360 Degree CEO Global and Economic
Perspective Of The Chemicals &
Materials Industry
© 2009 Frost & Sullivan. All rights reserved. This document contains highly confidential information and is the sole property of Frost & Sullivan.
No part of it may be circulated, quoted, copied or otherwise reproduced without the written approval of Frost & Sullivan 1

Chemicals Market - Key End User Industries
Automotive
&
Transportation
Energy
&
Aerospace Power
&
Defense Market Growth
Information
Chemicals Communication Customer Needs
Environment &
& Technology
Building
Controls Competitive Landscape
Industrial
Automation Healthcare
&
Electronics
Market interdependencies will determine the developments in the Global Chemicals Market
2

Effect of Downturn on the Global Chemicals & Materials Market
Decline in consumer demand resulted in Hungary and Czech republic were hit hard by the Russia is affected by the
Decline in consumer demand resulted in Hungary and Czech republic were hit hard by the Russia is affected by the
scaling-down of production and redundancies economic stagnation economic downturn but its
scaling-down of production and redundancies economic stagnation economic downturn but its
across all industries. Poland is still experiencing growth fuelled by the strong position in oil and gas
across all industries. Poland is still experiencing growth fuelled by the strong position in oil and gas
Construction. automotive and real estate increasing adoption of western-type lifestyle and reserves suggest a quick
Construction. automotive and real estate increasing adoption of western-type lifestyle and reserves suggest a quick
industries and the finance and banking consumption of relevant products comeback
industries and the finance and banking consumption of relevant products comeback
sectors have already been hit, affecting the Some badly hit: Uralkali reduced
sectors have already been hit, affecting the Some badly hit: Uralkali reduced
chemicals and materials markets its production by 6.4 per cent in
chemicals and materials markets its production by 6.4 per cent in
2008, with a massive short-term
2008, with a massive short-term
fall in December
fall in December
Housing market collapse affected a wide
Housing market collapse affected a wide
range of chemicals and materials markets
range of chemicals and materials markets
Significant job losses in the industry and plant Automotive giants are hit
Significant job losses in the industry and plant Automotive giants are hit
closures (Dow, BASF, Rohm & Haas and Drastic drop in exports of textiles, leather and hard by economic
closures (Dow, BASF, Rohm & Haas and Drastic drop in exports of textiles, leather and hard by economic
other) other finished goods due to major recession recession and resulting
other) other finished goods due to major recession recession and resulting
in western economies significantly impact the drop in global demand;
Decline in consumer demand affects end- in western economies significantly impact the drop in global demand;
Decline in consumer demand affects end- chemical markets. this directly affects all
market pricing, which in turn led to volume chemical markets. this directly affects all
market pricing, which in turn led to volume dependent chemicals and
reduction dependent chemicals and
reduction materials markets
materials markets
Chemicals &
Materials 3

Global response: Massive Government Stimulus
USA UK: £250bn bailout Russia
• $700bn bailout rapid Germany: $700bn relief package • Support for Russian
interest rate cuts Belgium and Switzerland: Capital infusion ruble
• $23bn support for top ECB: Interest rate cuts • $20bn stimulus package
three auto companies; France: $50bn stimulus package
• plan to create 2.5
million jobs by 2011
Japan:
China • Interest rate cuts
• Interest rate cuts • 447bn yen stimulus
• $586bn stimulus (infrastructure, rural) package
India
• Interest rate cuts South Korea:
• $4bn stimulus package (infrastructure, • Interest rate cuts and
exports, textiles) efforts to keep
Brazil
• Support to Brazilian real currency stable
• Infrastructure development under PDP • $11bn stimulus
(more than $64bn into country’s financial package
system)
Global Response
• Governments infusing capital into financial institutions
• Globally coordinated interest rate cuts
• IMF (International Monetary Fund) offers bridge loan to meet foreign exchange requirements
• Discussions, coordinated efforts (G20 summit)
Chemicals &
Materials 4

Mega Drivers for Rebound
Positive economic news around the world; unprecedented focus worldwide on addressing the
economic situation
Fastest government response in history, primarily driven by massive government fiscal stimulus
package
New U.S. Government/Obama’s economic growth plan focuses on creating employment
through investments in infrastructure, renewable energy, broadband, and medical technology;
infrastructure alone will create 2 million jobs
Decline in commodity and oil prices leading to a tax break stimulus in U.S.
Easing of inflationary and liquidity pressures
Strong demand from emerging nations will be a factor in reviving the global economy
Smart money is coming back to the market, with stock exchanges at historic low PE ratios
“Fear fatigue” and rebound in confidence
<N5AA-F1> 5

