with three carbon atoms and one
double bond and then butylenes with four carbon atoms and one double bond.
Organic Chemicals Chemical compounds that contain carbon. The petrochemical industry relies on organic
chemicals.
Oxidation A chemical reaction in which a substance combined with oxygen loses one or more electrons.
PH A measure of the acidity and alkalinity of a solution. A pH of 7 is said to be neutral. The pH
decreases as the solution become more acidic. Conversely, pH will increase as the solution
becomes more basic.
Petrochemical A substance derived from petroleum or natural gas.
Plasticizer Chemical compounds used to make polyvinyl chloride (PVC) and other polymers flexible.
Polymer Generally composed of smaller molecules or monomers that are linked in chains. They are
derived from simple monomers and feature a higher molecular weight.
Polymerization A process in which very large polymer molecules are formed from small molecules. A catalyst is
generally used.
Propane A gaseous hydrocarbon containing three carbon atoms and derived from natural gas and
petroleum.
Propene See propylene.
Propylene An olefin compound derived from cracking petroleum hydrocarbons, it has three carbon atoms
and is a basic “building block” for other chemicals.
Pyrolysis A process in which a more complex molecule (or a mixture of longer chain molecules) is broken
into smaller or less complex molecules through the use of heat.
Reduction A chemical reaction that involves the gain of electrons.
Salts Compounds formed by the reaction of acids and bases
Specialty Chemical Low-volume, high-value compounds sold on the basis of what they do, not what they are. That is,
their performance criteria. For this reason they are often referred to as performance chemicals.
These are generally blended with other compounds according to proprietary formulations.
Surfactants Also referred to as surface-active agents, these compounds reduce the surface tension of water
or the solvents that they are dissolved or the tension at the interface between liquids or a liquid
and a solid surface. Surfactants include detergents, emulsifiers, wetting agents, etc.
Specialty Chemicals
Synthesis Gas Mixtures of carbon monoxide and hydrogen used for manufacturing some petrochemicals. It is
generally produced by steam reforming of hydrocarbons such as methane.
Thermoplastics Long-chained polymers that soften without chemical change when heated. As a result, they can
be recycled. The long chained molecules slip if pushed or pulled. They are generally more flexible
than thermosets.
Thermosets A type of plastic; polymers that once formed by heat and pressure, cannot be resoftened or
reshaped. As a result, they aren’t generally recycled.
Toluene This liquid compound contains 7 carbon atoms, is an aromatic and is a “basic building block” for
industrial chemicals.
Valence Electrons Electrons that occupy the outermost shell of an atom. These often determine the chemical
behavior of an element.
Xylenes This liquid compound is an aromatic, contains 8 carbon atoms, and takes on the three following
forms: para-xylene, ortho-xylene, and meta-xylene.
Specialty Chemicals
ANALYST CERTIFICATIONS
I, Laurence Alexander, CFA, certify that all of the views expressed in this research report accurately reflect my personal views about
the subject security(ies) and subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or
indirectly, related to the specific recommendations or views expressed in this research report.
I, Robert Schenosky-Industrial Group Head, certify that all of the views expressed in this research report accurately reflect my
personal views about the subject security(ies) and subject company(ies). I also certify that no part of my compensation was, is, or
will be, directly or indirectly, related to the specific recommendations or views expressed in this research report.
Important Disclosures
As is the case with all Jefferies employees, the analyst(s) responsible for the coverage of the financial instruments
discussed in this report receive compensation based in part on the overall performance of the firm, including
investment banking income. Jefferies & Company, Inc. and Jefferies International Limited and their affiliates and their
respective directors, officers and employees may buy or sell securities mentioned herein as agent or principal for their
own account. Additional and supporting information is available upon request.
In February 2005, Jefferies acted as a co-manager in the initial public offering of equity for Huntsman Corporation.
Meanings of Jefferies & Company, Inc, Ratings

