Chemicals For Beginners Deutsche Bank May 13, 2011

Europe
Company
Chemicals Bulk
Industry Update
13 May 2011
For beginners (and experts)
Chemicals for
You have just been allocated the chemical
sector and perhaps now regret sitting at
Global Markets Research
the back of the classroom messing

around with a bunsen burner. Fear not,
Beginners
while the chemical industry is a minefield
of products and processes with all sorts
of wonderful and sometimes complex
names and applications, we’ve put
together this easy to read yet informative
overview of the major product areas, their
applications, size and prospects.
The Vth edition
Tim Jones Martin Dunwoodie, CFA Virginie Boucher-Ferte Oliver Reiff

Research Analyst Research Analyst Research Analyst Research Analyst
(+44) 20 754-76763 (+44) 20 754-72852 (+44) 20 754-57940 (+44) 20 754-76663
tim.jones@db.com martin.dunwoodie@db.com virginie.boucher-ferte@db.com oliver.reiff@db.com
Deutsche Bank AG/London

All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from local
exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies. Deutsche
Bank does and seeks to do business with companies covered in its research reports. Thus, 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. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1.
MICA(P) 146/04/2011.
Europe
Chemicals Bulk
13 May 2011
Industry Update
Chemicals for Beginners
The Vth edition
Tim Jones Martin Dunwoodie, CFA Virginie Boucher-Ferte Oliver Reiff
Research Analyst Research Analyst Research Analyst Research Analyst
(+44) 20 754-76763 (+44) 20 754-72852 (+44) 20 754-57940 (+44) 20 754-76663
tim.jones@db.com martin.dunwoodie@db.com virginie.boucher-ferte@db.com oliver.reiff@db.com
For beginners (and experts)

You have just been allocated the chemical sector and perhaps now regret sitting at
the back of the classroom messing around with a bunsen burner. Fear not, while
the chemical industry is a minefield of products and processes with all sorts of
wonderful and sometimes complex names and applications, we’ve put together
this easy to read yet informative overview of the major product areas, their
applications, size and prospects.
A simple guide
In 1999 we first published “Chemicals for Beginners” hoping it would prove useful
for both those new to the sector and old hands alike. This was such a success we
are now on our fifth edition in which we have updated and significantly expanded
our original text. As with the four previous editions of this book, ‘Chemicals for
Beginners’ is not intended to be read from cover to cover, instead it is meant to be
kept on the shelf as a simple reference guide to the numerous segments of the
chemical sector.
A chemical industry overview and guide to the main chemical products
Within this document we provide a broad overview of the global chemical
industry; including details of industry structure in terms of end markets and
geographic exposure, together with main products and processes. For the most
important chemical products or product groups we provide a description of its
properties (there is a bit of science here) together with a chart outlining uses,
production capacities and demand trends. A simplified diagram that shows the
basic production pathway and raw materials is also included for most products.
We have also covered many of the more “specialty” areas of chemicals alongside
the more traditional petrochemicals and plastics products. There is also a detailed
glossary included in the appendix that provides an explanation of much of the
‘technical jargon’ used.
Not just for “beginners”
Although intended for “beginners” to the chemicals sector there is also plenty of
information that many more learned or experienced readers should find useful.
Each product section has a detailed analysis of its growth and margin prospects
alongside issues to be aware of, such as technology changes or overcapacity risks
in the medium-term. The focus of this note is long-term and it is designed to
provide support to investors within the sector for at least several years to come.
.

All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from local
exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies. Deutsche
Bank does and seeks to do business with companies covered in its research reports. Thus, 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. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1.
MICA(P) 146/04/2011.
13 May 2011 Bulk Chemicals for Beginners
Table of Contents
The Global Chemical Industry .......................................................... 5

End use breakdown .................................................................................................................. 5
Regional breakdown ................................................................................................................. 6
Growth and cyclicality ............................................................................................................... 8
Cost structures ......................................................................................................................... 9
Organic chemicals ........................................................................... 10

The petrochemical industry............................................................ 11
The olefin plant (cracker) ......................................................................................................... 11
Petrochemicals ................................................................................ 15
Ethylene .................................................................................................................................. 15
Propylene ................................................................................................................................ 19
Butadiene................................................................................................................................ 23
Benzene .................................................................................................................................. 27
Ethylene Oxide........................................................................................................................ 30
Ethylene Glycol ....................................................................................................................... 32
Methanol................................................................................................................................. 34
Phenol ..................................................................................................................................... 36
Styrene.................................................................................................................................... 38
Paraxylene (PX) ....................................................................................................................... 41
Purified Terephthalic Acid (PTA).............................................................................................. 42
Acrylic Acid ............................................................................................................................. 45
Acetic Acid.............................................................................................................................. 48
Acrylonitrile ............................................................................................................................. 50
Caprolactam............................................................................................................................ 53
Melamine ................................................................................................................................ 57
Plastics (or Polymers)...................................................................... 60

Polymerisation – The Manufacture of Plastics (polymers) ...................................................... 60
Polyethylene (PE) .................................................................................................................... 63
High and linear low density polyethylene (HDPE and LLDPE) ................................................ 64
Low density polyethylene (LDPE) ........................................................................................... 68
Polypropylene ......................................................................................................................... 71
PVC (polyvinyl chloride)........................................................................................................... 74
Polystyrene (PS) ...................................................................................................................... 78
High performance plastics and engineering resins ...................... 81

Polyurethanes (PU).................................................................................................................. 84
MDI (methyl di-isocyanate) ..................................................................................................... 85
TDI (toluene di-isocyanate)...................................................................................................... 88
MMA (methyl methacrylate) ................................................................................................... 90
PET Resin (polyethylene terephthelate) .................................................................................. 92
Nylon/Polyamide ..................................................................................................................... 95
Polycarbonate (PC)................................................................................................................ 100
Other engineering plastics .................................................................................................... 102
Solvents.......................................................................................... 104
Surfactants ..................................................................................... 106
Page 2 Deutsche Bank AG/London

Table of Contents (cont'd)
Fine chemicals ............................................................................... 108

Life-science molecules (chemical based and biotech) .......................................................... 109
Chemical based life-science molecules (small molecule)...................................................... 111
Biotech molecules (large molecule) ...................................................................................... 113
Flavours and Fragrances ....................................................................................................... 116
Colourants: Dyes, Pigments and Masterbatches.................................................................. 126
Other selected specialty chemicals ............................................. 131

Plastic Additives.................................................................................................................... 131
Vitamins and carotenoids...................................................................................................... 134
Penicillin and Cephalosporins................................................................................................ 140
Household & Personal care................................................................................................... 142
Water Treatment................................................................................................................... 146
Paper Chemicals ................................................................................................................... 147
Leather Chemicals ................................................................................................................ 149
Thiochemicals ....................................................................................................................... 150
Textile Chemicals .................................................................................................................. 152
Construction Chemicals ........................................................................................................ 154
Resins, paints and adhesives........................................................ 155

Synthetic resins..................................................................................................................... 155
Paints (coatings).................................................................................................................... 158
Adhesives ............................................................................................................................. 163
Inorganic chemicals....................................................................... 166

The chlor-alkali industry – chlorine and caustic soda............................................................. 166
Soda ash ............................................................................................................................... 172
TiO2 (Titanium dioxide) .......................................................................................................... 175
Hydrogen peroxide ............................................................................................................... 179
Agribusiness................................................................................... 181
Agrochemicals ...................................................................................................................... 181
Herbicides............................................................................................................................. 191
Insecticides ........................................................................................................................... 194
Fungicides............................................................................................................................. 196
Seed Treatment .................................................................................................................... 198
Conventional seeds............................................................................................................... 200
Agricultural Biotechnology / Genetic Modification (GM) ....................................................... 202
Fertilizers........................................................................................ 207
Nitrogen ................................................................................................................................ 210
Potash ................................................................................................................................... 219
Phosphate ............................................................................................................................. 224
Industrial Gases ............................................................................. 230

Industry background ............................................................................................................. 230
Distribution methods ............................................................................................................ 232
Improved industry-wide capital efficiency............................................................................. 233
Price discipline is expected to continue in the industry ........................................................ 235
Air separation process for production of industrial gases..................................................... 236
An increasing focus on the on-site business......................................................................... 237
Energy prices ........................................................................................................................ 238
Increasing exposure to high growth and less GDP sensitive users ...................................... 239
Opportunities in Mega Energy support long-term growth .................................................... 241
Deutsche Bank AG/London Page 3

Table of Contents (cont'd)
Natural rubber ............................................................................... 243

Synthetic rubber............................................................................ 244
Styrene-butadiene rubbers (E-SBR & S-SBR) ........................................................................ 245
Polybutadiene rubber (PBR) and Nd-PBR.............................................................................. 246
Butyl rubber .......................................................................................................................... 248
Other rubber products .......................................................................................................... 249
Autocatalysts ................................................................................. 250

Diesel engine emissions reduction ....................................................................................... 251
Structure of industry ............................................................................................................. 253
Autocatalyst growth driven by auto growth and legislation .................................................. 255
Heavy duty diesel (HDD)....................................................................................................... 256
Non-road diesel (NRD) .......................................................................................................... 258
Appendix: Glossary of Terms ....................................................... 260

The Global Chemical Industry

End use breakdown
Despite a generally cautious consumer attitude towards the chemical industry, its products
are pervasive and critical to a number of applications. As global producer BASF used to
advertise, “We don't make a lot of the products you buy. We make a lot of the products you
buy better”.
The chemical market sells into a broad range of end uses. While some of these products are
used in markets that are mature (textiles) and GDP dependant (construction, autos) there are
also a number which go into markets with fast growth (electronics) or with a more stable
demand outlook (food and beverage, industrial gas).
Figure 1: End product breakdown for the European chemical industry 2011E
Basic Inorganics
12%
Specialties
26%
Consumer
Chemicals
14%
Polymers Petrochemicals
23% 25%
Source: CEFIC and Deutsche Bank estimates
Figure 2: End market breakdown by sector for the EU chemical industry 2009
Others
16%
Consum er
Elec. Goods 31%
4%
Paper
5%
M etals & M achinery

5%
Construction
5%
Autom otive
Services
5%
17%
Textile & clothing Agriculture
6% 6%

Regional breakdown
Figure 3: Regional breakdown of chemical output, 2010
RoW
Latam 3%
7%
Asia
33%
North America
26%
Europe
31%
Source: CEFIC, Deutsche Bank estimates
From a regional perspective Asia is now the leading producer of chemicals with
approximately 33% market share. Europe currently has 31% market share and a turnover of
approximately Euro 600bn per year (2.4% of European GDP). The largest production regions
are Germany, France, Italy and the UK. From a size perspective the EU is followed by North
America which accounts for 28% of global sales. However, the position of the EU and North
American manufacturing bases, while strong, has been eroding over time. In the past 10
years Asia, and China in particular, have taken an increasing share of global chemical
production (higher domestic rate of growth, greater focus on manufacturing rather than
service etc). This has also been seen in the Middle East where the abundance of
petrochemical raw materials has provided cost advantages.
Figure 4: Contribution of the chemical industry to the Figure 5: Geographical breakdown of EU chemical
EU economy 2011E industry sales 2011E
Others
12% Germany
IE
Rest of 25%
5%
Industry
17%
Belgium
7%
Chemicals
1% ES
Agriculture Services & 8%
2% Admin France
73% Netherlands 15%
Construction
8%
7%
UK Italy
10% 10%
Source: CEFIC and Deutsche Bank estimates Source: CEFIC and Deutsche Bank estimates
Over the past decade, Asia has gone from being a net importer of many chemical products,
to being a net exporter of many products and has significantly expanded into other products
particularly specialty chemicals. Countries such as Korea now regularly sell product into the
Americas. The exception is China, for now, which is a key importer (both for the region and
the world). The major global chemical companies wish to be manufacturers within Asia rather
than exporters into it. Consequently, significant percentages of their total capital expenditure,
continues to be deployed in the region.

Figure 6: Top 100 Chemical companies (by sales) 2009

Ranking Name Sales ($m) Note Ranking Name Sales ($m) Note
1 BASF 72,660 a 51 Orica 6,469 o
2 Dow Chemical 44,875 b 52 Clariant 6,373
3 ExxonMobil 40,979 c 53 Arkema 6,370
4 Sinopec 31,371 c 54 Polimeri (ENI) 6,024 j
5 LyondellBasell 30,828 55 Rhodia 5,778
6 Shell 27,559 c 56 Sibur 5,334 j
7 SABIC 27,481 57 WACKER Chemie 5,331
8 Mitsubishi 27,138 d 58 Ashland 5,220 q/o
9 DuPont 26,109 59 Honam Petchems 5,130 v
10 INEOS 25,911 60 K+S 5,122
11 Bayer 21,758 e 61 Dow Corning 5,093
12 Total 21,107 c 62 Celanese 5,082
13 AkzoNobel 19,913 63 Eastman Chemical 5,047
14 Sumitomo 17,490 d 64 Formosa Plastics 4,901 n
15 Air Liquide 17,166 65 Taiyo Nippon 4,676 d
16 Linde 16,115 f 66 Lubrizol 4,586
17 Toray 14,670 d 67 Israel Chemicals 4,554
18 Evonik Industries 14,431 c 68 PKN Orlen 4,535 j
19 Mitsui Chemicals 13,031 d 69 Kaneka 4,451 d
20 Reliance 12,277 d/j 70 Mitsubishi 4,149 d
21 Johnson Matthey 11,815 d 71 Honeywell 4,144 r
22 LG Chem 11,769 72 ALPEK 4,134
23 DSM 11,275 g 73 NOVA Chemicals 4,050 x
24 Merck KGaA 11,104 74 Hexion 4,030
25 Syngenta 10,992 75 PotashCorp 3,977
26 SK Energy 10,834 j 76 Petronas 3,958 j/d
27 Asahi Kasei 10,646 d/m 77 Mitsubishi Rayon 3,939 d/y/w
28 Yara International 10,577 78 Airgas 3,864 d
29 PPG Industries 10,397 k 79 PEMEX 3,838 j
30 Shin-Etsu 9,893 d 80 Givaudan 3,815
31 Sekisui Chemical 9,263 d 81 Nalco 3,747
32 Agrium 9,129 82 Cognis 3,704
33 Praxair 8,956 83 Showa Denko 3,593 s
34 Henkel 8,921 u 84 Kuraray 3,592 d
35 Braskem 8,792 I 85 Kemira 3,583
36 Chevron Phillips 8,406 86 Denka 3,495 d
37 Teijin 8,263 d 87 Daicel Chemicals 3,455 d
38 Air Products 8,256 o 88 RPM 3,413 l
39 DIC 8,177 d 89 JSR 3,347 d
40 Solvay 8,163 e 90 Occidental 3,225 c
41 Sasol 8,045 h/p 91 Cementhai 3,041
42 Huntsman 7,763 92 Tessenderlo 3,001
43 LANXESS 7,248 93 Rockwood 2,963
44 NPC (Iran) 7,192 d/z 94 Flint Group 2,900
45 Sherwin-Williams 7,094 95 Valspar 2,879 t
46 Formosa 6,860 n 96 FMC 2,827
47 BP 6,800 i 97 W.R. Grace 2,825
48 Tosoh 6,784 d 98 Cytec Industries 2,790
49 Mosaic 6,759 l 99 Quattor 2,723 I
50 Borealis 6,757 100 CEPSA 2,706 j
Source: ICIS, Notes: (a) From April 9, 2009, Ciba is included in BASF. (b) The 2009 financial results for Dow Chemical have been taken from the company accounts. Pro-forma financial results have been used for 2008; this
reflects the acquisition by Dow of Rohm and Haas, which was completed on April 1, 2009. (c) Chemical segment figures only. Includes intersegment revenues, e.g. revenue for sales to other divisions of by-products. For
ExxonMobil, intersegment revenue was $1,413m in 2009 and $1,967m in 2008. Also for ExxonMobil, the operating profit figure was calculated by adding the earnings after income tax for the US and non-US with the income
taxes for the US and non-US. Operating profit in 2009 was $2,408m and $3,144m in 2008. For Shell in 2009, intersegment chemical figs including trading and intersegment sales of $2,973m and $5,591m in 2008. For Sinopec =
external sales with intersegment sales. Ube figs = Chemicals & Plastics + Specialty Chemicals & Products. For Evonik Industries in 2009, external sales = €9,978m and €11,762m in 2008 and internal sales in 2009 = €90m and
€116m in 2008. (d) Financial year end March 31, 2010 (e) Bayer data excludes HealthCare division with 2009 sales of €15,980m and 2008 sales of €15,400m. Solvay data excludes pharmaceutical business with sales of €2,800m
in 2009 and €2,700m in 2008. In February 2010, Solvay completed the sale of its pharmaceutical business to Abbott Laboratories. (f) Linde Gas & Engineering sales, operating profit and employee figures only. (g) DSM basic
instead of diluted earning per share used (h) Financial year end June 30, 2009 (i) BP estimated revenue excluding equity accounted joint ventures in China, Malaysia and Germany (j) Petrochemical figures only. For SK Energy, the
sales revenue figure includes intersegment sales, for 2009 in won (W) 2,945,553m and for 2008, W3,616,254m. (k) In January 2008, PPG acquired Sigma Kalon - in the 2009 and 2008 figures, the segment is reported as
Architectural Coatings – EMEA. Optical segment and glass segment figures have not been included. (l) Financial year end May 31, 2010 (m) Asahi Kasei excludes homes and health care segments. (n) Net profit is pretax. (o)
Financial year end September 30, 2009 (p) Sasol turnover figures from polymers, solvents, olefins and surfactants added together. (q) Ashland excludes distribution business and includes Hercules from November 13, 2008. (r)
Specialty materials figures used. (s) Petrochemicals + chemicals figs used (t) Financial year end October 31, 2009 (u) Adhesive Technologies segment only. (v) In January 2009, Honam Petrochemical completely absorbed its
100% subsidiary Lotte Daesan, to operate its businesses more efficiently under a single entity. (w) In November 2009, Mitsubishi Rayon merged with Mitsubishi Chemical Holdings Corp (MCHC) and is now a subsidiary of
MCHC. (x) On July 6, 2009, International Petroleum Investment Co completed the acquisition of NOVA Chemicals. (y) In May 2009, Mitsubishi Rayon completed the acquisition of Lucite International. (z) The total of NPC and its
associated companies in 2009 adds up to $14bn (I) In April 2010 Braskem acquired control of Quattor. We have not considered following companies as PetroChina: Does not segment chemicals from refining business. Repsol:
Repsol no longer discloses its chemical figures. The company indicated an operating loss of €223m in 2009 and €352m in 2008, compared with an operating profit of €100m in 2007. INEOS NOVA: In 2009, INEOS NOVA had
approximately $2.1bn (€1.7bn) sales revenue. Koch: Does not segment chemical data. OMV: Includes petrochemical operations in its refining and marketing segment. Shanghai Petrochemical Corp.: Majority owned by Sinopec.
Samsung Total : Sales equity accounted in Total and Samsung figures. ChemChina: Estimated 2009 sales Rmb122.6bn ($18bn). No relevant public domain data found for 2008. China Blue Star Chem : Majority owned by
ChemChina. Formosa Plastic Corp USA: Not segmented in Formosa reports. Formosa Petrochemical Corp: Does not segment chemicals from refining business. Nan Ya Plastics: Sales a mixture of chemicals and processed
items. Yeochon NCC: Results included with Hanwha and Daelim. Daelim: Below Top 100 in sales as Yeochon NCC accounted as equity company. Samsung: Does not consolidate various chemicals company interests into one
area. PTT Group: Results included as IRPC and PTT businesses. Indorama Group: Figures not disclosed.

Growth and cyclicality

The global chemical industry grows at a rate of close to 1.5x GDP and nearly twice the
general rate of manufacturing growth as a whole. This rate of growth varies between product
groups, however. Growth rates for selected specialty niches can be sustained at high single-
digit levels (or even higher) with more conventional specialty applications growing at mid
single digit rates. By contrast some of the more mature ’commodities’ show growth rates
lower than GDP.
Figure 7: Growth in chemical and manufacturing growth Figure 8: Production growth in the EU chemical industry
(%) by sector
20%
Production (volume): Growth rate YoY

10.0%
15%
5.0% 10%
5%
0.0%
0%
-5.0% -5%
-10%
-10.0%
-15%
-15.0% -20%
Inorganics
Polymers
Chemicals
Chemicals
Chemicals
Petrochemicals
Consumer
Specialty
-20.0%
Basic
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Chemicals Manufacturing 2009 2010 2011
Source: CEFIC Source: CEFIC
Industry cyclicality is essentially caused by any significant increase or decrease in the

difference between supply and demand growth. Periods of ’boom’ have historically
correlated with a surge in demand. This generally results in a lack of available product supply,
chemical prices subsequently rise with a corresponding effect on margins and profits.
Cyclically low profits have historically been caused by surges in supply relative to demand,
thereby depressing prices.
Companies have consistently sought to reduce the cyclicality of their operations by a variety
of means, these include: more gradual addition of new production capacity, focus away from
sensitive and cyclical market sub-segments, and the better management of inventory and
customer ordering.
Figure 9: Volume growth in the European Chemical Figure 10: …and pricing is often lagged to volumes
sector is volatile…
30% 14%
20% 10%
6%
10%
2%
0% -2%
-10% -6%
-20% -10%
-14%
-30%
Q1 11E
Q1 00
Q1 01
Q1 02
Q1 03
Q1 04
Q1 05
Q1 06
Q1 07
Q1 08
Q1 09
Q1 10
Q1 11E
Q1 00
Q1 01
Q1 02
Q1 03
Q1 04
Q1 05
Q1 06
Q1 07
Q1 08
Q1 09
Q1 10
Volum e changes - year-on-year Pricing changes - year-on-year
Source: Company data Source: Company data

Cost structures
While cost structures vary notably for different companies some relevant general comments
can be made about the industry. External purchases generally account for 55-60% of total
sales. Raw materials represent by far the largest element of this amount (estimated 40-50%),
with direct energy costs broadly accounting for another 9-10%. Payroll costs represent 15-
20% of sales on average although this level has been declining over recent years. One should
note that both petrochemical and industrial gas manufacturers have a proportionately higher
fixed cost element with lower payroll and marketing costs. The opposite is of course true for
the specialty chemicals where service levels comprise a greater component of overall costs.
Figure 11: Breakdown of average costs for a chemical Figure 12: Global ethylene cash costs: regional averages
company 2011E at $80/bbl oil
Trading
cost
7%
Gross
operating Other cost
surplus 69%
11%
Labour cost
13%
* Gross operating surplus = value added - labour cost (payroll) - profit before taxes, financial charges and Source: CMAI
depreciation; ** Including raw materials, capex and R&D
Figure 13: R&D to sales in the chemical industry Figure 14: Capex/sales in chemical industry by region
6.0% 7.0%
5.0% 6.0%
4.0% 5.0%
4.0%
3.0%
3.0%
2.0% 2.0%
1.0% 1.0%
0.0% 0.0%
1991
1993
1995
1997
1999
2001
2003
2005
2007
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
EU 13 USA Japan EU NAFTA Japan
Figure 15: EU chemicals industry energy consumption Figure 16: EU manufacturing industry breakdown of
by source labour cost per employee
Furniture manufacturing
90 Food products and beverages
80 Recycling
Fabricated metal products, except machinery and equipment
70 Other non-metallic mineral products
60 Rubber and Plastic Products

Manufacturing
50 Electrical machinery and apparatus
40 Publishing, printing, reproduction of recorded media

Pulp, paper and paper products
30 Machinery and equipments
20 Basic metals
Medical precision and optical instruments, watches and clocks
10 Office machinery and computers
0 Tobacco products
Radio, television and communication equipment and apparatus
Electricity
Renewables
Oil
Heat
Coal
Gas
Others
Other transport equipment

Automotive
Chemicals
Pharmaceuticals
0 20 40 60 80 100 120 140
Feedstock Fuel & Power
Source (Fig 13-16) CEFICl

Organic chemicals
All organic chemistry is based upon hydrocarbons (carbon-based molecules) and derivatives
of oil or natural gas. Organic chemicals account for approximately 85% of all substances
produced in the chemical industry and form the basis of the chemical industry from upstream
petrochemical products through to downstream compounds such as pharmaceutical
intermediates. These products play a significant role in all our daily lives.
Very crudely, there are three main stages in the conversion of raw materials through to final
product. The first of these is the manufacture of base chemicals (see below). These are
produced in high volumes in large facilities. Base chemicals are then converted into various
'intermediate' products (for example, ethylene glycol). Lastly, these intermediates are either
further processed or converted into goods and ‘effects’ used directly by consumers or
industry. The petrochemical portion of the industry is chiefly concerned with the first of these
three stages; the manufacture of base chemicals and their conversion into ‘downstream’
intermediates.
Base chemicals can be broadly classified into two groups: olefins and aromatics. Olefins have
chains of carbon atoms as their 'backbone' whereas aromatics contain a ring of carbon atoms
at the core of the molecule.
Figure 17: Base chemicals

Olefins Aromatics
ethylene (2 - carbon chain) benzene (6 - carbon ring)

propylene (3 - carbon chain) toluene
butadiene (4 - carbon chain) xylene
Source: Deutsche Bank
Figure 18: The molecular structure of ethylene and benzene

H H
C C
H H
C=C H C C H
H H
C C
H H
ethylene benzene
(Olefin) (Arom atic)
carbon atoms are denoted by C, hydrogen atom s by H


The petrochemical industry

The olefin plant (cracker)
An olefin plant takes long chained carbon molecules and 'cracks them' (splits them up) into
smaller chains such as C2 (a chain consisting of two carbons), C3 & C4. The two cracking
methods used are thermal cracking (high temperature) and cat cracking (use of catalysts),
both of which are very energy intensive.
Figure 19: End products of the cracking process

Naphtha / Natural Gas / LPGs
C C
C C
C=C C=C–C C=C–C=C
ethylene propylene butadiene
C C
benzene
C denotes a carbon atom: C-C represents a carbon single bond: C=C represents a carbon double bond
Naphtha and natural gas/LPGs (liquefied petroleum gases rich in ethane, propane and butane)
are the major feedstocks in olefin production. Naphtha is the dominant feedstock in Europe
while natural gas/LPG is predominant in the US. Naphtha is essentially a crude form of
gasoline and is obtained from the fractional distillation of crude oil, part of the oil refining
process.
Broadly, the principal feedstocks consumed in the main producing regions are:
Figure 20: Typical regional feedstocks

Region Key feedstock
Europe Naphtha
US Mainly natural gas with some naphtha
Middle East Natural gas
Japan Naphtha
Asia (excluding Japan) Mainly naphtha with some natural gas
China Naphtha, natural gas and increasingly coal
Only about 7% of naphtha (part of the gasoline pool) is actually used by the chemical
industry, the rest is consumed by the fuel industry. Consequently, the price of naphtha
virtually replicates that of gasoline, with the price being determined by the demand for fuel.
As a consequence chemical producers are often subject to wild variations in feedstock costs.
Similarly, in developed economies, like the US, consumption of natural gas by the chemical
industry is dwarfed by utility and energy demand. Therefore, natural gas-based crackers are
also subject to volatile feedstock cost swings.

As shown below, cracking naphtha, ethane, propane or butane produces different

proportions of the base chemicals ethylene, propylene, butadiene and aromatics. Ethylene
and, increasingly, propylene are the two most significant outputs. Ethane, propane and
butane are the most the important constituents of natural gas and LPG.
Figure 21: Percentage of base chemicals produced by feedstock

Ethane Propane Butane Light naphtha Full-range Gas oil
(%) (%) (%) (%) naphtha (%) (%)
Ethylene 82 44 42 29 25 25
Propylene 2 21 15 14 13 8
Butadiene 3 4 4 4 5 5
BTX 1 5 5 14 11 11
Others 13 26 35 39 44 47
Source: Business Briefing: Oil and Gas Processing Review 2006
The operations and economics of the participants in the olefin industry are heavily influenced
by the availability and cost of upstream feedstock. This in turn is often determined by the
proximity and relationship of ‘local’ refining operations or upstream reserves.

13 May 2011
Figure 22: From oil to petrochemicals
Oil Refining Industry The Petrochemical Industry
ethylene (30%)
refinery gases
Bulk Chemicals for Beginners

OLEFINS (50%) propylene (15%)
gasoline
butadiene (5%)
naphtha
benzene
kerosene (paraffin)
toluene
Olefin Plant
crude oil Fractional Distillation AROMATICS (15%)
(Cracker)
gas oil (diesel) xylene
Others
lubricating oil
fuel oil
bitumen FUELS/GASOLINE
(35%) End products
† Liquified petroleum gases
natural gas/ LPGs †

Page 13
Page 14
13 May 2011
Figure 23: Organic chemistry - simplified flow diagram of the derivatives from petrochemical production
salt caustic soda
chlorine

VCM PVC
ethylene oxide ethylene glycol
methane ldPE
natural gas
ethane ethylene polyethylene hdPE
lldPE
ethyl benzene styrene polystyrene caprolactam nylon 6
cylohexane Adipic Acid nylon 6,6
benzene nitrobenzene MDI
phenol Phenolic resins

cumene
acetone MMA
aromatics toluene nitrolene TDI

DMT
LPG xylene paraxylene polyester

PTA
isobutane isobutylene
C4 butadiene polybutadiene
oil naphtha olefins hexene methanol acetic acid
butene MTBE
octene ABS
propylene polypropylene
Styrene
acylonitrile acrylonitrile
Raw Material
Intermediate polyacrylonitrile Acylic fibres
acrylic acid
End Product
Source: Deutsche Bank and SRI
Petrochemicals
Ethylene
Figure 24: Ethylene at a glance
Long-term growth rate 1.25x GDP
Growth rate relative to sector Average
Supply/demand Strong in 2010 due to high outage rates supporting effective operating rates. Likely
to remain high for at least the next few years
Watch out for… Further Middle-Eastern expansions, further Chinese expansions, de-bottlenecking.
Regional profit abilities strongly impacted by gas and oil prices differentials
Source: Deutsche Bank estimates
Ethylene is the petrochemical industry’s key building block. It is the substance from which
approximately 60% of other organic chemicals are derived. The production economics and
output of an ethylene production facility are largely determined by the choice of feedstock
(raw material). Within Europe naphtha is generally used as the raw material whereas in the
US most plants use natural gas due to its ready availability. Natural gas fed facilities also
produce a far higher proportion of ethylene (approximately 80%), although the proportion of
co-products produced (propylene and butadiene and so on) is much less, when compared to
a naphtha cracker. The capital investment required for natural gas fed units is generally lower.
Figure 25: End uses of ethylene 2011E Figure 26: Ethylene capacity by region 2011E
CIS & Baltic States Central Europe Africa

Other
3% 2% 1%
8%
Ethylene Benzene
6% Indian
Subcontinent Northeast Asia
3% 24%
Ethylene dichloride
11% South America
4%
Southeast Asia
7%
Polyethylene
Ethylene Oxide 61%
14%
West Europe
16% North America
22%
Middle East
18%
Source: Deutsche Bank and CMAI estimates .
Figure 27: Ethylene industry data and participants 2010

(kt/pa) Global Capacity: 143,316
N. America 32662 W. Europe 24268 Middle east 24927 Asia 47820 ROW 13639
Dow 5269 Ineos 2260 Petrokemya 2900 FPCC 2935 Braskem 2580
Equistar 4331 SABIC Europe 2115 YANPET 1855 Reliance Industries 1960 Quattor 1240
ExxonMobil 3988 Polimeri Europa 2055 JUPC 1350 YNCC (5) 1833 PBB Polisur 828
Chevron Phillips 3368 Dow Benelux 1785 Jam PC 1320 Honam PC 1750 SASOL 720
Nova Chemical 2375 LyondellBasell 1780 Yansab 1300 LG Chem 1695 PKN Orlen 700
Shell Chemical 2268 FAO (3) 1380 Borouge 1300 PTT Chemical 1378 TVK 650
Ineos 1746 Repsol Quimica 1300 SADAF 1280 Mitsub.Corp. 1275 Pequiven 600
FPC USA 1495 BASF Antwerp 1080 Petro-Rabigh 1250 Dushanzi PC 1220 NKNK 600
PEMEX 1382 Ruhr Oel 1080 SHARQ 1200 Secco 1200 Unipetrol RPA 544
Westlake 1334 OMV 945 Marun PC 1100 CPC-Taiwan 1115 Kazanorgsintez 430
BASF/FINA LP (1) 920 Shell Chem Neth 940 Arya Sasol PC 1000 Idemitsu Kosan 1101 Stavrolen 350
DuPont 681 Total PC 860 SEPC 1000 PCS 1080 Salavatnftgsz 340
Nova 635 ExxonMobil/Shell 830 RLOC 975 Maoming PC 1000 RASCO 330
Williams/SABIC (2) 626 Naphtachimie (4) 740 Equate 920 SINOPEC/SABIC JV 1000 Tomskneftekhim 300
Flint Hills Resources 617 Dow Iberica 670 TKOC 850 CNOOC & Shell PC 950 Sintezkauchuk 300
Others 1627 Others 4448 Others 5327 Others 26328 Others 3127
Source: CMAI. YANPET: Saudi Yanbu Petrochemical Company. SADAF: Saudi Petrochemical Company. JUPC: Jubail United Petrochemicals. KEMYA: Al Jubail Petrochemical Company a 50-50 JV between SABIC and Exxon
Mobil. QAPCO: Qatar Petrochemical Company. PCS: Petrochemical Corporation of Singapore. IPCL: Indian Petrochemical Corporation Ltd. TVK: Tiszai Vegyi Kombinat. PQC: Petroquimica Uniao. SEC: Saudi Ethylene and
Polyethylene Co. RLOC: Ras Laffan Olefins Co. FPCC: Formosa Petrochemical Corporation. (1) 60: 40 jv between BASF and Total; (2) 83:17 jv between William company and SABIC; (3) 35:65 jv between Exxon Mobil and Total;
(4) 50:50 jv between Ineos and Total; (5) 50:50 jv between Daelim Industries and Hanwha Chemical Corporation.

Figure 28: Ethylene product chain

Low Density Polyethylene Food Packaging,
(LDPE) and Film, Trash Bags,
Linear Low Density Diapers, Toys,
Polyethylene (LLDPE) House wares
High Density House wares, Siding,

Polyethylene Crates, Window
(HDPE) Drums, Food Frames,
Containers, Bottles Swimming
Pool
Liners,
Pipes
Ethylene Dichloride Vinyl Chloride PV
C
Automotive
Ethylene Ethylene Glycol Antifreeze
Oxide
Crude
Oil /
Natural Pantyhose,
Gas Ethylene Clothing,
Fibers
Carpets
Polyester
Resin
Miscellaneous
Models, Cups,
Polystyrene Insulation
Resins
Ethyl benzene Styrene
Styrene
Acrylonitrile Instrument Lenses
Resins House wares
Linear Deterge Styrene Tires,

Alcohols nt Butadiene Footwear,
Rubber Sealants
Styrene
Adhesives Carpet Backing,
Vinyl Butadiene
Coatings, Paper Coatings
Acetate Latex
Textile/
Paper
Finishing,
Flooring Miscellaneous
Miscellaneous
Chemicals
Source: American Chemistry Council
Growth prospects and industry trends

Global trade in ethylene usually takes place in the form of derivative products produced,
such as polyethylene or ethylene glycol for example. Largely through this mechanism
ethylene pricing becomes transparent on a global basis. Ethylene itself is a gas but can
be liquefied for transportation.
Although the balance of supply and demand is important to predict pricing and margins,
the major determinant of the ethylene price is the cost of feedstock (this is a cost-plus
industry). Ethylene prices tend to lag changes in feedstock costs by around 1-2 months
maximum.
Ethylene demand growth reflects both global GDP and petrochemical demand due to its
position as a major petrochemical building block. Long-term demand growth is typically
1-1.5x GDP.

Over the next five years (2011-2015), we forecast nameplate global ethylene capacity to
expand by a CAGR of 2.4%. There is some risk of de-bottlenecking/capacity creep which
could increase this capacity addition rate by approximately 1-2% per annum.
We anticipate effective utilization rates to remain broadly stable in 2011 as compared to

2010. Post 2011 assuming normal GDP type growth we expect steady improvement in
nameplate operating rates due to the lack of any major capacity expansion and steady
improvement in demand. However, effective operating rates are unlikely to show much
improvement due to the very high rates of outage experienced in 2009 and 2010 due to
plant technical problems. In high cycle conditions we would expect these outage rates to
fall.
Figure 29: Some of the key planned ethylene investments

Region Name Size (kt) As a % of 11 Feedstock
global capacity
2011
Saudi Arabia Kayan 1025 0.7% EPB (Ethane,Propane,Butane)
UAE Borouge 700 0.5% Ethane
Qatar RLOC 325 0.2% Ethane
China ZRCC 250 0.2% Naptha
Thailand MOC 225 0.2% Naptha
2012
Saudi Arabia Saudi Polymers 1200 0.8% Ethane/Propane
Singapore ExxonMobil 1000 0.7% Naphtha/Gas Oil/Residues
China Sichuan PC 666 0.5% Naphtha/Gas Oil/Residues
China Fushun PC 533 0.4% Naphtha/Gas Oil/Residues
Iran Ilam PC 458 0.3% EPB/Naphtha
2013
China SINOPEC Wuhan 733 0.5% Naptha
India OPAL 642 0.4% EPB/Naphtha
China Daqing PC 600 0.4% EPB/Naphtha/Gas Oil/Residues
Taiwan CPC-Taiwan 600 0.4% Naptha
China Fushun PC 267 0.2% Naphtha/Gas Oil/Residues
China Yulin Energy & Chem. 225 0.2% Recovery from FCC/DCC Unit
2014
China Shanghai PC 600 0.4% Naphtha/Gas Oil/Residues
India OPAL 458 0.3% EPB/Naphtha
RUSSIA Novy Urengoy GCC 420 0.3% Ethane
Egypt SIDPEC 400 0.3% Ethane
China Zhejiang Tiansheng 300 0.2% Methanol to Olefins
China Shaanxi Yanchang 225 0.2% Methanol to Olefins
2015
India Reliance Industries 1650 1.2% Recovery from FCC/DCC Unit
China Sinopec-KPC PC JV 1000 0.7% EPB/Naphtha
Algeria Sonatrach/Total 550 0.4% Ethane
Qatar QP/ExxonMobil 325 0.2% Ethane/Propane
Philippines JG Summit PC 320 0.2% Naptha
China Shaanxi Yanchang 225 0.2% Methanol to Olefins
Source: CMAI, Deutsche Bank estimates

Figure 30: Global nameplate supply/demand (kt/pa) Figure 31: Regional nameplate operating rate
160,000 95%
105%
140,000 100%
120,000 90% 95%
100,000 90%
80,000 85% 85%
60,000 80%
75%
40,000 80%
70%
20,000 65%
0 75%
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012E
2014E
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012E
2014E
N. America W. Europe
Global Capacity Operating rate N. E. Asia S. E. Asia
Figure 32: Major expansions (kt/pa) Figure 33: Top producers (kt/pa) 2010
1400 12,000 8%
1200 10,000 7%
1000 6%
800 8,000 5%
600 6,000 4%
400 3%
200 4,000
2%
0 2,000 1%
ExxonMobil
Kayan
Polymers
SINOPEC
Borouge
Sichuan
OPAL
RLOC
Daqing PC
---- 0%
Wuhan
Saudi
PC
Exxon Mobil
LyondellBasell
SABIC
Ineos
NPC-Iran
Dow
SINOPEC
Abu Dhabi
Formosa
Dutch/Shell
Group
Gov't
Royal
Corp.
2011 2012 2013
Figure 34: Global ethylene cost curve 2010 Figure 35: Historical margins ($/tonne)
1,500
1,250
1,000
750
500
250
0
-250
Jan-1990
Jan-1992
Jan-1994
Jan-1996
Jan-1998
Jan-2000
Jan-2002
Jan-2004
Jan-2006
Jan-2008
Jan-2010
North America ($/tonne) West Europe ($/tonne)
Figure 36: Global capacity additions (%) Figure 37: Capacity additions by region (%)
9%
100%
8%
7% 80%
6% 60%
5%
4% 40%
3% 20%
2%
0%
1%
2011E
2012E
2013E
2014E
2015E
0%
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011E
2012E
2013E
2014E
2015E
N. America Europe Middle East Asia RoW

Source: Deutsche Bank and CMAI estimates .

Propylene
Figure 38: Propylene at a glance
Growth rate relative to sector Above average
Supply/demand Remaining tight through to 2013 at least
Margin prospects Likely to remain strong due to limited supply additions
Watch out for… New capacities in Middle East/China, new technologies in Middle East (propane
dehydrogenation, metathesis) and potential product substitution (e.g. Polyethylene)
In Europe, propylene is produced mainly as a by-product of ethylene. In the US, oil refineries
provide a second major source. The crude propylene stream created in a refinery can be
“cleaned up” for use as a gasoline component. Thus, when gasoline values are much higher
than chemical values refineries will retain the propylene stream while in when gasoline values
are low they will separate and market this merchant product. There are two principal grades
of propylene: chemical grade (from crackers or refineries) and polymer grade (from crackers
only). There is a third source of propylene, from the dehydrogenation of propane gas, but it
accounts for only a small proportion of global propylene production currently. Propylene does
not have many direct applications in the consumer market but is used extensively as an
intermediate product in the chemical chain, for example in the production of fibres, textiles,
injection moulded plastics and paints among others.
Figure 39: End uses of propylene 2011E
Others
6%
Acrylic acid
4%
Cumene
4%
Oxo alcohol
Polypropylene
4%
68%
Acrylonitrile
7%
Propylene oxide
7%
Figure 40: Propylene industry data and participants 2010

N. America 20,076 W. Europe 17,122 Asia 39,452 Middle East 7,764 ROW 9,460
Enterprise 2596 Dow 1455 Reliance Industries 2824 Petro-Rabigh 900 Braskem 1344
Equistar 2527 Shell Chem Neth 1312 FPCC 2468 Petrokemya (4) 710 SASOL 990
ExxonMobil 2459 Polimeri Europa 1200 Mitsub. Chem. Corp. 1055 Carmel Olefins 450 Petrobras 877
Shell Chemical 1593 SABIC Europe 1161 SK Energy 1040 Advanced PC 450 PKN Orlen 485
Chevron Phillips 1324 Ineos 1155 LG Chem 998 Al-Waha 450 Quattor (6) 375
Dow 1199 LyondellBasell 1155 YNCC (2) 927 Saudi Polyolefins 450 TVK 320
BASF 856 BASF 1030 Honam PC 880 NATPET (5) 420 Slovnaft 295
FPC USA 823 Total PC 980 CPC-Taiwan 835 Yansab 360 NKNK (7) 270
Ineos 790 OMV 955 PCS (3) 820 Oman Ref. Co. 340 Unipetrol RPA 266
Indelpro (1) 780 Ruhr Oel 770 Secco 750 Jam PC 305 Pequiven 260
Other 5129 Other 5949 Other 26855 Other 2929 Other 3977.7
(1) 49:51 jv between LyondellBasell and Grupo Alfa; (2) 50:50 jv between Daelim Industrial Ltd and Hanwha Chemical Corporation; (3)Petrochemical Corp. of Singapore; (4) Owned by SABIC; (5) Owned by Alujain corp. 57%,
Xenel Industries 31% and General Organization for Social Insurance 12%; (6) 60:40 jv between Braskem and Petroleo Brasileiro SA; (7) NKNK: JSC Nizhnekamskneftechim
Source: CMAI

Figure 41: Propylene product chain
Propylene Oxide Propylene Glycol Polyesters

Auto Patch
Compounds,
Furniture
Parts,
Foams, Boats, Fibers
Polyols Polyurethane
Coatings,
Lacquers
Auto Steering Wheels,

Resins Knobs, Auto Grills, Pipe,
Film, Shirt Packages,
Polypropylene Strapping, Rope & Twine
Fibers
Indoor/Outdoor
Carpets, Matting
Plastics, Signs,
Isopropyl Alcohol Acetone Methyl Plexiglass,
Methacrylate Paints,
Crude Tail-light Lenses,
Oil Propylene Lighting Panels
Solvents, Coatings,
Cosmetics, Health Care
Rain
Coats,
Inflatable
Oxo-Alcohols Plasticizers PVC Plastics Toys
Solvents Coatin
gs Carpets,
Sweater
s,
Draperi
Acrylonitrile Polyacrylonitrile es,
Dresses
Acrylic
Fiber
Modacrylic Lenses,
Acrylic
Fiber Light Fixtures,
Resins
Domestics,
Coatings
Coatings,
Synthetic
Furs
Phones, Auto
Cumene ABS Resins
Parts, Bathtubs
Phenol Resins, Nylon Fibers,

Phenol Solvents
Coatings, Adhesives,
Acrylic Acid, Acrylates Super Absorbent Polymers,
Detergents
Miscellaneous

Growth Prospects and Industry Trends

Propylene demand is driven largely by the demand for polypropylene, but there is also a
demand-pull from products like acrylic acid (mainly for fibres) and MMA (acrylic plastic).
Demand is expected to grow at an average of 5% over the next five years
Long-term growth rate is expected to be around 1.5x GDP, higher than for basic ethylene
products
Globally, capacity growth is expected to be 3.6% annually through to 2015. The largest
rise is expected in North East Asia and the Middle East. In Europe and America we do
not expect any significant capacity expansions in near term (but potentially some de-
bottlenecking/capacity creep). We expect higher expansion in Polymer grade propylene
as compared to chemical grade propylene in the future.
Nameplate global operating rates reached below 80% in the last two years due to
economic crisis, however it is now expected to see some improvement but we believe
this improvement to remain muted due to significant capacity expansions in North East
Asia and Middle East. Effective operating rates (after outages are taken into
consideration) show propylene operating rates of the high 80s.
An increasing number of companies are seeking a higher proportion of propylene raw

materials given the strong growth profile of many of the derivative products.