Growth Imperative in a Weak Economy
Growth investment optimization is paramount during tough economic times
Need to invest wisely is more critical now than ever before
100% focus on cut backs and retrenchments increases risk of failure
Relative growth is as important as absolute growth
Need for more metrics, with greater frequency and accuracy
Risk of inaction greater than risk of action
Revitalizing your growth initiatives at this time
makes sense
strategically – be well positioned for growth
when the economy turns around
competitively – be opportunistic while your
competition is busy retrenching
<N5AA-F1> 6

Opportunity Universe Determination
The Product- Market Matrix (PMM)
New
Adjacent “Blue Sky”
Focus on Product Development Focus on Innovation and R&D
and Line Extension
Products
Core
Adjacent
Focus on Competitive Strategies
Focus on New Applications,
to Increase Share
Current
Verticals and Regions
Current Markets New
<N5AA-F1> 7

Identifying Growth Opportunities
Even during times of decline, certain areas offer avenues
for growth
Medical devices are expected to be a stable growth market for Winners
plastics, despite a general economic slowdown
Strong trend towards greener building materials, despite the •Water treatment and utilities
slowdown in construction •Personal care
Growth in composites for aerospace; even if the aircraft •Safety and security
construction industry sees a major downturn in the short term, •Healthcare
the usage of composites is set to boom due to the very high •Food industry
penetration that has now been achieved by composites in this
area
In other areas such as automotive, plastics have strong
underlying reasons for long- term growth. However, in the short Losers
term, plastics usage will be adversely affected by the
slowdown. •Building & Construction
All the above markets are characterised by their own unique •Steel Industry
drivers, which hold true even in adverse economic climates. •Automotive
Identifying and targeting these opportunities are key to •Electrical & Electronics
emerging successful from the downturn.
<N5AA-F1> 8

Growth Opportunity Universe
Case Study: Advanced/Specialty Metals
Motor Vehicles &
Motor Vehicles & Medical
Medical Energy/Power
Energy/Power
Engines
Engines
• Connecting Rods • Dental Implants • Steam Turbines
• Valve Springs • Crutches • Power Plan Heat Exchangers
• Intake valves • Wheelchair Frames • Superconducting Power
• Turbocharge impellers • Optical Devices • Down Hole Oil/Gas Drilling
• Turbo Exhaust Systems • Orthopedic Prosthetics Loggers
• Gas turbine cooler compressor
Sporting & Recreational
Sporting & Recreational Chemical Process
Chemical Process Consumer Goods
Consumer Goods
Goods
Goods Industries
Industries
• Tennis Racquet Frames • Reactor Vessels • Wristwatches
• Bicycle Frames • Process Vessels • Jewellery
• Fishing Goods • Piping • Body Piercings
• Firearms • Heat Exchangers • Mobile Cases
• Tanks • Earrings
• Golf Club Heads
<N5AA-F1> 9

Opportunities in the Chemicals Industry
Fiscal
Challenges
Is the right time for growth Credit Crunch
opportunities within the chemicals
Contraction
sector?
Amidst fiscal challenges, credit crunch and contraction of consumer markets, growth
opportunities exist for the chemicals industry and are based on global trends
Green Chemicals Logistics and Supply Chain Acquisitions
Renewable Sourcing & Feedstock Food & Beverage Geographic Regions – Russia, CEE
Growth in Profits
<N5AA-F1> 10

Supply chain management
Vertical integration is a key theme
• This includes both backwards integration and How can we manage
gaining greater downstream visibility our sourcing?
• Examples of downstream visibility include:
• additive suppliers taking a direct interest in the
end-markets which use the formulated coatings
or compounded plastics that contain their
additives
• BASF promoting the importance of its products
through TV and newspaper adverts
Strategic sourcing is another key aspect of supply chain
management.
• Frost & Sullivan has identified this as a key
emerging theme across many industries
How can we manage
• Companies are taking a more strategic view of the way in which our
products are used
sourcing, for example by analysing other end- downstream?
markets that use the same raw materials to gauge
future availability
<N5AA-F1> 11