Buy - Describes stocks that we expect to provide a total return (price appreciation plus yield) of 10% or more within a
12-month period. A Buy-rated stock's total return is expected to exceed the average total return of the analyst's (or
industry team's) industry coverage universe, on a risk-adjusted basis.
Hold - Describes stocks that we expect to provide a total return (price appreciation plus yield) of plus or minus 10%
within a 12-month period. A Hold-rated stock's total return is expected to be in line with the average total return of the
analyst's (or industry team's) industry coverage universe, on a risk-adjusted basis.
Underperform - Describes stocks that we expect to provide a total negative return (price appreciation plus yield) of 10%
or more within a 12-month period. An Underperform-rated stock's total return is expected to be below the average total
return of the analyst's (or industry team's) industry coverage universe, on a risk-adjusted basis.
NR - The investment rating and price target have been temporarily suspended. Such suspensions are in compliance
with applicable regulations and/or Jefferies & Company, Inc. policies.
CS - Coverage Suspended. Jefferies & Company, Inc. has suspended coverage of this company.
NC - Not covered. Jefferies & Company, Inc. does not cover this company.
Speculative Buy - Describes stocks we view with a positive bias, whose company fundamentals and financials are
being monitored, but for which there is insufficient information for Jefferies & Company, Inc. to assign a Buy, Hold or
Underperform Rating. At the discretion of the analyst, a Speculative buy-rated stock could also include stocks with a
price under $5, or where the company is not investment grade to highlight the risk of the situation.
Speculative Underperform - Describes stocks we view with a negative bias, whose company fundamentals and
financials are being monitored, but for which there is insufficient information for Jefferies & Company, Inc. to assign a
Buy, Hold or Underperform Rating. At the discretion of the analyst, a Speculative underperform-rated stock could also
include stocks with a price under $5, or where the company is not investment grade to highlight the risk of the situation.
Restricted - Describes issuers where, in conjunction with Jefferies engagement in certain transactions, company policy
or applicable securities regulations prohibit certain types of communications, including investment recommendations.
Monitor - Describes stocks whose company fundamentals and financials are being monitored, and for which no
financial projections or opinions on the investment merits of the company are provided.
Valuation Methodology
Jefferies' methodology for assigning ratings may include the following: market capitalization, maturity, growth/value,
volatility and expected total return over the next 12 months. The price targets are based on several methodologies,
Specialty Chemicals
which may include, but are not restricted to, analyses of market risk, growth rate, revenue stream, discounted cash flow
(DCF), EBITDA, EPS, cash flow (CF), free cash flow (FCF), EV/EBITDA, P/E, PE/growth, P/CF, P/FCF, premium
(discount)/average group EV/EBITDA, premium (discount)/average group P/E, sum of the parts, net asset value,
dividend returns, and return on equity (ROE) over the next 12 months.
Risk which may impede the achievement of our Price Target

Risk which may impede the achievement of our Price Target This report was prepared for general circulation and does
not provide investment recommendations specific to individual investors. As such, the financial instruments discussed
in this report may not be suitable for all investors and investors must make their own investment decisions based upon
their specific investment objectives and financial situation utilizing their own financial advisors as they deem necessary.
Past performance of the financial instruments recommended in this report should not be taken as an indication or
guarantee of future results. The price, value of, and income from, any of the financial instruments mentioned in this
report can rise as well as fall and may be affected by changes in economic, financial and political factors. If a financial
instrument is denominated in a currency other than the investor's home currency, a change in exchange rates may
adversely affect the price of, value of, or income derived from the financial instrument described in this report. In
addition, investors in securities such as ADRs, whose values are affected by the currency of the underlying security,
effectively assume currency risk.
Rating and Price Target History for: Huntsman Corp. (HUN) as of 12-15-2005
03/22/05 05/05/05 08/04/05 09/28/05

H:$26.5 H:$25 H:$24 H:$19.5
32
28
24
20
16
12
Q1 Q2 Q3 Q1 Q2 Q3 Q1 Q2 Q3
2003 2004 2005
Created by BlueMatrix
Rating and Price Target History for: Cytec Industries Inc. (CYT) as of 12-15-2005
08/23/05
B:$55
56
48
40
32
24
16
Q1 Q2 Q3 Q1 Q2 Q3 Q1 Q2 Q3
2003 2004 2005
Specialty Chemicals
Rating and Price Target History for: Airgas, Inc. (ARG) as of 12-15-2005
08/09/05
B:$36
35
30
25
20
15
10
Q1 Q2 Q3 Q1 Q2 Q3 Q1 Q2 Q3
2003 2004 2005
Distribution of Ratings
IB Serv./Past 12 Mos.
Rating Count Percent Count Percent
BUY [BUY/SB] 381 51.98 71 18.64
HOLD [HOLD] 327 44.61 30 9.17
SELL [UNPF/SU] 25 3.41 1 4.00
OTHER DISCLOSURES
This material has been prepared by Jefferies & Company, Inc. a U.S.-registered broker-dealer, employing appropriate
expertise, and in the belief that it is fair and not misleading. The information upon which this material is based was
obtained from sources believed to be reliable, but has not been independently verified, therefore, we do not guarantee
its accuracy. Additional and supporting information is available upon request. This is not an offer or solicitation of an
offer to buy or sell any security or investment. Any opinion or estimates constitute our best judgment as of this date,
and are subject to change without notice. Jefferies & Company, Inc. and Jefferies International Limited and their
affiliates and their respective directors, officers and employees may buy or sell securities mentioned herein as agent or
principal for their own account.
Additional information for UK and Canadian investors