Figure 42: Global nameplate operating rates Figure 43: Regional nameplate operating rates
120,000 90% 110%
88%
100,000 86% 100%
80,000 84% 90%
82%
60,000 80% 80%
78%
40,000 76% 70%
20,000 74% 60%
72%
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012E
2014E
0 70%
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012E
2014E
N. E. Asia S. E. Asia
Global Capacity Operating rate N. America W. Europe
750 6,000 7%
600 5,000 6%
4,000 5%
450 4%
3,000
300 3%
2,000 2%
150
1,000 1%
0 ---- 0%
Kayan
MRPL
Polymers
Borouge
Rushd
Sichuan
Sinopec
EGPC
Chemical
Exxon Mobil
LyondellBasell
Dow
SABIC
Industries
SINOPEC
CNPC
Formosa
Total
Reliance
Dutch/Shell
Ibn
Saudi
Bohai
Group
PC
Royal
Corp.
2011 2012 2013
Figure 46: Historical monthly pricing ($/tonne) Figure 47: Global % capacity additions
2,000
1,800 9%
1,600 8%
1,400 7%
1,200 6%
1,000
800 5%
600 4%
400 3%
200 2%
0 1%
Jan-03
Jul-03
Jan-04
Jul-04
Jan-05
Jul-05
Jan-06
Jul-06
Jan-07
Jul-07
Jan-08
Jul-08
Jan-09
Jul-09
Jan-10
Jul-10
Jan-11
Jul-11
0%
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011E
2013E
2015E
U.S. S.E. Asia W. Europe
Source: CMAI Source: CMAI

Butadiene
Figure 48: Butadiene at a glance
Growth rate relative to the sector Above average
Supply/Demand Tight with shortage of new capacity in C4’s
Margin prospects High due to tightness of C4’s, expected to remain high
Watch out for New capacities in Asia and de-bottlenecking
Butadiene, a colourless gas at room temperature (liquid a few degrees below freezing point),
is a by-product of the cracking process (that produces ethylene primarily). Approximately 5%
of the base chemicals produced in the cracking process are in the form of butadiene (a
molecule with four carbon atoms). The raw materials are again natural gas or naphtha. The
main use of butadiene is as an intermediate in the manufacture of various forms of rubber,
latex, plastics and several intermediate chemicals. The largest customers for butadiene
include Goodyear Tire & Rubber, Firestone Synthetic Rubber & Latex, DuPont Nylon, Dow
Chemical, Lanxess, Michelin and Ameripol Synpol. Butadiene usage has a very significant
exposure to the Global automotive industry and for this reason it’s produced and consumed in
all key regions.
Figure 49: Production process of butadiene
methane
natural gas
ethane Synthetic Rubbers, eg SBR
ethylene
LPG Petrochemicals propylene
Engineering Plastics, e.g. ABS

butadiene (5%)
oil naphtha
Styrene butadiene latex
Figure 50: End uses of butadiene
Others
11%
Nitrile Rubber
S. B. Rubber
4%
28%
Adiponitrile
6%
S. B. Latex
12%
ABS Resins Polybutadiene

13% 26%
Source: CMAI and Chemical Week and Deutsche Bank Estimates * Synthetic rubbers

Figure 51: C-4 product chain product chain
Styrene-Butadiene Tires, Footwear

Rubber
Polybutadiene Tires, Golf Balls

Rubber
Butadiene Styrene-Butadiene Carpet Backing, Adhesives

Latex
ABS Resins Automotive

Parts, Spas
Gaskets,
Chloroprene
Seals, Hoses
Rubber
Crude
Oil C-4
Nitrile Rubber Shoe Soles,
Kitchen Mats,
Hoses,
Gaskets
Miscellaneous
Isobutylene Synthetic Rubber Auto Tires,

Plastic
Compounds
Gasoline
Miscellaneous
Butylene
Oxide Foams, Insulation
Polyurethanes
Unsaturated Polyesters
Maleic
Anhydride
Alkyd Resins

Figure 52: Butadiene industry data and participants 2010

(kt pa) Global Capacity: 12,598
N. America 2,387 W. Europe 2,372 Asia 6,082 ROW 1,757
Shell Chemical 411 Ineos 245 FPCC 447 Braskem 280
Sabina PC 408 Polimeri Europa 235 LG Chem 277 NKNK 254
ExxonMobil 322 Oxeno 220 JSR 268 Tobolsk-Neftekhim 195
TPC Group 310 Repsol Quimica 207 Korea Kumho 237 Petrokemya 130
Equistar 232 LyondellBasell 170 YNCC 222 Jam PC 115
Lanxess 120 Dow Benelux 170 Dushanzi PC 213 Synthos Kralupy 110
Texas PC 103 SABIC Europe 130 Yangzi PC 210 Omsk Kauchuk 90
Ineos 98 Naphtachimie 120 Reliance Industries 200 Quattor 80
Shell Chem Neth 115 CNOOC & Shell PC 196 Bandar Imam PC 77
Dow 105 Chiba Butadiene 177 Syntezkauchuk 75
Others 655 Others 3,635 Others 351
Source: CMAI(

Long-term demand growth for butadiene is above GDP (approx 1.5x GDP). This is driven
by the trend for greater mobility and more synthetic rubber which is outstripping GDP.
Through the mid 1980s growth rates accelerated due to pull from ABS engineering
plastics (into electronic items such as computers). Post this, however, demand has
dropped back slightly although still above GDP and sector average growth rates.
Regionally demand continues to be led by Asia and particularly China (which is growing
double the regional level) as a result of its focus on the manufacture of finished goods
(e.g. autos, electronics, tires etc)
Demand in China outstrips supply with China structurally short C4’s and looking to
increase capacity in this product chain.
Currently, new butadiene capacity is being added below levels of demand. Therefore
operating rates are anticipated to tighten further out to 2015 from already healthy levels.
Regional differences in demand/supply will likely become evident in the coming years.
Going forward the most significant capacity additions are anticipated in Asia (ahead of
demand from end uses), though we expect demand to outstrip supply and operating
rates continue to tighten gradually.
With the structurally lower gas price in the US butadiene, a co-product mainly from
naphtha crackers, is getting tighter leading to our expectation for operating rates to
tighten. The only potential relief may come from relocation of tyre plants to other
regions.
The European market has gradually tightened in recent years as little new capacity has
been added. This is anticipated to continue in the coming years. It should be noted that
risks to demand from the relocation of tire production is of only limited influence in
Europe, as tire production has generally relocated from western to Central Europe where
it can still supplied by European industry.

Figure 53: Top 10 producers Figure 54: Capacity additions (m tonnes)

6.0% 160
140
5.0% 120
100
4.0% 80
3.0% 60
40
2.0% 20
----
1.0%
BASF/Yangzi
Indian Oil
Fushun PC
Sichuan PC
Sinopec
Wuhan
0.0% ExxonMobil
Dow
FPCC
JSR
Sabina PC
TPC Group
Shell
Ineos
Braskem
LG Chem
2011 2012 2013
Figure 55: Butadiene Plant Capacity Increases

Company Location Increase As a % of global Timing
capacity
BASF/Yangzi PC Nanjing, China 120 1.0% 2011 Q3

Fushun PC Fushun, China 120 1.0% 2012 Q2
Sichuan PC Chengdu, China 150 1.2% 2013 Q1
Sinopec Wuhan Wuhan, China 120 1.0% 2013 Q1
Indian Oil Panipat, India 138 1.1% 2013 Q1
Daqing PC Heilong, China 90 0.7% 2013 Q1
CPC Lin Yuan, Taiwan 110 0.9% 2013 Q2
OPAL Dahej, India 95 0.8% 2013 Q3
Shanghai PC Jinshan, China 65 0.5% 2014 Q1
Source: Deutsche Bank, CMAI

Benzene
Figure 56: Benzene at a glance
Growth rate relative to the sector Average
Supply/Demand Likely to remain tight in the near term due to limited additions
Margin prospects Strong in 2010 and expected to remain healthy
Watch out for ... Middle Eastern expansions, de-bottlenecking, change in refinery outputs
Benzene can be derived from petroleum based sources or coal. Petroleum sources include
refinery streams, pyrolysis gasoline (a by-product of ethylene manufacture in cracking
naphtha, gas oil or LPG) and toluene. Coal-derived benzene is obtained from the light oil
resulting from coke-oven operations. Some of this light oil is processed by petroleum refiners
for benzene recovery.
Benzene can be produced via the toluene hydrodealkylation method (HDA) or using
disproportionation technologies. The relative cost effectiveness depends on the price gap
between benzene and toluene, as such HDA is an effective means of balancing the supply
and demand for benzene. When demand is weak relative to availability, dealkylation units can
be shut down.
Figure 57: End uses of benzene 2011E
Others
Alkylbenzene
5%
3%
Nitrobenzene
8%
Cyclohexane
12%
Ethylbenzene
53%
Cumene
19%
Source: CMAI

Figure 58: Benzene product chain
Polystyrene Insulation,
Resins Cups, Models
Styrene Instrument
Acrylonitrile Lenses,
Resins Houseware
Ethylbenzene Styrene Styrene

Butadiene Tires, Footwear,
Rubber Sealants
Styrene Carpet Football

Butadiene Latex Backing, Paper Helmets,
Coatings Eyeglasses,
Computers
Miscellaneous
Crude
Oil
Polycarbonate Resins
Acetone Protective
Epoxy Resins Coatings,
Cumene Bisphenol Adhesives
Benzene A
Miscellaneous
Phenol
Phenolic
Resins Plywood, Coatings, Housings
Ethylene Adipic Acid Nylon Fibers & Resins

Cracker
Miscellaneous
Cyclohexane
Caprolactam Nylon Fibers & Resins
Miscellaneous
Isocyanates
Aniline
Rubber Chemicals
Pesticides
Dyes
Miscellaneous
Pesticides,
Chlorobenzenes Dyes
Miscellaneous


Demand for benzene is predominately driven by styrene production - styrene is used to
make polystyrene used in insulation, moulding and packaging). However, it is also
influenced by a variety of other products such as nylon (via cyclohexane), resins (for
wood treatment), CD/DVD (via polycarbonate), acrylics (through cumeme, phenol and
acetone) and furniture and auto components (via aniline into polyurethane). As a result of
this wide mix benzene demand is anticipated to grow just above GDP.
In 2008 and 2009 global demand for Benzene saw a sharp decline due to global
slowdown, however 2010 saw exponential increase in the Benzene demand and there
was a record increase in the global Benzene production. We expect global supply
demand conditions to remain tight in the near term and this will in turn result into higher
benzene prices.
Regionally, Northeast Asia is the biggest consumer of Benzene with around 40% of the
demand coming in from this region, followed by North America and West Europe which
account for 20% each.
The decision to build or operate benzene capacity is not driven purely by the economics
of benzene production. Predominantly it is driven by its co-production alongside mixed
xylenes and paraxylene (raw materials for polyester) with some smaller amount of ‘on-
purpose’ production to soak up available C7 plus streams (octane etc).

Ethylene Oxide
Figure 59: Ethylene oxide at a glance
Supply/demand Steady recovery close to previous highs by 2015 helped by limited new capacity.
Watch out for… Very hazardous product to make, therefore restricts global trade
Ethylene oxide is a colourless odourless gas used chiefly in the synthesis of ethylene glycol
(and subsequently polyester fibre and resin and also anti-freeze). It is manufactured through
the reacting of ethylene with air over a silver oxide catalyst. The manufacture of ethylene
oxide accounts for about 13% of ethylene consumption.
Figure 60: Production of ethylene oxide
ethylene
ethylene oxide
oxygen ethylene glycol
water
Figure 61: End uses – 2011E Figure 62: Top producers (kt/pa) 2010
Others
2,000 8%
Glycol Ethers 4% 1,800 7%
% share of global capacity

3%
1,600
6%
Capacity (kt)
Ethanol-amines 1,400
5%
1,200 5%
1,000 4%
Surface-active
agents
800 3%
11% 600
2%
400
200 1%
---- 0%
Ethylene Glycols
Dow
JUPC
Nan Ya
Reliance
SHARQ
YANPET
Shanghai
Ineos
Chemical
Honam
77%
PC
Shell
PC
Source: SRI and Deutsche Bank estimates. Note: Ethlene Glycols also includes di- and triethylene glycols. Source: CMAI
Figure 63: Ethylene Oxide industry data and participants 2010

(kt/pa) Global Capacity: 25605
N. America 4756 W. Europe 2863 Asia 9821 ROW 8165
Dow 1090 Ineos 925 Nan Ya 1190 SHARQ (5) 1725
Shell 775 BASF 845 Honam PC 930 JUPC 975
MEGlobal (1) 535 Shell 305 Reliance Industries 621 YANPET 730
Huntsman 453 Clariant Intl 220 Shanghai PC 605 Yansab 560
PEMEX (2) 428 SASOL 200 Shell Chemical 600 TKOC (6) 452
Equistar 340 Dow 163 OPTIMAL Glycols 385 Oxiteno (7) 440
Old World 305 IQA 105 PTT Chemical 380 Petro-Rabigh 400
Alberta&Orient (3) 270 Akzo Nobel 100 SINOPEC/SABIC JV (4) 360 Others 2443
Others 560 Others 4750
(1) 50/50 joint venture between Dow and Petrochemical Industries of Kuwait; (2) PEMEX: Petroleos Mexicano; (3) 25:75 jv between Oriental Petrochemical Corp and ME Global; (4) 50:50 jv between China Petrochemical Corp.
and Saudi Arabia Basic Industries Corp.; (5) SHARQ: Eastern Petrochemical Company; (6) TKOC: The Kuwait Olefins Co.; (7) Oxiteno Nordeste SA
Source: CMAI


The main driver of ethylene oxide demand is ethylene glycol (end therefore polyester and
anti-freeze). In the near term we forecast demand for ethylene oxide to remain at approx
1.0-1.5x GDP.
The market for ethylene oxide is relatively fragmented with the 20 largest producers only
accounting for just over 50% of the total market.
The majority of producers are integrated forward into ethylene glycol. Only some of the
larger producers (BASF, Shell, Dow, Reliance, Nan Ya) are integrated backwards into
ethylene production also.
Consumption of ethylene glycol was affected in 2008 and early 2009 more than other
end uses due to the world recession.
Over the next five years we anticipate global capacity to increase by an average of 2-3%
per annum. However, we anticipate this growth to be lumpy with little in North America
or Europe but large concentrations in the Middle East and Asia on the back of the
petrochemical expansions in these areas.
After touching its lowest point of capacity utilization in 2010, we forecast ethylene oxide
operating rates to improve gradually through 2015. This should be driven by limited
capacity additions and slightly higher demand (approximately 5% p.a.).
Figure 64: Global capacity additions % Figure 65: Regional capacity additions %
14% 25%
20%
12% 15%
10% 10%
8% 5%
6% 0%
-5%
4% -10%
2% -15%
0% -20%
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011E
2012E
2013E
2014E
2015E
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011E
2012E
2013E
2014E
2015E
Global Capacity additions North America West Europe Asia

Source: Deutsche Bank and CMAI estimates Source: Deutsche Bank and CMAI estimates

Ethylene Glycol
Figure 66: Ethylene glycol at a glance
Supply/demand Big capacities in 2010 still being absorbed but modest
improvement of operating rates expected in the future
Watch out for… Ultimately too much Mid-East/Asian capacity may suppress the
market. De-bottlenecking (particularly in the US) is also a risk to
supply
Ethylene glycol (EG) is an intermediate product used in the production of a range of products
including polyester fibre, PET (polyester) resins and antifreeze. It is a clear, odorless, slightly
viscous liquid.
The first stage of EG production is to manufacture ethylene oxide (EO). Ethylene oxide is
produced by reacting ethylene with air over a silver oxide catalyst. The ethylene oxide is then
hydrated to generate ethylene glycol.
Ethylene glycol is the main consumer of ethylene oxide accounting for 65% of use
(approximately 77% including di- and triethylene glycols).
Figure 67: Production of ethylene glycol
ethylene
ethylene oxide
oxygen ethylene glycol
water
Figure 68: End uses of ethylene glycol 2011E
Other
6%
Antifreeze
10%
Polyethylene
Terephthalate
(PET)
84%
Source: Deutsche Bank and CMAI


In the next five years we anticipate global capacity to grow by approximately 3% pa,
driven mainly by China, rest of Asia and Middle-Eastern capacity. With approximately
16% capacity addition alone in 2010, ethylene glycol industry looks oversupplied with all
planned capacity coming onstream.
We expect Ethylene glycol demand to increase by approximately 4% p.a. driven by

demand for polyester fiber and PET demand, especially in China and rest of Asia. This
should help improve the global operating rates slowly recover from the low 80s rates
currently being seen.
MEG Prices and margins have begun to rise because it now appears that the capacity in
place and under construction may not be enough to satisfy demand beyond about mid-
2012.
Further capacity rationalization is possible in more mature markets given the low growth
prospects in these regions.
Figure 69: Global capacity additions % Figure 70: Regional capacity additions %
18% 50%
16% 40%
14% 30%
12% 20%
10% 10%
8% 0%
6% -10%
4% -20%
2%
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011E
2012E
2013E
2014E
2015E
0%
-2%
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011E
2012E
2013E
2014E
2015E
North America West Europe Middle East

China Asia ex China
Figure 71: Ethylene Glycol pricing trend (US$/mt) Figure 72: Recent Ethylene Glycol pricing (US$/mt)
1,600 1,600
1,400 1,400
1,200 1,200
1,000
1,000
800
600 800
400 600
200 400
0
200
Jan-2000
Jan-2001
Jan-2002
Jan-2003
Jan-2004
Jan-2005
Jan-2006
Jan-2007
Jan-2008
Jan-2009
Jan-2010
Jan-2011
0
Jan-2007 Jan-2008 Jan-2009 Jan-2010 Jan-2011

Methanol
Figure 73: Methanol at a glance
Supply/Demand Operating rates to improve after significant new capacities during
2007-11
Margin prospects Likely to normalize at current levels
Watch out for ... Increased Chinese production and fuel applications, possible
Chinese legislation and growing concerns over the use of methanol
in fuel
Methanol (CH3OH) is an alcohol that consists of only one carbon atom. It is mainly produced
by a process known as steam reforming, which uses natural gas as its main feedstock.
Methanol is one of the most important commodity chemicals as it is used as a raw material
in several intermediate chemicals and end uses such as MTBE (fuel additive), formaldehyde
and acetic acid. Because of its toxic properties, methanol is frequently used as a denaturant
additive for ethanol manufactured for industrial uses — this addition of methanol exempts
industrial ethanol from liquor excise taxation. Methanol is often called wood alcohol because
it was once produced chiefly as a byproduct of the destructive distillation of wood.
Figure 74: Production of methanol
carbon monoxide
methanol
hydrogen synthesis gas
water
carbon dioxide & other gases
Figure 75: End uses of methanol 2011E
Others
20%
Pipeline
Dehydrating Agent
Formaldehyde
2%
34%
Solvent
3%
Methyl
Methacrylate
3%
Methylamines
3%
Chloromethanes
4% MTBE
Direct Fuel Uses Acetic 13%
8% Acid/Anhydride
10%
Source: SRI and Deutsche Bank

Figure 76: Methanol industry data and participants 2010

N.America 1160 W.Europe 2975 Asia 37469 Middle East 15339 ROW 18232
Millennium 620 STATOIL 900 Petronas 2520 Ar Razi 4850 TTMC) 4000
Eastman 195 Total 660 Kingboard 1670 Zagros PC 3300 Methanex 2925
PEMEX (1) 180 Shell & DEA Oil 400 Shenhua Ningmei 1410 IMC (2) 1100 Atlas 1822
Terra Industries 120 BioMethanol 400 Methanex 1220 Oman Methanol 1050 Metor 1200
Praxair 45 BASF SE 330 Baotou Shenhua 1000 Fanavaran PC 1000 AMPCO 1150
BP RP 285 Boyuan Unichem 1000 Ibn Sina 1000 Metafrax 1000
Others Others Others
(1) PEMEX: Petroleos Mexicanos; (2) IMC: International Methanol Company; (3) QAFAC: Qatar Fuel Additives Co. Ltd.; (4) GPIC: Gulf Petrochemical Industries Co.; (5) NOC: National Oil Company;Source: CMAI.

We expect Global methanol demand to growth at approximately 6-8% through 2011-
2015. This growth should be driven mainly by Chinese demand across all derivatives as
well as fuels applications in China and the rest of the world.
Geographically, the growth sector is China with annual average growth near 20 percent
while the rest of the world grows at a nominal 3 percent. We expect China methanol
consumption to grow from nearly 18 million metric tons in 2010 to nearly 44 million
metric tons in 2015. This should be driven by continued growth in formaldehyde
demand, huge growth in direct blending of methanol into the gasoline pool and newly
planned DME and MTO/MTP capacity. However, there is some growing concern over
the use of methanol as a fuel additive which remains a key risk to the demand growth
forecasts.
We expect supply to grow at around 6% per annum to 2015. Therefore, with global
methanol around this level we see operating rates remaining at current levels over the
medium-term. Current rates are averaging low 80s.
Figure 77: Methanol price (US$/mt) Figure 78: Global capacity expansion (%)
600 20%
500 18%
400 16%
14%
300 12%
200 10%
8%
100
6%
0 4%
2%
2005
2006
2007
2008
2009
2010
2011E
2012E
2013E
2014E
2015E
0%
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011E
2012E
2013E
2014E
2015E
US (Contract) Europe (Contract)
NE Asia (Spot) SE Asia (Spot)
Figure 79: Methanol operating rates Figure 80: Methanol industry cost curve
100%
80%
60%
40%
20%
0%
2005
2006
2007
2008
2009
2010
2011E
2012E
2013E
2014E
2015E
North America West Europe

Middle East North East Asia
Source (ALL): CMAI

Phenol
Figure 81: Phenol at a glance
Supply/demand Improving from lows in 2009 due to limited new capacity
Watch out for… Volume pull (or not) from polycarbonate demand
Phenol is an alcohol that has an aromatic (benzene ring) type structure. While phenol is a
white crystalline solid at room temperature, it is mostly consumed molten as a clear liquid.
Phenol was first isolated from coal tars in the 1800s. Currently the principal method (over
90%) of phenol production uses cumene as the feedstock.
Cumene is prepared by alkylating benzene with propylene. It then oxidises with air in an alkali
environment and the resultant product then splits into phenol and acetone (a useful by-
product used as a solvent in paints). An alternative method of synthesising phenol from
toluene which was historically more prevalent in Europe is now less used due to the weaker
cost economics. Most phenol produced is not consumed in-house, but sold to third parties.
Figure 82: Production of phenol
benzene
cumene phenol
propylene
oxygen acetone
Source: Deutsche Bank, SRI
Figure 83: End uses of phenol 2010
Other
20%
bisphenol A
38%
nylon/cyclohexanol
13%
phenolic resins
29%
Source: CMAI

Figure 84: Regional production growth (%) Figure 85: Top producers (kt/pa) 2009
40% 2,000 20%
30% 1,800
1,600 16%
20% 1,400
10% 1,200 12%
1,000
0%
800 8%
-10% 600
-20% 400 4%
200
1997
1999
2001
2003
2005
2007
2009
2011E
2013E
2015E
---- 0%
North America Western Europe

Asia exc. Japan Japan
Latin America
Source: Deutsche Bank and CMAI Source: Deutsche Bank and CMAI
Figure 86: North America Phenol Demand Figure 87: West Europe Phenol Demand
2.5
2.5
2.0
2.0
1.5 1.5
1.0 1.0
0.5 0.5
0.0
0.0
2005
2006
2007
2008
2009
2010
2011E
2012E
2013E
2014E
2015E
2005
2006
2007
2008
2009
2010
2011E
2012E
2013E
2014E
2015E
Bisphenol A Nylon-KA Oil Phenolic Resins Others Bisphenol A Nylon-KA Oil Phenolic Resins Others

The end uses of phenol are mainly into plastics (polycarbonate via bi-phenol A and nylon
via cyclohexane) Phenol demand has grown in excess of GDP in recent years. We
forecast growth rates going forward at 1.5x GDP.
Phenol demand is pulled strongly by demand for bisphenol A, which is a major

intermediate in the manufacture of polycarbonates. Polycarbonates are engineering
plastics used in various applications, for example, as a substitute for glass (car
headlights, rear side windows), but also for items such as compact discs/DVDs. This is
particularly the case in China and other Asian regions.
Current operating rates are in the mid 80s with the industry likely to see limited new
capacity addition over the next few years (but some de-bottlenecking is inevitable). We
expect operating rates to modestly improve.
It should be noted that the economics of producing phenol remain significantly impacted
by the market for the by-product acetone of which 6 tonnes is produced for every 10
tonnes of phenol. Over the past few years demand for acetone has been impacted by
the development of a more cost–effective production method for its main product MMA
which does not require acetone.

Styrene
Figure 88: Styrene at a glance
Long-term growth rate GDP
Growth rate relative to sector Below average
Supply/demand Steady recovery through 2011 onwards due to very limited supply additions
Margin prospects Some margin improvement likely next five years
Watch out for… New capacities in Asia, but plant closures and further rationalization appear likely in
more mature markets
Styrene is a colourless, water-insoluble liquid, which has a penetrating aromatic odour. There
are two processes by which it is made: ethylbenzene dehydrogenation and the propylene
oxide co-product method. The ethylbenzene process is the most common. Styrene is
predominantly used in the production of polystyrene, but also has uses in the production of
ABS rubber and styrene butadiene resins and emulsions.
Figure 89: Ethylbenzene dehydrogenation process
styrene
ethyl benzene
hydrogen
Figure 90: Propylene oxide co-product process of styrene
ethyl benzene
ethyl benzene hydroperoxide propylene oxide
oxygen
propylene methyl phenyl cartinol styrene
Source: SRI
Figure 91: Styrene end uses 2011E
Others
Styrene butadiene 12%
rubber
4%
Polystyrene
Unsaturated 38%
polyester resins
5%
Styrene butadiene
latex
5%
Acrylonitrile
butadiene rubber
Expandable
17%
Polystyrene
19%

Figure 92: Styrene industry data and participants 2010

N. America 5925 W. Europe 5622 Middle East 3095 Asia 15148 ROW 1710
INEOS NOVA (1) 1702 BASF 1050 SADAF (5) 1150 FCFC 1200 NKNK (9) 275
LyondellBasell 1259 Lyondell/Bayer (4) 700 Jubail ChevPhill 775 Samsung Total PC 930 Innova 255.5
Cosmar (2) 1150 Polimeri Europa 655 Pars PC 600 Asahi Kasei Chem. 710 Salavatnftgsz 200
Americas Styrenics 953 Total PC 600 TKSC (6) 475 LG Chem 670 Synthos Kralupy 170
(7)
Shell Canada 450 Ellba 550 Tabriz PC 95 Secco 650 Petrobras Energia 160
Westlake 261 Repsol Quimica 450 CNOOC & Shell PC 607 EDN-Unigel 160
PEMEX (3) 150 Shell 440 Idemitsu Kosan 550 Sibur Khimpron 135
Dow 400 Ellba Eastern 550 Synthos Dwory 120
Styron 400 Honam PC 500 CBE 120
Ineos 350 Tianjin Dagu 458 Angarsk Petchem 44
(1) 50:50 jv between INEOS and NOVA Chemicals; (2) 50:50 jv between SABIC and Total; (3) PEMEX: Petroleos Mexicanos; (4) 50:50 jv between Bayer and LyondellBasell; (5) SADAF: Saudi Petrochemical Co.; (6) TKSC: The
Kuwait Styrene Co.; (7) 30:20:50 jv between China Petrochemical Co., Shanghai Petrochemical Co. and BP; (8) NKNK: JSC Nizhnekamskneftechim
Source: CMAI

After the weak demand during 2008-09, the demand for styrene is has shown recovery
in 2010. We expect global demand to increase at around 3-4% per annum through 2011-
15 driven mostly by emerging markets. On a percentage basis, Middle East should also
grow strongly (average annual growth of around 16%) with startup of significant
polystyrene, EPS and ABS capacity, but this is from a very low base and the derivatives
produced are more for export than domestic use.
In terms of demand breakdown, we expect expanded PS and ABS combined to overtake

Polystyrene as a styrene end use by 2013, which is good for the business since they are
growing much faster and should positively influence growth rates in the future. They also
have less price sensitive end uses than PS and should not be substituted as easily,
should upstream cost pressures in the styrene chain escalate relative to competitive
materials.
Over the coming five years (2011-15) we anticipate less than 1% capacity growth p.a.
compared to demand growth estimated at 3% p.a. This would improve the operating
rates gradually to around 91% by 2015 compared to a global average operating rate of
81-82% in the last three years. However, this would still be lower than the preceding 20
years average of 93%.
In recent years, the styrenics rationalization impacted units that were not necessarily at
the tail end of the cost curve. For example, there are units in Japan that are probably less
cost competitive and less integrated than Mitsubishi Chemical’s Kashima unit, but it is
the one that is being shut down in 2011. Mitsubishi Chemical is moving out of base
chemicals, including styrenics. Dow is the biggest and most prominent example of this
trend, and it cut capacity for economic and strategic reasons to make the spin-off Styron
more appealing to a buyer. It worked, and Styron has been acquired. BASF took a slightly
different approach to styrenics and started selectively selling and/or shutting down
assets. The BASF Korea styrene plant was sold back to SK, since it was not cost
competitive in the current crude oil and naphtha price environment. BASF is separating
their styrenics business into a new entity named “Styrolution” to be merged with Ineos.
We expect more industry rationalization in the future.
Over the next five years (2011-15), we expect pricing and margins to improve slightly in
most regions driven by modestly improved operating rates.

Figure 93: Global supply/demand (kt/pa) Figure 94: Regional nameplate operating rate
35000 96% 110%

94%
30000 92% 100%
25000 90% 90%
88%
20000 86% 80%
15000 84%
82% 70%
10000 80%
78% 60%
5000
76% 50%
0 74%
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011E
2012E
2013E
2014E
2015E
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011E
2012E
2013E
2014E
2015E
Global capacity Operating Rate,% North America West Europe Asia
600 3,000 9%
500 8%
400 2,500
7%
300 2,000 6%
200 5%
100 1,500
4%
----
1,000 3%
Styron
Styrolution
NS Styrene
ZRCC/Lyondell
Baling PC
Jilin Chemical
SP Chemicals
2%
Monomer
500
1%
---- 0%
JV
LyondellBasell
Ineos
SABIC
SINOPEC
CNPC
Abu Dhabi
BASF SE
Formosa
Total
Dutch/Shell
Group
Gov't
Royal
2011 2012 2013
Source: Deutsche Bank and CMAI Source: Deutsche Bank and CMAI * Ineos acquired Innovene in December 2005
Figure 97: Historical pricing ($/tonne) Figure 98: Cash margins ($/tonne)
250
2,000
200
1,500 150
1,000 100
50
500
0
0 -50
Jan-1999
Jan-2000
Jan-2001
Jan-2002
Jan-2003
Jan-2004
Jan-2005
Jan-2006
Jan-2007
Jan-2008
Jan-2009
Jan-2010
Jan-2011
-100
2005
2006
2007
2008
2009
2010
2011E
2012E
2013E
2014E
2015E
North America Northeast Asia West Europe US Europe North East Asia

Paraxylene (PX)
Figure 99: Paraxylene at a glance
Long-term growth rate >1.5x GDP
Supply/demand Strong current conditions with only limited capacity additions in the next few years
suggesting that tight operating rates should continue subject to demand
Margin prospects High at the moment and likely to remain quite strong
Watch out for… New supply additions from 2013 onwards and capacity creep/de-bottlenecking
Paraxylene (PX) is a colourless liquid and is the most commercially important xylene. It is
almost entirely used as an intermediate into polyester (via PTA and DMT). Paraxylene is most
commonly separated from the mixed xylene stream that results from the refining of naphtha.
However, it can also be produced through toluene disproportionation which involves toluene
with a limited amount of C9 aromatics being combined with a hydrogen rich recycle gas,
preheated and passed through a catalyst bed. The liquid from this process is then
fractionated to recover the benzene product and the mixed xylenes.
Figure 100: The production of paraxylene

Major Aromatic
Petroleum Source
Reforming
Direct use of
meta -Xylene
Mixed Xylene
Coal Processing
Steam Cracking
Other Aromatic Mixed Xylenes Separation
ortho -Xylene
Sources recovery Isomerization
Toluene Disproportionation Paraxylene
Benzene
Source: SRI
Figure 101: Paraxylene end uses – 2010 Figure 102: Top producers (kt/pa)
12%
% share of global capacity
10%
8%
6%
Dimethyl
Teraphthalic
Terephalate
Acid
4%
7%
93% 2%
0%
Mobil Corp
NPC- Iran
Industries
Chevron
Sinopec
Holdings
CNPC
BP
Gormosa
Petroleum
Reliance
Group
Nippon
Corp
Exxon
GS

The main use is as a raw material for polyester which continues to see good growth
driven by new applications (PET) which should support demand growth of 5-6% pa.
In the coming four years global capacity is anticipated to grow at around the level of
demand (assuming some de-bottlenecking and capacity creep additions). We expect the
current tight conditions to remain until 2012 and early 2013. We expect new potential
plants in the Middle East and Asia (where demand for the end product is growing
fastest) to accelerate in the medium-term.

Purified Terephthalic Acid (PTA)

Figure 103: PTA at a glance
Long-term growth rate 2x GDP
Growth rate relative to sector High
Supply/demand Currently tight, likely to modestly weaken in 2013/14 due to new capacities
Margin prospects High at the moment but could weaken modestly in 2012/2013l
Watch out for… Further new plants in 2013 onwards, some de-bottlenecking/capacity creep
Purified Terephthalic acid is a white, water-insoluble powder obtained from the oxidation of
Paraxylene with the solvent acetic acid. It is used primarily in the manufacture of polyester
(either resin called PET or fibre). PTA is also known as TPA (Terephthalic acid).
Figure 104: Production and end uses of PTA
4%
PET Film Packaging
83% Apparel, home,

PET Fibre textiles
mixed xylenes paraxylene PTA PET
12% Water, drink & food
PET Solid State
containers
acetic acid ethylene glycol 1% Engineering

Resins Automotive
Source: SRI
Figure 105: PTA end uses – 2011E
PBT Others
Polyester Films 2% 3%
5%
PET Solid-State
Resins
30%
Polyester Fibers
60%

Figure 106: TPA industry data and participants 2010

N. America 5650 W. Europe 3060 Asia 38525 Middle East 1190 ROW 255
(2)
BP 1950 BP 1400 FCFC 3100 Shahid Tondguyan 700 Polief 250
Petrocel 960 CEPSA Quimica 550 Reliance Industries 2030 Ibn Rushd 420 INA Banja 5
Eastman 810 Indorama Petrochem 360 CAPCO (3) 1870 Petkim 70
Temex 610 Lotte Chemicals UK 360 Zhejiang Yuandong 1800
(1)
DAK Americas 600 Equipolymers 190 Samsung PC 1800
CEPSA Montreal 500 Artenius 120 Sam Nam 1700
(4)
Invista 220 PCK Schwedt 80 Xianglu PC 1650
Zhuhai Biyang 1600
(5)
Yisheng Dalian 1500
Yangzi PC 1420
Others 20055
(1) 50:50 jv between Dow Chemical Company and Petrochemical Industries of Kuwait; (2) FCFC: Formosa Chemical Fiber Corp. ;(3) CAPCO: China American Petrochemical Co; (4) Owned by Tuntex Group and Presendential
Group; (5) 51:49 jv between Rongsheng and Zhejiang Hengyi Group Ltd..
Source: CMAI
Figure 107: TPA regional capacity breakdown 2011E
Others
Middle East 2%
2%
West Europe
6%
Indian
Subcontinent
9%
Southeast Asia Northeast Asia
10% 60%
North America
11%
Source: SRI

TPA saw very strong demand growth before the last downturn, helped by strong
demand coming in from Polyester fibers. In 2008 demand was badly impacted by the
economic slowdown, however now it has shown strong recovery and we expect it to
remain strong in near term.
Regionally, Northeast Asia is the biggest producer with around 60% of the global
capacity and around half of the capacity concentrated in China. Despite being major
producers, China is a net importer of PTA due to its high domestic demand and we
expect this strong demand will remain a key driver of the PTA industry.
Currently, the supply demand conditions are very tight in the PTA market with plants
running at around 90% operating rates, however we expect this to decline modestly in
2012/13 due to material capacity additions.

Figure 108: Global supply/demand (kt/pa) Figure 109: PTA % capacity additions
80,000 100% 25%

70,000 90% 20%
60,000 15%
50,000 80% 10%
40,000 70% 5%
30,000 60% 0%
20,000 -5%
10,000 50%
-10%
0 40%
2005
2006
2007
2008
2009
2010
2011E
2012E
2013E
2014E
2015E
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012E
2014E
Global Capacity Operating rate Global N. E. Asia N. America W. Europe
2,000 8,000 18%

7,000 16%
1,500 6,000 14%
5,000 12%
1,000
10%
4,000
500 8%
3,000 6%
---- 2,000 4%
Xianglu
Yisheng
Yisheng
Yuandong
Jiaxing PC
Hanbang
PKN Orlen
Artenius
Chemical
1,000 2%
Zhejiang
Dalian
Hailun
PC
PC
PC
---- 0%
Yuandong
SINOPEC
Industries
Grupo Alfa
Eastern
Rongsheng
BP
Formosa
Chemicals
Chemical
Reliance
Zhejiang
Mitsub.
Group
Far
Mitsui
2011 2012 2013
Figure 112: Historical margins US $/metric ton
500
400
300
200
100
-100
-200
-300
Jan-03
Jul-03
Jan-04
Jul-04
Jan-05
Jul-05
Jan-06
Jul-06
Jan-07
Jul-07
Jan-08
Jul-08
Jan-09
Jul-09
Jan-10
Jul-10
Jan-11
N. America N. E. Asia W. Europe

Source: CMAI

Acrylic Acid
Figure 113: Acrylic Acid at a glance
Supply/Demand Remains tight due to robust demand growth and limited capacity additions
Margin prospects Remaining high for the foreseeable future
Watch out for ... Debottlenecking, propylene availability
Acrylic acid, a colourless corrosive liquid with an acrid odour, comes in several different
grades, the most common of which are crude acrylic acid (CAA) and glacial acrylic acid
(GAA). The latter is a higher-purity grade than CAA. CAA is primarily consumed 'captively' and
is rarely sold commercially or transported long distances. GAA is used in the production of
acrylic polymers and various esters.
The vast majority of acrylic acid is produced via the oxidation of propylene (a major co-
product of the petrochemical cracking process) over a catalyst to create acrolein which is
then further oxidised to given acrylic acid.
Most acrylic acid produced is used as acrylate esters in the production of emulsions and
resins whose end markets include paints, textiles, adhesives and plastics. Polyacrylic acid,
another major product of acrylic acid, is used to manufacture superabsorbents (which give
baby nappies/diapers their absorbent properties), detergents, dispersants, flocculants and
thickeners. Flocculant have major uses in the water treatment chemical market.
Figure 114: Production of acrylic acid
propylene
Emulsions and resins
acrolein acrylic acid
oxygen Super absorbent polymers
oxygen water
Figure 115: Acrylics demand by end-markets 2010 Figure 116: Acrylics demand by region 2010
Other
(water Superabso Europe
treatment rbents 26%
etc) 26%
33% Asia
45%
North
Coatings America
Adhesives 26% 29%
15%
Source: Arkema Source: Arkema

Figure 117: Acrylic Acid industry data and participants 2010

Dow 584 BASF 630 FPC (2) 461 Sasol Dia Acrylates 80
Arkema 280 StoHaas 330 Nippon Shokubai 460 Akrilat 60
BASF 220 Arkema 300 Jiangsu Jurong 205 Hexion 55
(1) (5)
StoHaas 165 Dow 100 LG Chem 191 FSUC 4
American Acryl 120 BASF/Yangzi PC (3) 160
BASF PETRONAS (4) 160
Shenyang Paraffin 130
Huayi Acrylic 126
Mitsub. Chemical Corp. 110
Beijing Dongfang 80
Others 462
(1) 50:50 jv between Rohm & Haas and Evonik; (2) FPC: Formosa Plastics Corporation; (3)50:50 jv between BASF and Yangzi Petrochemical Company; (4) 60:40 jv between BASF Petronas; (5) FSUC: Federal State Unitary
Company
Source: CMAI

Demand for acrylics should grow at 4-5% p.a. due to above-GDP growth expected in
some key end markets such as coatings (substitution to higher performance
formulations, building & construction in emerging markets), water treatment
(industrialisation and waste-water treatment) and some new fast-growing applications
such as enhanced oil & gas recovery (shale gas, high-pressure gas fields).In addition
coatings is a major end-market for Acrylics and largely linked to the construction market
which has yet to recover in Europe and in the US.
Since the 2006-08 acrylics investment wave, there has not been any new capacity
addition. With recovering demand in most end-markets and exceptionally high outage
rates in 2009-10, the market has tightened significantly and effective operating rates
have increased to 91%. Although there is no planned capacity addition in 2011, likely
lower outage rates that those seen in 2009-10 and debottlenecking (e.g. both Arkema
and BASF have announced their intention to increase their existing acrylic acid capacity)
is likely to restrict further material tightening of the acrylics market (we forecast 91%
effective capacity utilisation in 2011E). Beyond 2011, there is only one material
expansion (250kt) planned by the Saudi Acrylic Monomer Company in 2012/13
(representing approx c5% of global capacity) but this should be easily absorbed by the
relatively fast growing demand. We therefore expect the Acrylics market to remain
strong (above mid-cycle level) until at least 2013 with effective operating rates above
92% (note that our effective operating rates reflect our own assessment of outages and
debottlenecking).
The top four companies (BASF, Dow, Arkema and Nippon Shokubai) account for
approximately 70% of global production. Dow’s position was reinforced in 2009 with the
Rohm & Haas acquisition. With this relatively high degree of consolidation, we would
expect the players to keep a disciplined approach to new capacity.
Propylene, the key raw material for acrylic acid and a naphta-cracker co-product is
currently in short-supply as most new crackers use cheaper ethane (natural gas) as
feedstock instead of naphta (oil). We estimate that once the propylene supply has been
secured, it takes at least 2-3 years to build an acrylic acid plant which gives us a relatively
good visibility until 2014.

Figure 118: Acrylic acid supply/demand outlook Figure 119: Top producers (kt/pa) 2010
6,000 95%
1,200 20%
5,000 90% 18%
1,000 16%
4,000
85% 14%
3,000 800
12%
80% 600 10%
2,000
8%
1,000 75% 400 6%
200 4%
0 70% 2%
---- 0%
2010E
2012E
1996
1998
2000
2002
2004
2006
2008
Dow
Industries
SINOPEC
LG Group
SunVic
Shanghai
BASF SE
Formosa
Shokubai
Arkema
Nippon
Group
Evonik
Huayi
Global capacity (kt) Effective operating rates
Source: CMAI, Arkema, Deutsche Bank Source: CMAI, Arkema, Deutsche Bank
Figure 120: Capacity by region
3,000
2,500
2,000
1,500
1,000
500
----
2005
2006
2007
2008
2009
2010
2011E
2012E
2013E
2014E
2015E
North America Europe Asia ROW
Source: CMAI

Acetic Acid
Figure 121: Acetic Acid at a glance
Growth rate relative to the sector Below average
Supply/Demand Increasing capacity may modestly impact the dynamics
Margin prospects Expected to remain stable
Watch out for ... Further Asian expansions, de-bottlenecking
Acetic acid is also known as ethanoic acid (effectively vinegar). It is a colourless hygroscopic
liquid, which readily absorbs water, and freezes below 16.7 C (62 °F) to a colourless
crystalline solid.. The most widely-used manufacturing process for acetic acid is called
methanol carbonylation (MC) which accounts for 80% of production. The MC process begins
with natural gas or methanol being oxidised to produce what is known as a synthesis gas
(syngas - a mixture of hydrogen and carbon monoxide). This syngas is then converted into
acetic acid using a catalyst in a process called methanol carbonylation (MC). However, there
are a number of variations of this technology most notably the AO Plus (used by Celanese
and BP). Alternative technologies include the direct oxidation of ethylene, ethane or methane.
Figure 122: Acetic Acid production Figure 123: End uses of acetic acid
Liquide phase oxidation
Others
Naphtha or NGLs Direct vapour phase oxidation 15%
Ethylene
Vinyl acetate
monomer
33%
Liquide phase oxidation
Acetaldehyde
Solvent for TPA
17%
Acetic Acid
Direct vapour phase oxidation

Natural Gas Ethane
Fuel oil
Methanol Acetate esters Acetic anhydride
Methanol Carbonylation 17% 18%
Syngas
Coal Carbon Monoxide
Fermentation
Carbohydrates
Source: Deutsche Bank Source: Deutsche Bank
Figure 124: Acetic acid industry data and participants 2010

N.America 3053 W. Europe 885 Asia 9998 ROW 1277
Celanese 1200 BP 544 Celanese 1800 IAC (7) 460
Loyndell 550 Wacker Chemie 150 Jiangsu Sopo 650 SSME Azot Assoc. 180
Sterling 546 Kuraray 70 Shanghai Wujing 630 Eurochem 162
Eastman 400 BASF SE 50 Kingboard 500 Fanavaran PC 150
DuPont 98 Lenzing (2) 22 Yankuang Cathay 500 MSK 100
Primester (1) 95 Sekisui Plastic 20 BP Petronas Acetyls (4) 500 Rhodia Poliamida 40
(3)
Sekisui Plastic 95 SEKAB 12 Kyodo Sakussan 400 Polyvinilacetat 35
Dow 27 Mesta-Serla 6 Samsung/BP Chem (5) 400 Arak PC 30
Solutia 22 Borregaard 5 BP/Sinopec (6) 367 Ibn Rushd 30
Monfel 20 Alko 4 Yangtze River 350 Navoi Azot 25
Puratos 2 Others 3901 Atanor 16
Others 49
(1) Primester: 50-50 joint venture of Eastman Chemical and Rhodia; (2) Bank Austria owns 51%; (3)SEKAB: Svensk Etanolkemi AB; (4) BP Petronas Acetyls: 70-30 joint venture between BP and Petronas; (5) Samsung/BP Chem :
51:49 jv between BP and Samsung General Chemical Co., Ltd; (6) jv between Sinopec 24.5%, Chongqing Municipality 24.5% and BP 51%; (7) IAC: International Acetyl Company; Source: CMAI

Demand for acetic acid increases broadly in line with GDP, and we currently expect
Chinese demand to remain a key driver for this product. We expect China to see a
demand growth of close to 7-8% per annum in near term with majority of growth
expected to come from VAM and acetic anhydride. US and West European demand is
expected to grow close to 2-3% per annum helped by a recovery in construction
markets in the US and robust demand from VAM producers in Western Europe.
Celanese is global leader in the global acetic acid market with one of the most advanced
production technology and very competitive production cost position.
A number of producers of acetic acid are forwards integrated into vinyl acetate monomer
(VAM). These include Celanese and Lyondell. However, given that acetic acid can be
transported such integration (while allowing savings) is not essential.
Figure 125: Top 10 producers of Acetic acid 2010 Figure 126: Capacity additions for Acetic acid (%)
2,500 25%
30%
2,000 20% 25%
1,500 15% 20%
15%
1,000 10%
10%
500 5% 5%
---- 0% 0%
SIPCHEM
LyondellBasell
SINOPEC
Sterling
Celanese
Jiangsu Sopo
Kingboard
CNPC
BP
Eastman
2006
2007
2008
2009
2010
2011E
2012E
2013E
Global Northeast Asia
Source: Tecnon OrbiChem Source: CMAi
Figure 127: Acetic acid demand by region 2011E Figure 128: Cost curve based on effective capacity 2011E
Others
9%
China
Western 30%
Europe
14%
United
States Rest of Asia
20% 27%
Source: SRI Source: Celanese

Acrylonitrile
Figure 129: Acrylonitrile at a glance
Supply/Demand Remains healthy as limited new capacity likely to come on-stream whereas
demand is expected to remain robust
Margin prospects To remain at a high level for at the next 2-3 years assuming demand remains robust
Watch out for ... Replacement risk, de-bottlenecking/capacity creep, higher feedstock prices
Acrylonitrile is a pungent smelling, extremely flammable, colourless organic liquid. It is also

known as cyanoethylene (cyanoethene) or vinyl cyanide. Acrylonitrile is used principally as a
precursor monomer in the manufacture of synthetic polymers, acrylic fibres, nylon (6,6) and
synthetic rubber. It can be used to make intermediates for dyes, pharmaceuticals, and
insecticides as well PAN (polyacrylonitrile), which is a precursor for the production of carbon
fibre.
Figure 130: End uses of Acrylonitrile 2011E Figure 131: Regional breakdown of Acrylonitrile 2011E
ROW
Others 9%
Nitrile
4%
Rubber
W. Europe
4%
15%
Acrylic
Adiponitrile
Fibers
6%
42% N. E. Asia
Acrylamide 51%
9%
N. America
ABS/SAN 25%
35%
Figure 132: Manufacturing process for acrylonitrile
propylene
Ammonia Acrylonitrile
oxygen Hydrogen cyanide (HCN)
Ammonium sulphate (fertiliser)
Source: SRI

Most industrial Acrylonitrile is produced through the Sohio process (BP/Ineos owned) which
represents more than half of global capacity. In this process, chemical-grade (often refinery-
grade) propylene, fertilizer-grade ammonia and air (sometimes oxygen enriched) are
combined in a fluidized-bed catalytic reactor at high temperature. Other processes include a
Propane to Acrylonitrile process (no commercial operations yet established) and a one-step
fluid-bed ammoxidation of Propane process. Hydrogen cyanide is a key by-product in
Acrylonitrile synthesis.
On a global basis the leading producer of Acrylonitrile is Ineos (formerly BP/Innovene) with
close to 22% of the global capacity followed by Asahi Kasei Corp with 12% of global
capacity. However, on a regional basis there are also a number of major players –Ineos and
Solutia in the US; Ineos, and DSM in Western Europe; and Asahi, CNPC and SINOPEC in
Asia.
Figure 133: Acrylonitrile industry data and participants 2010

Ineos 730 Ineos 595 Asahi Kasei Chem. 450 ACRINOR (4) 100
Ascend 467 DSM 260 Secco (1) 347 Saratovorgsintez 150
Cytec 215 Jilin Chemical 342 Petkim 94
Unigel 70 Tongsuh PC 300 Polimir 85
FPC (2) 280 Lukoil Neftochim (BUL) 30
Tae Kwang 250 Navoi Azot 26
DiaNitrix 205
CPDC (3) 182
Shanghai PC 130
Others 573
(1) SECCO: Shanghai Secco Petrochemicals Co. Ltd.; (2) FPC: Formosa Plastics Corporation; (3) CPDC: China Petrochemical Devlpmnt Corp; (4) Owned by Unigel;
Source: CMAI

We anticipate the market for Acrylonitrile will to grow at approximately 4-5% pa through
2015, driven largely by the demand for ABS while we expect acrylic fiber demand to
remain at a lower growth rate.
Operating rates reached a record high in 2006 (close to 95%), after that there was a
steady decline due to higher competition from materials such as Polyester, followed by s
sharp demand depletion due to recession. Currently operating rates are running close to
80% and we expect some steady improvement due to very limited capacity additions
and increasing demand for ABS and some modest demand improvement for acrylic
fibre.
Regionally, more than 50% of the global capacity is concentrated in Asia, with most of
the plants situated in Japan and China. Globally, Ineos is the largest producer of
Acrylonitrile followed by Asahi Kasei and CNPC, these top three producer accounts for
more than 45% of the global capacity.
Transportation of Acrylonitrile is comparatively low cost which makes it a widely traded

product, with North America and West Europe exporting substantial volumes to the
North East Asian countries.