Examples of Strategic Sourcing in the Chemical Industry
DSM
DSM Bayer
Bayer
Global sourcing department positioned to Global sourcing changes them from aagood
Global sourcing changes them from good
Global sourcing department positioned to
fully leverage spend, resources, customer to aatop account for suppliers,
customer to top account for suppliers,
fully leverage spend, resources,
capabilities and best practices leading to better service (deliveries are on
leading to better service (deliveries are on
capabilities and best practices
time, problems resolved quickly) which in
time, problems resolved quickly) which in
Regional representation in Europe,
Regional representation in Europe, turn leads to better service for Bayer’s
turn leads to better service for Bayer’s
America and Asia-Pacific, allowing DSM to
America and Asia-Pacific, allowing DSM to customers
customers
utilize local knowledge to source effectively
utilize local knowledge to source effectively
Global procurement network allows Bayer
Global procurement network allows Bayer
DSM’s strategy is to ensure creation of
DSM’s strategy is to ensure creation of to leverage spend and ideas, and to
to leverage spend and ideas, and to
maximum value as an integral part of the
maximum value as an integral part of the identify new suppliers
identify new suppliers
business strategy
business strategy
Co-ordination of procurement efforts is
Co-ordination of procurement efforts is
vital to leverage larger volumes and
vital to leverage larger volumes and
improve logistics
improve logistics
Companies have pursued integration with strategic sourcing partners through
mergers, acquisitions and joint ventures
12

Mergers and Acquisitions –The definite trend in the chemicals
industry
At the current challenging economic and financial environment low share prices of chemical
companies can instigate hostile takeovers by competitors with available cash
Private Equity firms are also involved in fund raising and strategic acquisition of chemical
companies on a global basis
Less risky approach to mergers and acquisitions is the bolt-on acquisitions that assist
chemical companies to build product portfolios and expand their geographic reach
Improvement of Market Position
Chemical Company
Merger Bolt-on Acquisition
Large Scale Acquisition
13

M&A Deals by Segment
In d u s tria l / S p e cia lty G a se s G as C o n stru ctio n M a te ria ls CM
E la sto m e rs E la s F o o d s & B e ve ra g e s F&B
O ilfie ld & M in in g C h e m ic a ls O&MC P a in t a n d C o a tin g A d d itive s P&CA
T e xtile A d d itive s TA E n g in e e rin g P o lym e rs EP
C ro p P ro te ctio n C h e m ica ls CPC P e rs o n a l C a re C h e m ica ls a n d H ou s e h o ld C h e m ic a ls PCC&HC
W a te r tre a tm e n t C h e m ic a ls W TC A d h e sive s & S e a la n ts A&S
P u lp & P a p e r P&P A g ricu ltu ra l C h e m ic a ls & F e rtilizers AC&F
P la stic A d d itive s PA A P Is & In te rm e d ia te s API
P a ck a g in g P a ck P a in ts & C o a tin g s P&C
In k s & C o lo rs (E xce p tin g F o o d ) I& C C o m m o d ity P o lym e rs CP
P ro te ctio n E q u ip m e n t M a te ria ls PFE
P h a rm a ce u tic a l E xcip ie n ts PE
F u e l A d d itive s FA
H ig h P e rfo rm a n ce P o lym e rs HPP
300 2 8 3 28 8
C o n stru ctio n C h e m ica ls CC
E le c tro n ic C h e m ica ls EC
253
B io fu e ls B io 2 40
250
C a ta lyst C at
218
R u b b e r C h e m ica ls RC 208
E le c trica l & E le ctro n ic M a te ria ls E&E 1 92 1 9 7
200 L u b rica n ts & G re a s e s L&G 172 173 176
151 156
Deals (x)
142
150
126
109 114
100 79 83
71 71 77
61 64 65 67
60
51
50 34
27
8
0
I&C
PCC&HC
O&MC
API
TA
WTC
CC
EC
RC
CPC
AC&F
Bio
L&G
P&CA
CM
HPP
E&E
P&P
Elas
Pack
PFE
PE
FA
PA
F&B
EP
A&S
Cat
Gas
P&C
CP
S e g m e n ts
<N5AA-F1> 14

Deals by Time period- Yearly Classification
600 35.2 40.0
564
550 30.0
500 489 20.0
469 468
Growth (%)
8.1
Deals (x)
450 10.0
399 4.3
400 0.0
(4.3)
349 (8.0) 347 346
350 (10.0)
321
(12.5)
300 (20.0)
(26.1) 260
250 (29.3) (30.0)
2000 2001 2002 2003 2004 2005 2006 2007 2008 May 2009
Quarters
Deals by Year Year over Year Growth
<N5AA-F1> 15