This material is approved for distribution in the United Kingdom by Jefferies International Limited regulated by the
Financial Services Authority ("FSA"). While we believe this information and materials upon which this information was
based are accurate, except for any obligations under the rules of the FSA, we do not guarantee its accuracy. This
material is intended for use only by professional or institutional investors falling within articles 19 or 49 of the Financial
Services and Markets Act 2000 (Financial Promotion) Order 2001 and not the general investing public. None of the
investments or investment services mentioned or described herein are available to other persons in the U.K. and in
particular are not available to "private customers" as defined by the rules of the FSA. For Canadian investors, this
material is intended for use only by professional or institutional investors. None of the investments or investment
services mentioned or described herein are available to other persons or to anyone in Canada who is not a
"Designated Institution" as defined by the Securities Act (Ontario).
© 2005 Jefferies & Company, Inc

Jefferies Chemicals Primer Basic Plastics

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Specialty Chemicals

December 16, 2005

Chemicals Primer: Basic Plastics Laurence Alexander

Please see important disclosure information on pages 39 - 41 of this report.

Plastics: What Are They?

Global capacity U.S. Global capacity U.S.

1. Resistance to corrosive chemicals.

Source: American Plastics Council

Table 2: U.S. and Global Polymer Demand Growth

Table 3: Plastic Demand Trends by End Market

Demand Growth 1995-2005 (% CAGR)

Demand Growth 2005-2007E

Table 5: As Exports Demand Shrinks, U.S. Production Lags Consumption Growth

U.S. Consumption Domestic Production Exports % of Exports % Exports %

Inventory Change (m lbs) Days Supply (RHS)

Table 6: Monomer and Polymer Supply Growth (% CAGR)

1996-2005E 2001-2005E 2005E-2009E

Chart 4: Global Ethylene Supply Additions vs. Consumption Growth

Capacity Growth (% YoY) Consumption Growth (% YoY)

Source: CMAI, Jefferies & Company, Inc. estimates

Table 7: US Capacity Additions as % of Total Additions

1996-2000 2000-2005E 2006-2009E

North America Utilization (%)

Source: CMAI, Jefferies & Company, Inc. estimates

Table 8: Petrochemical Capital Costs (including working capital)

Worldscale Plant Working Total Capital* Debottlenecking * Includes Working Capital

Grassroots Debottleneck Non-feedstock Operating Cost* 2006E average margin

Ethylene (via ethane) $ 0.07 $ 0.05 $0.29 $0.14

Supply/Demand Balances Set the Tone

North America West Europe Asia 2005E (N. Am.)

Operating Rate (%) Average Cash Margin (cents/lb)

Chart 6: Ethylene Prices Driven by Energy Costs (combined R2=88%)

Natural Gas ($/MMBTU)

Chart 7: Petrochemical Margins Independent of Energy Costs

Natural Gas ($/MMBTU)

In Tight Markets, Inventory Accumulation Can Precipitate Peak Margins

Chart 8: HDPE Price vs. Integrated Margin, 1979-2005 (cents/lb)

Source: ChemData, Jefferies & Company, Inc. estimates

Inventory Change (m lbs) HDPE ($/lb)

Source: Bloomberg, CMAI, Jefferies & Company, Inc. estimates

Short-Term Indicators: Chemical Railcar Loadings, Spot Prices

2003 2004 2005

Source: AAR, Jefferies & Company, Inc. estimates

Source: AAR, Jefferies & Company, Inc. estimates

Chart 13: Ethylene Spot vs. Contract Settlements ($/lb), 1991-2005

Source: ChemData, Jefferies & Company, Inc. estimates

Chart 14: Ethylene Spot Typically Lower Than Contract ($/lb)

Source: ChemData, Jefferies & Company, Inc. estimates

Implications for Share Prices

Multiple Expansion % YoY

125% Dow decouples ahead 20%

Source: Factset, Bloomberg

Source: ChemData, Jefferies & Company, Inc. estimates

Chart 18: Ethylene Price vs. Margin, 1979-2005 (cents/lb)

Source: ChemData, Jefferies & Company, Inc. estimates

Chart 19: Ethylene Prices vs. Cash Costs, 1979-2005 (cents/lb)

Source: ChemData, Jefferies & Company, Inc. estimates

Chart 20: Ethylene Margins vs. Prices, 1979-2005 (cents/lb)

Source: ChemData, Jefferies & Company, Inc. estimates

Source: ChemData, Jefferies & Company, Inc. estimates

Source: ChemData, Jefferies & Company, Inc. estimates

Chart 23: HDPE Price vs. Margin, 1979-2005 (cents/lb)

Source: ChemData, Jefferies & Company, Inc. estimates

Chart 24: HDPE Price vs. Integrated Margin, 1979-2005 (cents/lb)