Figure 134: Global capacity additions (%) Figure 135: Global Capacity addition in key regions (%)
7%
6% 10%
5%
5%
4%
3% 0%
2%
1% -5%
0%
-10%
-1%
-2% -15%
-3%
2006
2007
2008
2009
2010
2011E
2012E
2013E
2014E
2015E
-4%
2000
2002
2004
2006
2008
2010
2012E
2014E
North America West Europe Northeast Asia
Figure 136: Supply/demand for Acrylonitrile Figure 137: Top 10 producers of Acrylonitrile (2010)
7,000 95%
6,000 1,400 25%
90%
5,000 1,200
85% 20%
4,000 1,000
80% 15%
3,000 800
2,000 75%
600 10%
1,000 70%
400
0 65% 5%
200
2005
2006
2007
2008
2009
2010
2011E
2012E
2013E
2014E
2015E
---- 0%
Capital II
Cytec
DSM
Kwang
Ineos
SINOPEC
Asahi
Kasei
CNPC
Formosa
Chemical
Mitsub.
Group
Tae
SK
Demand Operating Rate %

Figure 138: Acrylonitrile major expansions Figure 139: Acrylonitrile pricing $/ton
300 2,800
250 2,400
200 2,000
150 1,600
1,200
100
800
50
400
0
0
SIPCHEM
CPDC
Tongsuh
Chemical
Chemical
Chemical
Asahi
Asahi
Jan-03
Jul-03
Jan-04
Jul-04
Jan-05
Jul-05
Jan-06
Jul-06
Jan-07
Jul-07
Jan-08
Jul-08
Jan-09
Jul-09
Jan-10
Jul-10
Jan-11
Jul-11
Jan-12
Jul-12
PTT
PTT
Jilin
PC
2011 2012 2013 U.S. N.E. Asia


Caprolactam
Figure 140: Caprolactam at a glance
Long-term growth rate 1.0-1.5x GDP
Supply/Demand Tight and likely to stay so through 2015 with limited new capacity
Margin prospects High and likely to remain so with limited new capacity
Watch out for ... Further Asian expansions and debottlenecking
Caprolactam is a toxic cyclic amide, produced as clear liquid or more commonly a white
crystalline form. Caprolactam is a raw material (monomer) for the nylon-6 production for fibre,
film and plastic applications.
Figure 141: End use breakdown of caprolactam
Others
3%
Nylon 6 Resins and

Films
36%
Nylon 6 Fibers
61%
Source: SRI
Caprolactam can be made from either of three different raw materials: Cyclohexane, phenol,
or toluene. DSM has a very strong position in the caprolactam market with more than 20%
global share and over 40% of global production using DSM’s proprietary technology.
Caprolactam is produced by the reaction of cycylohexanone (raw materials being

Cyclohexane or phenol) with hydroxylamine sulphate (prepared through the oxidation of
ammonia, producing the by-product ammonium sulfate, AS) in the presence of aqueous
ammonia (forming further AS as a by-product). This produces cycylohexanone axime which is
treated with fumic sulfuric acid to produce caprolactam and sulfuric acid. From
cycylohexanone to Caprolactam there are as many as seven alternative processes of which
the main difference is the amount of by-product AS yielded.
Caprolactam usually kept molten until used and is shipped in that form (at about 75C in
insulated vessels). It can also be flaked for small customers at a higher cost.

Figure 142: Manufacturing process for caprolactam
Ammonia cyclohexane phenol toluene
Oxidation Oxidation hydrogenation Oxidation
cyclohexanone- benzoic acid

cyclohexanol
Ammonium sulphate Hydroxylamine sulphate hydrogenation
cyclohexane
cyclohexanone carboxylic acid
caprolactam
Source: SRI and Deutsche Bank estimates
Figure 143: Capacity of caprolactam by raw materials Figure 144: Technology comparison
2010
Current technology Emerging technology
1900 Mitsubishi, Bayer, Polish, Snia
100%
1800 DSM HSO, Toray, Allied
80%
60% 1700 DSM HPO, BASF, HSNO Sumitomo
Integral costs ($/mt)*
40% 1600
average caprolactam market price

20% 1500
DSM HPOplus BASF, Rhodia

0% 1400 Creep
&
US W. Europe Japan Debottle-
necking
1300
DSM Altam
1200
Cyclohexane Phenol Cyclohexanol/Cyclohexanone
* Integral costs including capital charge
** XXX
Source: SRI Source: DSM
Figure 145: Geographical breakdown of caprolactam
Southeast Asia
3%
North America
21%
Northeast Asia
33% South America
1%
Indian West Europe

Subcontinent 24%
2%
CIS & Baltic States
Central Europe
12%
4%
Source: CMAI

Figure 146: Caprolactam industry data and participants 2010

Honeywell 360 BASF 480 CPDC (2) 280 Kuibyshevazot 180
BASF 300 DSM 270 Capro Corp 270 Grodno Azot 111
DSM 225 Lanxess 200 Baling PC 210 Azot Kemerovo 108
(1) (3)
Univex 88 DOMO Chemicals 140 DNCC 190 Z.A. Tarnow 95
Evergreen Recycle 45 Ube Chem Europe 105 Sumitomo Chem. 180 Elektrokhimprom 80
Ube Industries 180 Z.A. Pulawy 65
Shijiazhuang 170 Azot Cherkassy 60
Chemfibre
Ube Chemicals (Asia) 119 Azot Shchekino 52
Toray 100 Spolana 48
GSFC (4) 70 CPM 33
Others 89 Others 15
(1) Owned by Hoechst AG and Grupo Alfa; (2) CPDO: China Petrochemical Development Corp; (3) 60:40 jv between DSM and Sinopec Nanjing Chemical; (4) GSFC: Gujarat State Fertilizer Company. Source: CMAI

We anticipate growth in caprolactam to be approximately 3-5% pa. Growth is driven by
increased demand for resin in automotive, construction and film applications, offsetting
increasing competition from polyester against nylon fiber. Regionally, stronger growth is
anticipated in Asia with China being a key driver.
Caprolactam is a widely traded product, Western Europe, Central and Eastern Europe,
Japan and the United States send significant quantities to China, Taiwan and the
Republic of Korea. Net imports account for just under 50% of total Asian (ex Japan)
consumption.
The market for caprolactam is fairly concentrated with the top 10 players accounting for
nearly 70% of production.
Regionally, Asia remains the major demand driver for caprolactam. In Asia, China is the
biggest consumer and it continued to perform robustly even in the recent downturn.
Most of the capacity additions in the recent years were concentrated in this region with
only a few new plants coming on stream in Europe and Americas.
Caprolactam prices declined substantially in the downturn due to the sharp decline in
global demand. However this has rebounded strongly with the pickup in demand and
currently is running at high levels with tight supply/demand.
We expect the tight supply/demand balance to continue with limited capacity additions
in the next five years. The next major plant is expected in 2014 (200kT in China from
DSM) with debottlenecking in the meantime.

Figure 147: Global capacity additions (%) Figure 148: Global capacity by raw materials
7% 6,000
6%
5,000
5%
4% 4,000
3% 3,000
2%
1% 2,000
0% 1,000
-1%
0
-2%
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011E
2012E
2013E
2014E
2015E
-3%
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011E
2012E
2013E
2014E
2015E
Cyclohexane Phenol Toluene Cyclohexanol/Cyclohexanone
Figure 149: Top 10 producers of Caprolactam Figure 150: Caprolactam pricing $/ton
900 18% 4,000

800 16% 3,500
700 14% 3,000
600 12% 2,500
500 10%
400 8% 2,000
300 6% 1,500
200 4% 1,000
100 2% 500
---- 0% 0
Kuibyshevazot
Honeywell
DSM
SINOPEC
Lanxess
Ube Industries
CPDC
BASF SE
HanKook
Sumitomo
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Synth.
Chem.
W. Europe N.E. Asia
Source: SRI and CMAI Source: CMAI
Figure 151: Some of the key planned Caprolactam investments

Year Company Name Capacity (Kt)
2011 Kuibyshevazot 50
2011 Lanxess 30
2012 Baling PC 90
2012 Zhejiang Hengyi 84
2012 CPDC 75
2013 Zhejiang Hengyi 116
2013 DNCC 100
2013 Dongji Chemical 75
2014 DNCC 100
Source: CMAI

Melamine
Figure 152: Melamine at a glance
Growth rate relative to the sector Slightly higher
Supply/Demand Slight over-supply as the demand growth has remained subdued as compared to
capacity growth in the last five years
Margin prospects Short-tem improving, weakening medium term
Watch out for ... Recovery of construction market in developed economies
Melamine is a product used in impregnating resins and adhesive resins for the wood-
processing industry, boosting the scratch, moisture and heat resistance of wood based
products. Melamine is also used in many other products, such as car paints, durable plastic
tableware, euro bank notes and flame retardants. Trade names used for melamine products
include Formica and Arborite.
Figure 153: Breakdown of end use applications 2011E
Paper/Textile Others
Treating 5%
Molding 4%
Compounds
8%
Surface Coatings
10%
Laminates
50%
Wood Adhesives
23%
* Wood based applications

Source: DSM and Deutsche Bank estimates
Melamine is produced from urea, mainly by either two methods: catalyzed gas-phase
production or high pressure liquid-phase production. The gas phase process offers
significantly lower fixed costs at larger scale potential.
Figure 154: Production of Melamine resin
CO2
Natural gas Ammonia Urea Melamine
Source: DSM

Regionally, China is the largest end market for Melamine and it accounted for 39% of the
global consumption and 53% of the total capacity in 2010. China has seen a rapid growth in
its domestic demand and export in last decade and we expect its domestic demand to grow
at a rate of 10% in near term. After China, Europe is the second largest geographical market
for melamine followed by other Asia-Pacific countries. The Americas remains a relatively
small market for melamine and we don’t expect any major change in this in near term.
Figure 155: Geographical breakdown of Melamine Figure 156: Geographical breakdown of Melamine
market 2010 market 2015E
Others Others
14% 15%
North
America
North 5%
America
7% Asia
Asia
52%
56%
Europe
Europe 24%
27%
Source: SRI Source: SRI
Figure 157: Regional split of end markets 2010
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Laminates Wood Adhesives Surface Molding Others
Coatings Compounds
North America Central and South America
Europe China
Other Asia Africa, Middle East and Oceania
Source: SRI
Within the melamine market OCI is the largest global producer (acquired DSM Melamine
assets in 2010) and it accounts for 14% of the global capacity. Other competitors have more
regional focuses.
Figure 158: Major manufacturers of melamine (kt)

Americas Europe China Other Asia World Market Share
OCI Melamine 0 150 52 60 262 14.0%

Borealis Agrolinz Melamine 0 160 0 0 160 8.5%
Zaklady Azotowe “Pulawy” 0 96 0 0 96 5.1%
Sichuan Chemical Works 0 0 87 0 87 4.6%
Cytec 80 0 0 0 80 4.3%
Source: SRI


The major end markets for Melamine are construction/remodeling, automotive
production and original equipment manufacture (OEM), and thus its demand is highly
dependent on the economic conditions. Regionally, we see strong demand coming in
from the emerging economies but developed economies such as Western Europe raises
some concern as the construction markets here remain weak/low growth.
Over capacity was major concern for this product in last couple of years, however now
we expect some capacity rationalization to take place in near term. We expect operating
rates to remain above 80-85% in the next five years helped by strong demand and
favorable supply demand dynamics. For 2011 we can see some capacity surplus due to
recent capacity addition in Qatar, Trinidad and China; however we expect this will be
broadly offset by the demand growth coming in from emerging Asia-Pacific economies.
Increasing concerns over the formaldehyde emissions is expected to benefit the

melamine demand as it is a strong formaldehyde binding agent. Many countries have
already set lower standards for formaldehyde emissions for both raw materials and
finished products and these standards are expected to be implemented in other
countries as well in near term.
The melamine industry has seen strong consolidation in the last few years with OCI
acquiring DSM Elastomers in 2010 and integration of AMI Agrolinz Melamine into
Borealis AG in 2009, these two entities now account for more than 20% of the global
capacity. This increasing consolidation will help customers to get suppliers which will
provide them with products and support services all over the world.
Figure 159: Global melamine demand (t/pa)
500
450
400
350
300
250
200
150
100
50
0
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
US W. Europe Japan
Source: SRI

Plastics (or Polymers)

Polymerisation – The Manufacture of Plastics (polymers)
Polymerisation is the linking of individual molecules or 'monomers', such as ethylene, into
long chains or 'polymers' such as polyethylene. This happens in the presence of pressure
and a catalyst. There are five commonly used polymerisation processes, each with their own
merits and downsides. They are:
1) Bulk/Gas-Phase Polymerisation
This is one of the most common (and modern) production methods and is used in the
manufacture of polyethylene and polypropylene. There is no solvent or dilutant in this
process, merely the monomer (e.g. ethylene) and a catalyst. As a result there are significant
environmental benefits from using this method. It is also less energy intensive per quantity of
polymer produced. Attempts are being made to make rubber-type polymers by such
methods, such as EPDM/SBR.
2) Solution Polymerisation
The monomer is dissolved in a solvent and the resultant polymer is also soluble. The polymer
can be used directly from this process, but solvent extraction can be difficult and expensive.
3) Slurry Polymerisation
In this process the polymer is produced as a slurry or paste from a solvent-based system.
Solvent removal can also be a problem with this method.
4) Suspension Polymerisation
This process is used when both the monomer and polymer are insoluble in the solvent but
the catalyst is soluble. Energy is required to prevent the original monomer and polymer
sticking together.
5) Emulsion Polymerisation
This high cost method is used in the manufacture of special latex polymers.
Although common usage tends to apply the generic term 'plastics' to everything, there are in
fact numerous types of plastics with a variety of characteristics suitable for a wide range of
applications. Plastics can be divided into two main categories - thermoplastics and
thermosets. Thermoplastics soften on heating and then harden again when cooled. They can
therefore often be re-moulded or extruded and, increasingly, even recycled. Thermosets
never soften once they have been moulded.
Figure 160: Common types of plastic

Thermoplastics Thermosets
HDPE MDI
LDPE TDI
LLDPE Epoxy
PET resins Phenolic resins
polypropylene
polystyrene
polyvinyl chloride (PVC)

Figure 161: Plastics pyramid
Source: Arkema, Deutsche Bank
Figure 162: Thermoplastics demand by major polymers 2011E
ABS PC
PS 4% 2%
5% PP
PET 25%
8%
LDPE
10%
LLDPE PVC
11% 18%
HDPE
17%
Source: SRI, Deutsche Bank

Page 62
13 May 2011
Figure 163: Polymers: simplified flow diagram of the product pathways Involved in their production

LDPE
chlorine
PVC HDPE
polyethylenes LLDPE
ethylene
styrene polystyrene
ethylene glycol
M DI
toluene polyurethanes
TDI
Base Chem icals Arom atics
DM T
xylene paraxylene PET
PTA
Source: Deutsche Bank, industry sources

Polyethylene (PE)
The majority of the ethylene produced globally is polymerized to form polyethylene (PE), the
most widely used plastic globally, with annual production of approx 90m tons. It is produced
in three different forms (HDPE, LLDPE and LDPE) each of which have different properties
giving it a wide range of applications. HDPE and LLDPE are often manufactured in the same
production facilities. Production can 'swing' from the manufacture of one to the other. LDPE
production facilities are dedicated to that product alone. The different ‘grades’ of each
polyethylene are produced using different combinations of pressure, temperature or
additives.
The biggest technological developments in this industry involve the use of catalyst in the
manufacturing process. Since the 1930s, chemists and engineers have used different types
of catalysts to link together olefin monomers to form polymers. Developed in the 1990s, new
metallocene catalysts enable the production of PE with much improved physical properties.
Currently, the Ziegler and metallocenes catalyst families are the most widely used catalysts
and they have proved very flexible at copolymerizing ethylene with other olefins.
Figure 164: Global Supply demand (Kt/pa)
120,000 90.0%
88.0%
100,000
86.0%
80,000 84.0%
82.0%
60,000
80.0%
40,000 78.0%
76.0%
20,000
74.0%
0 72.0%
2004
2005
2006
2007
2008
2009
2010
2011E
2012E
2013E
2014E
Global Capacity Operating rate
Figure 165: Global PE product demand 2000 Figure 166: Global PE product demand 2011E
LLDPE LDPE
25% 26%
HDPE
HDPE
44%
46%
LDPE LLDPE
31% 28%
Source: Exxon Mobil Source: Exxon Mobil

High and linear low density polyethylene (HDPE and LLDPE)

Figure 167: HDPE at a glance
Supply/demand Steadily improvising
Margin prospects Improving to 2012 then decline
Watch out for… Middle East/Asian swing capacity and reduced exports from Europe and US,
Figure 168: LLDPE at a glance

Growth rate relative to sector High
Supply/demand Steadily improvising
Margin prospects Improving to 2012 then moderating
Watch out for… Substantial new Middle Eastern Capacity that can swing to HDPE
High density polyethylene (HDPE) is a rigid plastic made at low temperature and pressure. It
is the third largest commodity plastic material in the world after PVC and polypropylene (PP).
It is mainly used for rigid packaging items such as detergent or milk bottles, crates or car fuel
tanks. HDPE is commonly recycled. HDPE is generally produced by catalytic polymerization
of ethylene in either slurry (suspension), solution or gas phase reactors. A lot of research is
being carried out on the type of catalyst used in the production process as it plays a very vital
role in deciding the final properties of the product. Some key developments in this space
includes: DuPont’s iron and cobalt catalysts which produce very pure HDPE, Basell’s single,
multizone reactor which can produce bimodal and multimodal PEs using Ziegler-Natta or
single site catalysts.
Linear low density polyethylene (LLDPE) is a tough plastic also made at low pressure but
which has other monomers such as butane or octane added to it (a so-called co-polymer). It
has a higher tensile strength and higher impact resistance than LDPE. It is very flexible and
elongates under stress. It is not as easy to process as LDPE, has a lower gloss and a
narrower range for heat sealing. It is mainly used in the manufacture of films for plastic bags,
sheets, plastic wraps and heavy-duty applications, for example, agricultural film.
HDPE and LLDPE are often produced at the same plant in what is known as a “swing
facility”. Manufacturers can literally swing between the two forms of polyethylene that they
produce. For reasons of production economics, plants are generally dedicated to producing
one product or the other for long periods, however with the current technological advances
and the new catalyst families, this transition has become much easier as compared to the
historical production processes.
Figure 169: Production of HDPE and LLDPE
LDPE
naphtha/natural gas ethylene polyethylene HDPE ‡
LLDPE †
Source: Deutsche Bank. ‡ Manufactured at low pressure, but produces a product with very few side chains, due to the lack of co-monomer, † Manufactured at low
pressure using an alpha-olefin as a co-monomer. Side chains are periodically spaced

Figure 170: End uses of HDPE 2011E Figure 171: End uses of LLDPE 2011E
Other Film & Others

15% Sheet Wire &
8%
26% Cable
2%
Pipe &
Extrusion Pipe & Film &
13% Extrusion Sheet
2% 77%
Roto
molding
Injection Blow 4% Injection
Molding Molding Molding
20% 26% 7%
Figure 172: HDPE industry data and participants 2010

Chevron Phillips 1578 LyondellBasell 1223 TPE (4) 900 YANPET (6) 1300
Dow 1430 Ineos 1130 Dushanzi PC 710 Braskem 825
ExxonMobil 1376 Total PC 905 Japan Polyethylene 569 Borouge 635
Equistar (2) 1364 SABIC Europe 720 LG Chem 550 Quattor 500
(3)
Formosa Plastics USA 779 Borealis 521 FPC 535 Q-Chem 469
Ineos 767 Repsol Quimica 380 Haldia 500 Jam PC 450
Nova Chemical 515 DOW 230 Reliance Industries 480 Equate 450
Total PC 440 Polimeri Europa 230 Bangkok PE 479 TVK (7) 410
Imperial Oil 395 Syndial 110 Honam PC 460 Kazanorgsintez 400
CP/INEOS (1) 318 KPIC (5) 450 Petrokemya/JUPC (8) 400
PEMEX 250 Fujian Ref & Chem 400 SEPC (9) 400
Honeywell 55 Chevron Phillips Singapore 400 SHARQ (10) 400
Ticona 30 Daelim 380 Yansab (11) 334
Secco 375 Unipetrol RPA 320
Figure 173: LDPE industry data and participants 2010

Dow 2375 Dow 1425 ExxonMobil 555 SHARQ 1180
(13)
ExxonMobil 1540 Borealis 646 Reliance Industries 470 KEMYA 900
Nova Chemical 1010 Polimeri Europa 530 Dushanzi PC 410 Braskem 670
Equistar 512 Ineos 500 Fujian Ref & Chem 400 Petro-Rabigh 600
Westlake 455 ExxonMobil 425 PTT Polyethylene 400 Yansab 500
Chevron Phillips 293 SABIC Europe 175 Hanwha Chemical 396 Equate 450
Formosa Plastics USA 284 Dex Plastomer 120 Secco 375 Qatofin 450
PEMEX 250 Repsol Quimica 40 Japan Polyethylene 373 Petrokemya/JUPC 400
Imperial Oil 100 Siam PE 350 PBB Polisur 290
ZRCC (12) 338 Quattor 270
(1) 50-50 JV between Ineos and Chevron Philips, (2) As of Dec 04 Lyondell acquired the whole of the Equistar venture; (3) Borealis is JV between OMV AG (36%) and International Petroleum Investment Co. (64%); (4) TPE: Thai
Poyethylene Company Ltd; (5) KPIC: Korea Petrochemical Industry, Co.; (6) YANPET: Saudi Yanbu Petrochemical Co.; (7) TVK: Tiszai Vegyi Kombinat; (8) Petrokemya/JUPC: 5)-50 JV between PetroKemya and Jubail United
Petrochemical; (9) SEPC: Saudi Ethylene and Polyethylene Co.; (10)SHARQ: Eastern Petrochemical Company; (11)YANSAB: Yanbu National Petrochemicals Compamny; (12) ZRCC: Zhenhai Refining & Chemical Company; (13)
KEMYA: Al Jubail Petrochemical Co.
Source: CMAI


Long-term HDPE grows at around 1.5x GDP. LLDPE is experiencing stronger demand
growth than both HDPE and LDPE, at around 2x GDP. LLDPE is gradually replacing LDPE
in a range of applications. It has the advantage of a wider range of properties and a more
flexible manufacturing process.
The global HDPE industry is consolidating and it has seen a strong growth in China and
Middle East resulting in considerable shift in the production capacity to these regions
whereas the number of European and US producers has declined. We expect these
emerging regions will account for more than 30% of the total production capacity by
2013. We believe that continued substitution of traditional materials will become a major
demand driver for this product in the long term.
For HDPE, nameplate capacity utilization is forecast to modestly improve over the next
five years from the current mid 80s levels. In 2012 we expect significant capacity
expansion in the Middle East region, which may temporarily impact the supply demand
dynamics. Effective operating rates may not improve over this five year period due to
very high outage rates through the past two years which are now expected to moderate
due to a better focus on maintenance and limited plant mothballing.
We forecast LLDPE capacity to show a similar trend to HDPE, with significant new
capacity in the Middle East and Asia. We expect LLDPE margins to remain relatively
robust near term.
Figure 174: HDPE global capacity additions (%) Figure 175: HDPE regional nameplate operating rate
14%
100%
12%
95%
10%
90%
8%
85%
6% 80%
4% 75%
2% 70%
0%
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012E
2014E
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011E
2013E
2015E
N. America W. Europe Asia Middle East
Figure 176: HDPE historical & forecast prices ($/tonne) Figure 177: HDPE top producers (kt/pa) 2011E
2,500 3,200 8.0%
2,800 7.0%
2,000
2,400 6.0%
1,500 2,000 5.0%
1,600 4.0%
1,000
1,200 3.0%
500 800 2.0%
400 1.0%
0 ---- 0.0%
Jul-03
Jul-04
Jul-05
Jul-06
Jul-07
Jul-08
Jul-09
Jul-10
Jul-11
Jul-12
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Exxon Mobil
LyondellBasell
NPC-Iran
SABIC
Ineos
Dow
SINOPEC
Abu Dhabi
Formosa
Total
Group
Gov't
Corp.
U.S. S.E. Asia W. Europe

Figure 178: HDPE capacity additions by region (%) Figure 179: LLDPE capacity additions by region (%)
100% 100%
80% 80%
60% 60%
40% 40%
20% 20%
0% 0%
2005
2006
2007
2008
2009
2010
2011E
2012E
2013E
2014E
2015E
2005
2006
2007
2008
2009
2010
2011E
2012E
2013E
2014E
2015E
Americas Europe Asia RoW
Figure 180: LLDPE global capacity additions (%) Figure 181: LLDPE regional nameplate operating rate (%)
18%
120%
16%
110%
14% 100%
12% 90%
10% 80%
8% 70%
6% 60%
4% 50%
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012E
2014E
2%
0%
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011E
2013E
2015E
N. America W. Europe Asia Middle East
Figure 182: LLDPE historical & forecast prices ($/tonne) Figure 183: LLDPE Top producers (kt/pa) 2011E
3,000 5,000 20.0%

2,500 4,500 18.0%
2,000 4,000 16.0%
3,500 14.0%
1,500 3,000 12.0%
1,000 2,500 10.0%
500 2,000 8.0%
1,500 6.0%
0 1,000 4.0%
Jan-90
Jan-92
Jan-94
Jan-96
Jan-98
Jan-00
Jan-02
Jan-04
Jan-06
Jan-08
Jan-10
Jan-12
500 2.0%
---- 0.0%
Exxon
Nazionale
SABIC
SINOPEC
Dow
Japanese
Abu Dhabi
CNPC
Formosa
Sumitomo
Mobil
Group
Chem.
MEG
Ente
Gov't
North America NE Asia W. Europe

Source: Deutsche Bank and CMAI. .

Low density polyethylene (LDPE)

Figure 184: LDPE at a glance
Long-term growth rate Sub-GDP
Growth rate relative to sector Low
Supply/demand Remaining relatively weak. Nameplate operating rates should now show some
improvement due to low capacity additions but the possibility of cheap de-
bottlenecking may restrict the rate of recovery
Watch out for… Substitution by LLDPE as new capacity surges. Some LDPE capacity additions
through de-bottlenecking. Lower outage rates in the future
LDPE was the first grade of polyethylene, produced in 1933 by ICI, made at high temperature
and pressure. It is a more flexible plastic than HDPE, is and its main uses are in carrier bags,
films and 'squeezable' applications such as toothpaste tubes.
Figure 185: End uses of LDPE 2011E
Others
10%
Pipe & Extrusion Film & Sheet

3% 67%
Wire & Cable
3%
Injection Molding
7%
Extrusion
Coating
10%
Figure 186: Production of LDPE
LDPE †
naphtha/natural gas ethylene polyethylenes HDPE
LLDPE
† Manufactured at high pressure. Produces a product with many side chains

Source: Deutsche Bank.

Figure 187: LDPE demand by region 2011E
N.E. Asia
Others 27%
30%
19% 24%
Figure 188: LDPE industry data and participants 2010

Westlake 692 Polimeri Europa 875 Hanwha Chemical 420 Braskem 520
(7)
ExxonMobil 666 LyondellBasell 750 Yanshan PC 410 SEPC 400
Dow 654 ExxonMobil 690 BASF/Yangzi PC (5) 400 QAPCO (8) 370
Equistar (1) 649 SABIC 525 Maoming PC 370 Petkim 335
DuPont 347 Ineos 510 Japan Polyethylene 357 Arya Sasol PC 300
(2)
Chevron Phillips 281 Borealis 494 LG Chem 335 Laleh PC 300
PEMEX (3) 279 Dow 425 CNOOC & Shell PC 306 Quattor 270
AT Plastics 146 Repsol Quimica 410 PTT Polyethylene 275 SASOL 220
Nova Chemical 140 SABIC Europe 400 TPC (6) 270 KEMYA(9) 215
Total PC 215 Daqing PC 265 Tomskneftekhim 200
(4)
TDESA 160 Petlin 255 Kazanorgsintez 197
Borealis Poly 150 Formosa Plastics 240 Carmel Olefins 165
Others 210 Titan Petchem 230 Others 1747
Others 2825
(1) As of Dec 04 Lyondell acquired the whole of the Equistar venture; (2) Borealis is JV between OMV AG (36%) and International Petroleum Investment Co. (64%); (3) PEMEX: Petroleos Mexicanos; (4) ) TDESA: Transformadora
de Etileno SA; (5) BASF/ Yangzi PC: 50-50 JV between BASF and Yangzi (6) TPC: The Polyolefin Company, Singapore (7) SEPC: Saudi ethylene and polyethylene co; (8) QAPCO: Qatar Petrochemical Company; (9) KEMYA: Al
Jubail Petrochemical Co.
Source: CMAI

LDPE is gradually being substituted by LLDPE across the industry in many applications
as a consequence of LLDPE's wider range of properties and the more cost effective
manufacturing process. Despite this pressure from the modern polymers LDPE still
remains an important plastic grade.
LDPE growth is limited due to high substitution pressure. We expect LDPE capacity is
expected to grow at an average rate of 3% per year through to 2015 but in 2011-13 the
new capacity additions rates appear lower. The net addition rate over the next five years
appears in-line with the demand growth of approximately 3% per year. Therefore some
modest tightening of operating rates in 2011 and 2012 is possible with rates then
declining from 2014 onwards. However, there is additional capacity risk from “low-cost”
suppliers de-bottlenecking in the near-term so we see the likelihood of a sustained step-
up in operating rates from the current levels as relatively low.
Environmental issues remain a major threat for LDPE demand in many regions. Many
countries such as India have banned usage of plastic bags and are looking for many such
other measures to cope up with the threat of the disposal problem.

Figure 189: Global supply/demand (kt/pa) Figure 190: Regional operating rate
30,000 94%
92% 100%
25,000 95%
90%
90%
20,000 88% 85%
86% 80%
15,000
84% 75%
10,000 82% 70%
80% 65%
5,000 60%
78%
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012E
2014E
0 76%
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010E
2012E
2014E
Global Capacity Operating rate N. America W. Europe N. E. Asia
Figure 191: Major expansions (kt/pa) Figure 192: Top producers (kt/pa) 2011E
500 1,800 8.0%

1,600 7.0%
400 1,400 6.0%
300 1,200 5.0%
1,000
4.0%
200 800
600 3.0%
100 400 2.0%
200 1.0%
0 0 0.0%
Amir Kabir QAPCO Kayan Novy
Exxon Mobil
Nazionale Idr
LyondellBasell
Dow
SINOPEC
SABIC
Ineos
DuPont
Abu Dhabi
Westlake
Gov't
PC Urengoy
Corp.
Ente
2011 2012 2013 2014
Figure 193: Capacity additions by region Figure 194:Global capacity additions (%)
100%
5%
80% 5%
4%
60% 4%
3%
40% 3%
20% 2%
2%
0% 1%
1%
2005
2006
2007
2008
2009
2010
2011E
2012E
2013E
2014E
2015E
0%
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011E
2013E
2015E
Source: Deutsche Bank and CMAI Source: Deutsche Bank and CMAI estimates

Polypropylene
Figure 195: Polypropylene at a glance
Long-term growth rate 1.25-1.5x GDP
Supply/demand Recovery from trough conditions in 2010 – unlikely to reach previous cycle peaks
Margin prospects High outage rates in 2010 meant that effective operating rates better than
nameplate which helped margins. Tighter nameplate supply/demand from 2011
onwards may not therefore results in materially higher margins
Watch out for… New competitors in Middle East, Asia, de-bottlenecking and lower outage
rates/plant problems
Polypropylene (PP) is a thermoplastic polymer, which is produced in several grades, has a

wide range of applications across the industrial, automotive and domestic sectors from
injection moulding (car dashboards and toys) to fibres. Although less tough than LDPE, it is
much less brittle than HDPE. This allows polypropylene to be used as a replacement for
engineering plastics, such as ABS. Polypropylene has very good resistance to fatigue, so that
most plastic living hinges, such as those on flip-top bottles, are made from this material.
Currently, gas phase production is the process of choice – it offers significant cost
advantages over solution and slurry polymerisation methods (see manufacture of polymers).
Currently significant research is being carried out into the introduction of metallocene
catalysts to improve the properties of the product. Commercial quantities of product from
this process are currently available from a number of operators.
Figure 196: Production of polypropylene
Figure 197: End uses of polypropylene 2011E
Others
8%
Pipe & Extrusion
3%
Injection Molding
Fiber 35%
14%
Raffia
17%
Film & Sheet

23%
Source: Chem Systems

Figure 198: Polypropylene industry data and participants 2010


LyondellBasell 1417 LyondellBasell 2395 Reliance Industries 2750 Ibn Zahr 1220
ExxonMobil 1230 Borealis 1700 Japan Polypropylene 1407 Braskem 1180
Total PC 1180 SABIC Europe 1130 Prime Polymer Co. 1181 Quattor 875
FPC USA 863 Total PC 1100 Honam PC 950 Saudi Polyolefins Co. 720
Ineos 800 Ineos 740 FPC 900 Petro-Rabigh 700
Braskem PP Americas 734 Dow 560 Poly Mirae 700 SASOL 520
Indelpro (1) 640 Repsol Quimica 510 Dushanzi PC 690 Ecopetrol 490
(2) (3)
Dow 435 Appryl 300 TPP 658 Advanced PC 450
Pinnacle Polymers 430 ExxonMobil 250 Samsung Total PC 570 Al-Waha 450
Flint Hills Resources 425 Borealis Poly 245 HMC Polymers 530 Carmel Olefins 410
ConocoPhillips 350 Polychim 220 Fujian Ref & Chem 520 Basell Orlen Polyolefins 400
Phillips Sumika 322 Hellenic Petrol 200 FCFC (4) 510 NATPET 400
(5) (6)
Sunoco 157 DOMO Chemicals 180 IRPC 475 YANSAB 400
Epsilon C3 Polymers 88 Others 15631 Oman Polypropylene 340
Others 4941
(1) 49: 51 JV between LyondellBasell and Grupo Alfa; (2) 50:50, JV between Ineos and Total; Polipropileno Del Caribe SA; (3) TPP: Thai PolyPropylene company; (4) FCFC: Formosa Chemical Fiber Corp.; (5) IRPC: Integrated
Refinery and Petrochemical Company; (6) YANSAB: Yanbu National Petrochemicals Company
Source: CMAI
Figure 199: Polypropylene demand by region 2011E Figure 200: Polypropylene capacity by region 2011E
Others
N.E. Asia Others N.E. Asia
34%
36% 36% 34%
N. America
W. Europe N. America W. Europe
14%
16% 15% 15%

We expect polypropylene demand to grow above GDP up to 2015, as we believe there
will be increased demand from new markets. There is some modest current risk from
high polypropylene prices which is starting to increase the risk of substitution but the
impact remains relatively small at the moment
Global PP demand declined very significantly in the last downturn as most of the major
end markets of PP such as autos and housing were very badly impacted, however
demand is now reaching pre-crisis levels.
We expect global PP capacity to grow at an average growth rate of 4% up to 2015, as

compared to a demand growth of 5-6%. We therefore expect a modest tightening of
operating rates although not to previous cycle highs. Regionally we expect major
capacity addition to come in the Middle East region in the coming years. Margins may
not recover that materially due to high outage rates current supporting much tighter
effective operating rates – the impact of high outage rates in 2008-2010 is unlikely to
continue through 2011 to 2015.

We expect raw material pricing to remain a major concern for the PP producers in the
near term as higher gasoline prices will continue to result in some relatively tight supply
of propylene.
Figure 201: Polypropylene capacity additions (%) Figure 202: Top producers (kt/pa) 2010
18%
16% 7,000 12%
14% 6,000 10%
12% 5,000 8%
10% 4,000
6%
8% 3,000
2,000 4%
6%
1,000 2%
4%
2% ---- 0%
Exxon Mobil
LyondellBasell
SINOPEC
Industries
SABIC
Ineos
CNPC
Abu Dhabi
Formosa
Total
Reliance
0%
Group
Gov't
Corp.
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011E
2013E

2015E Source: Deutsche Bank and CMAI * Ineos acquired Innovene in December 2005; ** Basell acquired by
Access Industries
80,000 95% 110%

70,000 100%
90%
60,000
50,000 90%
85%
40,000 80%
30,000 80%
70%
20,000
75% 60%
10,000
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012E
2014E
0 70%
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012E
2014E
Global Capacity Operating rate N. E. Asia Middle East
Figure 205: Historical and Forecast Prices ($/tonne) Figure 206: Historical and Forecast Margins ($/tonne)
3,000 400
2,500 250
100
2,000
-50
1,500 -200
1,000 -350
-500
500
-650
Jan-03
Jul-03
Jan-04
Jul-04
Jan-05
Jul-05
Jan-06
Jul-06
Jan-07
Jul-07
Jan-08
Jul-08
Jan-09
Jul-09
Jan-10
Jul-10
Jan-11
Jul-11
Jan-12
Jul-12
Jan-03
Jul-03
Jan-04
Jul-04
Jan-05
Jul-05
Jan-06
Jul-06
Jan-07
Jul-07
Jan-08
Jul-08
Jan-09
Jul-09
Jan-10
Jul-10
Jan-11
Jul-11
Jan-12
Jul-12
U.S. S.E. Asia W. Europe U.S. W. Europe
Source: Deutsche Bank and CMAI Source: Deutsche Bank and CMAI estimates

PVC (polyvinyl chloride)

Figure 207: PVC at a glance
Supply/demand Slow recovery from trough conditions – unlikely to reach previous cycle peaks
Margin prospects Should remain under pressure in near term with only limited recovery
Watch out for… Construction recovery remains very slow in mature economies while it remains
strong in emerging countries (Asia, Eastern Europe), continued environmental
pressures in the background, local surpluses can slowly move globally, coal based
expansion in China still causing global oversupply
Figure 208: PVC end uses 2011E
Other
17%
Bottles
2% Pipe and Fittings
40%
Wire and Cable
8%
Film and Sheet

16%
Profiles and
Tubes
17%
PVC is the third most widely used plastic globally after PP and PE. It has diverse properties
and has significant cost advantages over other plastics. Applications include pipes, windows,
cables, packaging and flooring. It is manufactured by the polymerization of vinyl chloride
monomer (VCM) in a slurry based process. Hence the cost and supply of VCM is crucial to
the industry. PVC can also, but less commonly, be produced from ethylene dichloride (EDC).
The industry has been criticized in the past few years due to environmental concerns over
PVC and the chlorine industry in general. PVC, when incinerated, releases trace quantities of
toxic dioxins, which some believe may have human fertility implications. Historically, PVS was
not recycled because of the higher cost associated, however now with the increasing debate
over safety and environmental issues many manufacturers have started vinyl recycling
programs, recycling both the manufacturing waste and the consumed PVC materials.
Figure 209: Production of PVC
ethylene
vinyl chloride
polyvinyl chloride
m onom er
chlorine

Figure 210: PVC industry data and participants 2010


SHINTECH 2365 INEOS Chlor Vinyls 1395.4 FPC 1753 Solvay Indupa 541
Oxy Vinyls LP 1625 Solvin 1120 LG Chem 880 Braskem (5) 514
FPC USA 1231 Vinnolit 792 Tianjin Dagu 800 Mexichem 416
Georgia Gulf 1204 Arkema 618 Xinjiang Zhongtai 660 Ibn Hayyan (6) 406
Westlake 760 LVM (1) 500 Reliance Industries 650 Borsodchem 400
Mexichem 306 Shin-Etsu 450 Thai Plastic 637 Anwil SA 340
Policyd 235 Vestolit (4) 432 Qilu PC (3) 600 Oltchim 300
Certain Teed 218 Vinilis 315 Taiyo Vinyl 560 Sayanskkhimplast 280
PolyOne 116 Vinylberre 285 Yibin Tianyuan 550 SASOL Polymers 190
Tekni-Plex 32 CIRES (2) 210 Shin-Etsu 550 Pequiven 185
Aiscondel 130 Hanwha Chemical 545 Bandar Imam PC 175
Other 18688 Other 1326
(1) LVM: Limburgse Vinyl Maatschappij; (2) CIRES: Co. Ind. De Resinas Sinteticas, SA; (3) subsidiary of SINOPEC; (4) owned by Strategic Value Partners; (5) formed in 2002 from restructuring in Brazilian petrochemicals. Merger
of Copene and petrochemical companies owned by Odebrecht and Petrobras Auimica; 100% owned by Degussa; (6) 86.5% owned by SABIC, 10% National Petrochemical Industrialization Corp, 2% Saudi Plastic Production
Company, 1.5% Arabian Plastic Manufacturing Company
Source: CMAI
Figure 211: PVC demand by region 2011E
Others
29%
N. E. Asia
42%
N. America
14%
Europe
15%
Figure 212: Global PVC capacity additions Figure 213: Global capacity additions by region (%)
100%
12%
10% 80%
8% 60%
6% 40%
4% 20%
2%
0%
0%
2005
2006
2007
2008
2009
2010
2011E
2012E
2013E
2014E
2015E
2006
2007
2008
2009
2010
2011E
2012E
2013E
2014E
2015E

Source: Deutsche Bank, CMAI Source: Deutsche Bank, CMAI


PVC demand is highly correlated to the construction market as we estimate
approximately 65% of global PVC production goes into this market. PVC demand fell
materially during the financial crisis following the collapse of the construction market in
developed economies. Unlike most other markets, construction has not recovered which
has continued to weigh on the global PVC supply demand and we expect it to remain
weak in near term.
Regionally we expect demand In Europe and US to remain subdued due to relatively

weaker construction markets.
European supply/demand remains particularly weak and some capacity shutdowns

through the 2008/09 crisis have been observed. We expect more rationalisatio/plant
closures to continue through the coming years.
With no rapid recovery in construction in Western markets we expect PVC operating

rates to only recover modestly and margins to show limited improvement.
We see more new PVC capacity coming on stream in 2011-2013 (+5-6% CAGR), mostly
in China (the region will account for over 40% of the global capacity in the period 2011-
2013). Whilst some global capacity rationalization is underway, it should be more than
offset by new capacity and the current over supply situation is expected to remain.
We expect that Chinese PVC capacities are currently running at around 60% utilization
rate with the players running their capacity mostly for the domestic market. In addition,
with non-integrated PVC producers (into coal mines) becoming increasingly non-
economical and new environmental regulations coming in force in 2012, we expect
some capacity rationalization in China. We believe these trends should provide some
protection to European margins (although the protection will be limited as the limited
exports of Chinese PVC are offset by greater exports of finished products which include
PVC).

60,000 100%
100%
50,000 80% 95%
90%
40,000
60% 85%
30,000 80%
40% 75%
20,000 70%
10,000 20% 65%
60%
0 0%
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012E
2014E
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012E
2014E
Global Capacity Operating Rate N. America W. Europe Middle East Asia
4,000 9%
600
3,500 8%
500 3,000 7%
400 2,500 6%
5%
300 2,000
4%
200 1,500 3%
100 1,000 2%
500 1%
----
---- 0%
Ibn Hayyan
Hanwa
Tianyuan
Guangzhou
Jingniu
Tianchen
Zhongtai
Chemical
Chemical
Xinjiang
Chem
Beiyuan
Xinjiang
Hebei
Qinghai
Yihua
Solvay
SINOPEC
Ineos
Shin-Etsu
LG Group
Georgia
Formosa
Occidental
Arkema
Yibin
Westlake
Tosoh
Group
Gulf
2011 2012 2013
Figure 218: PVC production cost comparison Figure 219: Regional PVC cash costs in $/Metric Ton
1200 1,400
1000 1,200
1,000
800
800
600 600
400 400
200 200
0
0
Jan-00
Jan-02
Jan-04
Jan-06
Jan-08
Jan-10
Jan-12
Q1 06
Q3 06
Q1 07
Q3 07
Q1 08
Q3 08
Q1 09
Q3 09
Q1 10
Q3 10
Q1 11E
Q3 11E
NEA- Ethylene based PVC China Carbide-based PVC United States NE Asia W. Europe
2,400 750
2,000 600
450
1,600
300
1,200
150
`
800 0
400 -150
Jan-03
Jul-03
Jan-04
Jul-04
Jan-05
Jul-05
Jan-06
Jul-06
Jan-07
Jul-07
Jan-08
Jul-08
Jan-09
Jul-09
Jan-10
Jul-10
Jan-11
Jul-11
Jan-12
Jul-12
Jan-03
Jul-03
Jan-04
Jul-04
Jan-05
Jul-05
Jan-06
Jul-06
Jan-07
Jul-07
Jan-08
Jul-08
Jan-09
Jul-09
Jan-10
Jul-10
Jan-11
Jul-11
Jan-12
Jul-12
U.S. N.E. Asia W. Europe U.S. N.E. Asia W. Europe

Polystyrene (PS)
Figure 222: Polystyrene at a glance
Supply/demand Steady recovery from 2012 onwards helped by limited capacity additions but
supply/demand balances to remain weak
Margin prospects Remaining relatively weak due to low operating rates
Watch out for… High feedstock costs, most of the margin captured upstream, look for more
restructuring and capacity closures going forward
Polystyrene is manufactured by the polymerization of styrene monomer (which is itself

produced by reacting ethylene and benzene). There are four main grades of polystyrene. They
are general purpose, high impact, high heat and crystalline. General purpose and high impact
are the two most important grades. High impact is strong, durable and has a high shock
resistance, hence it competes against engineering plastics (such as ABS) in end markets like
injection moulding (car dashboards). General purpose is used mainly in packaging and
household items.
Expandable polystyrene (EPS) is a different type of polystyrene and is arguably considered to

be a different product in its own right. The manufacturing process used varies from the
grades of polystyrene above. EPS is used largely for insulation and packaging.
Figure 223: Production of polystyrene
ethane
ethyl benzene styrene polystyrene
benzene
Figure 224: End uses of polystyrene 2011E
Others
32% Packaging - single
use
40%
Electronics /
Appliances
28%

Figure 225: Polystyrene industry data and participants 2010


Americas Styrenics 758 BASF 570 FCFC (2) 580 Americas Styrenics 265
Total PC 749 INEOS NOVA 420 PS Japan 445 CBE (5) 190
(1)
INEOS NOVA 705 Total PC 360 Zhenjiang ChiMei 360 NKNK 170
BASF 160 Polimeri Europa 280 Supreme PC 300 Petrokemya 165
Resirene (2) 150 Styron 213 Secco (3) 300 Innova 150
Dart Container 93 Dow 213 Chi Mei 300 Videolar 120
Nova 45 TPF 80 Jiangsu Laidun 280 SAT Operating Aktau 110
SABIC Plastics 45 Total PC Iberica 80 Toyo Styrene 278 Tabriz PC 105
Ebro-Quimex 4 Polidux 10 BASF Korea 235 Styrovit 100
Productos Sesi 4 Kostas Zafranas 2 Denki KK 200 Polystyrol 96
Bokusui/Kasahar 2 BASF/Yangzi PC (4) 195 Synthos Kralupy 78
Total PC 175 Dunastyr 67
Kumho Chemicals 175 Petrobras Energia 65
(1)50:50 JV between Ineos and Nova Chemicals; (2) FCFC: Formosa Chemical Fiber Corp.; (3) Secco: Shanghai Secco Petrochemical Co. Ltd.; (4) 50:50 jv between BASF and Yangzi Petrochemical Company; (5) Companhia
Brasileria de Estireno;
Source: CMAI, Deutsche Bank

Long-term, polystyrene grows in-line with GDP. Packaging applications account for
approximately 40% of all polystyrene demand. However, its market share in this end use
has been impacted substantially over recent years by polypropylene. Potential growth in
expanded polystyrene (EPS) is driven by demand from the construction. EPS prices are
generally more stable than those of other grades of polystyrene, absorbing any increases
in styrene prices (raw material) to a better extent, and giving away less when feedstock
prices fall.
Though the coming three years (2011-2013) we anticipate only marginal capacity
increases as the PS market is facing very tough competition from other polymers such
as PP, PVC and ABS.
Another very important reason for declining PS demand is volatile benzene prices which
have materially increased in the past few years. These increasing raw material costs
have forced some end users to look for other polymers to substitute PS.
We expect operating rates to see gradual improvement in the coming years as there are
very limited new capacities which are expected to come on-stream in the coming three
years. However the demand is expected to remain subdued as the major end markets of
PS are still struggling to come out of the bottoms.
Over capacity remains a major concern for the PS market. We expect some
improvement in this area in the coming areas as the market is rationalizing old capacities
and very few new capacities are expected to come on-stream.
Globally the PS market is seeing some consolidation with BASF, Nova, INEOS and Dow
all currently involved in consolidation of their businesses to some extent. We expect this
to further continue and result in higher capacity shutdowns.