Sustainable production
This will remain a major theme for Materials companies
• Most now provide detailed CSR reports, within which Sustainability is becoming
increasingly important
• Two key, and very different, aspects of sustainability: Thermoplastics
Biopolymers
Renewable raw materials Coating/adhesive resins
Natural fibres
Sustainable Production
Energy efficiency
Sustainable processes Cleaner & less hazardous processes
Waste reduction / re-use of by-products
Renewable raw materials... Sustainable processes...
• Whereas thermoplastics with a renewable component are heavily • Some companies consider another
marketed as such, renewable coating resins are seen as a very aspect of sustainable production to be
traditional option (such as linseed oil) and are therefore not marketed in the theme of worker safety
the same way. Should they be? • Safety as a global trend is considered
• Further consideration should also be given to differentiate between as a distinct theme in this analysis
renewable plastics that (a) offer new and unique chemistry e.g. lactic
acid or PDO, and (b) replicate oil-based products e.g. "bio" PE and PP
<N5AA-F1> 16

Green Chemicals - Biobased Sourcing is Alternative to Naphtha
Stream
Starch based polymers
Polyhydroxyalkanoates
CO2 1,3 Propanediol
Wheat Ethanol ethylene Vinyl chloride 1,2 Propanediol
maize C5 and
Starch
potato C6
Lactic Acid Acrylic acid
Sugars
Chiral compounds
3 HP Acrylic acid
Sugar Poly lactic acid
beet, PBS
sugarcane Succinic THF
acid
1,4 Butanediol
Polyether polyols
Sorbitol
Glycols
C5 Isoprene Polyisopropene Isosorbide polymer
and
Cellulose/ C6 Ethanol Ascorbic acid
LignoCellulose Sugars
Levullinic acid MeMbl Cellulose ethers,
Cellulose esters
and Viscose Fibres
Acrolein
Rapseed, Bio Diesel Current bulk productions
Soyseed Vegetable Oil
Allyl alcohol
Glycerol
Production on pilot scale
1,3 Propanediol
Natural oil
Polyols Research Scale
(NOP) Epoxy resins
Epichlorohydrin
1,2 propanediol
Polyurethanes Source: Frost & Sullivan
<N5AA-F1> 17

Focus on Emerging Markets
Central and Eastern Europe China
Growing acceptance of “Western” type lifestyle Manufacturing hub
Increasing private healthcare expenditure Increasing competency in R&D and high-
Russia, Poland, Czech Republic and Hungary present healthy value added products
R&D opportunities Problems with quality control and corrupt
officials
Improved IP laws – attractive climate for
chemicals companies
Western Europe
Mature market and
USA increasing consolidation in
Increasing consolidation in the chemicals industry
the chemicals industry REACh legislative Japan
More active involvement of framework divides the
industry Innovative capability
the federal agencies in the and well developed
regulation of chemicals industry
Middle East More active
Geopolitical challenges involvement in the
Western financial
Vast supply of feedstock
institutions
Growing participation in
Brazil the Western financial
institutions and companies India
Latin American hub for bioethanol and
exports to neighboring nations Highly skilled labor and low costs –
attractive market for partnerships
Increasing focus in oil and gas exploration
– restructure in the state petrochemicals Agrochemicals companies with global
company presence
Africa Growing affluent middle-class with
Recognized potential for industrial growth
Growing construction spending power
Expansion of multinational companies
industry Weak IP protection – a concern
Agrochemicals
companies with global
presence
<N5AA-F1> 18

Best Practices in the Uncertain Times
Merquinsa
Situation
Merquinsa is a producer of thermoplastic polyurethanes and operates in a heavily
competitive market dominated by BASF and Bayer.
Action
To differentiate itself in such a concentrated market, Merquinsa has focused on R&D and
has developed the first-ever TPU from renewable resources to compete against
conventional TPUs based on petroleum feedstock.
Result
This will help the company carve out its own niche in the market, and will also position
itself firmly for future growth, as environmentally friendly products are the need of the
hour in the materials industry.
This will also enable to company to faster than the industry average growth rates.
<N5AA-F1> 19

Best Practices in the Uncertain Times
LyondellBasell
Situation
LyondellBasell is an example of a company facing the brunt of the current economic downturn, facing
slackening demand for its polymers in many of its key end user segments
Action
The company is now restructuring its businesses, and filed for voluntary bankruptcy protection in the
US in January, 2009
Nevertheless, LyondellBasell is also making changes to its operations in key end user segments. For
example, it is now expanding its footprint worldwide in in the medical devices area, setting up a global
team catering to this segment. This will enable it to supply its customers with local production units
and also spread its regulatory know-how and resources across a wider geographic area.
Through this globalisation, LyondellBasell is also generating synergies from the merger of Lyondell
and Basell, merging the upstream capabilities of the latter with the immense industry experience of
the latter.
Result
Through the effective integration of Lyondell and Basell, and the globalisation of its healthcare
operations, LyondellBasell has created a strong value proposition for itself in the healthcare arena.
Through these measures the company has ensured that it will emerge stronger out of the recession,
when demand for its products picks up again.
<N5AA-F1> 20