100%
12,000 75% 90%
10,000 70% 80%
8,000 70%
65%
6,000 60%
60%
4,000 50%
2,000 55%
40%
0 50%
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011E
2012E
2013E
2014E
2015E
1996
1998
2000
2002
2004
2006
2008
2010
2012E
2014E
North America Western Europe
Global Capacity Operating rate Asia exc. Japan
250 1,600 12%

200 1,400 10%
150 1,200
1,000 8%
100
800 6%
50 600 4%
---- 400
2%
Polymers
Jiangsu
Pars PC
Total PC
Chemical
Chemical
Chemical
Laidun
200
Rentai
Rentai
Rentai
Saudi
---- 0%
Nazionale
Ineos
Chi Mei
Dow
SINOPEC
Capital
Abu Dhabi
BASF SE
Formosa
Total
Bain
Group
Ente
Gov't
2011 2012 2013
3,000 500
2,500 400
2,000 300
1,500 200
1,000 100
500 0
-100
0
-200
Jan-03
Jul-03
Jan-04
Jul-04
Jan-05
Jul-05
Jan-06
Jul-06
Jan-07
Jul-07
Jan-08
Jul-08
Jan-09
Jul-09
Jan-10
Jul-10
Jan-11
Jul-11
Jan-12
Jul-12
Jan-03
Jul-03
Jan-04
Jul-04
Jan-05
Jul-05
Jan-06
Jul-06
Jan-07
Jul-07
Jan-08
Jul-08
Jan-09
Jul-09
Jan-10
Jul-10
Jan-11
Jul-11
Jan-12
Jul-12
U.S. N.E. Asia W. Europe

W. Europe N.E. Asia
Figure 232: Global capacity additions (%) Figure 233: Regional capacity additions (%)
100%
16%
14% 80%
12%
60%
10%
8% 40%
6%
4% 20%
2%
0% 0%
2005
2006
2007
2008
2009
2010
2011E
2012E
2013E
2014E
2015E
-2%
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011E
2012E
2013E
2014E
2015E
Americas Europe Asia

High performance plastics

and engineering resins
Figure 234: Engineering resins and high performance plastics at a glance
Long-term growth rate 1.5-2x GDP
Supply/Demand Different in each individual product market
Margin prospects Medium to high
Watch out for ... New applications driving market growth
Engineering resins and high performance plastics are generally distinguished from other
plastics such as polyester or polystyrene by their improved properties which generally come
at a higher cost. They tend to exhibit superior mechanical and thermal properties in a wide
range of conditions compared to more general plastics. The terms engineering plastics
usually refers to thermoplastic (can be re-melted) rather than thermoset materials.
Engineering plastics tend to be higher volume products than the more niche application high
performance plastics.
Figure 235: Plastics pyramid
High Performance Plastics

(high spec, low volume) PEEK, LCP,
COC, PPS, COPE,
LCP, HT PA,PSU/PES,
PEI, TPE-E
Engineering Resins
Nylon 6,66 Polyacetal (POM)
(high spec, high volume)
Polycarbonate PBT
Thermoplastics
(lower spec, high volume) Polypropylene PMMA
Polyethylene PVC ABS
Polystyrene
Note: Products shown are examples only, this is not a comprehensive list
Source: Celamese and DSM
The main end markets for engineering resins are electronics and electrical, autos, industrials,
discs (compact disks, DVDs – only polycarbonate) and extrusion applications.

Figure 236: Geographical breakdown of engineering Figure 237: End market breakdown on engineering
plastics plastics market
Packaging
RoW
&
6% Electrical
Extrusion
Europe 8% &
Optical &
Rest of 25% electronics
Glazing
Asia 27%
16%
21%
Consumer
North &
China America Industrial
Auto
23% 25% 26%
23%
Source: DSM, Deutsche Bank estimates Source: DSM, Deutsche Bank estimates
Engineering plastics is in fact a term to describe a wide range of mainly thermoset resins
with significantly different market sizes ranging from the large size of polycarbonate and
nylon to the very small markets for some of the new innovative composite markets using
materials such as carbon fibre nanotubes and long fibre resin (too small to show on the chart
below). Due to this large product range there is also considerable breadth in raw materials –
based on resins including polyester, polyethylene, polyamide, polycarbonate etc.
As a result of the wide range of plastics and end products involved a significant number of
companies participate in the engineering plastics market. Some participants focus on only
one area, others have developed a portfolio encompassing a range of products (generally the
focus being the end market). Key players in the market as a whole include SABIC (formerly
GE Plastics), Bayer and DuPont in the higher volume products. In the lower volume, more
niche products of Ticona (Celanese), Mitsubishi, Dow and DSM.

We anticipate growth in the engineering resins and high performance plastics market to
grow at approximately twice the rate of GDP at 6% pa. Growth rates, however, in the
products vary from 5% for polyacetals to above 10% for high temperature polyamide
and some heat resistant resins. Growth in these products is driven by end-market
growth but also the increased use of these products as they substitute other substrates
and other plastics. On a regional basis demand in fastest in Asia (double digit growth
rate) driven by China and India.
Demand/supply in the larger volume products of polycarbonate and polyamide/nylon can

be relatively transparent. However, in the smaller products information on the size of the
market, pricing and volumes tend to be more closely held. In these more niche areas the
number of suppliers tends to be relatively limited.
Control of technology (either in terms of production, or just as important the skill at

adapting the product for very specific end uses) is the key barrier to entry. When this
barrier is upheld then manufacturers tend to have a strong degree of pricing power and
margins tend to be relatively healthy.

Figure 238: Main participants in selected engineering resin and high performance plastics markets
Nylon 6 Nylon 6,6 HT PA Polycarbonate HPPA
(high temp. polyamide) (High Perf. Polyamides)
BASF Koch Industries DSM Bayer DSM

Li Peng DuPont Mitsui SABIC EMS-
DSM SK Capital II Solvay Teijin Ube
Formosa group Rhodia Mitsubishi Gas Chemical Solvay
Honeywell BASF Dow DuPont
DOMO group RadiciGroup Mitsubishi Chemical corp Arkema
Zig Sheng Asahi Kasei Corp. Idemitsu Kosan
Xinhui Meida Nylon Nylstar Chi Mei
SINOPEC Zhong Ping Energy Chemical Bain Capital
Kuibyshevazot Shenma Group Formosa group
PET PBT POM LCPs TPE

(acetyl resin) (Liquid crystalline polymers ) (thermoplastic
elastomers)
Mossi & Ghisolfi Chang Chun PC Celanese (Ticona) Celanese (Ticona) DuPont
Jiangsu Sanfang. BASF DuPont Solvay DSM
Far Eastern Group DuPont BASF DuPont Celanese (Ticona)
La Seda SABIC Kepital Others
Grupo Alfa Blue Ridge Capital
Eastman Mitsub. Chemical Corp
Formosa group Toray
PEEK/PK PSU/PES Composites PVDF MDI Polyurethanes

(Polyketone) PolyVinylidine DiFluoride
Vitrex Solvay Celanese (Ticona) Solvay BASF
BASF Arkema Bayer
Dyneon Huntsman
Dow
Wanhua
NPU
TDI Polyurethanes UHMWPE PAI FEP/MFA, FKM/FFKM PTFE

Fluorinated elastomers Polytetrafluoroethylene -
Teflon
BASF Celanese (Ticona) Solvay Solyay AG Fluoropolymers (Fluon)
Bayer DSM DuPont Solvay
Dow Honeywell Daikin Daikin
Perstorp Others Dyneon DuPont
Mitsui Dyneon
Source: Deutsche Bank, SOLVAY, DSM, Celanese, Company data

Polyurethanes (PU)
Figure 239: Polyurethanes at a glance
Long-term growth rate 1-2x GDP
Growth rate relative to the sector Above Average
Supply/Demand MDI supply/demand balance improving, TDI low operating rates as new capacity
comes on-stream
Margin prospects MDI should maintain good margins, overcapacity and feedstock volatility likely to
pressure TDI margins
Watch out for ... New capacity additions and for TDI plant closures for companies high on the
cost curve
Polyurethanes are used in a variety of different applications and end markets for their
cushioning and insulatory properties. Produced by the reaction of an isocyanate with a polyol
they are capable of being formulated into a broad range of physical forms. Due to its more
expensive cost (compared to other elastomers) polyurethanes tend to be used in more
demanding applications. There are two main types of polyurethanes: rigid (based on MDI,
methylene diphenyldiisocyanate) and flexible (based on TDI, toluene diisocyanate).
MDI and TDI are not shipped long distances, with prices determined based on regional
supply/demand. So a company can have a profitable plant in one region and an unprofitable
plant in another.
Figure 240: Production of polyurethanes
toluene DNT TDA TDI flexible polyurethane
polyol
(long chain alcohol)
benzene nitro benzene aniline M DI rigid polyurethane
DNT = Dinitroluene
TDA = Toluene Diamine

MDI (methyl di-isocyanate)

Figure 241: Polyurethane (MDI) at a glance
Growth rate relative to sector Higher
Supply/demand Operating rates to recover steadily. Oligopolistic nature of industry should ensure plant
outage rates remain high and support pricing trends.
Margin prospects Margins should show some modest improvement in the next few years in-line with
steadily tightening operating rates
Watch out for… Capacity additions (and de-bottlenecking), especially 500kt Bayer plant in 2015/16
Methyl di-isocyanate (MDI) is preferred for rigid foams, special flexible plastics (for example,
shoe soles) and moulded flexible foams for vehicles and furniture. Lesser applications include
paints and adhesives. Importantly, its rigidity and insulating properties make MDI ideal for use
in construction, refrigeration and automotive markets. Not only does the material protect,
prove easy to process and dampen noise; it also affords significant energy savings through
heat insulation. MDI has a varied set of applications and it is increasingly used to substitute
other products especially in the construction, packaging and refrigeration markets.
To produce MDI, aniline, usually derived from nitrobenzene, is reacted with formaldehyde, a
derivative of methanol. MDI is reacted with a polyol to manufacture polyurethanes.
Figure 242: Production of MDI
formaldehyde
benzene nitrobezene aniline MDI
Rigid polyurethane
propylene oxide Polyol

propylene
Figure 243: End uses of MDI 2010 Figure 244: Company capacity shares 2010
Fibres,
Insulation, Other
Elastomers & 14% Bayer
Others 23%
Packaging 8%
12% Dow
13%
Refrigeration BASF SE
13% 20%
Yantai
Construction Wanhua
50%
13%
Injection Huntsman
moulding Group
17% 17%
Source: Deutsche Bank estimates Source: CMAI

The MDI market is a consolidated market where the four major players account for 73% of
global capacities. Bayer and BASF are the global market leaders with 23% and 20% market
share, followed by Dow, Huntsman and Wanhua.
Figure 245: MDI industry data and participants 2010

Global Capacity 5,643
N America 1,385 W Europe 1,850 ROW 2,408
Huntsman 450 BASF 560 Wanhua 575
Dow 345 Bayer 530 Bayer 482
Bayer 300 Huntsman 430 NPU 430
BASF Corp. 290 Dow 330 SHG Lianheng Iso. 240
Mitsui 210
BASF 190
Borsodchem 190
Dow 61
Other 30

MDI is a play on the Asian construction market and is likely to grow at 2x GDP driven by
strength in this market.
MDI like many other commodity chemicals reached a cyclical trough in 2009 and
operating rates should continue to rise in line with global demand. However, large
capacity additions over the next 4-5 years will likely keep effective operating rates in the
mid to low 80s.
Over the next four years (2011-2015) we forecast global capacity to expand by 20%
(CAGR of 4.6%) but most of the new capacity is planned for 2014 (BASF in China) and
2016 (Bayer in China). The majority of all planned expansions are expected in Asia/Pacific
where MDI demand is growing faster.
Despite significant increases in both propylene and benzene raw material costs, pricing
power in the industry has allowed much of this to be passed through to customers.
SABIC is talking about building a large MDI and/or TDI plant in Saudi but no firm plans as
yet so likely not before 2015.
Figure 246: MDI capacity additions Figure 247: MDI effective capacity utilisation
20% 95%
90%
15% 85%
80%
10% 75%
70%
5%
65%
60%
0%
55%
-5% 50%
2005
2006
2007
2008
2009
2010
2011E
2012E
2013E
2014E
2015E
2011E
2012E
2013E
2014E
2015E
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Source: CMAI, Deutsche Bank Source: Deutsche Bank, CMAI, Bayer

Figure 248: Global capacity (2011E) Figure 249: Global planned MDI additions
East Latin America Company Plant Region Size (k mt) As % total Start up
Europe 1% cap year
4%
Wanhua Ningbo, Asia 300 5% 2011
N America Zhejiang
23%
Wanhua Yantai, Asia 120 2% 2011
Asia Inc. Shandong
Japan
41% Borsodchem Kazincbarcika Eastern 110 2% 2012
Europe
Blue Star Tianjin Asia 100 2% 2012
Bayer Caojing, Asia 150 2% 2013
Shanghai
BASF Chongqing Asia 400 6% 2014
West Europe
31% Bayer Brunsbuttel Europe 260 4% 2014
Bayer Caojing, Asia 500 7% 2015-16
Shanghai
Source: CMAI Source: Deutsche Bank, CMAI, Bayer

TDI (toluene di-isocyanate)

Figure 250: Polyurethane (TDI) at a glance
Long-term growth rate 1-1.25x GDP
Growth rate relative to sector Slightly below
Supply/demand Oversupply due to large capacity additions coming onstream
Margin prospects Margins low due to oversupply and tight feedstock markets
Watch out for… Capacity additions 2011-2014, possible plant closures in mature markets in Europe/US
Toluene di-isocyanate (TDI) is a flexible type of polyurethane. Less versatile than its rigid
sister MDI, its growth is far more dependent on the health of the global economy. Main end
markets include furniture and automotive where it is largely used as cushioning. TDI is a
derivative of benzene. Benzene is converted into toluene, which is further converted into a
diamine that is reacted to produce TDI. As with MDI, TDI is reacted with a polyol to
manufacture polyurethanes.
Figure 251: Production of TDI (fexible polyurethane)

dim oroltoluene toluene diam ine
toluene TDI
(DNT) (TDA)
flexible
polyurethane
polyol
propylene propylene oxide
Figure 252: End uses of TDI 2011E Figure 253: Company market shares 2010
Elastomers Other
4% 4%
BASF
Coatings Others 24%
4% 28%
China
Chemical
3%
Dow Bayer
4% 19%
Flexible foam Yantai
88% Wanhua Gansu Ying.
4% Mitsui
7% Chemicals
11%
Source: Deutsche Bank estimates Source: Deutsche Bank, CMAI
Figure 254: TDI industry data and participants 2010

Global Capacity: 2,147
N America 405 W Europe 385 ROW 1,357
Bayer 220 Bayer 185 BASF 320
BASF 160 Perstorp AB 120 Mitsui 240
Dow 25 BASF 80 Cangzhou Dahua 120
Gansu Ying. 100
Borsodchem 90
Dow 63
CIECH Zachem 60
Others 364


The TDI market is oligopolistic, with Bayer and BASF having a combined market share of
43% and the top 5 players accounting for 65% of the market. This is evidenced by the
past few years seeing relatively disciplined capacity additions by market participants.
TDI has as slower growth than MDI since its end markets (furniture and auto cushioning)
do not have the same drive from the Asian market. Estimated market growth rate is
around 4-5% pa.
Large capacity additions are coming on-stream over the next 5 years, much of which is
low cost capacity which will push out the cost curve. We estimate that 2011-2015,
capacity additions in Asia, Germany and Hungary will result in a 30% (CAGR 6.7%)
increase in global capacity by 2015. Demand will not grow fast enough to absorb this
and so effective operating rates are likely to fall from the current mid to high 80s levels.
We view it as unlikely that smaller producers will put on capacity when big producers
have large plants coming on-stream. We expect (and reflect in our supply/demand
model) that smaller producers higher on the cost curve will delay or cancel planned
capacity. We do not expect operating rates to fall too sharply as a result and expect
them to be around 80% from 2013-15. Consolidation is likely to continue as larger
producers that are lower on the cost curve take share from higher cost producers.
SABIC is talking about building a large MDI and/or TDI plant in Saudi but no firm plans as
yet so likely not before 2015.
Figure 255: TDI capacity expansions Figure 256: TDI effective capacity utilisation rates
30% 100%
25% 95%
90%
20% 85%
15% 80%
75%
10% 70%
5% 65%
60%
0%
55%
-5% 50%
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011E
2012E
2013E
2014E
2015E
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011E
2012E
2013E
2014E
2015E
Source: CMAI, Deutsche Bank, CMAI, Bayer Source: Deutsche Bank, CMAI, Bayer
Figure 257: Global capacity (2011E) Figure 258: Planned TDI additions
Middle East Company Plant Region Size (k As % total Start up

Latin America 2% mt) cap year
4%
East Europe Bayer Caojing, Asia 250 12% 2011
10% Shanghai
Borsodchem Kazincbarcika Eastern 160 7% 2012
Europe
North
America Wanhua Yantai, Shandong Asia 300 12% 2013
15% Asia Inc.
Japan Fujian Meizhouwan, Asia 100 4% 2013
54% Dongnan Fujian
Chem.
Yibin Jiangan Yibin, Sichuan Asia 100 4% 2013
West Europe
15% Bayer Dormagen Europe 300 4% 2014
Yibin Jiangan Yibin, Sichuan Asia 100 3% 2015
Source: Deutsche Bank, CMAI Source: Deutsche Bank, CMAI, Bayer

MMA (methyl methacrylate)

Figure 259: MMA at a glance
Supply/Demand Quite tight but big capacity additions expected in 2011
Margin prospects Relatively high at the moment and likely to remain around this level subject to
demand remaining strong
Watch out for ... New technology, de-bottlenecking increasing production
Methyl methacrylate (MMA) is the basic building block for acrylic sheeting and acrylic resins.
Developed in the early 1900s by Dr Otto Rohm and other German chemists, it is sold either
in solid form or as a resin pMMA (polymethylmethacrylate). Construction/re-modelling
activity, automotive applications and OEM account for ~80% of world MMA consumption.
PMMA is sold under the trade names of Plexiglas, Perspex, Acrylite, Acrylplast, and Lucite
and is commonly called acrylic glass or simply acrylic. MMA is generally produced via
acetone cyanohydrin (ACH). For the end-use markets the product is usually polymerised and
compounded to produce pMMA (the plastic).
MMA/pMMA is used in a diverse range of applications. For example, the polymerised

product (pMMA) may be used to produce plastic sheeting sold under brand names such as
'Perspex' or moulded into bathtubs and washbasins for use in the home. Equally, because
acrylic resins can be formulated in water based solvents, they are increasingly used in
surface coatings and adhesives, and for their structural/fixative properties, in personal care
products like hairsprays.
Over the years, acrylic polymers have become popular due to their toughness, chemical
resistance and good weathering properties. They continue to be used as a substitute for
more traditional materials such as glass and metals.
Figure 260: Production of MMA

% of the total product
propylene cumene acetone sulphuric acid Acrylic sheet 29%
Surface Coating
acetic acid acetone cyanohydrin MMA 24%
Resins
Extrusion &
HCN methyl alcohol Moulding 17%
Figure 261: 2010 Major producer capacities kt Figure 262: End uses of MMA
Others
14%
Lucite Intl
Impact Modifiers/
16% Processing Aids
5% Acrylic Sheet
33%
Others
36%
Dow
13%
Surface Coatings
21%
Mitsub.
Cyro
Rayon Molding
Industries
10% Compounds
4% Rohm 27%
LG MMA Sumitomo
9%
5% Chem.
7%
Source: Deutsche Bank, CMAI Source: Deutsche Bank estimates

Figure 263: MMA industry data and participants 2010

Global Capacity: 3,715
North America 816 W Europe 666 ROW 2,233
Dow 477 Rohm 325 Mitsub. Rayon 367
Lucite Intl 160 Lucite Intl 205 Sumitomo Chem. 263
Cyro Industries 155 Arkema 100 Lucite Intl 235
Unigel Acrilicos 24 BASF 36 Kaohs. Monomer 105
Asahi Kasei Chem. 100
Evonik Degussa 100
Jilin Chemical 100
FPC 98
Daesan MMA Corp 90
Thai MMA 90
Heilongjiang Zhongmeng 77
Kuraray 65
Proquigel 50
Saratovorgsintez 50
Mitsubishi Gas Chemical 50
Nihon Methacrylic 50
Others 343

Underlying demand for MMA and its derivatives grows at approximately 4-6%, the
exposure to the slower growing construction market is offset by its substitution of more
traditional products such as glass and the increasing use in coatings. However, demand
is strongly impacted by construction and renovation activity, as well as automobile
production which account for approx 80% of MMA consumption.
The top five producers account for 55% of world capacity. Both Lucite International and
Dow have the largest shares with 16% and 13% of the market respectively. Increasingly
capacity additions in MMA have centered in Asia, where demand is growing fastest.
There is a new method of production, using methacrolein as a raw material. Potentially,

this may offer significant savings in production costs of up to 40-45% compared to
traditional technologies (although this may be offset by the requirement for a large
reactor size). The first commercialisation of this technology (named alpha technology)
was in 2005 with a manufacturing collaboration between Mitsubishi and Lucite.
Figure 264: MMA capacity additions Figure 265: Consumption of MMA by region
12% Other
2%
10% Europe
17%
8%
6%
4%
Americas
2% 25% Asia
56%
0%
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014

PET Resin (polyethylene terephthelate)

Figure 266: PET at a glance
Supply/demand Material investment in 2000s resulted in oversupply. Some slow recovery from
here to 2015
Margin prospects Low at the moment relative to many petrochemical products due to oversupply.
Some recovery from here likely although 2011 could be impacted by Asian
additions
Watch out for… Oversupply in Asia in fibre and bottle chip
Polyethylene terephthelate (PET) resin is a solid-state polyester resin used mainly in

packaging and film. It is produced through the same process as polyester fibre and differs
only in terms of the final processing and end-use applications. In recent years the demand for
PET has grown dramatically due to its increasing use in packaging, particularly for soft drinks.
PET resin's clarity, strength and ability to be recycled make it highly desirable, particularly
with the move away from glass, aluminium and PVC.
Polyester is formed by the co-polymerisation of purified terephthalic acid (PTA) or dimethyl
terephthalate (DMT) with ethylene glycol (EG). The main raw material for both PTA and DMT
is paraxylene (PX) which is produced from oil refining. In general PTA is the preferred route to
PET due to its greater cost efficiency.
PET resin is usually sold in 'chip' form, that is, small pieces of solid resin, to the
bottlemaker/film manufacturer who then further processes, for example, through
blow/injection moulding or rolling it, to produce the end product. PET is manufactured under
trade names Arnite, Impet and Rynite, Ertalyte, Hostaphan, Melinex and Mylar films.
Figure 267: Production of PET (solid state)
4%
PET Film Packaging
83% PET Fibre Apparel, hom e,

textiles
m ixed xylenes paraxylene PTA PET
12% PET Solid State Water, drink,

food containers
acetic acid ethylene glycol 1% Engineering

Resins Automotive
Figure 268: End uses of PET resin Figure 269: Polyester bottle resin market share
Mossi &
Ghisolfi Jiangsu
Carbonated 8% Sanfang.
soft drinks Non-Food
7% Artenius
19% containers
29% 4%
DAK
Americas
4%
Eastman
Other 4%
drinks Invista
Others
Food 3%
24% 70%
containers
28%
Source: Deutsche Bank Source: CMAI, Deutsche Bank

Figure 270: PET resin industry data and participants 2010

Global capacity: 20,059
N. Armeica 5,137 W. Europe 2,217 Asia 8,832 ROW 3,873
Mossi & Ghisolfi 875 Artenius 710 Jiangsu Sanfang. 1,340 Mossi & Ghisolfi 650
Invista 793 Equipolymers 376 China Resources 520 Octal Holdings 362
Eastman 775 Indorama Petrochem Ltd. 320 KP Chemical 471 JBF RAK 360
DAK Americas 650 Novapet 225 Far Eastern Group 454 Ibn Rushd 330
DAK Americas 650 M & G Polimeri 193 Shanghai Far Eastern 448 Shahid Tondguyan 309
Wellman 435 Ottana Polymeri 120 Yizheng Chem. 370 Neo Group 308
Nan Ya 405 Lotte Chemicals UK 113 Reliance Industries 330 Polief 210
Alpha PET 329 Plastipak 100 TK Chemical 280 DAK Americas 186
StarPET 225 Invista 60 Jiangsu Chenxing 260 Orion PET 170
Gatron 230 Artenius 135
Tenglong (Dragon) 213 SK Eurochem 120
SAPL 200 HOSAF 120
Guangzhou Fanya 200 Belpak 115
Hainan Xing Ye Polyester 200 Alko-Naphtha 110
Nan Ya 200 Europlast 100
Shinkong Syn. Fiber 180 Sibur-PET 80
Indorama Petrochem Ltd. 180 Enka de Col. 40
SK Chemical 165 Korteks 30
Other 2,591 Other 138

As a result of its continued substitution in soft-drink bottles and food packaging
applications, the demand for PET is forecast to show strong growth of approximately 5-
6% pa.
Through the coming four years PET bottle resin operating rates are anticipated to remain
relatively low as a large amount Asian capacity from small producers comes onstream.
We expect supply/demand to normalize after 2015.
Margins are likely to continue to be pressured as this new capacity comes on as well as
from feedstock inflation.
Figure 271: Global supply/demand (kt/pa) Figure 272: Regional nameplate operating rate need to
update
25000 100% 100%
95%
90%
20000 90%
85% 80%
15000 80%
75% 70%
10000 70% 60%
65%
5000 60% 50%
55%
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
0 50%
2000
2002
2004
2006
2008
2010
2012E
2014E
West Europe Southeast Asia

Global Capacity Operating rate
Northeast Asia North America

Figure 273: Capacity expansions kt Figure 274: : Geographical breakdown of polyester

bottle resin capacity
CIS &
30%
India Baltics
25% Southeast 5% 5%
Asia
20% 7%
15% Africa/ Northeast
Middle East Asia
10% 8% 36%
5%
Europe
0% 12%
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012E
2014E
-5%
Americas
27%
Figure 275: Historical quarterly margins ($/tonne) Figure 276: Recent & forecast margins ($/tonne)
400.00 400.00
300.00 300.00
200.00 200.00
100.00 100.00
0.00 0.00
-100.00 -100.00
-200.00 -200.00
Jan-1999
Jan-2000
Jan-2001
Jan-2002
Jan-2003
Jan-2004
Jan-2005
Jan-2006
Jan-2007
Jan-2008
Jan-2009
Jan-2010
Jan-2011
Jan-2012
Jan-2008
Jan-2009
Jan-2010
Jan-2011
Jan-2012
Jul-2008
Jul-2009
Jul-2010
Jul-2011
Jul-2012
North America Northeast Asia West Europe North America Northeast Asia West Europe

Nylon/Polyamide
Figure 277: Nylon/polyamide at a glance
Long-term growth rate 1.5x GDP for plastic applications
Growth rate relative to the sector Above for plastic applications
Supply/Demand Currently tight
Margin prospects Should remain relatively high but new supply risk in Nylon 6
Watch out for ... New capacity in Nylon 6 (China), higher growth in non-textile, niche applications
such as auto, oil & gas, electronics etc
Source: Deutsche Bank. Nylon used in auto-engineering plastic application grows in excess of 2 x GDP
The term nylon refers to a family of polymers called linear polyamides.
Nylon 6 and nylon 6,6 are the most important of all nylon fibers, accounting for
approximately 91% of total production. Both nylon 6 and nylon 6,6 are used for similar
applications. Nylon 6 has a lower melt temperature but better resistance to light degradation,
dyeability, elastic recovery, fatigue resistance and thermal stability. As a result of these
properties nylon 6 tends to be used more in textiles (clothing) while nylon 6,6 is used in
more industrial applications including engineering plastics. Engineering plastics account for
the consumption of about 30% of all nylon.
Other nylon fibers include nylon 46, 610, 612, 11, 12 and the aramids offer high
performances and are used primarily in specialty and non-textile, niche applications such as
automotive tubing and connectors, off-shore flexible pipes, sport equipments, industrial
tubes and wire & cable. They are therefore consumed in much smaller quantities.
Figure 278: World’s nylon consumption by type Figure 279: Specialty polyamide outperform standard
Other
Nylons
9%
Nylon 6
47%
Nylon 6,6
44%
Source: SRI Source: Arkema
Nylon 6,6 is produced from adipic acid and nylon 6 from caprolactam.

Figure 280: Production of polyamide
caprolactam nylon 6
cyclohexane KA oil (1) adipic acid
nylon salt nylon 6,6
benzene cumene phenol cyclohexanol
butadiene adiponitrile (2) HMD (3)
Source: Deutsche Bank (1) a mixture of cyclohexanone, the ketone or K component, and cyclohexanol, the alcohol or A component, (2) also known as hexanedinitrile, (3) Hexamethylenediamine
Figure 281: Production of other types of nylon

Figure 282: End uses of nylon 6 Figure 283: End uses of nylon 6,6
Staple Fiber Staple Fiber

BCF 2% 1%
12% BCF
Textile 3%
Filament
Yarn Engineering
Industrial
Industrial 36% Resins &
Filamant
Filamant Other
Yarn
Yarn 60%
14%
15%
Engineering Textile
Resins & Filament
Other Yarn
35% 22%
Figure 284: Geographical consumption of Nylon resins Figure 285: End uses of polyamide for engineering
2010 plastics (by capacity)
Central and
South Other
5% Electronic &
Africa & America
Electrical
Middle East 4%
5% 22%
Europe
36% Auto
42%
Asia
23%
Consum er &
North Ind. Goods
America 36%
27%
Source: SRI Source: Rhodia
Figure 286: Nylon 6 market shares Figure 287: Nylon 6 top 10 players (‘000 metric tonnes)
BASF SE 3,000
11% 2,500
Li Peng
7% 2,000
DSM 1,500
6% 1,000
Formosa 500
Group ----
Xinhui Meida…
4%
Honeywell
Formosa Group
Zig Sheng
Kuibyshevazot
DOMO Group
Others
DSM
Li Peng
SINOPEC
BASF SE
Honeywell
Others 4%
65% DOMO
Group
3%
Source: Deutsche Bank estimates Source: Arkema

Figure 288: Nylon 66 mkt share Figure 289: Top 10 (thousand metric tonnes)
600
Koch 500
Others Industries
26% 400
23% 300
200
100
Radici ----
Zhong Ping…
Group
Asahi Kasei Corp.

DuPont
Rhodia
Nylstar
Radici Group
Shenma Group
DuPont
Koch Industries
Others
SK Capital II
BASF SE
4%
15%
BASF SE
5%
Rhodia
12% SK Capital
II
15%
Figure 290: PA 12 industry participants Figure 291: PA 11 industry participants
Other
Evonik
20%
24%
Ube Arkema
15% 100%
EMS
22%
Arkema
19%

We estimate Nylon 6 will grow at 1xGDP, Nylon 6,6 at 1.5x GDP and Other Nylons at
2xGDP. Nylon 6 is fairly low growth driven by its textiles, engineering and industrial end
markets. Nylon 6,6 is likely to grow slightly faster due to end market growth and
substitution away from traditional materials. Other Nylons are low volume specialty
chemicals but high growth.
Despite their slightly different physical properties nylon 6 and 6,6 tend to be used
interchangeably in most end-use applications. In the carpeting industry, nylon 6,6 may be
preferred because of its molecular structure, which leads to greater product durability.
The nylon resin market is becoming more consolidated and companies are beginning to
compete globally rather than on a regional basis. Backwards integration into caprolactam
occurs in many of the larger participants. In Western Europe all producers of nylon 6,6
are integrated back into adipic acid. The nylon 6 market remains more fragmented than
the nylon 66 market.

The raw material for nylon 6 (caprolactam) and nylon 6,6 (adipic acid) tend to be priced
on a cost plus basis with the predominant price setting region being Asia. As such
production costs are very sensitive to 1) the oil price and 2) tightness of individual raw
material feedstocks.
There is a significant amount of Nylon 6 supply coming on-stream in China from 2010-12,
which will keep operating rates low. We therefore expect rates to show little
improvement from the current 80% level (effective). For Nylon 6,6 there is little
additional supply coming on-stream, which will likely result in rising operating rates (from
the current levels of 90% effective).
Supply of other nylon resins is also increasing (e.g. Arkema is trebling its PA 11 and
PA12 capacity in China with an expected start up in H2 2012) however we note this is to
meet the sharply growing demand from Asian customers, in particular the automotive
and energy markets.
Figure 292: Anticipated capacity additions in nylon 6,6 Figure 293: Anticipated capacity additions in nylon 6
10% 12%
8% 10%
6%
4% 8%
2% 6%
0%
-2% 4%
-4% 2%
-6%
0%
-8%
-10% -2%
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011E
2012E
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011E
2012E

Polycarbonate (PC)
Figure 294: Polycarbonate at a glance
Long-term growth rate 1.5-2x GDP
Supply/demand Modest recovery in operating rates but outage rates remain high and support better
underlying supply/demand trends
Margin prospects Some modest tightening expected in the coming years
Watch out for… Auto glazing growth, trends in CD/DVDs and substitution trends in packaging, de-
bottlenecking/capacity creep
Polycarbonate is the second largest volume engineering resin produced (after nylon). With
high levels of impact and ductility, fire resistance and engineering properties over a wide
range of temperatures, clear polycarbonate resin goes into a number of end-users particularly
optical media (CD, DVD) and electronics, but also automotive, consumer goods, bottles &
packaging, medical & healthcare, glazing. Polycarbonate is produced from bisphenol A and
carbonic acid. There are two different production processes: Interfacial polycondensation (a
reaction between phosgene and bisphenol A and melt trans-esterification (a reaction
between bisphenol A and diphenylcarbonate).
Figure 295: Production of polycarbonate via interfacial polydensation process
Acetone
Biphenol A polycarbonates
phenol
Methylene chloride phosgene

(solvent)
Source: SRI and Deutsche Bank
High barriers to entry into the polycarbonate resin business exist because of the requirement
for initial large investment, access to technological licensing, possible start-up difficulties and
establishment of efficient and effective marketing of PC resins. This is an oligopolistic market
where SABIC and Bayer are dominant with around 25% share each.
Figure 296: End uses of polycarbonate Figure 297: Polycarbonate market shares
Other
18% Others SABIC
Electrical/ 31% Plastics
Electronic 26%
27%
Transportat
ion Bayer Poly
14% Shanghai
4%
Optical Formosa Bayer
Media Idemitsu Teijin 25%
Glazing
and Sheet 21% 4% Polycarb Teijin
20% 5% 5%
Source: Deutsche Bank, SRI Source: Deutsche Bank, CMAI

Figure 298: Polycarbonate industry data and participants 2010

(kt/pa) Global capcity: 4,296
N. America 948 W. Europe 1,185 ROW 2,163
SABIC Plastics 598 Bayer 570 Bayer 436
Bayer 260 SABIC Plastics 505 Teijin Polycarb 336
Dow 45 Dow 53 Chi Mei-Asahi 190
Styron 45 Styron 53 Formosa Idemitsu 175
ISL Polymers 5 Thai Polycarbonate 160
Dow 158
Sam Yang 120
Mitsubishi Gas Chemical 120
Chinese producers 103
Other 365

We anticipate trend demand growth of polycarbonate to be 1.5-2x GDP level, with
growth anticipated to be strongest in Asia. The majority of planned capacity additions are
from Asia and the Middle East but these only amount to a 7% rise in capacity from 2011-
15. Current operating rates are in the mid 80s and some modest tightening is expected
in the coming years.
We expect the market to be driven by auto-glazing and substitution away from the use of
glass. This should offset the expected on-going decline of demand for CDs.
Figure 299: Polycarbonate capacity additions (%) Figure 300: Regional shares of planned capacity
additions
20% 100%
18%
16% 80%
14%
60%
12%
10%
40%
8%
6%
20%
4%
2%
0%
0%
2010 2011 2012 2013
CIS & Baltic States Middle East Northeast Asia
Figure 301: Global capacity by region (2010) Figure 302: Global planned PC capacity additions
Middle East Company Plant Size (k mt) As % of Start-up

CIS & 1% South total cap year
Baltics America Bayer Caojing, Shanghai 100 2.2% 2011
1% 0%
SE Asia Mitsubishi Eng Kashima 60 1.3% 2011
Northeast Plastics
15% Asia
33% MCC/MEP/SIN Yanshan, Beijing 60 1.3% 2011
OPEC JV
North Kayan Al Jubail 260 5.5% 2011

America LingYou Shanghai 80 1.7% 2012
22% Engineering
plastics
West
Europe MGC/MEP Shanghai 80 1.7% 2012
28% Zhenjiang Zhenjiang, Jiangsu 75 1.6% 2013
ChiMei

Other engineering plastics

Polybutylene terephthalate (PBT) is a thermoplastic crystalline polymer, and a type of
polyester. PBT is resistant to solvents, shrinks very little during forming, is mechanically
strong, heat-resistant up to 150°C (or 200°C with glass-fibre reinforcement) and can be
treated with flame retardants to make it noncombustible. PBT is a plastic that is used as an
insulator in the electrical and electronics industries. It has also been used within the beverage
industry as packaging. The manufacture of PBT is based on the raw material PTA. Trade
names in PBT include Arnite (DSM)
Polyoxymethylene (POM), also known as acetal resin, polytrioxane, polyformaldehyde, and

paraformaldehyde, is used to make gears and other mechanical parts. It is a thermoplastic
with good physical and processing properties. It is sold under the trade names Delrin
(DuPont), Kepital, Celcon (Celanese), and Ultraform (BASF), the last three being copolymers.
Manufacture of this product is based on the raw material formaldehyde.
Poly(p-phenylene sulfide) (PPS) is the precursor to a conducting polymer of the semi-

flexible rod polymer family. The PPS may be converted to the semiconducting form by
oxidation or use of dopants (an impurity element added in quite low concentrations in order
to alter the optical/electrical properties of the semiconductor).
Polyetheretherketones (PEEK), also referred to as polyketones, are obtained from aromatic

dihalides and bisphenolate salts. The bisphenolate salt is formed in situ from bisphenol and
either added sodium or added alkali metal carbonate or hydroxide. PEEK is partially
crystalline, with a high melting temperature of 334 °C. The material is resistant to both
organic and aqueous environments, and is used in bearings, piston parts, pumps,
compressor plate valves, and cable insulation applications.
Cyclic olefin copolymers (COC) are engineering thermoplastics made from

dicyclopentadiene (coproduced in the steam cracking of naphtha and gas oils to ethylene)
and ethylene. These resins have glass-like transparency, low dielectric loss, low moisture
absorption, excellent dimensional stability, high heat resistance, and high melt-flow rates that
permit very precise molding. Cyclic olefins are also being investigated as a blending
ingredient to stiffen polyolefin films. One of the trade names of COC is Topas (Celanese).
Ultra high molecular weight polyethylene (UHMWPE) is also known as high modulus
polyethylene (HMPE) or high performance polyethylene (HPPE). It has extremely long chains,
with molecular weight which result in a very tough material, with the highest impact strength
of any thermoplastic presently made. It is highly resistant to corrosive chemicals, with
exception of oxidizing acids. It has extremely low moisture absorption, very low coefficient of
friction, is self lubricating and is highly resistant to abrasion (10 times more resistant to
abrasion than Carbon Steel). UHMWPE finds use in high modulus fibres for example, Spectra
(Honeywell) or Dyneema (DSM) for bulletproof vests. Due to its low friction and wear
resistance it is used in industrial impact wear, and sliding applications in both normal and
corrosive environment, such as Dyneema for towing, mooring and anchoring cables, fishing
lines and nets, protective gloves and medical applications. Other UHMWPE includes GUR
from Ticona (Celanese).
Liquid crystalline polymer (LCP) is an aromatic polyester polymer (partially crystalline

aromatic polyesters based on p-hydroxybenzoic acid and related monomers) that provides
high performance properties. The structure of LCPs consists of densely packed fibrous
polymer "chains" that provide self-reinforcement almost to the melting point. Typically LCPs
have outstanding mechanical properties at high temperatures, excellent chemical resistance,
inherent flame retardancy and good weatherability. Liquid crystal polymers come in a variety
of forms from high temperature to injection moldable compounds. Applications for this
product include electric/electronic, auto, engineering, packaging (food).

Composite materials (or composites for short) are engineered materials made from two or
more constituent materials that remain separate and distinct on a macroscopic level while
forming a single component. The most common thermoplastics used are polyester, vinyl
ester, epoxy, phenolic, polyimide, and polyamide. The reinforcement materials are often
fibres but also commonly ground minerals.
Nanotubes (NTs) are a composite which include very small carbon fibres combined
with the thermoplastics (usually PS) to add strength as well as unique electrical and
efficient heat conducting properties to the material
Long fibre thermoplastic (LFT) is a composite which shows advantages of high

specific tensile strength and recyclability. In this composite there is a choice of a wide
range of fibres that can be used as well as a choice of the thermoplastics polymer thus
the properties of LFT can be changed according to customer needs.
PolyVinylidine DiFluoride, or PVDF is a highly non-reactive and pure thermoplastic
fluoropolymer. It is generally used as a piping product, sheet, plate and an insulator for
premium wire. Key end markets for PVDF are architectural, coatings, chemical processing
industry, energy and oil & gas. PVDF’s brand name (at Arkema) is Kynar®. The PVDF market
is expected to grow at 7% p.a. with new applications (in new energies & water management)
growing at 10%+
Figure 303: Examples of emerging fast growing applications for PVDF/Kynar

Applications Growth rate Characteristics
Back and front sheets for solar panels >20% p.a. Exceptional UV stability and low permeability.
Increases panel life time
Li-ion batteries binders > 10% p.a. Chemical resistance and good binding properties.
Cheaper Li-metal layers and more efficient graphite
MF and UF membranes for water treatment > 8% p.a. High purity, mechanical resistance and easy
processability
Source: Arkema

Solvents
Figure 304: Solvents at a glance
Long-term growth rate 1-1.25x GDP
Supply/Demand Relatively balanced
Margin prospects Flat
Watch out for ... New capacity in Asia, poor competitive behavior, environmental issues
Chemically a solvent is the liquid used to dissolve or soften a solid substance to form a
solution. Industry examples of the use of solvents include industrial cleaning where the
solvent dissolves the grease and keeps it in the water solution and paints where the solvent
dissolves or softens the solid resins (pigments, additives) to allow them to be deposited on a
treated surface in a uniform film.
Liquid solvents may be either aqueous (water) or organic (petroleum) based. There are three
major groups of organic solvents: the oxygenated, chlorinated and hydrocarbon classes.
Oxygenated solvents include products such as alcohols, glycol ethers, esters and
ketones. These are used in a variety of industries such as lacquer solvents, paint
removers, anti-freeze and in food processing and preservation. This is the largest class of
solvents and they are generally considered to more environmentally acceptable than the
two remaining classes. The main players in this market are Eastman, Shell, BASF, Dow
Chemical, Celanese and BP.
The principal chlorinated solvents are methylene chloride (used in chemical processing,
pharmaceuticals and surface treatment including paint stripping and urethane foam
blowing), perchloroethylene (used for dry cleaning and metal cleaning), and
trichloroethylene (used in specialty adhesives, dry cleaning, metal cleaning, pesticides,
pharmaceuticals, as a degreaser for hide and fur and as an intermediate in the production
of ethylene fluorides). Chlorinated solvent manufacturers include Solvay and Dow.
Hydrocarbon solvents are derived from higher olefin fractions, for example, xylene and
toluene. They also often include mineral spirits. A large proportion of hydrocarbon
solvents are used in the paint industry. They are also often mixed with surfactants to
produce cleaning agents. Major producers of this solvent include Shell, Exxon, Ashland
and Degussa.
Figure 305: Adhesives end markets

Consumer Industrial/Packaging Engineering
Wall paper paste Bookbinding Cable and electronics

Glue sticks and rollers Cigarette manufacture Superglues
All purpose glue Labeling General industry
Building adhesives Lamination Insulating glass
Solvent free adhesives Woodwork Sealant
Sealant Footwear Rubber-metal-bonding
Superglues Packaging Medical

Figure 306: European solvents market breakdown 2011E
Other
15%
Printing inks
3%
Metals
4%
Adhesives
4% Paints & Coatings
55%
Industrial
Cleaning
9%
Pharma and
agriculture
10%

There is a strong trend away from the use of organic solvents towards those which are
aqueous (water based). This is largely driven by environmental concerns over the
emission of VOCs (volatile organic compounds) and HAPs (hazardous air pollutant) into
the atmosphere.
After a decline in demand during 2008 and 2009 due to recession, we now forecast
global demand for solvents to increase 3-4% pa through 2015. This growth should be
supported by demand from electronics, medical products, and automotives.
Oxygenated and other solvents (most of which are environmentally- benign "green"
solvents) are expected to show market share gains while demand for
chlorofluorocarbons and chlorinated solvents is anticipated to continue its downward
trend as a result of environmental regulations.
We expect the Asia/Pacific region to hold the strongest growth prospects through 2015
with most of the actual production of these solvent-based products happening in the
Asia/Pacific region due to lower labor and transportation costs. We expect China to
continue to see strong demand for solvents driven by demand in paints and coatings,
chemicals, rubbers, adhesives, cosmetics, pharmacy and others.

Surfactants
Figure 307: Surfactants at a glance
Margin prospects Low relative to the sector (on average) but some areas have very high (sustainable)
margins
Watch out for ... Consolidation, further rationalization globally
Surfactants or 'surface active agents' allow oil molecules to mix with or ‘dissolve’ in water.
Surfactants are primarily used as detergents. They can, however, also be used in personal
care products to enhance properties such as emollience, solvency, and solubility, as well as
in healthcare, chemical and agrochemical products as a solvent.
Surfactants can be synthesized from two broad types of raw material: oleochemicals (natural
oils) or petrochemicals. Oleochemicals include coconut oil, palm kernel oil and tallow,
amongst others. The petrochemical raw material is primarily linear alkylbenzene (LAB)
which is synthesised from benzene and ethylene oxide. The substances produced from these
two groups of raw materials can be combined or used individually to produce a range of
surfactants.
Figure 308: Major World Producers of Surfactants

BASF (including Cognis) New Japan Chemical Co., Ltd.
AkzoNobel Oleon
Clariant Petresa Group
Croda Rhodia
Dow Chemicals Sasol
Huntsman Group Shell
Kyowa Yuka Co., Ltd. Stepan Group
Mitsubishi Chemical
Source: SRI
Surfactants are categorised not just by raw materials, but also by the level of complexity and
refinement of their chemical properties. Through further processing, more complex
surfactants may be produced which offer greater value to their customers. These added
value surfactants are referred to as specialties and may have properties such as skin
kindness, high foaming and durability.
Depending on their production, surfactants possess different chemical properties, which are
more applicable to certain end users:
Anionics are the largest class of surfactants. The water-loving part of the molecule is
negatively charged. They are often used in detergents, toiletries, washing powders and
industrial applications as well as the personal care market. This accounts for
approximately 37% of the total production.
Nonionics are uncharged molecules but still soluble in water. Petrochemicals are the
main raw material. Nonionics are used mainly in detergents and industrial applications.
This accounts for approximately 46% of the total production.
Cationics are positively charged. They are milder than both anionics and nonionics and
hence are used in baby products and shampoos. These surfactants are in general more
expensive than anionics, because of the high pressure hydrogenation reaction carried
out during their synthesis. This accounts for approximately 12% of the total production.

Amphoterics have an active chemical entity attached to both sides of the molecule.
They are used in specialised applications such as conditioners. This accounts for
approximately 5% of the total production.
Figure 309: Surfactant production
Synthetic Oleochemicals (Natural Oils)
Coconut,
benzene paraffins linear olefins Palm Kernal Oils
and Tallow
glycerine
ALCOHOLS
linear alkyl benzene synthetic fatty
ethylene oxide fatty acid
(LAB) alcohols alcohols
am ines
cationic
anionic non-ionic amphoteric
surfactants surfactants surfactants
surfactants
Heavy-duty laundry liquids Heavy-duty laundry liquids Fabric softeners Conditioners

Light-duty dishw asher heavy-duty laundry pow ders Baby products Specialised toiletries
Personal care Industrial, i.e. hard-surface cleaning Sham poos Anti-static plasticisers
Washing pow ders Toilet disinfectant Textile Auxillaries Agrochem icals
Dishw asher detergent
Household cleaners
Growth Prospects and Industry Trends:

Growth of commodity surfactants is closely linked to growth in detergents, which
generally keeps pace with GDP. Some specialty surfactants for personal care or
agrochemicals have a much faster growth rate. In the more niche end markets of
agrochemicals (as a mixer), cosmetics and healthcare margins are also above that of the
commodity product. While many companies have tried to redirect their focus to these
niche areas it should be noted that this remains difficult as the production of the larger
volume detergents is usually required to base load production plants
Europe is the largest consumer (by volume) of surfactants accounting for 35% of the
global market. North America and Asia remain large markets, consuming 31% and 26%
respectively. We expect global consumption for surfactants to grow at 2-3% per annum
through to 2015.
We expect regional growth rates in surfactants consumption to vary with China, Middle
East and Africa the highest (expected to grow by 6-8% per annum). The growth rates in
other regions should vary from low (in the case of Western Europe) to medium (in the
case of Latin America). The poor growth in Western Europe is due to a stagnant
economy, low population growth, and reduced surfactant concentration in formulations.
Profit margins for surfactant producers have been squeezed in recent years. There has
been pressure from higher raw material costs (i.e., crude oil, natural gas, and natural oils)
since 2005 and few companies have been able to fully recover these higher costs.
The industry has continued to consolidate in recent years. One trend has been that the
major vertically integrated companies such as P&G and Croda have invested in or
acquired oleochemical-based raw materials. The other trend has been the rapid
disappearance of small producers.

Fine chemicals
Figure 310: Fine chemicals at a glance
Long-term growth rate Largely around GDP although many niches offer better or worse rates
Growth rate relative to the sector Historically high but now below average due to commoditization
Supply/Demand Niche markets, but excess capacity in some areas
Margin prospects Poor short-term, selected niches maintaining high levels
Watch out for ... Further consolidation, biotech
A fine chemical is, in theory, a small volume, high value chemical which sells to an exact
chemical specification. Production often involves a number of complicated steps. Perhaps
the best example of a fine chemical is the active ingredient in a pharmaceutical, which is the
chemical that gives the pharmaceutical its medicinal effect. Indeed, in recent years the term
'fine chemical' has been increasingly used to refer to only pharmaceutical and
agrochemical intermediates.
We view fine chemicals in the wider (more traditional) sense of the definition and as such see
pharmaceutical and agrochemical end-markets (life-science) accounting for 40% and 25%
respectively. Outside the life-science industry, roughly 7% of fine chemical sales arise in
dyestuff end-markets and 5% in the markets for flavors and fragrances. The remaining
20% or so of fine chemical sales are destined for a multitude of industrial and consumer end-
markets.
Traditionally, fine chemicals have been regarded as stable growth, added value chemical
products. However, as customers have become more focused on price, increased
competition in many fine chemical markets from lower cost Asian producers has meant that
this need not necessarily hold true. For example, dyestuffs represent a sizeable component
of fine chemical markets globally. However, competition from Asian producers has led to the
commoditization of dyestuff markets and, with it, a sharp deterioration in dyestuff industry
profitability. Flavors and fragrances remains one of the few “fine chemicals” where some
degree of pricing power remains.
Figure 311: End uses of fine chemicals 2011E-
Other
18%
Dyes
5%
Flavours & Pharmaceuticals
Fragrances 45%
7%
Agrochemicals
25%

Life-science molecules (chemical based and biotech)

Figure 312: Life-science molecules at a glance
Long-term growth rate ~5%
Growth rate relative to the sector High in biotech, lower in Pharma and subject to customer product approvals
Supply/Demand Significant over-supply in Pharma ingredients
Margin prospects Flat, mature segments declining
Watch out for ... Consolidation, emergence of biotech
Life science molecules are intermediates and sometimes end compounds used in the
formulations of agrochemicals or drugs sold by the pharmaceutical, agrochemical and biotech
markets. Those chemical companies who operate in this industry are involved in the out-
sourced manufacture of product, not in the R&D discovery or marketing of the products.
The chemical-based products supplied to the Pharma and agrochemical industry generally
are based on small molecules, produced through a range of technologies such as
hydrogenation, condensation, estification, etherification, chlorination, oxidation, halogenation,
and chirality.
Biotech manufacturing produces large molecules through fermentation technologies.
Figure 313: Life science molecule – diagrammatic explanation of terms
Chemical based production Biotech based production
Large range of technologies used Using for example mammalian

or microbial fermentation
Small molecules Large molecules
Historically the traditional participants within the life-science molecule industry were the
Pharma/agrochemical/biotech companies. Through out-sourcing and in some cases the
separating of chemical assets from larger Pharma groups the manufacture of (some parts of)
these products have moved to chemical companies – contract manufacturers. However, a
significant part of this industry still remains in-house at the customers – some of the largest
competitors to the chemical companies in this industry are its own customers.
Drivers of the move to outsourcing manufacturing have included:
The pharmaceutical industry focusing on the highest value-creating portion of its

business - drug development and marketing
Increasing of the speed to market of new compounds. The manufacture of increasingly

complex molecules requires greater focus. Contract manufacturers who focus on
complex routes to molecules are generally able to manufacture these more efficiently
and master unique niche technologies.
Saving capital investment on pharmaceutical manufacturing
Emergence of virtual pharmaceutical companies. Virtual pharmaceutical companies rely

completely on outsourced manufacturing for production. The growth of this sub-industry
could provide an additional avenue of growth for contract manufacturers.

However, in more recent years there has been a reversal of the trend to out-source
production. Drivers of the subsequent drive back to in-sourcing:
A focus on manufacturing costs by pharmaceutical companies (in many cases post large
mergers/acquisitions) has led to a greater evaluation of capacity utilization of in-house
production asset and their cost structures. Pharmaceutical companies manufacturing at
lower capacity utilization have been seen not only to produce some of their new
compounds in-house but to also in-source production back from contract manufacturers
in order to improve their cost structures.
When a product is out-sourced the Pharma company gives control of the supply of its
product to the contract manufacturer. If the contract manufacturer encounters issues
(either from FDA regulation compliance as seen by many in the late 1990s, or more
general manufacturing problems) it can significantly impact the sales and cashflow of the
Pharma company. The risk from these issues can be partially countered by using at least
two contract manufacturers and also by focusing on those with strong records in
manufacturing and FDA compliance, however some Pharma companies have preferred
to be in complete control of manufacturing in order to manage this risk
For active compounds and biotech products significant returns can be made in
manufacturing (if plant capacity utilization is sufficient). Outsourcing of product can in
these cases be seen as passing on a healthy return to a contract manufacturer that could
be captured internally by the Pharma/biotech company
For Pharma and biotech intermediates the FDA and the European agencies regulate the
manufacturing process and end product quality of exclusively produced compounds. This
regulatory control involves the approval of manufacturing facilities, processes and end
products and involves inspections of plants on a regular basis. The regulatory agencies
participation is more significant further towards the end-product (i.e. the advanced
intermediate/active ingredient). The regulation for biotech manufacturing is the most
substantial in this industry (because most biotech products have to be injected, given they
are proteins if they were taken orally they would be digested rather like steak). It should be
noted where applicable these regulatory controls are of vital importance with the FDA having
authority to shut production, seize product and fine a company for digressions.

Chemical based life-science molecules (small molecule)

Figure 314: Traditional chemical based life-science molecules at a glance
Long-term growth rate Largely in line with the Pharma market, approx 5-6%
Supply/Demand Significant over-supply appears to be improving, very company specific
Margin prospects Low/medium in most areas dependant on value added of product produced
Watch out for ... Continued impact of Asian producers moving up the value chain
In chemical-based life-science molecule (small molecules) manufacturing companies can

operate in one or more step of production. At the start of the chain are the raw material or
basic chemicals. This raw material is transformed into an intermediate, which is a building
block for the final molecule. At this stage the intermediate may be further refined to produce
an advanced intermediate. This may involve the addition of one or more intermediates to
each other. Finally the different components or building blocks are 'zipped' together to create
the finished or active ingredient for the pharmaceutical or agrochemical application. This
active ingredient is then manipulated into its final delivery form.
Those building blocks at the early stages of production tend to be chemicals which can be
used in a number of end uses and end products (and in many cases these products are so far
away from the end product there is little regulation). These products can be sold to a large
number of customers. Only the latter stages of production are products manufactured on an
exclusive basis for specific customers. It is these products which have a degree of
differentiation and therefore the greater value added. The production of these molecules
tends to be referred to as ‘exclusive synthesis’.
Figure 315: The fine chemicals value chain
Value Added
Perform ance/
Oil Interm ediates Advanced Finished/’Active
Base Chem icals Form ulated
Gas (building block) Interm ediates M olecule’
Products
Raw m aterials or Basic Chem icals Fine Chem icals

Selling price / unit
Ethylene Oxide Diethanolam ine Im inodiacetic acid Glyphosphate Roundup Herbicide

The critical success factors for companies producing chemical/small molecule life-science
molecules are:
Access to a wide range of technologies. This not only provides the skills for contract
manufacturers to produce the products but also allows scope for possible improvements
in the costs of manufacture by using different technologies to reduce the number of
steps of production.
Process development capability. This again can help to reduce costs of production and
helps maintain margins for the contract manufacturer in the face of yearly price
discussions.
Developing the manufacture process to larger quantities of product is also an essential

part of the service to a customer

Close interaction, development and project management with customers from initial
stages of drug discovery.
Multi-purpose production units/flexibility. This aids the capacity utilisation of a plant

particularly when manufacturing smaller volumes of products not yet at launch stage.
Regulatory approval (FDA) of facilities.

At the early stages of production, particularly at the building block stage, barriers to entry
appear low: basic technologies are available, investment costs need not be large, and
regulation may not be required. Pricing appears the primary differentiator and customers
have been willing to source lowest cost product for many of these basic products.
Further towards the finished product and as products become more exclusive the barriers to
entry increase with a greater requirement for technology and a more onerous regulation
environment particularly for pharma products from the FDA and European agencies. For
active ingredients/finished products exposure to raw material costs are modest and margins
can be towards the top end of the specialty chemical peer group.
Historically life-science molecules have been manufactured within multi-purpose plants and
generally on a batch production basis, although for larger products focused manufacturing
has been built and continuous (or perfusion) manufacturing developed. As a result of batch
production methods capacity data for the industry is not readily available. While sales data
from publicly listed companies provides some idea of size of positions in this business, the
definition of products included in life-science often differ (ranging from active ingredients,
through exclusive synthesis down to the most basic of chemical building blocks).

Biotech molecules (large molecule)

Figure 316: Biotech molecules at a glance
Long-term growth rate Approx 20% pa
Growth rate relative to the sector Substantially ahead
Supply/Demand Depends on product approvals, could be significant under or over-supply
Margin prospects High, but could deteriorate if over-supply
Watch out for ... New capacities in Asia, new biotech product launches, improvements in
manufacturing yields
Production of a biotech product is based on a cell line which goes through a fermentation
process to yield the desired cells, which are then purified/sterilized and then packaged into
the individual dosage containers.
Figure 317: Biotech manufacturing process Figure 318: Breakdown of technologies used in biotech
manufacturing market
Fill/finish
17%
12 months 4-7 w eeks 2 -4 w eeks 1-2 m onths
Transgenic
cell line creation
fill and m am m als
and process fermentation purification
finish
development 6%
Selected Custom m anufacturers

M isc.
Support
M ost Custom M icrobial
m anufacturers services
ferm entation
11%
66%
Source: Company data and Deutsche Bank Source: Company data and Deutsche Bank
Figure 319: Biotech – a digramatic explanation
Biotech based production
Large molecules
Microbial fermentation Mammalian fermentation
Large molecules but lacking Large molecules with human

human characteristics e.g. anti- characteristics e.g. monoclonal
body fragments. antibodies or complex proteins.

Within the manufacturing process the cell line used is dependant on the end product desired.
The two main technologies are
Microbial fermentation: used to produce proteins and anti-body fragments. It is based

typically on the e-coli bacteria and yeast – small cells. Production tends to be relatively
quick, straightforward and suitable for larger quantities. The microbial process produces
a less complex molecules than mammalian production.
Mammalian cell fermentation: used to produce more complex monoclonal

antibodies/fusion anti-bodies and proteins. These are based on mammal cells – large
cells. To date these are typically Chinese hamster cheek cells, although there is
significant R&D focused on developing a human cell line. Production using mammalian
technology tends to be more complex and is more readily suited to smaller quantities.
Production of larger volumes requires more substantial expertise and experience.
Between the two types of production method there is a substantial difference between the
production yields, with microbial facilities able to produce approximately twice the level of a
mammalian plant. This is not only a result of the higher harvest of product per batch but also
a quicker time frame for productions.
Products produced though biotech manufacturings are:
Antibodies: An antibody is a soluble protein used by the immune system to identify and
neutralize foreign objects like bacteria and viruses. Each antibody recognizes a specific
antigen (a substance that stimulates an immune response unique to its target) and
specifically bind to that substance to neutralise or purify that substance
Fusion antibody: An antibody is linked with another substance (a chemical process after
the biomanufacturing). A fusion antibody rather than binding to a antigen to neutralise it,
delivers another substance to neutralise or kill it
Anti-body fragment: Within an antibody only a small part (a fragment) actually binds
onto the targeted antigen the remainder is just ‘scaffolding’. It is a cheaper and more
straightforward to manufacture a fragment than a full antibody – it can be made through
microbial manufacturing rather than requiring mammalian process. However, for chronic
diseases where drugs are required for long periods of time the side-effect profile is
generally perceived to be better if a product is based on a mammal cell line. Therefore
antibody fragments tends to be used for drugs with only short periods of application.
Monoclonal antbodies: Antibodies that are identical because they were produced by
one type of immune cell, all clones of a single parent cell. Given (almost) any substance,
it is possible to create monoclonal antibodies that specifically bind to that substance;
they can then serve to detect or purify that substance. The use of monoclonal antibodies
for example in cancer treatment involves monoclonal antibodies that bind only to cancer
cell-specific antigens and induce an immunological response against the target cancer
cell.
Proteins are essentially polymers made up of a specific sequence of amino acids. The
term can be used to describe basic proteins such as insulin as well as much more
complex antibodies. Proteins and peptides are polypeptide molecules: peptides being
short chains of amino acids, proteins long chains of amino-acids
Within biotech, barriers to entry are higher than elsewhere in life-science molecules, with a
stricter and more wide ranging regulatory environment than for chemical life-science
molecules - regulatory approval and compliance maintenance is required for not just for the
plant but for each individual product manufactured within each individual vessel. This
provides a strong barriers to supplier substitution vessel as it can take up to nine months to
achieve regulation approval for a vessel.

Other barriers to entry include the substantial costs of investment required to build large
scale (£200-500m) with a 2-3 year lag before the plant can be filled, and the experience
required to scaling up production when larger quantities of product are required.
The critical success factors for companies producing large biotech molecules are:
Regulatory approval (FDA) of facilities. These are more onerous than those of small
molecules. A strong FDA record is invaluable in these operations.
Process development capability particularly in being able to scale up manufacture to

larger quantities - the movement from small-medium size vessels to large scale can be
difficult
Close interaction, development and project management with customers from initial
stages of drug discovery. Ability to negotiate longer term contracts (and potentially
contributions to capacity builds) from customers in order to reduce the risk of large plant
builds
Figure 320: The timing to build a bio-manufacturing plant
procurem ent /
i i
Construction
Start up
validation product sales
0 1 2 3 4
Source: Lonza

Flavours and Fragrances

Figure 321: Flavours and Fragrances at a glance
Long-term growth rate 2-3%
Growth rate relative to the sector Slightly lower
Supply/Demand Balanced
Margin prospects Expected to remain at a high level but no expansion expected (raw materials,
structural costs increase)
Watch out for ... More consolidation, raw materials pressure through H1 11, new products in the
non-conventional F&F segments e.g. heath & wellness
Flavours
The major end markets is the flavouring market, an industry worth Euro 8.6bn globally,
include beverages and food such as bakery products, confectionery, savoury snacks and
meat. There are only four basic flavours that the nerve endings in the taste buds on the
tongue can detect: sweet, sour, salty and bitter. The popular conception of flavour, however,
involves the combination of these four basic stimuli with simultaneous odour sensations. In
flavours we continue to note opportunities for stronger overall growth driven by increasing
volumes of pre-prepared foods, where flavours are required to offset the loss of food ‘taste’
during the industrialisation process. Some of the growing trends in flavours include
sweetness modulation (customers looking for reduced sugar content), sodium modulation
(customers looking for low sodium consumption) and natural solutions (driven by new EU
regulations)
Fragrances
The global fragrance market is a Euro 8bn industry and is divided into three key segments:
Personal care, one of the largest markets, used in cosmetic and toiletry products.
The household market, where fragrances are used in products such as detergents and air
fresheners.
Fine (alcoholic-based) fragrances used in perfume and after-shaves.

Fragrances are used industrially in masking, neutralising and altering the odour of various
products, as well as in creating a distinctive aroma for normally odourless objects. Within the
fragrance industry, the more complex the product, the more profitable they tend to be.
Amongst the fragrance products, fine fragrance is the most volatile of the all.
Figure 322: Flavours & Fragrances market by player Figure 323: Flavours & Fragrances market by region
(2011E) (2011E)
Frutarom
Others Others
7% 13%
Hasegawa 3%
3% Givaudan US
24% China 31%
Mane Fils
9%
4%
Sensient Japan
5%
10%
Takasago Firmenich
8% 17%
Symrise IFF
13% 16% W. Europe
37%
Source: Deutsche Bank, Company Data Source: Deutsche Bank, Symrise, SRI consulting, IAL Consultants

Figure 324: End use markets for Flavours (2010) Figure 325: End use markets for Fragrances (2010)
Other
Dairy 7% Fine
7% Fragrance
& Beauty
Beverage Care Functional
36% 29% Fragrances
Sweet 41%
19%
Savory Ingredients
31% 30%
Source: IAL Consultants and IFF Source: IAL Consultants and IFF
Figure 326: Breakdown of flavours and fragrances in the Figure 327: Breakdown of geographical exposures in the
top players (2010) top players (2010)
Givaudan Givaudan
Firmenich
Symrise
Symrise
IFF
IFF
Takasago Takasago
0% 20% 40% 60% 80% 100% 120% 0% 20% 40% 60% 80% 100%
Flavours Fragrances Europe N. America L. America Asia-Pacific

Source: Company Data, Deutsche Bank estimates Source: Company Data, Deutsche Bank estimates
Industry has seen significant consolidation: The flavours and food ingredients market has
seen significant consolidation at the top end: IFF purchasing BBA (US) in 2000 and Givaudan
acquiring FIS (from Nestlé) in 2002, the acquisition of Harmaan & Reiemer from Bayer by
EQT Northern Private Equity Funds in 2002 and its merger with DRAGOCO (private German,
majority shareholder Horst-Otto Gerberding) to form Symrise (which in itself could become a
takeover target) and Givaudan acquisition of Quest (ICI’s flavours and fragrances) in 2006,
Firmenich acquisition of Dansico Flavours business in 2007 and Symrise’s acquisition of Chr.
Hansen, Manheimer Fragrances and Intercontinental fragrances in 2008 and Futura Labs in
2010. At the beginning of 2011, DuPont announced its intention to buy Danisco. There have
also been many smaller technology or niche flavour and fragrance producers who have been
bought to add the range of the larger companies. Top seven producers now accounts for
87% of the market with the rest being held by relatively small producers
Industry players see the F&F market growing on average 2-3% pa over long term.
Over the past 5 years the top tier participants have seen average local currency growth of
5.0% pa (although the range varies significantly from 0.5% to 10.6%). While clearly 2008/9
have been difficult years growth for F&F players has been resilient when compared to other
speciality chemical companies. F&F market recovered in 2010 (underlying sales growth of
10.6%) driven by some customer re-stocking to more normal inventory levels, a recovery in
consumer demand and ongoing strong emerging markets growth. On a long-term basis the
top tier F&F players guide for an industry growth rate of 2-3%.

Figure 328: Sales growth of the top tier flavour and fragrance companies
YoY growth 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011E
Top tier F&F average 5.0% 2.7% 3.7% 2.9% 5.8% 4.3% 0.5% 3.6% 10.6% 5.6%
Givaudan 6.1% 4.2% 2.2% 2.5% 3.5% 2.8% 1.0% 1.4% 8.9% 5.2%
IFF 1.0% -2.0% 4.0% 0.0% 5.0% 5.0% 2.0% 0.0% 13.0% NA
Firmenich 9.5% 6.6% 7.1% 8.7% 8.3% **18.4% -4.3% 12.1% NA NA
Symrise NA NA Û1.5% Û0.2% 7.5% 6.2% 3.5% 0.5% 11.1% 5.0%
Source: Company data, Deutsche Bank, ÛReflecting the restructuring of the newly merged businesses, ** including acquisition of Danisco Flavours. With no pro-forma local currency sales growth available we have excluded
this from the average growth calculation
Demand for food remains consistent over cycles. Over the past 50 years spending on
food in the US has proved relatively consistent showing around 1.5-2.0% growth. While there
have been times of lower growth in many cases these correlate with times of deflation and a
lowering of the value of the product rather than necessarily a drop in the volume. A further a-
cyclical argument can be presented for flavours given that during economic downturns there
tends to be a trend to reduce dining out (which uses only little flavour, accounting for 5% of
the market) in favour of prepared foods (including frozen) eaten at home (which contain a
much greater proportion of added flavours). The flavour market is however subject to
destocking. While customers only have a limited scope for destocking (due to the
requirement for food freshness), reductions of their holdings of flavours (which can have a
longer life span) has been seen to create a degree of cyclicality. This was what exactly
happened during the 2008/09 downturn when sales for the top-tier players grew lower than
the historic industry average. However, this destocking is seen as only temporary in nature
given the limited time frame that food inventory can be stored. This was also corroborated by
the strong rebound we saw in the 2010 when the sales by top tier players grew by 10.6%.
Figure 329: US food spending YoY change
7.0%
6.0%
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
-1.0%
-2.0%
-3.0%
Jun-47
Jun-49
Jun-51
Jun-53
Jun-55
Jun-57
Jun-59
Jun-61
Jun-63
Jun-65
Jun-67
Jun-69
Jun-71
Jun-73
Jun-75
Jun-77
Jun-79
Jun-81
Jun-83
Jun-85
Jun-87
Jun-89
Jun-91
Jun-93
Jun-95
Jun-97
Jun-99
Jun-01
Jun-03
Jun-05
Jun-07
Jun-09
Source: Deutsche Bank, BEA
Home & Personal care (HPC) is largely resilient to recession: The personal care and
cosmetic industry has a well known resilience to recession best highlighted by the “lipstick
effect” (as first highlighted by Estee Lauder). During times of economic uncertainty, women
still spend on affordable luxuries as a substitute for more expensive items like clothing and
jewellery. The theory was first identified in the Great Depression, when industrial production
in the US halved, but sales of lipsticks rose 25% between 1929 and 1933. This was also seen
in the 1990 and 2001 recessions in the US, the number of people working in the cosmetics
industry increased as demand for make-up rose in the US (Estee Lauder lipstick sales +11%
in 2001) although this effect has not been as strong in all economic turndowns and does not
appear in all categories of HPC (e.g. not perfumes or air care). However, again H&PC industry
has been impacted by destocking as in late 2008/early 2009 although the impact of
destocking was generally less pronounced than for the flavour and fragrance players.

Growth tends to be similar to customers: Revenues in F&F (ex M&A and FX) show a
correlation to customer sales. This relationship is most pronounced in the consolidated
consumer goods industry, while the correlation is weaker to the food & drink manufacturing
reflecting the relatively fragmented nature of the customer industry (which we represent here
with just the top 7 of the participants which we estimate to make up less than 20% of the
industry). Given the lumpy nature of the F&F business (e.g. orders 1-6 times a year for
product) compared to the customer (more steady consistent sales over a period) the F&F
companies see greater volatility in sales than their customers. This was again the case during
the last recession and subsequent bounce back where the average sales growth/decline in
F&F businesses was higher than its customers largely due to the more pronounced impact of
restocking/destocking.
Figure 330: F&F local currency sales growth relative to average of customer organic
sales growth
16.0%
14.0%
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
-2.0%
-4.0%
Q1 06
Q2 06
Q3 06
Q4 06
Q1 07
Q2 07
Q3 07
Q4 07
Q1 08
Q2 08
Q3 08
Q4 08
Q1 09
Q2 09
Q3 09
Q4 09
Q1 10
Q2 10
Q3 10
Q4 10
Average customer growth F&F
Source: Company data and Deutsche Bank
Low correlation to GDP & consumer indexes: There appears only limited correlation of
F&F growth to consumer spending or GDP. It should be noted that while the end use
demand for F&F is related to consumer spending, the non-discretionary element of F&F end
markets implies that F&F sales growth does not correlate significantly with consumer spend
indices.
Figure 331: F&F sales relative to US and European Figure 332: F&F sales relative to US & European GDP
consumer index
15% 6% 15%
10% 4% 10%
2% 5%
5%
0%
0%
0% -2%
-5%
-5% -4%
-10%
Q1 02
Q3 02
Q1 03
Q3 03
Q1 04
Q3 04
Q1 05
Q3 05
Q1 06
Q3 06
Q1 07
Q3 07
Q1 08
Q3 08
Q1 09
Q3 09
Q1 10
Q3 10
Q1 02
Q3 02
Q1 03
Q3 03
Q1 04
Q3 04
Q1 05
Q3 05
Q1 06
Q3 06
Q1 07
Q3 07
Q1 08
Q3 08
Q1 09
Q3 09
Q1 10
Q3 10
Flavour & Fragrance lc sales growth

Flavour & Fragrance lc sales growth
European Consumer spending Growth % (RHS) European GDP growth
US Consumer spending Growth % (RHS) US GDP growth
Source: Datastream and Deutsche Bank Source: Datastream and Deutsche Bank

Approx 15% of sales of industry are into the economically sensitive luxury products:
The economically sensitive F&F business is generally perceived to be fine fragrances and
luxury personal care which account for approximately 6-18% of sales of the top tier
companies. Historically these fine fragrance sales historically have shown significant variation
(+/- 20%). While only IFF report fine fragrance data on a consistent basis, this data shows
that 2008/09 trough has certainly lasted longer (with previous downturns lasting only 4-6
months) although the rebound was equally strong with IFF reporting four consecutive quarter
of double digit growth through 2010.
Figure 333: Fine Fragrance weakness since Q4 07 lasted Figure 334: Fine Fragrance weakness centered on North
till Q4 09 but the rebound was been equally strong America and Europe
40%
80%
30% 60%
20% 40%
10% 20%
0%
0% -20%
-10% -40%
-20%
Q1 06
Q3 06
Q1 07
Q3 07
Q1 08
Q3 08
Q1 09
Q3 09
Q1 10
Q3 10
Q1 06
Q3 06
Q1 07
Q3 07
Q1 08
Q3 08
Q1 09
Q3 09
Q1 10
Q3 10
Fine fragrance and beauty care North America EAME

Functional Latin America Asia-Pacific
Flavours
Source: IFF Source: IFF
Figure 335: Fine fragrance exposure (2010)

Fine fragrances as % group sales
Givaudan 9%
IFF 19%
Firmenich * 13%
Symrise 7%
Industry 12%
Source: Company data and Deutsche Bank,* DB est
Lumpiness: Sales in the flavours and fragrance markets can show significant ‘lumpiness’
over 12 month period. This is a result of the impact product launches, which require a
significant amount of ‘shelf filling’ product at one time, with only a smaller ‘top-up’ amount in
subsequent months. Movements in market shares are best to be judged over a period of at
least 12 months in order to avoid temporary impacts such as these. On a rolling 12 month
basis IFF has lead the sector with a growth of 13%, followed by Symrise at 11% and
Givaudan at 8.8%. Higher growth for IFF was mainly due to its higher exposure to Fine
Fragrances which was the worst hit during the 2008/09 downturn.
Figure 336: Seasonality in the F&F industry: Sales of IFF Figure 337: Rolling 12-month underlying (ex FX, M&A)
and Givaudan on a quarterly basis rebased to Q1 2003 sales growth
14.0%
175 12.0%
10.0%
150 8.0%
6.0%
125 4.0%
2.0%
100 0.0%
-2.0%
75 -4.0%
Q1 03
Q3 03
Q1 04
Q3 04
Q1 05
Q3 05
Q1 06
Q3 06
Q1 07
Q3 07
Q1 08
Q3 08
Q1 09
Q3 09
Q1 10
Q3 10
Q1 11
Q1 04
Q3 04
Q1 05
Q3 05
Q1 06
Q3 06
Q1 07
Q3 07
Q1 08
Q3 08
Q1 09
Q3 09
Q1 10
Q3 10
Q1 11
Givaudan IFF Givaudan IFF Symrise

Source: Deutsche Bank, Company Data Source: Deutsche Bank, Company Data

Top tier F&F companies should continue to take market share from the small to
medium size peer group for the foreseeable future. As customers look to focus their own
costs we believe the use of core lists and a restricted number of F&F houses used will
accentuate this trend. Barriers to entry in F&F are wide-ranging: the high innovation rate, R&D
critical mass, inclusion on top customer core lists, regional dominance and global presence,
access to raw materials, increased regulatory environment, full traceability of product and to
a lesser extent integration with customer ERP systems.
Over the past five years the top five companies have increased their market share from
68% to 79%. Through the past five years top tier F&F companies have taken market share
both on an organic basis and also by acquisition (Quest by Givaudan, Danisco Flavors by
Firmenich, Chr. Hansen, Manheimer Fragrances and Intercontinental fragrances by Symrise).
In 2010 top tier companies grew by 10.6% compared to market growth, we estimate of 8%.
With all constituents of the top tier F&F companies growing ahead of market in the period
these market shares gains appear to have largely been at the cost of the medium and small
F&F participants.
Figure 338: 12 month rolling local currency flavour Figure 339: 12 month rolling local currency fragrance
growth by company growth by company
20%
15%
15%
10%
10%
5%
5%
0%
-5% 0%
-10% -5%
Q1 04
Q3 04
Q1 05
Q3 05
Q1 06
Q3 06
Q1 07
Q3 07
Q1 08
Q3 08
Q1 09
Q3 09
Q1 10
Q3 10
Q1 11
Q1 04
Q3 04
Q1 05
Q3 05
Q1 06
Q3 06
Q1 07
Q3 07
Q1 08
Q3 08
Q1 09
Q3 09
Q1 10
Q3 10
Q1 11
Givaudan IFF Symrise Givaudan IFF Symrise
Drivers of ability to achieve market share gains above the top tier peers include the
proportionate exposure to
The faster growing emerging markets: With an improvement from the current low
penetration levels of processed meals and scented products, growth in the F&F was the
fastest in the emerging market countries in the last five years. Growth rates in Emerging
Asia, Central and Eastern Europe, and Latin America averaged between 4-8% pa in the
period– in some cases two to three times the growth seen in more mature markets for
the top tier players. The top tier flavour and fragrance companies have approximately
43% of their sales in emerging markets. However, the type of emerging market
exposure differs between companies. Givaudan has a greater proportion of its sales into
Asia and Latin America than its peers, proportionately below in Middle East and Central
and Eastern Europe. IFF’s exposures have a greater leverage towards Latin America (and
lesser into Eastern Europe and Middle East and Africa), Symrise has a significant
exposure to Asia, Central and Eastern Europe and Africa and the Middle East, but a much
lower proportion from Latin America. Through 2010 exposure to Latin America and
emerging Asia has been important to supporting growth. Over the next five years we
expect emerging markets to outgrow the developed markets in both flavour and
fragrance segments mainly driven by the higher growth in disposable income vs. the
developed markets.

Figure 340: Emerging market exposure (2010)

Company % Sales into % sales into Middle East % sales into Emerging % sales into Latin % sales into C&E
emerging markets Africa Asia America Europe
Givaudan 40.0% 7.4% *15.4% 12.1% *5.0%

IFF 43.0% *5.0% *16.0% 15.2% *7.8%
Symrise 46.0% 7.0% 17.0% 12.0% 9.0%
Source: Company data and Deutsche Bank, *DB estimate.
Figure 341: Expected growth in F&F markets

Projected five year growth rate (2010- 2010 sales by market 2015E sales by market
2015E)
Fragrances
Developed markets 1.0% 37% 41%
Emerging Markets 5.0% 63% 59%
Flavours
Developed markets 2.5% 38% 47%
Emerging Markets 6.0% 62% 53%
Source: IAL consultants, IFF
R&D: Top tier F&F players spend approximately 8% of their sales on R&D. Amongst the
top four players Givaudan is the market leader in the absolute R&D spend followed by
Firmenich, IFF and Symrise. We believe returns on R&D should be sustainable despite
the shortening of product life-cycles. Over the past few years the fine fragrance and
personal care industry has seen the proliferation of product line extensions. While these
have aided volumes in the market the life span of these products have in many cases
significantly reduced creating concerns of declining returns on R&D (while many
products proliferations can have related fragrances – eg perfume, perfumed body
moisturiser and shampoos – each fragrance has to be separately developed). However
F&F participants believe such changes have not had an impact due to a greater focus on
the efficient allocation of R&D. An example of this comes from IFF which has in recent
years achieved consistent returns in fine fragrances despite this being a category with
the largest reduction in product life-span in the past five years.
Figure 342: R&D spending by top tier F&F players (2010)
R&D to sales R&D spend ($m) R&D as % of sales
Givaudan 323 7.9%

Firmenich 265 10.0%
IFF 219 8.3%
Symrise 143 6.9%
Source: Deutsche Bank, Company Data
Increasing focus on non-conventional F&F segments: Increasingly most of the top-

tier F&F players are focussing on the fast growing market segments like functional food,
slimming products, organic food/drink, men grooming products and sun/skin care
products which are expected to grow at a higher rate than conventional F&F segments.
Some of the examples of these products include functional ingredients for food
supplements and flavour solutions for health care/pharmaceutical products.

Figure 343: Fast growing market segments (2010-2013E) Figure 344: Portfoilo segmentation of F&F players
15.0%
Average F&F market growth
12.0%
9.0%
6.0%
3.0%
0.0%
Sun care
Skin care
Functional
food/drink
grooming
Slimming
products
Organic
Men's
food
Sources: Datamonitor, MarketsandMarkets, just-food, Global Industry Analysts, Packaged Facts Sources: Datamonitor, MarketsandMarkets, just-food, Global Industry Analysts, Packaged Facts
Increasing penetration of core lists: The ability to service a customer and enter into the
new product brief process increasingly requires the F&F company to be included in the
customers ‘core list’. However, details of the core lists of clients remain sparse. These
core-lists are reviewed by the F&F customers every 3-4 years on an average. Since 2008
Symrise has been winning new core list positions at an average rate of 2 new lists per
year. IFF has provided no details of change in core listings during this period although it
continues to state it is on the core list of the “majority” of its “strategic customers”.
Givaudan stated in May 2009 that it had gained a position on Colgate Palmolive’s core
list, while highlighting more core list wins at key accounts through H1 10.
Raw materials show a relatively limited sensitivity to oil prices. For the flavours and
fragrances houses the largest costs incurred are for the purchase of raw materials which
account for approximately 40% of sales. It is estimated that those raw materials which are
sensitive to the oil price account for approximately 30-56% of total raw material costs (the
lower proportion of costs being for those companies with a greater focus on flavour which
uses much more nature based ingredient or a lesser chemical molecule operation).
Figure 345: Raw material costs in the F&F industry 2010

Raw material cost $m Raw material % Sales % of crude oil based raw materials
Givaudan 1475 36% 56%
IFF 1070 41% 50%
Symrise *629 *40% 30%

Source: Company data and Deutsche Bank, *DB estimates
While the names of these raw materials in many cases tend to be well known there is little
transparency in their pricing with many bought direct from farmers, co-operatives or traders.
These naturals can see significant price changes from time to time (depending on harvests,
weather etc.). However with well over 10,000 potential natural based raw materials prices
changes in some often tend to be offset by others.

Figure 346: Natural flavour and fragrance extracts of greatest commercial importance
by category
Concretes / Absolutes Resinoids Oleoresins Extracts
Civet Benzoin Anise Cocoa

Geranium Chicle gum Black pepper Coffee
Jasmine Citrus Capsicum Hops
Lavandin Labdanum Ginger Tonka beans
Lavender Myrth Clove Vanilla
Oakmoss Olibanum Dill Various fruits / berries
Orange flowers Nutmeg
Rose Paprika
Tuberose Rosemary
Turmeric
Source: Company data and Deutsche Bank
Price changes in raw materials are being generally offset. Over the past years the F&F
companies have taken significant steps to minimize the impact of changes in raw material
prices. The evidence for this can be seen in the gross profit margin which bears little
correlation to the movement in oil or the movement in some of the larger raw materials such
as vanilla. Methods used to combat rises in raw material costs in older products include price
rises (increasingly more accepted in recent years and in general offsetting 50% of impact),
changes in formulation (only with agreement with customers), increased efficiency of
sourcing and changes in portfolio mixes and backward linkages in some key natural raw
materials (e.g. Symrise is backwardly integrated in menthol). It should be remembered that
raw material price changes do not impact new product profitability (approx 25-30% of
portfolios YoY) as current raw material prices are taken into account during their development
in initial price settings.
Figure 347: Gross margins of the F&F companies relative to the oil price
45% 120
100
40%
80
35%
60
30%
40
25%
20
20% 0
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
F&F Gross Margins Oil Prices (RHS, $/bbl)

Source: Company data and Deutsche Bank, F&F average includes Givaudan, IFF, Symrise, Sensient, Hasegawa, Takasago, Soda Aromatic Frutarom, Huabao and China
Flavour & Fragrances.
Margin should remain stable: We believe that F&F EBITDA margins should be at least
sustainable longer term as the cost of the flavour and fragrance is only 2-6% of the total
costing to a customer (<0.5% beverages up to 5-6% for fine fragrance); packaging and
marketing being much more important. Secondly, pricing is a lesser part of the innovation
process (purchasing managers only entering negotiations typically after a year). Additionally,
the integral nature of the flavour or fragrance to the success of the customer product results
in low pricing pressure.

Figure 348: Key Financials of leading F&F Companies (2010)

Market share Givaudan IFF Firmenich* Symrise Takasago‡ Sensient Hasegawa† Mane Fils Robertet
Global market share 24.9% 16.0% 16.9% 12.8% 8.0% 4.8% 3.1% 3.9% 2.9%
Market share in fragrances 23.5% 18.2% 20.0% 14.4% 4.3% 1.0% 0.8% 4.2% 3.2%
Market share in flavours 23.1% 14.1% 14.0% 12.5% 8.5% 8.3% 4.9% 3.8% 3.0%
Market capitalization (m$) 9256 4990 na 3441 546 1804 681 na 355
Sales comparisons
F&F Sales $m 4071 2623 2759 2085 1313 787 515 637 481
Proportion to group sales into F&F (%) 100% 100% 100% 88%# 87% 59% 100% 100% 100%
Sales Breakdown by F&F

Flavours (%) 53% 46% 43% 51% 60% 53% 87% 49% 51%
Fragrances (%) 47% 54% 57% 37%# 27% 6% 13% 51% 49%
Breakdown of flavour sales 53% 46% 43% 51% 60% 53% 87% 49% 51%
Beverages (%) 19% 11%# na 18% na 5% 34% na na
Savoury (%) 19% 17%# na 17% na 11% 7% na na
Confectionery/bakery (%) 8% 8%# na 13% na 3% 12% na na
Dairy (%) 7% 2%# na 0% na 11% 23% na na
Other (%) 0% 7%# na 3% na 24% 11% na na
Breakdown of fragrance sales 47% 54% 57% 37%# 27% 6% 13% 51% 49%
Fine fragrances (%) 9% 19% na 7%# na na na na na
Home and Personal Care (%) 31% 23% na 17%# na na na na na
Aroma Chemicals (%) na na na 8%# na na na na na
Other 6% 12% na 5%# na na na na na
Geographical breakdown of Sales

Europe (%) 32% 34% na 48%# 10% na na na 37%
N America (%) 24% 25% na 18%# 16% na na na 35%•
S America (%) 12% 15% na 12%# 0% na na na na
Asia Pacific (%) 25% 26% na 22%# 74% na 97% na 28%
Others 7% na na na na na 3% na na
Profitability comparisons
EBIT in F&F $m 629 418 na 324 58 122 50 na 37
EBIT margin 15.5% 16.0% na 15.5% 4.7% 15.5% 9.8% na 7.8%
EBITDA in F&F $m 925 498 na 439 NA 147 89 na 49
EBITDA margin 22.7% 19.0% na 21.1% NA 18.7% 17.3% na 10.2%
R&D $m 323 219 na 143 89 31 43 na NA
Source: Deutsche Bank, Company Data, Reuters, Bloomberg,*June ending 2010 data, †September ending 2010 data, ‡March ending 2010 Data,, •Includes Latin America, #DB estimates
Figure 349: Ranking of sub-sector profitability in the Flavours and Fragrances industry
Fine Fragrances Personal Care Confectionary/Bakery Savoury Fragrance Ingredients
Beverages Dairy Household
Source: Deutsche Bank Symrise states its cosmetic ingredients has profitability between Fine Fragrances and Personal Care
Figure 350: Ranking of sub-sector growth in the Flavours and Fragrances industry
Beverages Personal Care Fragrance Ingredients Fine Fragrances Confectionary/Bakery
Savoury Household Dairy
Source: Deutsche Bank Symrise states its cosmetic ingredients has growth at same level as beverages and savoury

Colourants: Dyes, Pigments and Masterbatches

Figure 351: Dyes at a glance
Long-term growth rate GDP (depending on type)
Growth rate relative to the sector Below
Supply/Demand Oversupply remains a key issue for many products
Margin prospects Limited prospects for long-term recovery
Watch out for ... Small and medium regional capacities and ill-disciplined competition
Dyes, pigments and masterbatches are compounds used to impart colour, especially onto
textile materials but also onto leather, paper, and plastics. Dyes are soluble in water as
opposed to pigments which are insoluble. Pigments are used in masterbatches which are
then used to colour plastics
All dyestuffs are organic, that is derived from hydrocarbons rather than mineral based. There
are many different chemical varieties of dyes, and they are classified in terms of the way the
chemical is applied or held in the material. It is possible to classify dyes according to their
application:
Acid Dyes: These are insoluble in acid baths, and are used for dyeing protein fibers such
as wool, silk, nylon, leather and paper. Most of the synthetic food colors also belong to
this group.
Azoic Dyes: These 'ice colour' dyes are made using ice to keep the chemicals at low
temperatures. These are brilliant, long-lasting dyes used primarily on cotton. They are the
one most versatile of all the classes and therefore widely used.
Basic Dyes: These are soluble in acid, but insoluble once the solution is made basic
(alkali added). They are usually used for duplicator inks, carbon paper and typewriter
ribbons. In solvents other than water they form writing and printing inks.
Direct Dyes: These are used to dye cotton directly and also union goods (mixed cotton,
wool and silk). They are also used as pH indicators and as biological stains.
Disperse Dyes: Used to dye synthetics (cellulose acetate, plastics and polyesters) which
are difficult to dye. They are mainly used to dye polyester but can also be used to
nylone, cellulose triacetate and acrylic fibers.
Reactive Dyes: The newest dyes to be created, these are used for dyeing cellulosic
fibres and some nylons. They react to form a chemical link between the dye of the fibre
and consequently produce dyes of outstanding wash-resistance. Some of these dyes
can be used at room temperatures and these are one of the best choice for dyeing
cotton and other cellulose fibers at home.
Sulphur Dyes: A large group of dyes which produce dull shades on cotton (in some
cases used in more value added applications). Sulfur black 1 is one of the largest selling
dyes by volume.
The demand for textile dyes is linked to the demand for the end product mainly clothing.
Textile fibres have a long-term steady growth rate of 2-3%. However, this growth varies
depending on the type of fibre: polyester grows at approximately 3-4% pa. Dyes can be used
on a variety of substrates and growth depends on current market penetration and end use
growth. The demand for leather dyes depends on the supply of hides. The demand for paper
is based on the paper market but also the on-going fashion for brighter increasingly coloured
paper.

Figure 352: Regional consumption of dyes 2011E
RoW
Europe 4%
9%
Americas
25%
Asia
62%
Source: Deutsche Bank SRI

The global dyestuff market is mature. The textile industry is the significant driver for the
global dye market and the textile industry is highly dependent on population growth and
consumer spending. We expect these markets to see higher growth in the emerging
markets as they have very low per capita consumption of dyes as compared to the
developed economies.
In the last decade global dye industry has seen a major structural change with production
shifting form US, West Europe and Japan to other Asian countries, particularly in China
which now comprises more than 40% of the global dye production.
In the last ten years this industry has been badly impacted by over supply, resulting into
significant pricing pressure. To combat this low cost competition significant restructuring
has taken place in the industry over the past few years, we don’t expect any material
improvement in this condition in near term as higher competition from small and
medium players remains a major threat for this industry.
Despite all these problem areas this industry also has certain small pockets of high
growth such as specialty dyes which has robust demand levels and we see material
growth opportunities in these new areas.