What Will Catalyze the Turnaround?
Food & Beverage Ingredients
• Growing interest and push towards Health & Wellness by consumers. Increased
usage is indicative of many consumers becoming more health and wellness conscious:
nearly 40% of US consumers feel consumption of functional foods and beverages is very
important to maintaining a healthy lifestyle.
• New product introductions. The number of new organic beverages free from chemical
additives, preservatives and pesticides nearly tripled in the last couple of years. To meet this
growing need, functional beverage manufacturers are adding new products on a regular
basis. This is likely to continue in 2009.
• Greater awareness of functional benefits of food ingredients on cognitive/brain, bone,
cardiac, digestive health, and weight management.
• Promotion of nutrients that are difficult to incorporate into a diet. Omega 3 fatty acids
have received a great deal of attention due to their importance in brain development and
heart health. More dietary supplements will be formulated with ingredients such as
glucosamine and chondroitin for healthy joints targeted towards the aging population.
<N5AA-F1> 21

What Will Catalyze the Turnaround?
Food & Beverage Ingredients
• Demand for alternative delivery formats of dietary supplements like fruit juices, yogurts,
cereal bars and chewing gum among young and mid-age adults will further boost health &
wellness sector growth.
• Functional foods sales are forecast to increase by more than 40% from 2007-2012 driven
by an increase in product availability and consumer usage. Cardiovascular health is the most
popular functional food claim, yet products for the brain/nervous system and for the immune
system are also emerging.
• Functional beverage sales are forecast to rise approximately 30-35% during 2007-2012 as
consumers seek additional nutrition sources to compensate for the lack of foods that address
health-specific problems.
<N5AA-F1> 22

PESTLE factors impact the Chemicals market environment
regionally and globally
2007 2010 2020
Political
Enlargement of EU stimulates Governmental and State interference improves the product quality in emerging markets
pan-European trade Political coalitions among states and new political demands for
trade liberalization could affect the chemicals supply chain
Economical
R&D investments in developing countries change the hot spots of chemicals innovation globally
Slow-down and feared recession in US financial markets Reduction in subsidies for biofuels affects
create a short-term domino effect to global markets the prices across the supply chain
Social
An increasingly aging European Changes in population regional synthesis impact on chemicals sales strategies
population creates opportunities and
challenges for the chemicals industry Emerge of the customer-supporter of chemicals companies based on their
environmental performance and “green” product offering
Technological
Investment in research and development of Emerging markets increasingly become “green”-focused
innovative recycling techniques
Increasing replacement of traditional synthetic chemistry building blocks
and products with organic and renewable alternatives
Legal
The REACH legislative framework increase its impact in the regulation of markets on a global basis
Growing effort on global harmonisation
Improvement on global protection of IP with the support of developing countries
of legislation and standards
Environmental
EU targets on car emissions create opportunities for catalysts and novel lubricants
Global carbon trading increasingly affect
Standardisation of 2nd generation biofuels the business planning and operations of
assists their market uptake chemicals companies globally
23

Chemical Trends Impact
Major 2010 2015 2020
Trend
Power Customers increasingly gain Support of companies which use
1 Customer-centric product development
Customer access to chemicals information sustainable resources, recycle
2 Biorenewables Crops companies get involved more in the chemicals industry Self-sustained industry
Reduction in subsidies
Logistics Increases in oil and raw materials Chemical companies leverage Glocalisation – Global companies
3 Excellence prices drive massive logistics costs and share distribution expertise resource locally
R&D of new and better recycling techniques
4 Recycling Quality problems arise
Recycling an economic, not moral, decision
Super-Chem Rise of Mega chemical companies 10 Super-giant chemical
5 Increased consolidation
companies globally
Companies in China, ME & Russia
6 Environmental Voluntary publishing of carbon footprints Sustainability audit of companies
REACh
Legislation for products and companies and trail accounting of products
7 F/B Chemical companies pursue One-stop shop for entire
Agro companies become forward integrated
Integration backwards integration supply chain
8 White Increasing investment and R&D
First commercial plants successful Replacement of traditional synthetic
Biotechnology into white biotechnology chemistry with organic alternatives
9 Internet Increased use of auction sites Companies in developing countries use it
Auctions for commodity chemicals as an easy market entry point Chemicals “e-bay”
10 By-products Research into potential uses Increased utilisation of by-products
Elimination of waste by 70%
Management for waste and by-products as feedstock
24