Pigments
The faster growing market of colourants is that of pigments. Pigments can categorised as
organic or inorganic colour pigments. Organic can provide certain advantages over inorganic
pigments. They generally possess greater brightness and tinctorial strength and can serve as
replacements for inorganic pigments.
Pigments are available in a variety of commercial forms, including the following:
Dry colours (usually powders, also granules)
Presscakes (water-wet pastes or granules)
Flushed colours (thick, oily pastes)
Fluid dispersions or slurries (pourable pastes)
Colour paste concentrates (pastes)
Resin-bonds or predispersions (powders)
Plastic colour concentrates or masterbatches (pigment contained in plastic pellets)
Surface-treated colours (powders or pastes)
Figure 353: Breakdown of inorganic pigments market Figure 354: Regional breakdown of Inorganic Pigments
market
Bismuth Iron Blues Cadmiums Others
Vanadate 1% 1% India 10%
2% 4%
Ultramarines Central and China
5% South 34%
Iron Oxides
Chromium 42% America
Oxide 7%
8%
Chromates North
9% America
Complex 22%
Inorganic Europe
31% 23%
Source: Deutsche Bank estimates, SRI Source: Deutsche Bank estimates, SRI
Figure 355: Breakdown of organic pigments market Figure 356: Regional breakdown of Organic Pigments
(2009) market (2009)
Others
High-
16% China
Performance/
Other 28%
27% India
7%
Azo
53%
Japan
12%
Phthalo- United
cyanine Europe States
20% 16% 21%
Source: Deutsche Bank estimates, SRI Source: Deutsche Bank estimates, SRI


The consumption of pigments is driven primarily by growth in the printing inks, paints
and coatings, and plastics industries. Worldwide markets for pigments are expected to
grow more or less in line with GDP during the next five years. Organic pigment products
are estimated to be growing faster than inorganic, replacing them in many applications
as a result of properties of greater brightness and tinctorial strength
In 2009 the global market for organic and inorganic pigments amounted to $5.2bn, this
segment was one of the most adversely impacted segment in the last recession,
However most end markets have returned to pre-crisis levels and we now expect a
steady improvement going forward.
Printing inks is one of the key end market for the pigment industry and this end market is
expected to continue to see a long-term slow decline due to increasing substitution from
the electronic media.
Regionally, US and Europe were the worst impacted by global slow down where Asia
was comparatively resilient and provided a support to this industry - going forward we
expect emerging economies to remain the significant demand driver.
In inorganic pigments synthetic iron oxide holds the largest share with approx 73% of
the total volumes and China is the biggest player with more than 40% market share.
Masterbatches
Masterbatches are the dyes contained in plastic pellets which are used to colour plastics.
These plastics are mostly used in packaging and building but also in electronic and auto
applications. Clariant is market leader in this industry with approximately 20% of the global
market share.
The customer base for manufacturers is very fragmented, ranging from the large auto and
consumer companies to hundreds of thousands of small compounders and plastic product
manufacturers. Due to the specialty nature of the product, the requirement of individual
specifications per customer and per product, and the necessity of quick delivery times to
customers, a close manufacturing location to the customer is essential. Masterbatch
productions tend to require only a low level of capital.
Figure 357: End markets for Masterbatches (2009) Figure 358: Breakdown of coloured Masterbatch market
(2009)
Other
10% Black
15%
Durable goods
4%
Electronic
5% Packaging
42%
Auto
7%
White
26% Colour
59%
Building
32%
Source: SRI Source: Clariant

Figure 359: Geographical breakdown of masterbatch Figure 360: Market share in masterbatches (2009)
market (2009)
Clariant
RoW 22%
Europe
25%
30%
PolyOne
10%
Asia Other
15% 68%
US
30%
Source: Deutsche Bank estimates Source: SRI

Materbatches are expected to see strong growth in near term supported by increasing
demand from key end markets and increasing usage of Masterbatches as compared to
traditional coloring methods.
Regionally, we expect emerging economies to see major demand growth supported by

higher industrial and automotive production as compared to developing economies. In
the near term we expect the Asia-pacific region to remain a key demand driver for this
business.
Some of the key players include A. Schulman Inc, Americhem, Ampacet Corporation,
Cabot Corporation, Clariant, Colortech Inc, Dainichiseika Color & Chemicals, Dow
Corning, etc.

Other selected specialty

chemicals
Plastic Additives
Figure 361: Plastic additives at a glance
Long-term growth rate 1-1.5x GDP (depending on type)
Supply/Demand Dependant on niches. Most markets are not that “tight”
Margin prospects Generally robust, particularly in the more specialty areas
Watch out for ... Further consolidation? Asian capacities? Aggressive competitive behaviour
Plastic additives are chemicals which are added to a range of plastics in order to alter the
characteristics of the plastics either for the final product (e.g. UV stabilisers which protect the
product from sun degradation) or during its manufacture (e.g. processing aids). The plastic
additives market is worth approximately $17bn.
Within plastic additives there are eight main classifications of product, which in turn
frequently contain a number of individual chemicals. We exclude colourants for plastics -
masterbatches – which are discussed in the previous section on colourants, and commodity
plastic additives such as polymerisation catalysts.
Antioxidants
Antistatic agents
Chemical blowing agents
Flame retardants
Heat stabilizers
Impact modifiers and processing aids
Lubricants
Ultraviolet light stabilizers
The plastic additives market is still rather fragmented with the top 5 producers having 33% of
the market. Although there are many participants, two to four companies tend to dominate
each functional type within each major world region (~90% market share). Post a large
degree of M&A and consolidation, several major producers now produce a broad range of
functional additives. Volumes of individual additive products are often quite small. As such
product is generally produced in one or two plants and exported globally.

Figure 362: World consumption of additives by polymer Figure 363: Plastic additives world market shares by
class 2009 value 2009
Other BASF
12% 10% Chemtura
PVC 9%
Thermosets 40% Dow
15% 4%
Arkema
4%
Albemarle
2%
Other Kaneka
Polyolefins/ 67% Songwon 2%
PS 2%
33%
Source: Deutsche Bank, SRI Source: Deutsche Bank, SRI estimates
Plastics additives are sold to base resin producers, custom compounders and plastic
fabricators. The base resin producers that purchase additives directly from additive producers
do their own compounding and sell finished products largely to plastics fabricators, although
a few do their own fabrication and sell directly to end users. Because there are relatively few
base resin producers (compared with the number of fabricators), they tend to be large
corporations with considerable compounding skills. Indeed, these companies may produce
some of their own additives for captive consumption.
Figure 364: Structure of the world plastic additives industry
Source: SRI
As a result of customer demand for a single supplier, additives are increasingly supplied to
compounders and fabricators in the form of “one-pack” granulated dry blends that can
contain heat stabilizers, antioxidants and lubricants as well as colorants (masterbatches).

Figure 365: Major additive producers market operations

Anti-oxidants Anti-static Chemical Flame Heat stabilisers Impact Lubricants Ultaviolet (UV)
agents blowing agents retardants modifiers light stabilisers
Akcros Chemicals X X X X
Akzo Nobel X X X X
Albemarle X X X
Arkema X X X X
Baerlocher X X X X
Lanxess X X X X X
BASF X X X X X X
Clariant X X X X X X
Chemtura X X X X X X X X
Cytec Industries X X X
Degussa X X
Ferro Corporation X X X X X
Kaneka Texas Corp X
Lonza X X
Dow X X X X
Source: SRI
Critical factors for success in plastic additives are:

Global presence is becoming increasingly necessary, with a number of the large
customers looking to standardise products purchased across regions.
Enough flexibility and resources to find and develop replacement products for types of
plastics additives that lose their markets because of government regulations, voluntary
commitments from the industry, changes in demand or new technical trends favoring
different products, as well as sufficient R&D investment to increase the chances of
finding such new solutions.
High and consistent product quality and reliable delivery.
Competitive cost/performance in manufacturing as well as an ability to source other

products in order to blending of different types of plastics additives for optimum
performance.
Raw material integration or supply contracts for high-volume raw materials.

Growth is largely a function of the growth of the resins in which it is used, the growth of
the end product, and its ability of the plastic additive to substitute others. In general
volumes in this industry tend to grow 1-1.5x GDP.
We expect a continuation the main trends in the plastic additives industry to be 1)

Continued consolidation through M&A as companies seek greater scale and pricing
power 2) Continued investment in southeast Asian capacity 3) Compounders and
masterbatchers continuing to play a more important role.
Health and environmental issues continue to dominate certain sectors of the plastics
additives industry, particularly flame retardants, blowing agents and heat stabilizers. As a
result there is a continuing shift away from brominated and chlorinated flame retardants,
and growth in non-halogenated products. Heat stabilizers containing lead will continue to
be under scrutiny from non-government organizations (e.g. Green Peace) and will
gradually be replaced by products such as calcium/zinc or calcium/organics.
Raw material pressures are continuing and discipline in some areas of Plastic Additives is not
always the same. The strongest pricing trends tend to be in the most consolidated parts of
the Plastic Additives chain.

Vitamins and carotenoids

Vitamins are naturally occurring compounds present in most foods that are essential for all
body functions including growth, repair of tissues, and the maintenance of health. Mammals
in most cases cannot produce vitamins and therefore has to acquire them from external
sources such as diet or supplements. Thirteen vitamins have been identified: A, C, D, E, K,
and eight in the B group.
Figure 366: Natural vitamin sources and characteristics

Vitamin Food source Solubility Chemical names (list not complete)
A cod liver oil, carrots Fat Retinol, retinal and four carotenoids
B1 rice bran, cereal grains, milk, eggs, pork Water Thiamene
B2 meat, eggs, yeast Water Riboflavin
B3 meat, eggs, grains, yeast Water Niacin, niacinamide
B5 meat, whole grains (in many foods) Water Pantothenic acid
B6 meat, Dairy products Water Pyridoxine, pyridoxamine, pyridoxal
B7 meats, dairy products, egg, yeast Water Biotin
B9 leafy green vegetables Water Folic acid, Folinic acid
B12 liver, eggs, animal products, dairy Water Cyanocobalamin, hydroxycobalamin
C citrus, most fresh foods Water Ascorbic acid
D cod liver oil Fat Ergocalciferol, cholecalciferol
E wheat germ oil, unrefined vegetable oils Fat Tocopherols, tocotrienols
K leafy green vegetables Fat phylloquinone, menaquinones
Source: Deutsche Bank, Wikipedia
Water soluble vitamins

Vitamins are divided into two groups: water-soluble and fat-soluble. The water-soluble
vitamins (C and B-complex) dissolve in water. They are easily taken up and released by body
tissues. Because the body cannot store water-soluble vitamins, a daily supply is necessary.
Vitamin B12 is an exception to this rule: if intake has been adequate, the liver maintains
stores for several months.
Fat soluble vitamins

Fat-soluble vitamins (A, D, E and K) dissolve in body fat. They are absorbed from food along
with the fat in the food we eat. Excess fat-soluble vitamins may be stored in the liver and
body fat, so several weeks' supply may be consumed in a single dose or meal.
Figure 367: Split of global vitamins market
K
A
1%
13%
E
30%
B (all types)
D 33%
2%
C
21%
Source: Deutsche Bank, DSM, Adisseo

Carotenoids are colorants and antioxidants

Carotenoids consist of hundreds of naturally occurring fat soluble colourants and antioxidants.
In the animal feed industry, they are responsible for most of the yellow and orange pigments
in animals and plants. Carotenoids are added to animal feed to supply pigments that they
would receive in nature, for instance wild salmon flesh is generally orange/red getting the
carotenoids from eating krill and small shellfish. These are not present in farmed salmon diet
and since consumers have an aversion to purchasing white-fleshed salmon, synthetically
produced carotenoids are added to the feed of salmon acting as artificial colourants.
Carotenoids also serve as a colorant used in manufactured food and beverages in the human
market. There are claims of health benefits in humans where some carotenoids are thought
to help prevent diseases.
Figure 368: Vitamin end uses and benefits

Vitamin Benefit Examples of human primary end Approx % Examples of animal feed Approx % animal
use consumer primary end use (US)
(US)
A vision, growth, tissue differentiation foods and supplements e.g. fluid 15% cattle, pigs and poultry 85%
milk, margarine
B1 roles in carbohydrate metabolism and energy cereal, bread, flour, sport drinks 66% poultry 34%
production
B2 roles in enzyme systems yellow food colourant 23% pig and poultry 77%
B3 tissue respiration, carbohydrate and lipid cereal 25% pig and poultry 75%
metabolism
B5 energy metabolism, antibody synthesis cosmetics, multivitamins 48% feed ingredient 52%
B6 metabolism of protein, carbohydrates, lipids food ingredient 75% feed ingredient 25%
B7 maintenance of healthy skin, hair and nerves cosmetic products 16% cattle industry 84%
B9 synthesis of nucleic acid breads, flour cornmeal, rice 41% pig and poultry 59%
B12 bone marrow cells, nervous system, normal food fortification, multivitamins 40% pig and poultry 60%
blood function
C absorption of iron, wound healing, maintenance processed food and beverages, 98% 2%
of capillaries vitamin supplements
D regulate levels of calcium and phosphate ions food, milk 18% pigs and poultry 82%
E biological antioxidant- protect tissue from food, cosmetic and supplement 53% feed additives 47%
damaging reactions industries
K liver, blood coagulation blood coagulation, infant formula 2% poultry diets 98%
Source: Deutsche Bank, Wikipedia

Vitamin market is dividend between Human Nutrition and Animal Nutrition

The vitamin market is split between use in Human Nutrition and Animal Nutrition, with 57%
of vitamin production being used in Animal Nutrition and 43% being used in Human Nutrition
Figure 369: End use breakdown of vitamins market 2009
Animal feed
Human health
57%
43%
Source: Deutsche Bank estimates, SRI
Demand: Animal market

The majority of global vitamin sales, we estimate 57%, are consumed in the animal market
rather than by humans. The most important vitamins for the animal feed market are vitamin
A, E and B. Demand in the animal feed market is driven by cost effective use of agro-
commodities, industrialization and increasing protein consumption. The main end markets for
animal vitamins are poultry, swine, aquacultures, ruminants and pets. The animal market is a
local business (not regional or global), which means that producers need to actively promote
in all markets.
Demand: Human health market

We estimate that 43% of vitamin sales are attributable to the human market. In humans the
main vitamins used by volume are vitamin C, followed by A and E (accounting for circa 70%).
The end markets for the vitamins in the human market are Food ingredients (beverages,
infant nutrition, cereals, staple food, fats & oils and dairy products), dietary supplements and
personal care products. The human health market deals with large consumer groups and as
such is more of a global/regional market, not local.
Vitamins are added to processed foods:
During processing to restore vital nutrients to levels comparable with original levels
To standardize nutrient levels
To fortify fabricated foods that are low in nutrients
Preparation of functional foods containing vitamins that are shown to be useful in

preventing diseases
Demand in the human health market is driven by urbanization, demand for processed food,
preferences for healthy living and personal care.

Figure 370: Breakdown of vitamins for animal feed Figure 371: Breakdown of vitamin for human market
market
Vit. E
10% Vit A
Vit E Vit A 10% Vit B12
31% 32%
5%
Vit B1
Vit C 4%
50% Vit B2
3%
Vit D
6% Nicotinate
Vit C 3%
Others Vit B6
Vit B
6% 12% 3%
25%
Source: DSM, Deutsche Bank estimates Source: DSM, Deutsche Bank estimates
Supply dynamics
Commercially all vitamins are manufactured by chemical synthesis or fermentation (with the
exception of natural vitamin E which is extracted from vegetable oil) or a combination of the
two. The potential to cut costs is limited although we expect there to be constant refining of
processes leading to small incremental reduction in costs. This has been highlighted by the
fact that there have been very few technological ‘breakthroughs’ in the past few years.
Water soluble vitamins easier to produce than oil soluble vitamins

Water-soluble vitamins are easier to produce than the fat-soluble thereby creating lower
barriers to entry than seen in other vitamins. The required investment to produce fat soluble
vitamins is substantially higher, plus there is a need for backward integration of raw
materials. Currently Chinese manufacturers have the lowest cost technology in vitamin C,
working from proprietary fermentation technology developed in the 1970-80s. For Vitamin C,
the only non-Chinese producers, DSM, uses chemical technology. Technology for the
production of vitamin B is also becoming increasingly available and competition increasing. In
fat-soluble vitamins European producers tend to have the technological edge, although these
remain areas targeted by Asian manufacturers. A large proportion of production for vitamin A
and E are still based in Europe.
Vitamin producers between raw materials and the consumer

Vitamin producers receive their raw materials such as glucose and petrochemical derivatives
from raw material producers. They then produce the vitamins and carotenoids either to be
premixed and sent to be made into animal feed or produced in a form appropriate to be used
as an ingredient is consumer products such as food and beverages, dietary supplements and
personal care items. These items are distributed to retailers as final products which face the
consumer.

Figure 372: Vitamin and carotenoid supply chain

Human Health
Food and beverage
manufacturers
-Retailers
Dietary supplement -Food services
manufacturers -Drugstores Consumer
-Health shops
Personal care
manufacturers
Raw material companies

e.g. INGREDIENT PRODUCERS
-glucose -V ITAMINS
-petrochemicals -CAROTENOIDS
Poultry
Animal Feed Swine
Aquacultures
Bespoke Premix Bespoke Feed
Ruminants
Pets
Other
Source: DSM, Deutsche Bank
The market for vitamins is dominated by 2 industry leaders DSM and BASF
Chinese producers presence varies by vitamin, however they account for approximately 50%
of the global volume of vitamins produced, although no single Chinese producer has more
than 10% market share. Each Chinese province was instructed to have adequate feed and
vitamin facilities in the 1970s and 80s as focus was put on increasing agricultural output.
Surplus capacity is sold onto the global market, in general by means of traders. Vitamin C, B1,
B2 and E are restricted products in China which means that they can only be produced in
domestically by companies which are majority Chinese owned.
Figure 373: Relative market position in carotenoids Figure 374: Relative market positions in vitamins
Carotenoids
Vitamins
China
Chinese Other BASF DSM BASF Other DSM Chinese
China
producers producers
Source: Deutsche Bank, DSM Source: Deutsche Bank, DSM


Over the last 15 years, the competitive landscape in the industry has changed drastically.
Lower cost competition from China has had a profound impact, specifically on the global bulk
vitamin market. Through a relatively large number of players, China has increased by more
than 200%, of course coming from a relatively small base.
We estimate growth for vitamins to be approximately 3-5% pa – slightly higher growth in
fat soluble vitamins than water-soluble. Fat soluble vitamins vitamin A and E are both
increasingly used in human food (as an anti-oxidant) and pharma helping to drive growth
through these high-value added end markets and vitamin E is increasingly used in
cosmetics (skin care etc).
Advances in technology will continue to keep pressure on commodity vitamin prices. We
expect pricing to be flat to down 1-2% pa. This pressure will be focused in selective
areas, such as vitamin C and B which are easier to produce. However, there are barriers
in know-how for pre-mixes, forms and applications for food.
In the long run we expect more competition in the fat soluble market from Asian
producers overcoming the high investment hurdle and pre-mix network. This is likely to
create pricing pressure, however not to the same extent as with vitamin C production.
While this is the case, we expect European vitamin manufacturers to continue to set up
joint ventures in China to emulate low cost bases and maintain a competitive advantage.
The market for carotenoids has historically been well controlled with BASF and DSM
controlling 80% of the market. There has been little competition from Asian producers.
Figure 375: Breakdown of selected producers and selective market positions in
vitamins
A B B1 B2 B6 B12 Biotin C D E K
DSM H L H H H H H H H H H
BASF H L M H L M L M H L
Adisseo L L L L L
China L L H L L L H H L L L
Daiichi L M M
Eisai L L
ADM L L H
Cargill L
Kuraray L
Cambrex L L
Reilly L
Evonik L
Mitsui L
Lonza Nicotinates
Sumitomo M
H,M,L denominates global market position. Source: Roche, SRI, Company reports
Figure 376: Estimated growth in vitamin by product (%)

Vitamin A 4.0
Vitamin B1 3
Vitamin B2 3
Panthothenic Acid 3
Vitamin B3 3
Folic acid 3
Vitamin B12 3
Vitamin C 4.0
Vitamin D2 3
Vitamin D3 3
Vitamin E 6
Biotin 3.5
Source: Deutsche Bank estimates and company information

Penicillin and Cephalosporins

Penicillin refers to a group of beta-lactam antibiotics used in the treatment of bacterial
infections caused by susceptible, usually Gram-positive, organisms. Cephalosporins (7-ACA)
are the second major group of beta-lactam antibiotics which are similar to penicillin due their
toxicity and their broad spectrum of action against various diseases. They differ from
penicillins by having more gram negative activity.
The two natural penicillins obtained from the ‘original’ penicillin are penicillin G (PEN G) and
the more acid-resistant penicillin V (PEN V). They are active only against Gram-positive
bacteria and not against Gram-negative species, including many serious pathogens like those
which cause tuberculosis. However, the use of pencillins has been expanded by modifying
pencillins chemically to remove the side chain (which determines the antibiotic properties of
the penicillin) and then adding an alternative side chain that confer new properties. These
processes create the more modern semi-synthetic penicillins (SSPs) such as Ampicillin,
Carbenicillin and Oxacillin. Semi synthetic cephalosporins (SSCs) can also be manufactured.
The intermediates for these semi-synthetic products are 6-APA (penicillins), 7 ADCA
(cephalosporins) and other side chains such as PHPG (ParaHydroxy Phenyl Glycine) and PG
(pheylglycine).
Figure 377: Manufacturing process of penicillin and its side chains

M a in s tre a m p e n ic illin s S id e c h a in s
G lu c o s e T o lu e n e / M A N
R A W M A T E R IA L S
P e n G /V BALD / G LA
6 -A P A 7 -A D C A PG / PHPG
IN T E R M E D IA T E S
S S P ’s S S C ’s B U L K A C T IV IT IE S
D o s a g e F o rm F O R M U L A T IO N
P a tie n ts M A R K E T E E R /D IS T R IB U T IO N /R E T A IL E R
Source: DSM
Main producers of penicillins and cephalosporins are DSM, Antibioticos (Montedison),

Sandoz (Novartis), BMS and Chinese producers NCPC (North China Pharmaceutical
Corporation) and Harbin. A number of the Western producers are increasingly focusing their
efforts towards the more complex semi-synthetic products (SSP and SSC). These companies
consume a large portion of their PEN G/PEN V production captively. Penicillin price is most
commonly quoted in $/bou - a bou being billion oxford units. An oxford unit is a volume
measurement equal to 3.55 ml) or alternatively $/kg (one bou is equal to approx 1.4kg)
Figure 378: Details of selected penicillin, cephalosporin and intermediate producers

Company Positions
DSM DSM Anti-Infectives is one of the global leaders in penicillin G, semi-synthetic penicillin
and cephalosporin intermediates (6-APA and 7-ADCA), side chains, semi-synthetic
penicillin and semi-synthetic cephalosporin.
Antibioticos,(Montedison) World’s leading producer of cephalosporin intermediates (7-ACA), with a 30% share of
the non-captive market, and the second largest specialized manufacturer of penicillin in
the world.
NCPC Market share in China: PEN G 40%, PEN G sodium salt 35%, Ampicillin Sodium 20%,
Amoxicillin 30%, 6-APA 30%,

Figure 379: Global Antibacterial market split
Others
Sulfonamides 6%
4%
Tetracyclins Cephalosporins
5% 27%
Aminoglycosides
6%
Quinolones
13%
Macrolides Beta-lactams
13% 26%
Source: Deutsche Bank, DSM

Going forward we anticipate the market for penicillin to grow at approximately 3-4% pa.
with the SSC market expected to grow at 2% and 4% pa growth expected for the SSP
market. Regionally, we expect Asia will lead the growth story with 6-8% growth in SSP
and 3-5% growth in SSC.
DSM is the leading player in global betalactams and cephalosporins market with number
2 position in Penicillin and 6-APA and market leading position in 7-ACDA, SSP and SSC
market.
We expect further consolidation penicillin market with DSM already having announced
the formation of a JV with Sinochem. Sinochem will have a 50% equity interest in DSM
Anti-Infectives and this JV will include all the global activities of DSM Anti-Infectives. This
should allow DSM to achieve a stronger position structurally in anti-infectives with
access to Sinochem's strong distribution in the Chinese market.
Figure 380: Geographical end market demand of SSC and SSP
W Europe
Africa 5%
8%
Far East
Australasia 29%
8%
SE Asia
8%
S Am erica
9% UK
13%
M iddle East
N Am erica
10%
10%
Source: DSM

Household & Personal care

The personal care industry manufactures consumer products used primarily for beautification
and personal hygiene. The market includes a broad range of products from skin care, hair
care to baby care and oral care. The market was worth c.E350bn in 2010. The c.E120bn
household care industry products vary from laundry detergents, polishes and dish washing
products to toilet care, air care and insecticides.
Figure 381: E120bn Household Care market Figure 382: E350bn Personal Care market
Insecticides Sun Care Baby Care

2% 2%
6%
Dishwashing Colour Cosmetics
14%
11%
Skin Care
25%
Bleach Deodorants
3% 5%
Air Care Depilatories

1%
6%
Toilet Care Laundry Care

4% 53%
Fragrances
12%
Oral Care
Surface Care 11%
14%
Polishes Men's Grooming Hair Care

20%
3% 8%
Source: Euromonitor, Deutsche Bank estimates Source: Euromonitor, Deutsche Bank estimates
Household and Personal Care markets dominated by top 10 players

The top 10 players in household care account for 61% of the market: Procter & Gamble,
Unilever, Reckitt Benckiser, Henkel, SC Johnson, Colgate, Clorox, Kao, Sarah Lee and Lio.
The top ten players in personal care market account for 50% of the market: Procter &
Gamble, L’Oreal, Unilever, Colgate, Avon, Beiersdorf, Estee Lauder, J&J, Shiseido and Kao.
Figure 383: Household Care top players Figure 384: Personal Care top players
Procter & Gamble Procter & Gamble Co

19% 12%
Other L'Oréal
39% 10%
Unilever
10% U nilever
Other 7%
50%
Colgate
4%
Reckitt Benckiser
9% Avon
3%
Beiersdorf
Lion 3%
1% Henkel
Estée Lauder
Sara Lee 6% 3%
J& J
2% Kao Corp SC Johnson Kao Shiseido 3%
2% Colgate 6% 2% 3%
Clorox 4%
2%
Source: Euromonitor, Deutsche Bank estimates Source: Euromonitor, Deutsche Bank estimates
Chemicals companies manufacture and supply the active ingredients

Figure 385 lists European chemical companies in our coverage that have exposure to HPC
end markets. Chemical companies provide specialty ingredients to their HPC customers to
make various Personal Care and Home Care products such as skin care, hair care, sun care,

detergent, cleaners and more. Due to the “necessity” nature of HPC products, increasing
trend towards grooming (to keep an ageing population looking young, and male grooming),
increasing healthcare spending, and increasing sophistication and demand for
environmentally friendly homecare products make these end markets attractive for chemical
companies. In addition to this, the small cost of these chemical ingredients in the overall cost
of the end consumer product, along with the continued product innovation give these
chemical companies decent pricing power.
Figure 385: Exposure of Chemical companies to Personal/home care markets

Exposure Areas of exposure Products
Croda High Skin care, sun care, hair care, baby care, colour cosmetics, male Inorganic UV absorbers, lanolins, emollients, polymers,
grooming, bath and shower and antiperspirant markets proteins, surfactants and skin care actives
Laundry, household, industrial and institutional cleaning Proteins and their derivatives, softeners, surfactants,
applications, as well as for wipes, tissues, nappies and hygiene solvents, emulsifiers, solubilisers, hydrotropes, tissue
articles lotions, botanical extracts, fatty acids and glycerine
BASF Medium Hair/Body, Oral Care, Home Care, Skin Care, -Industrial and Additives for 2 in 1 shampoos, detergents for baby
Institutional Cleaning shampoos, additives for liquid soaps, lipid layer enhancer
& moisturizers, cold processable pearlshine concentrates,
sensitive skin laundry detergents, Sensitive skin fabric
softeners, additives for easy ironing/less wrinkle claims,
special low foaming surfactants for multifunctional
automatic dish detergent, additives improving gloss and
performance of cleaners Face care products like light
touch products by gel-cream structure, mild systems for
sensitive skin, color cosmetics e.g. face and eye make-up,
lip sticks, Sun care products, Emollients that improve
solubility of UV filters, sprayable sun care concepts,
Foaming / Defoaming Surfactants, multifunctional
polymers for hard surface cleaners, laundry detergents
AkzoNobel Low Hair care, skin care and sun care, soups, disinfectants, plastics, Surface-active agents which are used to mix or separate
soaps, detergents, cosmetics two different materials
Givaudan High Fragrances for air care, laundry care, home care products and fine Fragrances for shampoos, soaps, deodorants, body
fragrances lotions, candles, air fresheners, laundry detergent and
fabric softeners, perfumes and colognes
Symrise High Personal care, household, dental care, and pharmaceuticals Fragrances for personal care, household, dental care, and
pharmaceuticals
Clariant Low Laundry detergents and household cleaning products Cleaning agents, stain removers, laundry detergents,
dishwasher detergents, liquid all-purpose cleaners, liquid
metal /ceramic cleaners, sanitary cleaners
Rhodia Low Beauty, Hair & Skin Care, Home & Fabric Care, Industrial & Ingredients for personal care and home care products
Institutional Cleaning
DSM Low Skin care, sun care, hair care Ingredients for personal care products
Emerging markets already represent a significant proportion of H&PC market

Asia pacific, LATAM, Eastern Europe and Middle East and Africa represent 52% of the global
market. This highlights the fact that the high growth rates in these markets are not from small
bases but in fact equal bases relative to developed nations.

Figure 386: Household & Personal Care geographical split 2009
Western Europe
28% Asia Pacific
25%
Australasia
1%
Eastern Europe
7%
North America
19%
Latin America
Middle East and 15%
Africa
5%

Long run growth of the personal care market to be 1.5x GDP
We expect the market to be around 1.5x GDP with emerging market growth drivers. Baby
care and Fragrances have historically grown above this rate due to emerging market
preferences for spending money on their children and for luxury goods.
Long run growth of household care market to be in line with global GDP
The household care market during normal times has historically grown at around GDP and we
forecast the market to grow at this rate in the future moving to 1.5X GDP as emerging market
growth drivers pick up.
Emerging markets are the central growth story for Home and Personal Care
For both Personal and Home Care we anticipate growth being driven by Asia, Eastern
Europe, LATAM and the Middle East. These markets should continue to be the primary
growth drivers in these markets as urbanization, shifts into the middle classes, consumption
patterns and the wealth of emerging countries increase. Furthermore as these consumers
continue to trade up to premium products, margins are likely to increase.
Figure 387: Personal Care market growth rates by region 2005-9

2005 2006 2007 2008 2009
World 6.9% 6.5% 11.1% 8.9% -2.1%
Asia Pacific 5.4% 4.4% 7.9% 11.3% 4.9%
Australasia 8.2% 1.6% 15.7% 2.8% -7.6%
Eastern Europe 16.7% 14.9% 20.5% 17.1% -18.6%
Latin America 23.9% 16.9% 19.2% 17.4% 2.9%
Middle East and Africa 10.1% 7.6% 10.8% 10.5% 8.4%
North America 3.8% 3.8% 3.9% 0.6% -1.9%
Western Europe 2.9% 4.5% 13.2% 6.9% -7.2%
Source: Euromonitor

Figure 388: Home Care market growth rates by region 2005-9

2005 2006 2007 2008 2009
World 5.3% 5.6% 10.1% 8.7% -3.0%
Asia Pacific 5.8% 4.9% 8.9% 12.5% 5.6%
Australasia 6.6% 1.2% 13.5% 2.5% -6.9%
Eastern Europe 16.8% 15.1% 22.6% 20.6% -15.7%
Latin America 18.1% 12.1% 15.0% 14.1% -0.9%
Middle East and Africa 9.5% 8.2% 11.4% 12.7% 3.0%
North America 2.8% 4.9% 1.6% 1.2% -0.8%
Western Europe -0.4% 1.9% 11.2% 4.7% -8.7%
Source: Euromonitor
Growth in global middle classes is source of core H&PC momentum

The OECD calculates that this will lead to strong growth in global consumption spend by the
middle class, projecting annual real growth in spend by these households of 4.7% a year
from 2009 to 2030. On a regional basis the growth rate for middle-class spend ranges from
just 0.2% a year for North America and 1.6% a year for Europe (including Eastern Europe) to
3.4% for Latin America, 4.8% for Africa & Middle East and 9.4% for Asia.
Figure 389: GDP per capita highlights emerging markets growth prospects…
World $10,706
High income: OECD $37,026 Middle East & North Africa (all income levels) $9,885
North America $45,597 Middle East & North Africa (developing only) $7,035
United Kingdom $36,496 East Asia & Pacific (all income levels) $8,960
Germany $36,449 East Asia & Pacific (developing only) $6,073
Euro area $34,127 China $6,838
France $33,655 India $3,275
Spain $32,545 South Asia $2,955
Latin America & Caribbean (all income levels) $10,835 Sub-Saharan Africa (all income levels) $2,118
Latin America & Caribbean (developing only) $10,590 Sub-Saharan Africa (developing only) $2,094
Source: The World Bank, (PPP current international $)
Figure 390: Private consumption in China should be Figure 391: …spending by global middle class to grow
above current US levels by 2020….. exponentially (millions of 1995 PPP $)
Emerging markets exposure and tailoring products to market is key

These figures clearly have major implications for H&PC companies and those supplying
them, and those with greater emerging market exposure are going to be more favourably
positioned when it comes to benefiting from this trend. It is key that companies are flexible in
their approach to gaining share in these markets as they develop so as not to be left behind.

Water Treatment
Water treatment technologies and products are used to purify, supply, recycle and dispose of
water. Treatment chemicals are used all along the chain from water sourcing to waste
disposal. The nature of pollutants is well-known (minerals, metals, organics and bacteria) and
the technologies (chemical, physicochemical, mass transfer and fermentation) currently used
in water treatment are mature.
The water management chemicals market is split into two major categories:
Specialty chemicals, such as ion exchange resins and organic coagulants and flocculants,
and formulated products, including biocides and corrosion and scale inhibitors.
Commodity chemicals such as alum (aluminum sulfate), chlorine, ferric sulfate, ferric
chloride and polyaluminum chloride.
Figure 392: World consumption of water management Figure 393: Global water supply & demand [bn m3]
chemicals by region (2010)
Central & Shortfall 2,700=39%

Eastern 8000
6,900
Europe North
Japan 1% America 6000
4,200 4,500
10% 35%
4000
China
2000
14%
0
Western 2010E clean Current demand 2030E demand
Europe Other Asia water supply
Agriculture Industry
16% 24%
Domestic Ground water/Surface water
Source: SRI and Deutsche Bank Source: Charting our water future, McKinsey 2010; The 2030 World Water Resource Group: UNESCO
Hydrologic Program

Major companies in the segment are Nalco, BASF, Ashland, Kemira, Lanxess and Dow.
Global water management industry growth is dependent on (1) regulatory drivers, (2)
industrial development requiring high-quality process water, and (3) drinking water
improvement projects in part motivated by drinking water scarcity. Items 2 and 3 are
most important in developing nations, particularly in China.
The United States uses specialty water treatment chemicals more intensively than
Europe and Japan—particularly coagulants and flocculants. In Western Europe and
Japan, engineering and technical solutions are preferred when they can be used as a
substitute for specialty chemicals. When chemicals are used, the less expensive
commodity chemicals such as alum (aluminum sulfate), ferric sulfate, ferric chloride and
polyaluminum chloride are typically used in preference to organic polymers due to cost
although with efficacy of organic polymers continuing to rise – the trend of substitution
is continuing.
Through 2011-15, global consumption of specialty water management chemicals is

expected to grow by about 4-5% p.a. driven by increasing demand for clean water for
domestic and agricultural sectors, growing population and pollution. In addition, rapid
industrialization and recycling/reuse of limited water resources are also expected support
the long-term growth prospects. We expect China in particular (c.10%) and other
emerging countries to be the center of growth.

Paper Chemicals
Figure 394: Paper chemicals at a glance
Long-term growth rate Sub GDP
Supply/Demand Not that relevant as capacities can be easily expanded and time to build a new
plant is very short (6-12m)
Margin prospects Remaining low with few attractive niches
Watch out for ... Further consolidation, new privately owned capacity additions in Asia
The paper chemical producers make wide range of products which are used by Paper
manufactures to influence paper properties like improved printability, coloration, special
coatings and strength for all kinds of papers and board. Key end markets for chemical
companies in this segment include paper & printing, packaging & board and specialties.
The paper chemical market can be divided broadly into “specialty” and “commodity”
chemicals. World consumption of specialty paper chemicals is estimated at approximately
$15 billion; while consumption of commodity chemicals for pulp and paper production is
around an additional $8 billion.
Specialty paper chemicals can be classified into three groups according to their function and
point of use in the paper production process:
Pulp and fiber treatment chemicals such as bleaching, pulping and deinking chemicals
Processing aids, which are used to improve the efficiency of paper production including
defoamers, pitch-control agents, biocides/slimicides, and retention and drainage aids
Functional chemicals, which are used to impart various properties to the finished
paper, ranging from improved strength and optical properties to enhanced printability
(dry- and wet-strength resins, sizing agents, coating binders and specialties, as well as
dyes, pigments and fluorescent whitening agents).
Commodity chemicals would include chlorine and oxygen, hydrogen peroxide, sodium salts
and sulfuric acid (used mainly in pulp production).
Figure 395: World consumption of specialty paper Figure 396: Global Pulp & Paper Chemicals market by
chemicals by region applications
Central & ROW Process Pulping,

South 2% Chemicals bleaching &
China
America West 11% RCF
8%
4% Europe Chemicals
33% Coating 31%
Chemicals
18%
Rest of Asia
12%
Pigments &
Functional Filters
Chemicals 21%
Japan NAFTA 19%
13% 28%
Source: SRI, Deutsche Bank Source: Kemira
There can also be classified based on the technologies that the products offer through the
production chain for paper:

Figure 397: Types of chemicals used in paper production
Source: BASF

Some major companies in the segment are BASF (largest player with approximately 20-
25% market share), Ashland (Hercules), Nalco, Kemira, Eka Chemicals, Clariant and Dow.
Pulp and Paper chemicals market is largely dependent on the paper industry and hence
reflects the trends in the industry. The global paper industry has been witnessing a lot of
pressure due to increasing substitution in digit media and in plastic packaging.
The recent recession (late 2008 and 2009) had a material impact on the pulp and paper
chemicals industry. The demand of different paper grades decreased significantly in
2009, especially in the traditional markets of North America and Europe. In these
markets, paper demand dropped by about 10-25% approximately, depending on the
grade. Though the markets have now recovered, growth is likely to be modest in Europe,
North America and Japan, while China, South East Asia, East Europe and Latin America
are projected to gain strength
Over the next five years, the world consumption of specialty paper chemicals is
expected to increase at an average annual rate of 2-3% per year (volume basis). The
growth is expected to be slower in the markets of North America, Western Europe and
Japan (all between 1-2% p.a. through 2015) while China should continue to grow at a
fast rate (c. 6% p.a. through 2015). Other emerging markets of Eastern Europe and Asia
are also expected to grow steadily at 3% p.a. during this period.
China’s annual growth rate in paper production and consumption of paper chemicals is
the highest in the world, with a 7% per year gain in paper production since the year
2000. However, China’s consumption of specialty paper chemicals reflects production
dominated by lower-value grades of paper and paperboard, which require less specialty
paper chemicals. The major paper chemicals used in China are hydrogen peroxide,
modified starches, polyacrylamides (PAM) and synthetic sizes. In China, more than 200
companies are involved in paper chemicals production.
To reduce costs and achieve environmental and regulatory compliance objectives, the
use of virgin fibers (especially chemical pulps) and alum is expected to decrease, while
recycled paper fibers, fillers and pigments, and specialty paper chemicals will extend
their share in the raw material mix of the paper and board industry.
While the paper and paper chemical industries have been historically under pressure
from green groups, this has subsided in recent years. There have been no considerable
environmental and/or chemical issues since the late 1990s, when the industry stopped
using elemental chlorine-based bleaching and switched to the dioxide-based bleaching
used now. Consequently, there are no real legislative pressures on the paper industry.
Owing to the global focus on environment protection, environmentally friendly chemicals

such as sodium chlorate, hydrogen peroxide, and fillers including calcium carbonate are
witnessing robust growth. Recycling has emerged as a major game changer in the paper
industry, and is impacting demand for paper chemicals. The growing penetration of
closed-loop water-circulation system is also facilitating demand for specialty chemicals.

Leather Chemicals
Leather Chemicals markets includes chemicals that are used for tanning, re-tanning, and
finishing of leather products across various stages of the leather manufacturing process.
Leather chemicals demand is directly linked to the developments in the leather goods and
leather processing industry. Beamhouse chemicals, binders, chrome tanning salts, colorants
for wet end and finishing, fatliquor, finishing auxiliaries, patent leather chemicals,
preservatives and retanning chemicals are products manufactured by major players for the
leather markets. Key applications include leathers shoes, automotive, furniture and garments.
Figure 398: Global demand for Leather chemicals by region, 2010
Americas
22%
Asia-Pac
46%
EMEA
32%
Source: Lanxess

Leading players in the leather chemicals segment include BASF, Clariant, Lanxess, TFL
and Stahl with a number of local operators accounting for the rest of the market.
Global leather chemicals demand was estimated at Euro 2.5bn in 2010. The future
growth is expected to be driven by demand from end-use markets (particularly leather
footwear, automotive and apparel markets), decreasing hide quality and shift to higher
environmental standards leading demand for innovative leather chemicals and steadily
growing meat consumption.
Low growth prospects in the European markets mean that further consolidation in this
area is inevitable.
Leather markets grow slowly but steadily in line with meat consumption. The availability
of raw materials, rather than the end-product sales, is the key determinant of growth
patterns and trends in the leather chemicals market. Global meat consumption is
expected to increase from approximately 67 mt in 2010 to 74 mt in 2018.
We forecast the Asia-Pacific market for leather chemicals to grow much faster over the
next five years due to high availability of raw materials and lower cost of operations.
An environmental concern is a major issue. Growing awareness about environmentally

friendly products and processes, and the need to comply with regulatory specifications
is contributing to the uptake of eco-friendly leather chemicals. Increasing demand for
high-quality leather, particularly from garments, furniture, and car upholstery, enhances
the demand for eco-friendly and highly advanced leather chemical formulations.

Thiochemicals
Figure 399: Thiochemicals at a glance
Supply/Demand Currently high and likely to remain high despite large further investments
Margin prospects Should remain high
Watch out for ... Aggressive competition for market share, raw material, strong capacity additions
Thiochemcials are mainly sulphur derivatives with hydrogen often called thiols (thiochemicals)
or mercaptans. The main application for these sulphur derivatives is in methionine (an amino
acid used as an ingredient in mainly poultry but also piglet and ruminant feed) and to a lesser
extent in the polymer, pharma, natural gas odouriser, solvent and petrochemical market. The
main players in the sector are Arkema, Chevron Phillips Chemical, certain local producers for
some products and integrated methionine producers such as Evonik and Adisseo.
Figure 400: Global thiochemicals demand by end market Figure 401: Global thiochemicals demand by region
Source: Arkema Source: Arkema
Methionine is an essential amino acid, which is a basic building block for protein formulation.
It is widely used as a feed additive for poultry and swine in order to promote the growth in an
animal, shorten the feeding cycle and raise the quantity of lean meat.
Figure 402: Global methionine demand drivers Figure 403: Broiler feeds average inclusion rates for
methionine (kg/tonne of feed)
Source: Fountain Agricounsel Source: Fountain Agricounsel
The methionine industry is highly consolidated with 4 players controlling 97% of the market.
Barriers to entry are high due to technical and nutrition expertise requirements, strict

regulations and high capital requirements. Access to key intermediates and raw materials
(such as methylmercaptan and hydrogen sulphide) is also crucial for methionine production.
Figure 404: Methionine total capacities (DL-powder Figure 405: Methionine price chart (European quotes)
equ.)
Source: Fountain Agricounsel Source: Feedinfo

We expect thiochemicals demand to grow at 4-5% p.a. driven by animal nutrition
(increasing poultry consumption, fast growing emerging countries) and oil & gas
(projects in Asia and Middle East, lower sulfur content). Soil fumigation is a new
application which offers a relatively strong growth potential driven by the substation of
banned methyl bromide. We note thiochemicals is a relatively defensive business which
held up relatively well during the 2009 downturn.
We expect methionine demand to increase by 6% p.a. globally and 10% in China for
2009-12. This growth should be driven mainly by growth in developing countries as a
result of higher inclusion rates of methionine per kilogram of meat, such that local
production yields can meet rising regional demand.
Capacity utilization is near full capacity (97% in 2010). The new capacity plans over 2011-
15E (see Figure 23) should be just enough to satisfy demand and the market should
remain tight ensuring industry margins should remain high. Adisseo, the world’s second
largest methionine producer, has been achieving stable EBITDA margins of 35%.

Textile Chemicals
Figure 406: Textile Chemicals at a glance
Supply/Demand Oversupply to continue given low barriers to entry
Margin prospects Remain at a very low level
Watch out for ... Rising labour costs in China, competitive behavior, migration of customer base
The global textile chemicals market had a value in 2010 of about $10bn. Textile chemical
products range from highly specialized chemicals (biocides, flame retardants, water
repellents and warp sizes, for example) to relatively simple commodity chemicals or mixtures
thereof (such as emulsified oils and greases, starch, sulphonated oils, waxes and some
surfactants). Over 60 chemical product classes are used in yarn formation, fabric pre-
treatment and finishing, textile laminating and coating, and other miscellaneous applications.
Textile chemicals represent only a small part of the total yarn/fabric/textile production cost.
Figure 407: Use of Textile Chemicals in Textile production
Source: SRI
The industry is fragmented which has led to competition. Many companies are privately
owned (often run for cash). The industry is heavily located in Asia (due to the low-cost labour)
and we expect the steady migration of customers to low-cost regions to continue.
Figure 408: Labour costs for Textile Fibre production Figure 409: World production of textile fibres
($/hr)
Other
Americas 7%
6%
India
8%
Asia
79%
Source: SRI, Deutsche Bank Source: SRI, Deutsche Bank

Many products exist (over 6,500) and the same function may be served by many products.
These are relatively easy to copy and many interrelated functions are filled by the use of
interdependent groups of products.
Figure 410: Textile Chemical applications and functions

Textile Chemical Function Main chemicals used
Yarn lubricants Protect different types of fibres. Water based solutions and other
emulsions
Warp sizes Principally provide strength and lubrication during weaving. CMC, starch, PVA, polyacrylate, polyester
Desizing agents Because sizes are a form of coating, and therefore must be removed. When sizes are not Enzymes or oxidizing agents
removed, bleaching, dyeing and finishing processes become erratic and produce fabrics
that are uneven in appearance.
Bleaching agents Chemicals used as bleaching agents to produce white fabrics are hydrogen peroxide, Hydrogen peroxide, sodium hypochlorite
sodium hypochlorite and sodium chlorite, none of which is a specialty chemical but rather a and sodium chlorite
good example of a commodity chemical.
Surfactants Surfactants are widely used in textile processing to ensure even, thorough, and rapid Nonionic, anionic and cationic surfactants
wetting and penetration of processing solutions into textile substrates.
Fluorescent whitening Optical brighteners are used mostly to supplement bleaches, as bleaches alone often do
agents not provide sufficient whiteness and clarity. Polyester fibers in light shades especially
require treatment with optical brighteners.
Dyes Textile colouring.
Printing Auxiliaries
Pigment binders Polymeric binders are used in pigment-based print pastes to bond the pigment to the fabric. Acrylates and styrene acrylics
Dye thickeners Impart a stable viscosity to print pastes and to control the flow of the paste so that the print guar gum (carpet industry)
pattern can be applied correctly.
Finishing Agents
Anticrease agents Anticrease agents are applied to fabrics in order to provide ease of care. Cross-linking agent, curing catalyst,
softeners and lubricants.
Water, oil, soil and stain Most finished textile goods must be treated with a finish to provide adequate and fairly Fluorochemicals, acrylic polymers,
repellents durable water and oil repellence and/or soil and stain repellence. silicone polymers, polyeurethane, wax
based materials
Flame retardants Most textiles are combustible under certain conditions and can represent a human safety Use of a monomer or co-monomer during
hazard. The criterion for flame retardance is not complete fire resistance but whether or not polymerization that confers retardance to
a specific standard has been met. the fiber itself.
Biocides Biocides for textile applications prevent rot, mildew and (as biocides for any application) the Biocides
growth of microorganisms such as bacteria, mold and yeast.
Coatings
Nonwoven binders Nonwoven fabrics are made by laying down a web of staple fibers or continuous-filament All chemical binders for nonwovens are
fibers and then bonding them by chemical, thermal or physical means. Chemical bonding is synthetic polymer latexes or emulsions.
achieved by applying a polymeric binder to the fiber web.
Carpet backcoatings Holds tufts in place. Styrene-butadiene rubber (SBR), latex

Many markets have been in structural decline, the United States and Western Europe
have been suffering since the 1960s from ever-increasing imports of textile goods from
East Asian countries. We estimate textile chemicals to grow 6% in China and 3% in India
from 2010-2015. Elsewhere we expect declines in the Americas and Europe
The principal reason for the increase in Chinese apparel exports to the United States,
Western Europe and other Asian countries, is the low cost of labour in China. Although
India and Indonesia have low labour costs as well, China is leading in international textile
exports because of its well-integrated network in production and marketing in overseas
markets. However, Chinese labour costs have been increasing rapidly and this may yet
encourage other regions to compete more.
As a result of the relocation of fibre and textile production to Asia and the associated
aggressive price competition, most chemical companies have scaled back or shut-down
their textile chemical operations in developed markets.

Construction Chemicals
Figure 411: Construction Chemicals at a glance
Margin prospects Low currently but should some improvement (driven by recovery in Western
construction markets)
Watch out for ... Raw materials, new capacities in Asia
Construction chemicals are chemical compounds that are added as such or in formulations to
or on construction materials at the construction site in order to improve workability, enhance
performance, add functionality or protect the construction material or the finished structure
made out of it. They undergo chemical reactions (e.g., cross-linking) or physical changes (e.g.,
solidification from melt) during their application. Construction chemicals are used as
formulated products, so they are handled as powders, pastes or solutions at the site.
The different construction chemicals are as follows:
Protective coatings – All coatings applied to construction materials will have a certain
protective effect due to the formation of a barrier between the environment and the
underlying structure.
Adhesives and sealants – Adhesives and sealants are important components in building
construction, allowing the bonding of dissimilar materials like glass to metal or insulation
foam to concrete. The amount of labour needed is reduced compared with more
traditional fastening systems like nails, screws, nuts and bolts.
Concrete admixtures – ingredients added to the concrete matrix during mixing as solids
or liquids to improve various properties. These tend to be higher growth than average.
Asphalt additives – Asphalt is a mixture of aggregate with bitumen and some additive.
The bitumen forms a film around the aggregate beads and glues them together.
Additives are used to enhance the aggregate/bitumen interaction and the workability of
the raw asphalt.
Figure 412: Consumption of construction chemicals by Figure 413: Consumption of construction chemicals by
type region
Asphalt
additives Rest of the
4% China
World
27%
Protective 26%
coatings
Concrete 43%
admixtures
26%
Japan
12%
Western
Adhesives Europe
and North 22%
sealants America
27% 13%
The raw materials needed for the production of construction chemicals are manufactured by
the large chemical producers. Polymers are the most important group of raw materials and
are found in virtually every construction chemical formulation, ranging from adhesives to
waterproofing treatments. Growth in construction chemicals is driven by demand for
materials with improved functionality and sustainability, allowing for differentiated building
materials and reduced total construction cost (material and labour).

Resins, paints and adhesives

Synthetic resins
Figure 414: Synthetic resins at a glance
Long-term growth rate GDP (much higher in niches)
Supply/Demand Different in each individual resin markets
Margin prospects Low/medium in most areas
Watch out for ... Continued price and raw material pressure
Synthetic resins are intermediate products used to impart a particular characteristic to the
final product, for example heat-resistance, molecule binding or adhesive qualities. They are
used in a large number of products including inks, paints, coatings and electronic
components.
Synthetic resins are produced via the polycondensation (to make a thermosetting resin) or
polymerisation (for a thermoplastic resin) of different types of monomers. Thermosetting
produces infusible or insoluble products, which are most commonly used in non-moulded
applications such as industrial paints and varnishes, coatings, casting compounds, laminates
and adhesives.
The choice of monomer raw material depends on the end usage, but is wide ranging.
Monomers include melamine, methanol, urea, polyester and phenol to name but a few. For
example,
Epoxy resins have good adhesion properties, strength, little shrinkage and good heat
resistance. They find particular applications in adhesives for aeroplanes, cars, spacecraft,
and so on. Their electrical properties also mean they are used as an adhesive for semi-
conductor chips.
Amino resins (urea or melamine based) have an extreme surface hardness and
resistance to discoloration and fire. Melamine resin is commonly used for kitchen and
table surfaces.
Phenolic resins have good stability in heat and a resistance to chemical corrosion and
moisture penetration. This resin tends to be used for electrical components, brake linings
and rubber resins.
Other Types of Resin Include:
Urethane resins (which include isocyanates and polyisocyanates largely used in paints).
Polyester resin (coatings, plastic products, and others).
Silicones (flexible resins used for water-resistance, laminates, and others).
Alkyds (used for electrical insulation, electronic components, paints, and others).
Acrylic resins (used for glazing, coatings, adhesives, and others).

Figure 415: End uses of resins

Resins for the
Industrial graphic industry Adhesives &
coatings 7% sealants
9% 15%
Architectural
coatings
7%
M elam ine resins
for surfaces
4%
Phenolic resins
11%
Resins for
Foundary resins
structural
1%
com posites
Resins for insulationand 45%
friction m aterials 1%
Source: SRI, Deutsche Bank estimates, SRI
The final composition of the resin involves adding fillers, additives, and pigments depending
on the end product application. In some cases fibres can be added in order to provide
reinforcement.
There are many resin producers globally. Most producers concentrate on resins using one or
two raw materials only: the type of resin produced is usually dependent on the chemistry of
the company or a similar end-use application. For example, paint companies such as Akzo
Nobel tend to be involved in the production of resins used in paints.
Figure 416: Resin manufacturers

Polyester resins Acrylic resins Urethane resins Silicones
DSM Rohm & Haas Evonik GE also jv with Bayer and Toshiba
Lonza Evonik Lyondell Dow Corning
Arkema DSM Bayer Wacker
AOC Ineos Shin-Etsu
Ashland CYRO Cytec and Evonik Evonik
Cook Composites & Polymers Spartech
Eastman
Phenolic resins Epoxy resins Amino Resins urea formaldehyde, melamine Alkyd resins
formaldehyde
Borden 4 Dow BASF DSM
2 3
Dynea Huntsman TOTAL Eastman
Georgia Pacific Resolution Performance Products Borden Borden
Cytec Arkema
Georgia Pacific Dyno
Neste 1
Solutia
Chimica Pomponesco
(1) In Europe through a 96% participation in Krems Chemie; (2) Former assets of Neste and Dyno which were merged in 2000; (3) In 2003 Huntsman bought Vantico the former Performance Polymers business of Ciba;
(4) IncludingBakelite
Source: Company data


Demand growth for resins is linked to that of the end-use industries, providing long term
growth of 3-4%. Urethane resins used in coatings, epoxy resins used in electronics and
polyester resins used in packaging are expected to experience the strongest growth.
Resin demand is being driven by replacing metals and construction materials with light
with more light weight substitutes and development of legislation in the US and China
following European eco-friendly legislation.
In specialty resin markets, profit levels depend more on the properties than the costs of
production. Technical support and innovation remain important drivers of future growth
in this business.
There has been a structural move to waterborne resins, powder and UV curing resins
and away from traditional solvent based (high VOC)

Paints (coatings)
Figure 417: Paints at a glance
Supply/Demand Selectively improving
Margin prospects Stable
Watch out for ... Further consolidation
Paint, also known as coatings, is usually a formulation of a finely divided pigment (for opacity
and colour) dispersed in a liquid composed of a resin or binder and a volatile solvent (e.g.
organic solvent or water).
Figure 418: World consumption of coatings by technology
Radiation
curables Other
Powder 2% 2%
5%
High Solids
8%
Conventional
Waterborne
Solventbornes
Industrial
42%
9%
Waterborne
Emulsions for
architectural
32%
Source: Deutsche Bank, Akzo Nobel
Paints have a wide range of uses from interior decoration to marine and aerospace
applications. The different sub-sectors of the paints industry vary considerably in their
structure and key players. Packaging coatings, automotive OEM (original equipment
manufacturers), aerospace and marine coatings, for example, are truly global markets
dominated by a handful of participants. Other markets such as those for industrial, coil and
automotive re-finish have, to date, tended to be regional in emphasis and, as such, more
fragmented, although even here consolidation is increasingly seeing the creation of global
suppliers.

Figure 419: Breakdown of coatings markets by market

100
90
80
70
60
50
40
30
20
10
0
Architectural Coatings Automotive OEM Other Product Finishes Special-Purpose Coatings

Source: SRI, Deutsche Bank, Akzo Nobel
By volume the largest coatings market is that of decorative or architectural paints (typically
for use in the home). These consumer-oriented businesses account for roughly 50% of global
coatings demand. Decorative coatings are used in both the professional and do-it-yourself
(DIY) markets. Although regional in nature, consolidation within this part of the industry is
gradually seeing the emergence of global producers, building globally recognised brands (for
example AkzoNobel’s Dulux).
On a regional basis the largest market for coatings is the US, this is a factor not just of its
population but also its consumption per capita which is towards the top end of the range for
most countries. This market is largely a result of the large decorative/architectural market.
China, Japan, Germany, Brazil and Korea are also significant.
Figure 420: World production of paint and coatings Figure 421: Per capital breakdown of paint consumption
of selected countries
Kg/capita
Oceania Singapore 18.0
1% North
America US 18.3
19%
Canada 15.2
Asia Germany 19.7
Central and
39%
South
Sweden 17.0
America
6% Italy 18.5
United Kingdom 14.9
Europe France 13.8

25% India 1.5
Middle East Russia and Australia 13.2

4% Ukraine
Africa 4% Brazil 6.6
2% Mexico 5.2
China 4.6

Raw material costs for coatings typically account for about 50-55% of sales revenue.
Significant within this are the costs of titanium dioxide at 20% of sales (see later section),
resins (15%), solvents (5%) and packaging for the container (5%).
Coatings is split into different segments

Coatings market sub-sectors:
Automotive OEM – Paints and services for OEM buses, trucks and specialized
commercial vehicle builders
Automotive refinish – Paints and services for collision repairers and commercial vehicle
refinishes
Industrial/Packaging – Coatings for metal building projects, home appliances, consumer

electronics, packaging, sporting goods, coatings for beer and beverage cans, food cans,
caps and others.
Architectural – Interior and exterior wall paints and trim paints (lacquers) for consumers
and professionals
Aircraft – External and internal coatings for commercial, general aviation and military
markets for both OEM application and maintenance and repair
Figure 422: Value breakdown of the paints and coatings market

Yacht
Packaging coatings 1% Aerospace
2% Specialty plastics 0%
Coil coatings 2%
3%
Marine
5%
Wood refinishes
5%
Decorative paints
42%
Powder coatings
7%
Auto refinish
7%
Protective coatings
8%
General industrial
8% Automotive OEM
10%
Source: Deutsche Bank, Akzo Nobel, SRI

Exposure of companies to different coatings segments

The table below shows the different types of coatings and the exposure of the main coatings
players to these segments. It is not necessarily a competitive advantage to be involved in all
as most operate as discrete segments.
Figure 423: Coatings market outline

Automotive OEM Automotive refinish Industrial/Packaging Architectural Aircraft
Market size (Billion $) 11 8 22 30 1
Players DuPont, BASF, Kansai, DuPont, BASF, Akzo, Akzo, Lilly, Sherwin-Williams, PPG, Akzo, Deft Chemical,
Nippon, PPG Sherwin Williams, PPG Valspar,DuPont, Kansai, Valspar, Benjamin Moore PPG, Sherwin Williams
Nippon, PPG
Customers GM, Chrysler, Ford, Fiat, Body Shops and Whirlpool, Harley Hardware Stores, Paint Airlines, Aircraft,
Transplants, Renault, Distributors, light Davidson, Alcoa, Stores, Home Centers, Manufacturers, Window
PSA, All Major industrial Reynolds, Andersen, Mass Merchandisers Manufacturers
Manufacturers Crown Cork & Seal,
American National Can,
Roll
Strategy Car Content, Full Line, Distribution, OEM Market Segmentation, Product Segmentation, New Products,
Global, Total Service, Position, Full Line, Value Custom-designed Low Cost, Service, Technology, Service,
Unit Cost, Proactive Added Programs, Cost technology, Service, Unit Contractor programs, Application Support
Technology Cost, Globalize, Distribution, Density Centers- Growth
"Structure" Pkg. Platform, Fenestration
Growth
Source: Deutsche Bank, PPG
AkzoNobel is the world’s largest coatings supplier

The industry is very fragmented with many local coatings manufacturers. The largest
manufacturers have low double digit percentage market share with AkzoNobel the global
leader with approximately 14% market share.
Figure 424: AkzoNobel is the world’s largest coatings supplier

14%
12%
10%
8%
6%
4%
2%
0%
AkzoNobel PPG Sherwin DuPont BASF Nippon Paint Valspar Kansai Paint Jotun Masco
Williams
Source: Akzo Nobel, Deutsche Bank

Growth in the coatings market tends to be approximately 2-3% pa. However, this is
largely driven by higher growth regions including Asia (10-15%), Eastern Europe 6%,
Latin America 6%, and China 8-10%. The consumer coatings market is mature in
developed markets.
Consumer coatings are geared to disposable income, maintenance spend, DIY and
housing transactions more than construction.

Other end uses can also offer higher growth, e.g. aerospace 4-5%, as well as new
technologies, e.g. powder coatings 4%. Water borne coatings are seeing faster growth
than solvent based paints.
Post a period of heavy pricing competition in the US in the 1990s (in order to be the
primarily supplier to the main DIY retailers) manufacturers have become more disciplined
attempting to differentiate on quality.
Due to the seasonality of the business and lag in passing on cost inflation, raw material
inflation has the potential to place particular pressure on margins in the short term.
This coatings market has seen considerable consolidation over the past 10-15 years (see
below). This has been to take advantage of the very large economies of scale in this area
from not just production but also marketing and distribution. The market remains
fragmented, however – 60% of Asia is serviced by small to medium sized producers
(20% and 35% in US and Europe respectively).
Sector characterized by consolidation
Akzo Nobel bought Courtaulds paint (and fibre) operations in 1998. DuPont purchased the
Herberts Group from Hoechst (Germany) in 1999. With the acquisition, DuPont became a
major supplier of powder coatings and waterborne base coats for automotive OEM. In 1999,
Sigma merged with Kalon as a result of the ATOFINA-Total merger. In 1999, Valspar acquired
Dexter’s container coatings business and expanded its operations in Europe and its share of
the worldwide container coatings market to over 30%. In 2000, AkzoNobel acquired the
coatings business (mainly aerospace coatings in the United States) of Dexter (sales of $47m
in 1999). In 2002, Ferro sold its powder coatings business to Rohm and Haas (European
business) and to AkzoNobel (North American business). Rohm & Haas paid $60m for a
business with about $75m in annual sales. Akzo paid $73m for a business with about $80m
in annual sales. In 2003, Bain Management (financial interests) acquired SigmaKalon for Euro
1bn. In 2004, Sherwin-Williams acquired Duron Inc., which mainly produces and markets
architectural coatings. Annual Duron sales were $350m, focused on serving the professional
and do-it-yourself (DIY) markets in the eastern United States and they operate 230 company
owned stores. In 2004, Comercial Mexicana de Pinturas (COMEX) acquired Professional Paint
in the United States, which had sales of about $500m per year. Professional Paint, formed in
2000, is the parent company of seven medium-sized paint manufacturers and marketers of
architectural coatings in the Western United States and Canada. Most recently there have
been two large acquisitions with PPG acquiring SigmaKalon at the start of 2008 to expand its
European decorative coatings presence. At the same time AkzoNobel completed the
acquisition of ICI, again expanding its presence in decorative coatings and also increasing its
emerging market exposure.

Adhesives
Figure 425: Adhesives at a glance
Long-term growth rate GDP+2%
Growth rate relative to the sector Slightly above Average
Supply/Demand Not applicable
Margin prospects Reasonable long-term
Watch out for ... Further consolidation globally
An adhesive is a material used to bond two solids together. There are hundreds of adhesive
preparations on the market, supplemented by hundreds of available formulations targeted at
varied end uses. The three largest end-user markets are packaging, construction and
furniture/woodworking, which form over 65% of total revenues.
There are three types of adhesives. Animal adhesives are a mature market and mostly
focused in developing countries. The global chemical businesses tend to focus on the much
larger, faster growing and more specialty markets of starch and synthetic adhesives.
Animal Glues (protein glues). These are the oldest type of adhesive and are made from
animal bone. These are used for example in the woodworking industry and in the
manufacture of drinking cups and ice-cream containers.
Starch Adhesives. These adhesives are made from cornstarch, tapioca flour, wheat
flour and potato starch. Starch adhesives can be applied cold and do not have the
undesirable characteristic odour of some animal glues. Disadvantages include less
strength and lower water resistance. Starch adhesives are less costly than synthetic-
resin adhesives. Starch adhesives can be used for veneers, plywood, postage stamps,
and can be further modified into glues for glass and metals.
Synthetic Adhesives. These are used where water resistance is required and/or other
special conditions must be met. Synthetic adhesives can either be: rubbery thermosets
(mainly used as sealants, that is fastening materials together to exclude weather or
gases); thermoplastics (most hot-melt, non-solvent glues including polyamides, rubber-
based, polystyrenes, acrylates, vinyls adhesives); or a combination of both (to obtain
better properties than those achievable with single components, for example good
adhesion and high-temperature resistance). Raw materials for these products are wide
ranging, but include ethylene, formaldehyde and urethanes.
Adhesives may also be categorised by their end markets which all have different growth
rates and profit drivers.
Figure 426: Adhesives end markets

Consumer Adhesives Industrial/Packaging Adhesives Engineering Adhesives
Wallpaper paste Bookbinding Cable and electronics

Glue sticks and rollers Cigarette manufacturing Superglues
All purpose glue Labelling General industry
Building adhesives Lamination Insulating glass
Solvent free adhesives Woodwork Sealant
Sealant Footwear Rubber-metal-bonding
Superglues Packaging Medical

Market concentrated on North America and Western Europe

Of the 31% share of Asia/Pacific 70% is emerging Asia and 30% is mature Asia, with both
markets presenting opportunities for growth.
Figure 427: Regional share of €47bn adhesive market
North America
24%
Asia/Pacific
31%
Africa/Middle
East Western Europe
4% 28%
Latin America
5%
Eastern Europe
8%
Source: Henkel
Market is fragmented with market leader having 13% market share

The major producers represent only a relatively small share of the €47bn adhesive market,
with Henkel the market leader representing only 13% of the market.
Figure 428: Major adhesive producers 2009- revenue

7
4
$bn
0
Henkel ICI* H.B. Fuller Huntsman Bostik Dow 3M
Findley
Source: *2006 figure, acquired by Akzo Nobel, Company data and Deutsche Bank estimates

Growth in adhesives is forecast to average approximately 4-5% pa. This is largely being
driven by new applications. The main long run driver of above GDP growth is the
continued shift from bolting, stringing and screwing to using adhesives due to its
strength and lower cost. Everything from nappies to television screens to sofas is
increasingly using adhesives as a fixative.

With the continued growth in the use of plastic parts in transport vehicles and
construction, engineering adhesives are forecast to see strong growth. Other significant
growth opportunities include increased use in electronics and in medical situations and
clean energy technologies (solar panels & wind turbines).
Emerging markets will be a prime source of growth for adhesive manufacturers. The
shoe sole market, particularly in Asia remains an area of potential.
Industrial adhesives are forecast to prove more dependent on economic activity for
growth. The growth of solvent free adhesives for food applications, OEM, motor
vehicles and laminating are expected to see stronger growth rates.
Figure 429: Relative cyclicality of business segments
Source: Henkel
Figure 430: Cyclicality of major adhesive applications

Adhesive application Industry cycle Cyclicality
Craftsmen, Consumers and Slow-moving consumer goods Low
Building Adhesives
Building and Construction Construction industry High
adhesives
Packaging, Consumer Goods Consumer products Low
and Construction Adhesives
General Industry Industrial goods Medium/High
Transport and Metal Automotive and metal industry High
Electronics Semiconductor, consumer, electronics, durable goods High
Source: Henkel
Demand for consumer adhesives should be more stable and less vulnerable to
fluctuations in economies. Growth in this area is based on marketing, branding and new
innovations such as improved applications (increased ease of use) and formulations (less
solvents, more 'child friendliness').
This industry has seen a large amount of restructuring over the past seven years, with
the top ten companies purchasing many small adhesive producers. As with the markets
for coatings, size offers considerable economies of scale. Market fragmentation also
offers good scope for growth through acquisition. Further consolidation is likely.

Inorganic chemicals
The chlor-alkali industry – chlorine and caustic soda
The chlor-alkali industry, which produces caustic soda, chlorine and soda ash, is one of the
largest chemical industries by value. The applications of its products are so diverse that the
majority of all consumer products will have some stage of their production dependent on
them.
Caustic soda (NaOH) and chlorine (Cl2) are mainly produced as co products by the electrolysis
of brine (salt solution or NaCl). They are produced in a ratio of 1 unit chlorine to 1.1 of caustic
soda. However, both can be produced by alternative methods. Chlor-alkali is an energy
intensive industry with electricity typically accounting for 40-50% of variable production
costs.
Figure 431: Manufacture of chlor-alkali products Figure 432: Electrolysis - The production of caustic soda
and chlorine
Cath ode (ne gati ve ) An o de (p osi ti ve)
attr acts Na+ attr acts Cl -
chlorine (Cl2)
causti c
chl or i ne
soda a nd
hy dr o ge n
brine solution Electrolysis
br ine
caustic soda (NaOH)
Cath o de Ch am ber An o de Cha mber
Me m br ane or di aphr agm

As the production and thus pricing of both chlorine and caustic soda is much linked, both are
often referred to as one unit called an electrochemical unit (ECU) – ECU price, ECU margin
etc. Producers also use the ECU as a cost/productivity yardstick to monitor efficiency and
costs. As the ratio for the production of the two products is fixed, the pricing of each
commodity can be volatile when demand for one product is out of balance with the other.
Caustic soda is an important component in the petroleum, alumina and pulp and paper
industries. It is also used in a wide range of chemical processes. Chlorine has a wide variety
of applications, with its largest being the production of PVC and organic chemicals. Earlier It
was also used in the pulp and paper industries as a bleaching agent, but this type of
bleaching has largely disappeared in North America and Western Europe because of
environmental concerns. Some large users of caustic soda, such as paper mills, may install
facilities that allow use of either caustic or soda ash; the choice will depend on the cost per
unit of Na2O. The potential for switching is estimated at 200-300kt per year in the United
States. Strictly from the standpoint of economics, soda ash becomes a feasible substitute for
caustic soda when the delivered price of caustic soda (50% basis) is more than 1.5 times the
delivered price of soda ash.
The chlorine industry has been under considerable pressure from an environmental
perspective - chlorine and its derivatives are considered by some as harmful. Most of these
negative effects have already been felt and there are now substitute products for many
applications of chlorine and chlorine derivatives. However, production of these alternatives is
not yet cost effective.

Figure 433: Chlor-alkali product chain product chain

Polyvinyl
Siding,
Chloride Pipe,
Resins
Flooring
(PVC)
Ethylene Vinyl
Dicloride CHloride
Miscellaneous
Methyl Chloride, Methylene Chloride, Solvents, Polymers,

Chloroform, Carbon Tetrachloride, Metal Cleaning,
Chlorine Electronics
& Other Chlorinated Methanes
Siding, Flooring,
PVC Shower Curtains,
Resins Pipe
Ethylene Dichloride, & Other
Chlorinated Ethanes
Dry Cleaning,
Solvent Metal Cleaning,
Chlorinated Dyes, Degreasing
Pesticides
Benzene
Chlor-Alkali
Plant
Coatings,
Epichlorohydrin Epoxy Adhesives, Printed
Resins Circuit Boards
Other Chemicals Glycerin

Food,
Toothpaste,
Pulp Bleaching Cosmetics
Miscellaneous
Water
Treatment Other Chemicals
Pulp & Paper
Soaps, Detergents,
Caustic Cleaners
Soda
Water Treatment
Oil
Refining
Miscellaneous
Miscellaneous

Figure 434: End uses of chlorine (2010) Figure 435: End uses of caustic soda (2010)
Organics
Others Others
Vinyls 17%
32% 24%
35%
Inorganics
2%
Pulp &
Pulp & Paper
Water
Paper 15%
Treatment
2% 5%
Chlorinated Organics Alumina Soaps/

Water
Inter. 19% 12% Detergents/
Treatment
4% Inorganics Textiles
6% 15%
12%
Figure 436: Geographical breakdown of demand for Figure 437: Geographical breakdown of demand for
chlorine (2010) caustic (2010)
C. Europe &
Africa & Mid- S. America
CIS
East 3% Africa & Mid-
4%
4% East
C.
S. America 4%
Europe/CIS
4% 6%
W. Europe
Asia Asia
16% W. Europe
53% 52%
15%
N. America
20% N. America
19%
There are three main production techniques for caustic-chlorine, all of which use brine as the
raw material. Over the last few years there has been a trend away from the older mercury
cell production towards more environmentally friendly production processes.
Mercury Cell. This is the oldest method of production and until the mid-1980s was the
dominant method because of the high quality of the product produced. In a mercury cell,
chlorine is collected at the anode (the positively-charged end of the cell) and mercury is
used as the cathode (the negatively-charged end of the cell) which is at the bottom of an
inclined reactor tank. The mercury amalgam (a sodium mercury compound, Na-Hg) is
then transferred to another vessel and water is added. The reaction which takes place
produces caustic soda, hydrogen gas and the mercury is regained. The extent to which
mercury is recovered from water is very important environmentally, as even a partial
mercury discharge in the water table is unacceptable. As a result of this, the technology
shift has already taken place in Japan, where all capacity has been converted from
mercury or diaphragm cell technology to membrane cells. However, the change of
process technology in Western Europe has been slow as clean-up costs of closing down
such a cell are significant and generally poor investment cycle. Of the three methods
outlined, this method consumes the greatest amount of electricity (3.2-3.6 megawatt-
hours per metric ton ECU), and production costs are approximately 30% higher than for
membrane cell technology.

Diaphragm Cell. In the diaphragm cell, chlorine, hydrogen and sodium hydroxide are
produced simultaneously. This type of cell contains a diaphragm, usually made of
asbestos fibres, which helps to keep the caustic soda and chlorine separate once
produced. A major advantage of the diaphragm cell is that it can use fairly impure brine.
However, this produces caustic soda which contains a high concentration of brine, and a
great deal of electricity is consumed in concentrating the end product (approximately 3.4-
3.8 megawatt-hours per metric ton). Diaphragm cells continue to be used where
inexpensive brine is available or where cogeneration of power and steam provides
inexpensive steam. However, the technology has been clearly surpassed by membrane,
hence, very little new diaphragm capacity has been added in the last fifteen years.
Membrane Cell. The membrane cell also contains a barrier to keep the caustic soda and
chlorine separate, but it is more effective, since it selectively allows the movement of
sodium ions (Na+) from the anode chamber to the cathode chamber. Membrane cells
use more concentrated brine and produce a more concentrated product. The product is
also purer, since brine is added to the electrolysis cell on the anode side, that is, no brine
enters the cathode chamber, so the product has very little salt impurity. It is also the
most energy efficient method with total energy required is 2.15-2.57 megawatt-hours
per metric ton ECU. As energy costs tend to escalate, the motivation to switch away
from diaphragm cells increases.
Most new plants will be based on membrane cells, because of production economics and
environmental considerations. Today almost all of the Japanese capacity is based on
membrane cells.
Figure 438: Chlorine industry data and participants

Dow 3,541 Dow 1,795 FPC 1,452 SADAF 690 Braskem 480
Oxy 2,610 INEOS Chlor Vinyls 1,224 TOSOH 1,145 QVC 296 Dow Brasil 415
Olin 1,630 Bayer 1,187 Hanwha Chemical 829 Bandar Imam PC 220 Carbocloro 349
PPG 1,611 Akzo Nobel Chem 1,103 Xinjiang Zhongtai 600 Dead Sea/VW jv 100 Solvay Indupa 322
FPC USA 736 Solvay 927 Juhua Group 536 Petkim 100 Oltchim 296
Oxy Vinyls LP 500 Solvin 868 Tianjin Dagu 527 Cristal 73 Borsodchem 290
Georgia Gulf 427 Arkema 836 JAP_CHL 500 AIP 48 Kaustik Sterlit 258
Mexichem 334 Tessenderlo 438 Shandong Haili 499 Dead Sea Brom. 45 Anwil SA 195
SHINTECH 334 Vinnolit 430 Asahi Glass 493 JANA 45 Volgog. Kaustik 189
Bayer 310 BASF SE 385 Tianyuan 464 Arvand PC 40 Trust Chem. Ind. 180
Huasheng
Others 1,569 Others 1,926 Others 34,098 Others 350 Others 3,542
Source: CMAI

Figure 439: Caustic soda industry data and participants

Dow 3,891 Dow 1,975 FPC 1,597 SADAF 759 Braskem 540
Oxy 2,662 INEOS Chlor Vinyls 1,347 TOSOH 1,260 QVC 325 Dow Brasil 457
PPG 1,772 Akzo Nobel Chem 1,213 Hanwha Chemical 915 Bandar Imam PC 250 Carbocloro 394
Olin 1,733 Bayer 979 Xinjiang Zhongtai 660 Petkim 110 Solvay Indupa 354
FPC USA 810 Solvin 955 Juhua Group 590 Cristal 80 Oltchim 326
Oxy Vinyls LP 550 Arkema 919 Tianjin Dagu 580 AIP 53 Oltchim 326
Georgia Gulf 470 Solvay 909 Shandong Haili 550 Dead Sea Brom. 50 Borsodchem 319
Mexichem 367 Vinnolit 473 Tianyuan Huasheng 510 JANA 50 Borsodchem 319
SHINTECH 367 BASF SE 364 Xinjiang Tianchen 500 Arvand PC 44 Kaustik Sterlit 284
Bayer 341 Tessenderlo 302 Shanxi Yushe 500 BCI 43 Anwil SA 215
Others 1,504 Others 1,910 Others 36,103 Others 315 Others 3,735
Source: CMAI

Most chlor-alkali demand is dependent on economic growth and is installed for the
strategic purpose of using the chlorine to make PVC (largely driven by the construction
sector). Developed regions of North America and Europe will have a slower economic
recovery compared to the developed nations of Brazil, Russia, India and china. The
overall growth rate for chlorine between 2010-2010 is predicted to be around 4% pa
although this will be dependent on GDP, especially demand from the construction
industry (for example, PVC pipes). Caustic soda has a more wide ranging end market use
and tends to be more focused on local country GDP, but particularly pulp and paper and
alumina markets. The overall growth rate for caustic soda in 2010-2015 is predicted to be
approximately 4% pa.
Chlor-alkali capacity additions reached a high point in 2008-2010. New capacities and
lower demand in 2008-2009 due to the world economic recession caused operating
rates to decline to 75% in 2009 for chlorine. Now with improving demand scenario,
operating rates in chlorine production are anticipated to improve gradually from 77% in
2010 to 84% by 2015 also driven by restricted capacity additions. Through 2011-2015
only 8.2m tonnes of new capacity have been announced (mainly coming in China) due to
the already high capacity situation in the Chlor-alkali markets.
Through to 2015 we also anticipate an improvement in operating rates in caustic soda

from 77% to 85%, a slightly greater increase than chlorine as a result of the slightly
stronger demand anticipated.
Currently, majority of the new world capacity of Chlor-alkali is coming up in China. This is
expected to be 2/3 of the total new capacity on average. These capacity expansions have
been driven by their strategy of becoming self-sufficient in PVC and also to leverage its
domestic resources of coal, limestone and salt to produce chlor-alkali. North East Asia is
now and will continue to be the largest producing and consuming region for Chlor-alkali.
In 2008, the US ECU price and margin seems to have peaked, declining from then due to
excess capacity and lower than normal operating rates as the economy recovers from
the recession. On our current estimates the market is forecast to trough in 2013,
beginning to rise again from 2014. In Europe, ECU margins dropped considerably. We
anticipate cash costs to increase and remain higher than historical in Europe through
2015. Margins should improve gradually through 2015 as excess chlor-alkali and vinyls
capacities are absorbed however the margin peak should come only around 2015.

Figure 440: Supply/demand and capacity in chlorine Figure 441: Supply/demand and capacity in caustic soda
90,000 90% 100,000 90%

80,000
70,000 85% 80,000 85%
60,000
80% 60,000 80%
50,000
40,000 75% 40,000 75%
30,000
20,000 70% 20,000 70%
10,000
- 65%
- 65%
2005
2006
2007
2008
2009
2010
2011E
2012E
2013E
2014E
2015E
2005
2006
2007
2008
2009
2010
2011E
2012E
2013E
2014E
2015E
Nameplate Capacity (000 mt) Operating Rate,% Nameplate Capacity (000 mt) Operating Rate,%
Figure 442: ECU pricing Figure 443: ECU margin (US$/mt)

700 850
750
600
650
500 550
450
400 350
250
300
150
200 50
-50
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011E
2012E
2013E
2014E
2015E
2005
2006
2007
2008
2009
2010
2011E
2012E
2013E
2014E
2015E
-150
ECU asset sharing value (West Europe) U.S. Europe Northeast Asia
Figure 444: Top 10 producers Chlorine Figure 445: Top 10 producers caustic soda
9% 9%
8% 8%
7% 7%
6% 6%
5% 5%
4% 4%
3% 3%
2% 2%
1% 1%
0% 0%
Solvay
Dow
Bayer
AkzoNobel
TOSOH
Olin
PPG
Occidental
Ineos
Formosa
Dow
Solvay
Bayer
AkzoNobel
TOSOH
Olin
PPG
Occidental
Ineos
Formosa
Figure 446: Global capacity additions, chlorine(%) Figure 447: Global capacity additions, caustic soda (%)
7% 8%
6% 7%
5% 6%
5%
4%
4%
3%
3%
2%
2%
1% 1%
0% 0%
2006
2007
2008
2009
2010
2011E
2012E
2013E
2014E
2015E
2006
2007
2008
2009
2010
2011E
2012E
2013E
2014E
2015E
Source: CMAI

Soda ash
Figure 448: Soda ash at a glance
Supply/Demand Very modest capacity additions but with only low growth prospects
supply/demand balances are unlikely to show a material increase
Watch out for ... Consolidation and emerging markets shift
Soda Ash (sodium carbonate) is used in the manufacture of glass, pulp and paper,
detergents, and chemicals such as sodium silicates and sodium phosphates. It is also used
as an alkaline agent in many chemical industries. Domestically it is used as a water softener
during laundry.
Figure 449: End uses of soda ash- 2011E
Others
Pulp & paper
9%
2%
Flue gas
desulfurization Chemicals
4% 28%
Others Glass
5%
Soaps &
detergents
10%
Flat Glass Container Glass

17% 25%
Source: USGS, Deutsche Bank
Since caustic soda can be substituted for soda ash in certain uses (particularly in pulp and
paper, water treatment, and certain chemical sectors), the pricing of the two are linked. It
should be noted that soda ash is more influenced by caustic soda than vice-versa because
caustic soda production is often a by-product of the production of chlorine (which is required
for PVC).
Figure 450: Caustic soda/soda ash relationship Figure 451: Caustic soda/soda ash prices (US$/tonne)
800 380
700
Salt + Water Trona Limestone + Salt
600 330
electrolysis refining
500
400 280
Chlorine Caustic Soda Soda Ash 300
200 230
100
VCM
0 180
Jul-2005
Jul-2006
Jul-2007
Jul-2008
Jul-2009
Jul-2010
Jan-2005
Jan-2006
Jan-2007
Jan-2008
Jan-2009
Jan-2010
Jan-2011
PVC Chemicals Detergents, Pulp & Paper Glass, Metals & Mining
Caustic soda Soda ash

Source: CMAI Source: CMAI, DataStream (West Europe Prices)

Soda ash can be produced using either a natural or synthetic process.
The natural process involves mining trona ore and then refining it to produce soda ash
(sodium carbonate Na2CO3). Trona can be mined by conventional mining techniques
(similar to those used in coal mining) and by solution mining (a technique developed by
FMC). Solution mining is where trona is collected in solution. The trona is obtained from
the solution and then can be treated in the same way as a traditionally mined ore.
Two processes are used to convert trona to soda ash. One produces dense soda ash,
the other light soda ash. Each have different properties, and as a result are used in
different applications. Dense ash is the preferred type for glass manufacture and light
ash is favoured in dry detergent compounds and applications which involve dissolving
the ash. Environmental issues are raised in the production of soda ash via this process.
The synthetic process is also known as the Solvay process. This is the combination of
limestone (CaCO3) and salt (NaCl) to produce soda ash with the production of additional
by-products. The principal byproduct of the Solvay process is calcium chloride (CaCl2) in
aqueous solution.
This process is expensive due to high-energy requirements, higher operating costs and
problems associated with waste disposal. Environmentally, the biggest problem is the
effluent containing highly visible pollutants. These pollutants eventually settle to the
bottom of the solution, so the milky-white effluent is stored in large reservoirs and the
overflow is sent to nearby surface waters. A number of these problems have been
somewhat relieved by process modifications developed in Japan.
Figure 452: Manufacture of soda ash from natural Figure 453: Manufacture of Soda Ash by the synthetic
sodium carbonate Solvay process
Rec ycled am monia
am m oni a (NH 3 )
amm onium chloride
cal cium chl or ide (CaCl2 )

Slaked Lime
Surface Dredged Trona Soda Ash
(natural sodium carbonate) Wash & Heat
(sodium carbonate)
Brine
(sodium chloride NaCl) soda ash
sodium bicarbonate
carbon dioxide CO 2
Recycled CO2
Source: Deutsche Bank Source: Solvay, SRI
On the whole, the natural process is cheaper than the synthetic, since it does not have a
high-energy requirement or environmental problems. However, the natural process requires a
source of the ore to be nearby (or faces high costs for transportation of the ore), which
generally means that plants implementing the natural process are found in remote areas, thus
incurring high distribution costs.
In the production of soda ash, US producers have a substantial cost advantage over their
West European competitors due to the presence of large trona ore deposits in the US (mined
from deposits near Green River, Wyoming by traditional and solution mining). Such deposits
do not exist in Western Europe, thus originally forcing European producers to use the
synthetic process. The North American producers are often referred to collectively by the
name of their trade organisation, ANSAC, the Association of North American Soda Ash
Companies.

Figure 454: Top 10 Soda Ash producers (2009)

China 19.4
Solvay 7.9
Tata Chemicals 5.5
FMC 3.7
Oriental Chemical 2.8
Nirma Group 2.3
Ciech Group 1.9
Russian Soda 1.9
Soda Sanayii 1.5
Others 7.0
Source: SRI

Long-term global soda ash growth has been sub-GDP. The key emerging economies
such as China and other Asian countries, Middle East and South America have driven the
global soda ash markets growth at around 4% through 2000-2010. This was helped by
higher GDP growth and increasing urbanization in these regions. Europe and US markets
have also grown through this period but a much slower rate.
Over the last ten years the industry has seen (much needed) consolidation and
rationalisation. FMC acquired Texas Gulf (from Total) in 2000. In 2002 Rhodia sold its
assets to Bain Capital (venture capital). In 2005 India’s GHCL acquired a majority stake in
SC Bega Upsom (Romania), and Solvay closed 162kt capacity in Austria, and a 204kt
plant closed in Russia. In 2007, Nirma Group acquired US-based soda producer, SVM. In
2008, Tata Chemicals acquired General Chemical Industrial Products making it the
second largest soda ash producer.
Pricing in Europe is predominantly made through annual contracts (Jan 1st) whereas in
the US it is shorter-term.
Though 2010 capacity utilization increased to a high level of 90% (from high 90s in 2008
and around 80% in 2009). This is a result of steady demand and more restricted supply
in Europe and the US. Chinese companies have expanded synthetic capacity rapidly in
recent years accounting for over 35% of the global capacity in 2010.
We project world soda ash consumption to grow at around 3-4% p.a. for the next five
years. However, growth rates will vary from highs of 5% for Asia and 2% for Central and
South America to a flattish development in North America and Europe.
Figure 455: Soda ash operating rates
25.0 100%
90%
20.0 80%
70%
15.0 60%
50%
10.0 40%
30%
5.0 20%
10%
0.0 0%
Asia
Africa and the

Europe
Australia/Oceania
Commonwealth
South America
North America
of Independent
Middle East
Central and
States
Effective capacity (million tonne) Operating rate

Source: Deutsche Bank estimattes, SRI8

TiO2 (Titanium dioxide)

Figure 456: TiO2 at a glance
Supply/Demand Tight supply situation to remain until 2013 at least
Margin prospects High given short supply situation
Watch out for ... Raw material volatility, new capacities possible starting from 2014/15,
construction demand outlook, de-bottlenecking and capacity creep potential
Titanium dioxide (TiO2) is produced from mined naturally occurring compounds and is the
standard white pigment used principally in paints, paper and plastics. It is the most important
pigment in the world, accounting for approximately 70% of total volume. It enhances
brightness and opacity in products such as paints and coatings, plastics, paper, inks, fibres,
food and cosmetics. As well as having dielectric properties, titanium dioxide also possesses
high ultraviolet absorption and high chemical stability. This allows it to be used in specialty
applications, such as electro-ceramics and glass.
Figure 457: World TiO2 consumption by end use 2010
Fibers Rubber Food & Pharma

Inks 1%
2% 2%
3%
Specialities
3%
Paper
9%
Coatings
Plastics 57%
23%
Source: Kronos
Rutile and ilmenite are minerals used for TiO2 production

Titanium dioxide is made by processing a variety of titanium-containing minerals such as
ilmenite and rutile. Rutile has a titanium dioxide content of 94-96%, making it highly desirable
as a feedstock. However, ilmenite is much more plentiful, but has a titanium dioxide content
of 50-60%, so it is usually upgraded, or beneficiated, to a titanium dioxide content of 80%
(titanium slag) or 94% (synthetic rutile). The most important commercial sources of titanium
minerals are alluvial or beach sand deposits, which occur along the coastlines of Australia,
India, South Africa and the United States. Other commercial sources include rock ilmenite
deposits; cemented sand deposits (sandstone); and the mining of other minerals, such as tin,
gold and oil-bearing sands, which produce minor amounts of titanium minerals or zircon as a
by-product.

Figure 458: Major world producers of titanium dioxide Figure 459: Worlds most important deposits of basic
feedstocks raw materials use to manufacture TiO2
Rio Tinto
Other 20%
23%
Du Pont
2%
Indian Rare Earths

Ltd Iluka Resources
4% 19%
Ti West (JV Exxaro
and Tronox)
5%
Titania (Subsidiary
of Kronos) Exxaro
6% Bemax
BHP Hilton 8%
6%
7%
Source: SRI Source: Kronos
Titanium dioxide is produced by either the sulphate or chloride process

The sulphate route uses a batch, wet chemical process. In this process, concentrated
sulphuric acid is used to produce a titanium solution which, following hydrolysis and
calcination, produces titanium dioxide. The chloride route uses the most recent technology to
convert the titanium content of minerals to an intermediate mineral, using chlorine gas.
Purification and reaction with oxygen then produces titanium dioxide.
Figure 460: TiO2 production process

t itanium ore (il meni te)
SULPHATE PROCESS Producti on
and Puri fication t itanium dioxide
sul phuric acid
RECYCLED
t itanium ore (ruti le)
CHLORIDE PROCESS Producti on t itanium dioxide

and Puri fication
chlorine
RECYCLED
Environmental waste disposal is important when examining cost effectiveness

The sulphate route requires the neutralisation of any excess sulphuric acid and also produces
large amounts of iron sulphate as a by-product (up to four pounds of iron sulphate per pound
of titanium dioxide produced), which then needs to be disposed of. The chloride route
produces ferric chloride as a by-product, but in much smaller quantities (approximately 0.5
pounds per pound of TiO2 produced). Another advantage of the chloride process is that
excess chlorine can be recycled. Cost effectiveness (it is less labour, capital and energy
intensive), product quality and environmental benefits have seen the chloride route gain
favour.

TiO2 market is characterized by consolidation

The top 5 producers: DuPont, Cristal global, Huntsman, Tronox and Kronos account for 63%
of the market. 22% of TiO2 consumption is from Asia, 33% North America and 35% Europe
accounting for a total of 90% of global consumption.
Figure 461: Market share of titanium dioxide production Figure 462: Consumption of titanium dioxide by region
2009
Middle East
Central & & Africa
Other DuPont Eastern
23% 6%
37% Europe
6%
Latin
America
Cristal 8% Asia-Pacific
(Saudi) 40%
14%
North
Tronox Kronos America
7% Huntsman 10% 18% Western
9% Europe
22%
Source: Kronos Source: TZMI
Short supply of raw materials and years of capacity underinvestment

TiO2 was an underperforming business for many years resulting in a very little investment in
both raw material mining capacity and TiO2 manufacturing capacity. This subsequently
created a short supply of raw materials ilmenite and rutile used in the production of TiO2 as
well as TiO2 capacity (a new TiO2 plant costs around $500m). As a consequence of this
underinvestment and inability to de-bottleneck and the short supply of raw materials, the
market has got especially tight and there has been a very sharp price response. Operating
rates forecast around 94-98% over the next 5 years and both raw material mining capacity
and TiO2 capacity will need to expand to ease the supply/demand balance (raw material
capacity takes longer to build).
Figure 463: TiO2 Global Supply/demand model Figure 464: North America TiO2 prices ($/lb)
7,000 105% $1.70

6,000 100%
$1.50
5,000 95%
4,000 90% $1.30
3,000 85%
2,000 80% $1.10
1,000 75%
$0.90
2012E
2014E
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
$0.70
1990
1992
1994
1996
1999
2001
2003
2006
2008
2010
Demand Operating rate

Source: Deutsche Bank Source: Deutsche Bank, ICIS

Figure 465: TiO2 capacity additions Figure 466: TiO2 demand still trails GDP
10%
8%
6%
4%
2%
0%
(2%)
(4%)
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012E
2014E
Source: Deutsche Bank Source: TZMI Database, Consensus Economics

TiO2 demand is primarily driven by paint consumption and therefore is likely to grow in
line with this market. We expect TiO2 consumption to grow at around 3-4% in line with
GDP growth but with higher growth rates of 2x GDP for emerging markets.
Supply is likely to continue to remain tight over the next few years but we expect that
capacity is likely to grow at 2-3% per annum over the next few years. From 2015
onwards we are likely to see new raw material and TiO2 capacity coming on-stream with
capacity growth potentially rising to over 10%pa for at least two years
Low levels of TiO2 consumption per-capita in emerging markets suggests significant

growth to come. Since 2000, approximately 80% of the worldwide growth in demand for
titanium dioxide has been in Asia, with 50% of that attributable to China alone.
Figure 467: World per-capita consumption of TiO2

Kilograms per capita Average Annual Growth Rate 2008-2013
United States 4.0 2.0%
Germany 4.0 1.5%
Australia 2.3 2.0%
Japan 2.0 0.0%
United Kingdom 1.8 2.0%
Poland 1.6 4.0%
Brazil 1.6 3.5%
Malaysia 1.4 6.0%
Russia 0.5 3.5%
China 0.5 8.5%
India 0.3 7.5%
Vietnam 0.3 7.5%
Source: SRI
The drive toward consolidation is forcing the titanium dioxide industry to adopt a more
global focus, but also to deal with larger customers that wield greater power. The
coatings companies that provide architectural coatings, in turn, are pressured by the “big
boxes” (e.g., Home Depot, Loews, and other large warehouse-type retailers) to minimize
prices.

Hydrogen peroxide
Figure 468: Hydrogen peroxide at a glance
Supply/Demand Oversupply due to capacity in Russia & Ukraine and sluggish paper market
Margin prospects Low
Watch out for ... New applications for propylene oxide production, new capacity additions in Asia
Hydrogen peroxide (H2O2) is a colorless, syrupy liquid that is a strong oxidizing agent and, in
water solution, a weak acid. It is the most commonly used peroxide compound. Its largest
market is in the production of paper pulp. It is also used as a reactive agent (reagent) for
chemical synthesis, the detoxification and purification of water and effluent, an antiseptic and
in the manufacture of cosmetics and pharmaceuticals.
The advantages of using hydrogen peroxide for bleaching pulp are two-fold:
It produces excellent whiteness with little to no deterioration of the substance being

bleached.
Improved environmental implications are a very important factor. Due to this, hydrogen
peroxide, which decomposes into water and oxygen, is replacing other oxidising
compounds, such as chlorine, in pulp bleaching and other applications.
Figure 469: End uses of hydrogen peroxide Figure 470: Hydrogen peroxide market
Environme Specialty
ntal/ Mining Solvay
grades and
16%
applications other
4% 7%
Other
Textiles 41%
10% Degussa
14%
Pulp &
Paper mills
48% Arkema
Chemicals 9%
and Mitsubishi FMC
Laundry 3% Kemira Eka 6%
products 5% 6%
31%
Hydrogen peroxide is usually produced using alkylanthraquinone and the addition of hydrogen
gas and air in two separate additions. Theoretically, only hydrogen is required as a feedstock.
Within the production process, air is used as the oxygen source and alklylanthraquinone is
regenerated.
New technology is being developed to allow the direct production of hydrogen peroxide over
a catalyst, that is, avoiding the requirement of alkylanthraquinone. In this case, oxygen, and
not air, must be added for the production of a pure product.

Figure 471: Production of hydrogen peroxide - the anthraquinone method
Hy dr ogen Ox ygen
H 2 O2 extracted, pur ifi ed

Alkyanthraquinone Al kyanthrahy droqui none Alkyanthraquinone + H 2 O2 & concentr ated
Recy cled
alkylanthraquinone

Hydrogen peroxide demand is dependent on the pulp and paper industry. It is used as a
replacement to chlorine in most aspects of the pulp and paper bleaching process due to
the environmental benefits.
We expect demand for hydrogen peroxide to grow in line with GDP at best – we expect
supply additions to broadly match this level of demand growth so see limited prospects
for a material tightening of operating rates in the medium-term.
Main regional growth driver is Asia (especially China) where bleach substitution is on-
going. The substitution of bleach in the US and Europe is complete. We forecast growth
in Europe and the US to be in-line with pulp and paper industry (sub GDP).
The hydrogen peroxide market is currently quite tight in Europe as European customers
(particularly in paper) have benefitted from stronger exports to Asia.
In Europe and Asia we expect future growth for hydrogen peroxide to come from a new
production method for propylene oxide (PO) a raw material for polyurethane. Solvay is
currently building a 330kt plant as a JV with Dow Chemicals in Thailand for this purpose
due to come on-stream in Q3 2011.
Figure 472: Consumption of hydrogen peroxide by region (Thousand metric tonnes)

1200
1000
800
600
400
200
0
Europe China North Central & Japan Africa & CIS India Other
America South Middle Asia
America East
2008 2013E
Source: SRI

Agribusiness
Agrochemicals
Figure 473: Agrochemicals at a glance
Growth rate relative to the sector Below the chemical sector on average but above for innovative products
Margin prospects High and stable
Watch out for ... Possible subsidy reform in the US & EU, Tighter regulations on agrochemical
usage (eg EU), Biofuels, On-going penetration of GM crops
Agrochemicals are used to protect plants from weeds, pests and diseases in order to
maximise farm yields. Agrochemicals are also called ‘crop protection’ products. They
effectively maximise a plant’s ability to absorb vital nutrients by limiting competitive pressure
and keeping it healthy.
The agrochemical (crop protection market) consists of four major components:
Herbicides for the control of weeds.
Insecticides for the control of insects.
Fungicides for the control of fungi and moulds.
Seed Treatment (with insecticides and/or fungicides) for the protection of seeds at
planting.
Figure 474: Agrochemicals breakdown by product area (2010)

Others
5%
Fungicides
26%
Herbicides
42%
Insecticides
27%
Source: Cropnosis, Other include seed treatment products
In 2010, the global agrochemical market was valued at $40bn. Agrochemicals are used on a
global scale but the highest usage rates are in Far East (particularly China), Latin America,
North America and West Europe. Agrochemicals are used across a wide range of crops, with
fruit and vegetables, cereals, soybean, rice, maize and cotton the most important.

Figure 475: Agrochemical market by region (2011E) Figure 476: Agrochemical market by crop (2011E)
RoW Other Crops

East 7% Sugar beet 14%
Far East
Europe 2% Fruit &
24%
4% Canola/ Vegetables
Oilseed 33%
rape
West
2%
Europe
20% Cotton
7% Cereals
Latin Maize 15%
North 8%
America
America Rice
23% 9% Soybeans
22%
10%
Source: Cropnosis Source: Cropnosis
Figure 477: Global agrochemical market shares (2011E) Figure 478: Farmer production costs (2011E)*
Generics Syngenta General Other

18% 21% overheads 7%
MA 3%
Agchems
Industries Power &
3%
5% Machinery
Dupont Seeds 35%
6% 5%
Bayer CS Labour
Dow 20%
AgroSc. 9%
9%
BASF Monsanto Fertilizers Land
10% 11% 18% 20%
Source: Deutsche Bank, Cropnosis Source: USDA * wheat production. Note: Power & Machinery include repairs
The global agrochemical market is dominated by six major players: Bayer, Syngenta, BASF,
Dow, Monsanto and DuPont. These companies account for over 80% of the market.
Figure 479: The Market -Who does what and where (2010 Sales $m)
2010 ---------- By agrochemical product --------- --------------------- By region ---------------------
Company Total Herbicides Insecticide Fungicides Others Bio-tech Europe N. Am LatAm Asia ROW
Syngenta 8,878 3,295 1,475 2,662 1,446 Yes 2,649 (1) 2383 2300 1546 0
(1)
Bayer 7,286 2,579 1,817 2,083 808 Yes 2,693 1,268 1,971 1,354 na
BASF 5,350 1,870 1,173 2,307 0 Yes 2,033 1,337 1,391(1) 588 na
Dow Agrosciences 4,072 2,357 491 805 419) Yes na na na na na
Monsanto 2,891 2,029 na na na Yes na na na na na
DuPont 2,453 1,090 818 545 0 Yes na na na na na
(2) (2) (2) (2)
Sumitomo Chemical 2411 798 919 533 162 na na na na na
Makhteshim-Agan 2,362 1,191 631 470 71 966 404 540 na 453(3)
Nufarm 1991 1489 (2) 149(2) 103(2) 250(2) 436 508 313 733 na
FMC 1,242 559 596 87 0 159 (1) 252 629 202 na
Source: Deutsche Bank, Cropnosis, (1) Includes Middle East and Africa, (2) DB estimates, (3) Includes ROW and Israel, July ending 2010 data for Nufarm, March ending 2010 data for Sumitomo Chemicals, Data for Bayer only
includes their Crop protection division

Figure 480: Relative strength of global agribusiness

Company Effectiveness of Portfolio Quality of key products Marketing strength Total
current R&D diversification in key sub-markets (max = 20)
Syngenta 5 5 5 5 20
Bayer 5 4 5 5 19
Monsanto 5 3 5 5 18
BASF 5 4 4 4 17
DuPont 3 3 4 3 13
Dow 2 3 3 3 11
Source: Deutsche Bank estimates. NOTE: data shown are on a scale of one to five, with five representing the best industry position. Portfolio diversification refers to the
spread of products not only on a global basis but also on the spread across herbicides, fungicides and insecticides. Quality of products refers to the position of the
company in the market, ie how many blockbusters it ahs in the most lucrative markets.

The agrochemical market tends to show a long term growth of approximately 2-3% pa.
Following a period of very healthy growth through the 1980s and early 1990s the
agrochemical market growth slowed in 1997-2003 as a result of pricing competition in
the herbicides market initiated by the patent expiry of Roundup (world’s largest
herbicide), EU subsidy cap reforms and increasing penetration of GM seeds in the US.
Through 2006-09 the industry grew at 7% driven by the growth in emerging markets and
higher soft commodity prices. However, 2009-2010 were relatively weak years for the
industry due a combination of factors including bad weather, inventory build-up in the
agrochemicals chain (particularly fungicides) and lower crop prices. For 2011-2012
agrochemical growth is anticipated to average approximately 4-5% pa. More substantial
growth (mid-single to high single-digit digit percentage) is anticipated in the seeds market
driven by the increasing adoption of higher value GM seeds and new products launches
offering more effective pest control and yield improvement.
Figure 481: Agrochemical sector price/volume trends
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Price -1.0% -0.9% -1.5% -0.5% -1.5% -1.5% -2.7% -4.4% -1.7% -1.0% 5.4% 3.5% --5.0%
Volumes change 2.8% -1.1% -1.5% -1.1% -3.5% -2.9% 8.0% -1.4% 1.2% 7.7% 9.0% -3.0% 8.0%
Total 1.8% -2.0% -3.0% -1.6% -5.0% -4.4% 5.3% -5.8% -0.6% 6.7% 14.4% 0.5% 3.0%
Source: Deutsche Bank, Cropnosis
Longer term growth in agribusiness is driven by population growth, improving wealth

of global consumers and limited availability of arable land. These three factors imply
demand for more food and specifically more meat (as production of one kilogram of meat
requires multiple kilograms of animal feed) along with the need for increasing the farm
productivity which in turn drives demand for more agrochemicals.
Figure 482: Land available for food production per Figure 483: Required global cereal production in 2025
capita
0.5 10
0.4 8
0.3 6
0.2 4
0.1 2
0.0 0
1960 1970 1980 1990 2000 2010E 2020E
Arable land (hectares/person) LHS
World population (billion) RHS
Source: Yara (IFA, Worldmarkets.com) Source: Yara. *Note: without consideration of any further growth in bio energy

Demand for agchems (timing/proportion) is largely dependent on weather. Wet weather

tends to encourage growth of moulds and fungi and therefore increasing demand for
fungicides, but does not provide ideal conditions for insects and so potentially restricting
the demand for insecticides. Strong winds, especially hurricanes play a role in spreading
diseases (especially mould and fungi spores). Strong droughts (or excessive rain) can
impact harvests and therefore impact both farm incomes and also decisions on what
crops to plant the next year. Good weather in general encourages more weed pressure.
The use of agchems is also partly influenced by potential farm income. The higher the
value of the crop in the ground (dependant largely on crop quality) the more likely a
farmer is to pay for greater amounts of higher-quality agchems to protect the crop.
However, this is not a fully flexible relationship - as the cost of spraying tends to be
relatively small (from 5-15% of total farmer costs dependant on crop, location and
disease proliferation) with substantial benefits in terms of yield protection. Therefore a
farmer’s ability to cut back on agchem spending in difficult times is limited due to the
significant yield and resultant income impact he suffers. Agchems spend tend to have a
solid base even when farm incomes decline - spend on new machinery and farm
equipment (which is more discretionary) appear more correlated to farm income. For
2011 we expect the average farm income to improve in both US & Europe driven by
higher crop prices.
Figure 484: US farm income forecasts to 2011 ($ bn) Figure 485: Indexed EU farm incomes
115
500
400 110
300
105
200
100 100
0 95
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010E
2011E
90
2005
2006
2007
2008
2009
2010
2011E
2012E
Gross cash income (USD m)
Government payments (USD m)
Source: USDA Source: EU Directorate General Agriculture, Cropnosis. EU-15 includes Austria, Belgium, Denmark, Finland,
France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal, Spain, Sweden, United Kingdom
Figure 486: Farm incomes vs. industry agchem volumes Figure 487: Crop prices vs. industry agchem volumes
15% 90
10% 250
10% 80 8%
200
70 6%
5% 4% 150
60 2% 100
0% 50 0%
50
-2%
-5% 40
-4% 0
1998
2000
2002
2004
2006
2008
2010
1998
2000
2002
2004
2006
2008
2010
Volumes US Farm Income* Agchem Volumes Average Indexed Crop Prices
Source: Deutsche Bank, *Inflation adjusted Source: Company data, Deutsche Bank, Cropnosis

Figure 488: The net yield gain goes through an optimum Figure 489: …which increases with wheat prices
The net yield gain goes through an optimum This optimum rises along with wheat prices
15
20
15 10
Net yield gain (q/ha)

Yield gain (q/hq)
10
5
5
0 0
0 1 2 3 0 0.5 1 1.5 2 2.5 3
Fungicide dosage (l/ha) Fungicide dose (l/ha)

Optimum usage 1.9l/ha for a wheat at 170 € /t
Optimum fungicide dosage for a fungicide price of 40 €/l
1.3 l/ha for a wheat at 10 €/q
Gross yield gain Net gain 1.6 l/ha for a wheat at 13 €/q
1.9 l/ha for a wheat at 17 €/q
Wheat = 10 €/q Wheat = 13 €/q wheat = 17 €/q
Source: ‘Reussir Cereales Grandes Cultures’, January 2008 issue, Arvalis, 45 trials, Deutsche Bank Source: ‘Reussir Cereales Grandes Cultures’, January 2008 issue, Arvalis, 45 trials, Deutsche Bank
Farm incomes can also be impacted by government subsidies. In Europe, this is

controlled through the Common Agricultural Policy (CAP) which cost approximately Euro
57bn in 2010 of which Euro39bn was spend on direct subsidies. Direct subsidies are paid
either through single payment schemes or other aid schemes. Under single payment
schemes (SPS) payments are no longer linked to the production of a specific product,
thus allowing farmers to adjust production to suit the demand. To be eligible to SPS
farmers require payment entitlements, which are calculated on the basis of payments
received by the farmers during a reference period or the basis of number of hectares,
farmed during the year. In addition farmers may receive aid under other specific support
schemes linked to the area under crop or production in case a member state has decided
to implement these schemes for a specific crop or product. These other aid schemes are
scheduled to end by 2012. In 2008 EU also abolished its 10% set aside requirement. The
future reforms for CAP could include setting up a floor and a ceiling on the direct
payments to the farmers, mandatory “greening” component of direct payments, and a
simple and specific support scheme for small farmers.
In the US farm subsidies are controlled through the US farm bill 2008. The 2008 farm bill
provides income support for wheat, feed grains, upland cotton, rice, and oilseeds
through three programs: direct payments, countercyclical payments (CCPs), and
marketing loans. Under the direct payment program, eligible producers receive annual
payments. The payment is dependent on the national payment rate of the applicable
crop, the producer’s payment acres (83.3% of base acres) for that crop, and the
producer’s payment yield for the crop. The countercyclical payments provide price-
dependent benefits for covered commodities whenever the effective price for the
commodity is less than its target price. Payments are based on historical area and yields
and are not tied to current production of the covered commodity. Marketing loans
provide loan deficiency payments (LDPs) and marketing loan gains to farmers of loan
commodities when market prices are low. Marketing loans also reduce revenue risk
associated with price variability. Commodity loan programs allow producers of
designated crops to receive a loan from the Government at a commodity-specific loan
rate per unit of production by pledging production as loan collateral. After harvest, a
farmer may obtain a loan for all or part of the new commodity production.
2008 US farm bill has however set some limitations on subsidies as follows:
People with more than $750,000 adjusted gross income from agriculture will not be
receiving “direct” payments, although they would be still eligible for counter cyclical
payments and marketing loan benefits.
People with more than $500,000 adjusted gross income from off-farm source not
eligible for subsidy payments
Payment limit of $40,000 per person for direct payments and $65,000 in counter-
cyclical payments.

However, no limits are placed on marketing loan benefits which was earlier capped to
$75,000 in 2002 farm act. 2008 US farm bill however still allows doubling of these limits
by having a spouse.
Farmed acreage is impacted by regulation. Governmental policy can have a significant

effect on the levels of land used for agriculture (and so the volume of agrochemicals
used) and hence farm incomes. In 2007 European Union abolished its 10% “set aside”
requirements for the 2008 harvest season in view of the soaring food prices which
favorably impacted the demand of agrochemicals through 2008. Any change in the policy
governing farm acreage could have an impact on the demand of agrochemicals to the
extent to change in area under cultivation.
Figure 490: Set aside in UK (000 hectares)
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Set-aside in the UK 567 800 612 681 560 559 513 440 0 0
(000 hectares)
Source: UK agriculture, Deutsche Bank
Regulatory environment is becoming tougher in EU The regulatory environment is

becoming tougher on the type and quantity of agchems that farmers can use, for
environmental and food contamination issues. In January 09, the EU has decided to
withdraw a series of agchem products from the market, resulting in a loss of about 22
key products over a 3-10 year period (2012-2020). More losses of products cannot be
ruled out as further research is being conducted by the EU. In Figure 491 we show the
key losers/winners of this regulatory change based on the withdrawal of the 22 products.
In the short-term, we think the impact is likely to be neutral for big European
agrochemicals players but most likely to be positive in the longer-term due to the new
market opportunities that these regulations are creating. Generics look to be the key
losers. In regions where there is a lack of regulation such as Ukraine and Russia, generics
are still enjoying a strong market share (>40%). In Ukraine only, we count 120 generic
companies. However, we note that in the neighbouring Central European countries,
generics have a low share due to the strict regulations.
Figure 491: Key winner/losers from the regulatory change in the EU

Company Loss Impact Gains Net sales impact Comments
3-5 years 5-10 year
Bayer CropScience Key cereal fungicides Prothioconazole, strobilurins, spiroxamine - =/+
Key F&V herbicides Cereal herbicides
Key F&V insecticide Imidacloprid, thiacloprid, spiromesifen, Some initial impact is to be
flubendiamide expected however the impact is
likely to be very small due to new
Syngenta Key cereal fungicide Azoxystrobin, fludioxinil (F) = =/+ product launches offsetting the
F&V fungicide New cereal fungicide phase out of old molecules. In
Cereal herbicides addition, old molecules are lower
margin so the impact at the profit
Rynaxypyr mixture, l-cyhalothrin level should be even more limited.
Mefenoxam, mandipropamid Long-term the company will further
benefit from new products launches
BASF Agro Key cereal fungicides Pyraclostrobin, metrafenone, + new products - =/+
which should be even more
Key cereal herbicide Dimethenamid-p required post these regulatory
Sugar beet/OSR herbicide New F&V insecticides changes
F&V fungicides boscalid
F&V herbicide
Dow AgroSciences Cereal fungicide Cereal herbicides -- = Initial impact; Long term slowdown
Key F&V fungicides Spinetoram, g-cyhalothrin as US names portfolios are less
diversified than European peers
DuPont Cereal fungicides Proquinazid, picoxystrobin, famoxadone, new fung =/- = (they have been prioritizing the
domestic market). They have a
F&V herbicide Acetamiprid, rynaxypyr, indoxacarb
relatively weak position in cereal
F&V fungicides fungicides in particular
Source: Cropnosis Note: + = Winner, - = Loser

Cost and complexity of registration also creates higher barriers to entry. Unlike in
Pharmaceuticals where generic applicants can provide an abbreviated new drug
application (ANDA) to prove that its product is equivalent to that already approved,
generic agrochemical companies have to provide a full set of data when registering a
molecule in the US and the EU. This has been deterring generics to invest in new
products and explains why the market share of generics has remained broadly stable for
agchems at broadly 23% vs. 50-80% in many Pharmaceutical markets. In addition, we
note product registration costs are high in agrochemicals (in the region of $12m over c7
years) and are a positive function of the number of crops the product is to be registered
for. Therefore, in order to limit the financial burden of product registration, some generic
companies tend to seek registration for one crop. Historically, this has not stopped
farmers to use the molecules on other crops for which the products was not registered,
but nonetheless efficient. With the increasing enforcement of the legislation in the field in
many EU countries, this practice is becoming increasingly difficult and therefore reduces
the market potential of generic agrochemicals. c60% of off-patent crop protection
products in the market are not generic and therefore fall into the category of proprietary
off-patent products. In this way, the EU registration system provides market exclusivity
for many old active ingredients and partly explains why off-patent product still enjoys
robust sales/margins progression unlike in Pharma.
New products achieve superior efficacy and tend to have a strong growth profile.
The strong growth profile of new products is driven by superior efficacy compared to
competing and previous generation products. In addition, resistance issues against
traditional agrochemical molecules have been creeping up over the past decade as many
farmers have not been following the recommended spray schedule and dosage in order
to save on costs. Examples of molecules facing resistance include triazoles, strobilurins
(fungicides), glyphosate etc We also note a resurgence of pest and disease such as the
soybean rust (and aphids) due to a combination of causes: 1) No-tillage encouraged by
glyphosate resistant soybeans, 2) Conservation tillage encouraged by widespread use of
herbicides, 3) Density of planting increased to push yields and 4) Lower crop rotation due
to favourable prices and/or subsidies encouraging continuous mono-culture. These
increasing resistance issues are increasing farmers’ appetite for premium products.
Only leading companies can afford developing new products. We estimate that the
cost of developing and launching a new active ingredient is in the region of $150-200m
(over a period of approximately ten years). The sheer cost of the R&D involved means
product development can only be sustained by those companies with substantial
resources. In the agrochemical sector Bayer, Syngenta and BASF are the leading R&D
players.
Figure 492: R&D spent by leading agchem players (2010E)
CP R&D (US$ m) CP R&D to CP sales
Syngenta 555 6.3%
Bayer 629 8.6%
BASF 523 9.7%
Du Pont 176 6.9%
Dow 261 6.4%
Total agchem average 429 7.6%
Source: Company data, Cropnosis, Deutsche Bank estimates
R&D intensity has been decreasing leading to a rise in the share of off-patent
sales… As shown on Figure 493, R&D agrochemical companies have been increasingly
allocating funds to ag biotech R&D (e.g. GMs) at the expense of Crop Protection. This
has caused an increase in the share of off-patent products amongst the overall
agrochemical market.

Figure 493: R&D / sales evolution (13 leading agchem Figure 494: Patented vs. off-patent sales
companies)
2,000 100% 10%
30% 30%
80% 40% 35%
1,800 50%
60%
1,600 40% 90%
70% 65% 70%
60%
50%
20%
1,400
0%
1,200
Syngenta
BASF
Monsanto
DuPont
Bayer
Dow
1,000
2003 2004 2005 2006 2007 2008 2009
Off-patent sales & proprietary off-patent sales
R& D Crop Protection (Euro m) Patented sales
R& D Seeds Biotech (Euro m)
Source: Cropnosis Source: Makhteshim Agan (from Philips Mc Dougal))
… Loss of patent protection is manageable in agrochemicals.Despite the decrease in

off-patent sales, we note the profitability of agrochemical companies has increased
significantly over the past 10 years (Figure 496). Generic products in the agrochemical
industry tend to account for 23% of the market. The end of patent protection on a
product tends to have much less impact than seen in the pharmaceutical industry. This is
a result of a combination of factors including production economics of scale (an
advantage to big players), costs of registration (which can be prohibitive to smaller
generic firms entering the market), use of reformulations (when a product is off patent it
is combined with others in order to improve its properties and efficacy), increase in
capacity by branded players to pre-empt generics from entering the market and more
stringent regulatory environment, particularly in EU which will more impacting the generic
players as they generally do not have that strong R&D pipeline to replace banned product
quickly with new more profitable products. As a result there are many products (e.g.
Bravo and Flex from Syngenta which lost patent protection 34 years and 15 years
respectively but are still growing strongly) that have been off-patent for over ten years
where the original patent holder is still the largest manufacturer of the product.
Figure 495: Patented sales have decreased… Figure 496: … but profitability has increased
25%
50% 20%
45% 15%
10%
40%
5%
35%
0%
30%
-5%
25% -10%
20%
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011E
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Syngenta Crop Protection

Bayer CropScience
Generic Propriety Off-Patent Patented BASF Agricultural Solutions
Source: Phillips McDougall, AgriFutura, July 2009 Source: Company data
Agrochemical products are usually marketed through either distribution channels or in

areas of large farms (such as Brazil) direct to farmers. Given the geographical breadth of
the market a strong sales force is required in order to maximise sales.
A seasonality to agchem earnings. Given the timing of the seasons the most important
months for agrochemicals in the Northern Hemisphere are March-June, for the southern
Hemisphere it is typically the Q4 period. It should be noted that this seasonality of sales

of agrochemicals do create manufacturing to revenue imbalances– sales tend to be

focused on 2-3 quarters while manufacturing is continuous. This usually implies for
northern hemisphere dominated companies (all the global agchem companies) that H2
profitability can be slim (sales at their lowest with manufacturing costs continuing at the
same level for the year).
Farm credit creates cash flow seasonality for agrochemicals companies. Farm credit
holds particular significance in certain geographies, particularly emerging markets. The
delivery and invoicing of product to distributors with extended payment terms is often
used when trying to encourage the early purchase of products. However there are
significant variations from market to market with regard to duration/terms of credit, for
example Syngenta days of sales outstanding (DSOs) were as high as 100 in Latin
America, 170 in emerging Europe and close to 70 in emerging Asia during the peak of
economic crisis. Theoretically this exposes companies to the credit risk; however the
track record in receivable management has remained impressive for the industry. The
agrochemical companies (Syngenta, Bayer and BASF) successfully used the barter model
(accepting crops instead of cash) as an effective risk management tool during the
economic crisis. However the lengthy credit facilities creates cash flow seasonality for
the agrochemical companies (strong cash generation in H2), especially given the strong
earnings seasonality (strong earnings in H1)
Agrochemical distribution pipeline inventories. The sales of agrochemical products
can be impacted by pipeline inventories of agrochemical products. With most products
having a narrow window of use, it is not certain that farmer/distribution channel
inventories can be entirely used in that period and therefore they could be stored for the
following years. This can be exacerbated by the sometimes unpredictable nature of the
harvests (eg if drought or rain restricts sprayings). The impact of inventories was visible in
late 2009 and early 2010 when high channel inventories in North America (particularly in
fungicides) resulted in lower sales for the agrochemical players. Moreover, the
requirement of unique labelling per country restricts the movement of product from
country to country which can hinder the even distribution of product on a global basis.
The advent of GM (genetically modified) crops has significantly affected some
segments of the agrochemical market. Most affected is the herbicide market, particularly
soybean, corn/maize, cotton, canola and to a much lesser extent, insecticides. Fungicide
markets are unlikely to be affected in the medium-term as no fungal resistant traits are
close to commercialisation. The next wave of growth for GM seeds will be driven by
adoption in more number of countries, higher penetration in existing markets (Latam) and
opening up of new crops (particularly cereals, e.g. golden rice) and traits (drought
tolerance) for GM seeds.
Along similar lines to genetic modification (output traits - altering the crop to improve its
qualities) is the “smart breeding”- another practice used by the seed companies using
marker assisted selection. Although using the same principle as the cross-breeding
traditionally undertaken, smart breeding uses biotechnology to understand and select the
desired gene combination for breeding a product with desired attributes (rather than
genetically modifying the germplasm). Once a genetic sequence is identified, that is
linked to a particular trait (e.g. drought resistance); the producer can avoid testing every
offspring plant for this trait. They only need to look at the marker through a rapid DNA
test and can rapidly ascertain which plants have that trait or not. This significantly reduces
the development time and allows breeding of complex traits. Examples of this to date
include a seedless watermelon (Syngenta) and many smaller than normal products and
higher sugar content sugar beet from KWS Saat. This appears an area of strong growth
given higher public acceptance of these seeds.

In the future the growth of bio-fuels (bioethanol, biodiesel) should drive increased
demand for specific crops (sugar cane/sugar beet/maize and oil seed rape/canola
respectively). The US government has made a strategic decision to increase the role of
biofuels and specifically ethanol in the country’s energy mix. Today close to 40% of the
US corn harvest is used for ethanol production. While expansion in the ethanol industry
continues, smaller gains for corn-based ethanol are projected over the next 10 years than
seen in 2007/08, reflecting only moderate growth in overall US gasoline consumption and
limited potential for further market penetration of ethanol into the E10 (10% ethanol
blend) market (the blend wall).
Figure 497: US Maize usage in biofuels (m/t) Figure 498: US ethanol consumption near the blend wall
10% of gasoline use
14,000 50.0% 15.0
12,000 12.5
40.0%
Gallons (bushels)
10,000
30.0% 10.0
8,000
6,000 20.0% 7.5
4,000
10.0% 5.0
2,000
0 0.0% 2.5
US ethanol consumption
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
0.0
1995 1997 1999 2001 2003 2005 2007 2009
US Corn Production (m bushels)
% of Corn used for Ethanol
Source: USDA Source: USDA, EIA
The agrochemical market saw significant consolidation in the early nineties/early 00s.
This includes the acquisition of American Cyanamid by BASF, Bayer’s acquisition of
Aventis CropScience (itself an agglomeration of Agr-Evo – Hoechst and Schering – and
Rhone-Poulenc) and the formation of Syngenta from Novartis and Astra-Zeneca. Post this
period of consolidation the sector has undergone a substantial cost cutting programme
(Syngenta has cut $1.3bn since its inception), BASF targeted $250m from its Cyanamid
acquisition, Bayer targeted E530m from 2002-2005). With a market share of over 80%
held by the top six companies we anticipate little large scale activity in agrochemicals;
however M&A action in fast growing seeds market cannot be denied as the companies
try to gain access to the new markets for GM seeds. Over the next five years we expect
the companies to continue to focus on new product development especially in GM
Seeds alongside cost cutting to offset the higher product development costs. Syngenta
has already announced $650m cost cutting from 2011-15 while Bayer has also
announced E800m cost cutting program targeted at its CropScience and Healthcare
divisions.

Herbicides
Figure 499: Herbicides at a glance
Long-term growth rate Approximately 1.5-2.0% pa
Growth rate relative to the sector Low for mature products, selective herbicides growing fastest
Supply/Demand Not applicable (except for glyphosate)
Margin prospects Stable
Watch out for ... New selective herbicides & emergence of glyphosate tolerant weeds
Herbicides are chemicals used to control weeds or unwanted foliage. In 2010 the herbicide
market was estimated at just over $17.6bn. Over 50% of this market is accounted for by the
large markets of cereals, maize and soybeans. North America is the largest herbicides market
followed by Western Europe and Latin America. Herbicide usage is also increasing in Asian
countries like China/India mainly driven their need for improving the farm productivity to
ensure food security for their large population.
Herbicides are classified mainly according to their application usage. They can be selective
(for example, killing certain types of unwanted foliage) or non-selective herbicides (which kill
all foliage). Herbicides can be further sub-classified based on its time of application: pre-
emergent (before the crop breaks through the soil) and post-emergent or according to the
mode of action: contact herbicides (kills the unwanted plant when it comes in contact with
chemicals used in the herbicides) or translocated (kills the plant after their absorption by
accelerating/retarding the metabolic activity of the plant). The effectiveness of herbicides
depends on a number of factors including type of weed, time of application,
formulation/concentration of herbicides, soil type and concentration of spray material.
Figure 500: Breakdown of the herbicide market Figure 501: Herbicide market by crop (2010)
Other Crops
Cereals
Sugar Beet 14%
Non- 21%
3%
selectives
32% Oilseed
Rape
3%
Cotton
5% Soybeans
Rice 18%
Selectives 8%
68% Fruit & Veg
14% Corn
14%
Figure 502: Players in the herbicide market
Others Monsanto
19% 19%
DuPont
6%
Syngenta
19%
BASF
9%
Dow Bayer
14% 15%
Source: Cropnosis, Deutsche Bank


We believe that overall growth in the herbicide sector is expected to be between 1.5%-
2.0% mainly driven by volumes (largely a function of acreage). However new selective
herbicide launches which offer greater weed control benefits (particularly against the
weeds which are increasingly becoming resistant to the active ingredients e.g.
glyphosate) are anticipated to allow pricing power in certain areas such as cereals and
maize (e.g. BASF launch of Kixor in North America in 2010).
Herbicides have seen the largest impact from GM products particularly in the markets of
soybean and corn. The development and launch of herbicide-tolerant plants (plants
resistant to one type of non-selective herbicide spray therefore allowing this herbicide to
be sprayed even when the plant has emerged without damage to it) initially increased the
usage of a small number of non-selective products for example glyphosate (Monsanto
trade name Roundup) at the expense of other non-selective and selective herbicides.
However the use of GM crops does not eliminate the need for all selective herbicides -
these herbicides still have to be used in conjunction with GM crops to maximise yields,
particularly in crops like maize and cotton.
The launch of GM products was initially thought to reduce the applications of herbicides.
However the latest studies have shown that the use of herbicides has increased
significantly in the last decade due to the emergence of glyphosate resistant weeds
particularly in Southern and increasingly Midwest parts of US. Farmers are responding to
this challenge mainly through increasing the application rates or applying additional
herbicide active ingredients. Companies are responding to this challenge by offering
products which has a mode of action different from glyphosate (e.g. 2,4-D and dicamba).
Interestingly, Monsanto has started offering rebates (as high as $12 per acre) on soybean
and cotton herbicides where resistance to Round herbicide have become evident.
Farmers can earn these rebates by using herbicides other than Round up.
We believe the emergence of glyphosate tolerant weeds represents a key challenge (for
older chemistries like glyphosate) as well as opportunity (development of new
formulations with a mode of action different from glyphosate) for agrochemicals
companies.
Figure 503: Top three herbicides globally

Product Company Sales ($, m)
Glyphosate Monsanto 4,880
Paraquat Syngenta 780

Glufosinate Bayer 456

Figure 504: New Herbicide launches by leading players

Producer Name Launch Target market Comments
Syngenta Biocyclopyrone 2011-2012 Corn and Sugarcane na
BASF Saflufenacil (Kixor) 2010 Multiple crops Peak sales potential
>E200m, effective against
weeds resistant to
glyphosate
BASF Herbicide tolerance project 2011-2016 Specialty crops
cultivance
BASF Herbicide tolerance project dicabma 2011-2016 Multiple crops, seed
treatment
Bayer Indaziflam 2011 Specialty crops, Fruit Can also be used for weed
and grapes control on paths and
paved areas
Dupont Herbicides for Optimum GAT Pre-launch, stage
Dupont Broadleaf weed control (SU) Pre-launch stage Oil seeds
Dupont Brush and broadleaf weed control Launch stage Oil seeds, corn
Dupont Pre- and Post-emergent Grass and Concept stage Land management,
Broadleaf weed control Professional product
Dupont Broad-spectrum post-emergent Concept stage Cereals
weed control
Source: Cropnosis, Company Data
Glyphosate, a non-selective herbicide, is the world’s highest selling agrochemical

product, representing 33% of the total herbicide market (15% of the total agrochemical
market). Only Monsanto and some Chinese generic producers manufacture glyphosate
while other players such as Syngenta buy and re-sell the glyphosate ingredient with a
margin. Glyphosate prices have been very volatile and there is no good correlation
between the glyphosate price and the price of other agrochemical products. Glyphosate
differs from other branded players’products as it is a pure commodity being fully
unpatented and easy to make, therefore prompting severe generic competition.
Figure 505: Global glyphosate capacity (total capacity is Figure 506: Glyphosate formulators market shares
1mt)
45%
35%
Monsanto 25%
36%
15%
5%
Nufar m/Agr i pec/Ex …
-5%
FMC
Ni der a
Chinese
Ci agr o
Teckman
Syngenta
Chi nese & Other s
Chemi nova
Hel m
Dow Agr oSc
Monsanto
DuPont
MAIN/Mi l eni a*
Al baugh/Atanor *
producers
64%

Insecticides
Figure 507: Insecticides at a glance
Long-term growth rate Approximately 3% pa
Growth rate relative to the sector Average for agrochemicals
Margin prospects Good
Watch out for ... New product launches
Insecticides are agents for controlling insects or pests and can be applied as sprays, dusts or
gases. Insecticides are generally classified by their mode of action: stomach poisons are
lethal to insects which ingest them; contact insecticides kill following simple bodily contact
and fumigants act on the insect's respiratory system.
Unlike the herbicide sector, where to a large extent the continued use of products is linked to
farmers’ or growers’ economics, usage of insecticides is more directly tied to the incidence
of insect attack. The key crop sectors for insecticide use are fruit and vegetables (mainly
citrus, apples and potatoes) cotton and rice. Asia is the biggest market for insecticides
(approximately 45% of global insecticide sales) followed by Latin America and North America.
After the herbicide market this is the second largest class of agrochemical with a market
value in 2010 of $11bn.
Figure 508: Players in the insecticide market Figure 509: Insecticide market by crop (2010)
Bayer Other
Others Crops
24% Oilseed
26% 15%
Rape
1%
Soybeans
3% Fruit & Veg
FMC 44%
6% Cereals
Syngenta 4%
DuPont 19% Maize
7%
Dow BASF 7% Rice Cotton
8% 10% 12% 14%
Source: Cropnosis Source Cropnosis

Growth in insecticides is anticipated to be approximately 2-3% pa, in line with the
agrochemical sector. Growth in the chemical insecticide market, above and beyond any
large incidence of insect attack, is likely to be driven by new compounds based on
complex chemistry. These can offer enhanced effectiveness, dosage and environmental
benefits. Bayer is an example of a company that has successfully launched new
compounds over recent years (7 new formulations in last 10 years).
Insect-resistant genetically engineered crops have been cultivated since 1997 with the
incorporation of Bt genes into plants (in order for them to express toxins for inherent
insect resistance). This has particularly negatively impacted the use of insecticides in
soybean and maize plantations. This is not forecast to significantly reduce growth in
insecticides above and beyond the penetration seen to date.

Other key factors impacting the industry include regulatory pressure and generic
competition. However, restriction on environmentally harmful insecticides (e.g. aldrin,
chlordane, DDT) in developed countries has led to the development of new formulations
which are driving the market growth. Generic competition, we believe, will continue to
affect the sales of old chemistries however the R&D players will still be better placed on
the strength of their product innovation and extension of patent protection in certain
geographies (.e.g. through supplementary protection certificates (SPCs) in Europe which
extends the patent protection by a maximum of five years for existing products).
On a medium term basis, we believe, the increasing investment in insect control in fruit
and vegetables, growing usage of insecticides for seed treatment and new product
launches will continue to drive growth for the sector.
Figure 510: Top three insecticides globally

Imidacloprid Bayer 1,101
Thiamethoxam Syngenta 795

Clothianidin Bayer 450
Figure 511: New insecticide launches by leading players

Syngenta Cyantraniliprole 2011-2012 Multiple crops na
Dupont Rynaxypyr Launch stage F&V, rice, seed market and label
treatment, expansion
professional products
Dupont Cyazypyr Pre launch stage F&V, rice, seed cross spectrum
treatment, insect control
professional products
Dupont Broad sprectum Early development F&V
nematicide, new mode stage
of action
Dupont New class of insect Early development F&V, rice
control for chewing stage
pest
Dupont New class of insect Early development Rice
control for piercing stage
pest
Dow Sulfoxaflor 2012 Cotton
Dow 2 novel fungicides Post 2014 Wheat Based on Septoria
activity
Source: Cropnosis, Company Data, F&V: Fruit & Vegetables

Fungicides
Figure 512: Fungicides at a glance
Long-term growth rate Approximately 4% pa
Growth rate relative to the sector Above agchem sector on average driven by new products and disease
proliferation
Margin prospects High and Stable
Watch out for ... Development of new chemistries, increased use of strobilurin on corn (US) in
order to enhance yields
Fungicides provide plants with protection from fungal attack and other related diseases.
Fungicides can be broadly of two types: contact fungicides (they kill the fungi when sprayed
on its surface, generally low value products) and systematic fungicides (these fungicides are
absorbed by the plant first and then shows its effect, generally high value products). Some of
the active ingredients in fungicides include sulphur, neem oil, rosemary oil, jojoba oil and
bacterium bacillus subtilis. We estimate the global market for fungicides in 2010 was $11bn.
The major fungicide markets are Western Europe, Japan and Latin America where the damp
climate along with highly intensive agricultural practices provides the ideal conditions for
fungal and mould growth. The usage of fungicides in North America is relatively small
compared to the overall agrochemicals market mainly due to climatic conditions in this region.
The key crop outlets for fungicides are the fruit and vegetable sector (with major applications
in vines, potato and citrus) followed by cereals and rice.
Figure 513: Players in the fungicide market Figure 514: Fungicide market by crop
Others
Other Crops
13%
12%
Syngenta Cotton
DuPont
30% 1%
5%
Maize
Dow 2% Fruit & Veg
5% 50%
Rice
9%
BASF Soybeans
23% 8%
Bayer Cereals
24% 18%

We expect the fungicides market to grow at rate of 2-4% growth p.a. driven by new
product and formulation launches and disease proliferation (particularly soybean rust in
Latin America). Growth will be also helped by increased usage of strobilurin to enhance
the yield in corn (US). The use of fungicides in seed treatment is also anticipated to
continue to show strong growth. Due to the relatively fast evolution of moulds and fungi,
the fungicide market is not expected to see a significant negative impact from the
commercialisation of GM crops.
Soybean rust is a serious foliage disease which has been found for many years in many
Asian countries like Taiwan, Thailand, Japan and India (hence called Asian Soybean Rust)
but more recently in Latin American countries like Brazil, Argentina and Paraguay. This
disease has the potential to cause significant soybean yield losses (from 10-80%
depending on timing, plant and weather). This disease, which is spread primarily by
windborne spores, can be transported over long distances and it is currently endemic in
Latin America and potentially beginning to establish itself in the US. Increasing Soybean
acres driven by strong Chinese soybean demand and high disease pressure has resulted
in strong growth for soybean fungicides market estimated at $925m for the 2009/2010

growing season (refer Figure 515). Syngenta is the leading player in Soybean fungicide
market with an estimated market share of 35%.
Figure 515: Soybean rust market evolution ($m) in Latin Figure 516: Fungicide application increasing in Latin
America America
1,000 5.0 50%
800 4.0 40%
600 3.0 30%

2.0 20%
400
1.0 10%
200
0.0 0%
0
06/07 07/08 08/09
05/06 06/07 07/08 08/09 09/10E
Brazil winter corn season, m hectares (LHS)
Fungicide application, % (RHS)
Source: Deutsche Bank, Syngenta Source: Deutsche Bank estimates, Syngenta
Among the various classes of fungicides, the strobilurins is still the largest chemistry
group with significant usage in cereals and more lately in soybeans. However the
development of resistance (called Septoria resistance) against this class of fungicides has
led to expansion of triazole chemistry, another leading class of fungicides.
Over the next five years we expect a significant number of product launches in
fungicides, most notably from Syngenta, Bayer and BASF (which have shown significant
improvements in protection against competitor products) which will drive the market
growth.
Fruits and vegetables the biggest end market for fungicides should continue to grow due
to improving dietary standards in emerging countries which signals continued broad-
based demand from this product group.
Figure 517: Top three Fungicides globally
Azoxystrobin Syngenta 1,220
Pyraclostrobin BASF 1,140

Mancozeb Dow 635
Figure 518: New fungicide launches from leading players

Syngenta Isopyrazam 2010 Cereals Initial launch in UK barley
Syngenta Sedaxane 2011-2012 Multiple crops
Syngenta Yet to be Post 2012 Multiple crops
d
BASF Xemium 2012 Multiple crops Peak sales potential >E200m
BASF Initium 2011 Specialty crops e.g. grapes, Initial launches in Germany, UK
potato, vegetables and France
Bayer Fluopyram 2011 Peak sales potential >E150m

Bayer Bixafen 2011 Cereals Peak sales potential >E150m
Bayer Isotanil 2010 Rice Peak sales potential >E50m
Source: Company Data, Deutsche Bank

Seed Treatment
Figure 519: Seed Treatment at a glance
Long-term growth rate High single digit percentage growth
Growth rate relative to the sector Above
Margin prospects High
Watch out for ... Continued market penetration especially in NAFTA and Latin America
With seeds generally taking up to six weeks for their defences to mature, the farmer is
increasingly seeking to protect them through the direct treatment of seeds (rather than the
emergent plant) with fungicides and insecticides. This is particularly the case with some of
the highly productive crop varieties where the breeding to maximise yield has created a
weakened defence mechanisms against fungal disease and insect attack. Seed treatment
provides good protection during the germination period, better stress tolerance during the
early stage of plant development and ensures high yield for growers. The basic seed
treatment process involves seed dressing, coatings and pelleting.
Seed treatment is a value-added, profitable and innovative product for the agrochemical
companies. There are synergies of selling seeds and also the fungicides and insecticides in
being able to combine these to the customer. Globally the market for seed treatment is
relatively consolidated with top four players occupying more than 80% of the market.
Compared to the remainder of agrochemicals seed treatment is relative small although
growing at a fast pace with an estimated market size of $2.5bn in 2010.
Figure 520: Seed treatment market by product area Figure 521: Seed treatment market by crop
Others
Sugar Beet 7%
Nematicides
4% /Cane Cereals
3% 29%
Rice
7%
Insecticides Potatoes
Fungicides 50% 7%
46%
Cotton
9%
Oilseeds
11% Maize
27%
Figure 522: Breakdown of the seed treatment market participants
Others
18%
Syngenta
34%
Chemtura
7%
BASF
9%
Bayer
32%
Source: Cropnosis


We estimate growth in seed treatment to be a high single digit percentage driven by
improved pricing as greater value added is available from the seeds in terms of
fungicides and insecticides.
Europe and North America are the biggest seed treatment markets by size however
Latin America is the fastest growing region due to the increasing penetration of GM
seeds in these regions
Significant participants in this market include Syngenta, Bayer and BASF and Chemtura.
With the increasing use of genetically modified seeds which are more costly than
conventional seeds farmers have more incentive to use seed treatment products.
Figure 523: Global seed treatment market evolution $m) Figure 524: Global seed treatment market by region
(2010)
3,000
2,500 11.4% CAGR 2000-10 Asia-Pacific EAME
17% 30%
2,000
1,500
1,000
500
0 Latin
America
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011F
25%
North
America
28%
Source: Deutsche Bank, Cropnosis Source: Deutsche Bank, Cropnosis

Conventional seeds
Figure 525: Seeds at a glance
Long-term growth rate 3% pa
Growth rate relative to the sector Slightly above agrochemicals
Margin prospects Remaining strong
Watch out for ... Continued consolidation of seed companies
Conventional Seeds are produced by the process of conventional breeding which involves
growing two plants together each having a separate desirable characteristic so that they
flower simultaneously. Seeing the flower and pollination time the two plants are crossed by
the process of artificial fertilization. The resulting fruit from such a plant will contain seeds
which will have the characteristics of both the plants. One disadvantage of conventional
breeding is that many undesirable traits are also transferred with the desired trait.
Seeds are important for two reasons
Germplasm, the genetics required to breed quality seeds, are the basis for biotechnology
developments and as such there is considerable over-lap at the company level between
traditional seed breeding and biotechnological research, development and marketing.
They provide access to the seed treatment industry which is a value-added, profitable
and innovative product for the agrochemical companies. There are synergies of selling
seeds and also the fungicides and insecticides in being able to combine these to the
customer.
The seed market has a market size of approximately $32bn in 2010 (excluding the value of
seed treatment). By area under acreage wheat and corn comprises approximately 48% of the
market; however by value of crop corn alone constitute 47% of the market followed by
soybean which occupies 18% of the market.
Figure 526: Seed world market by acreage Figure 527: Seed world market by value (Conventional
(Conventional +Biotech Seeds) +Biotech Seeds)
Barley
Sunflower Rapeseed Sunflower 2% Sorghum
3% 4% 3% 1%
Cotton
3% Rapeseed
Wheat 4%
Sorghum 28%
Cotton Corn
5%
8% 47%
Barley Wheat
7% 8%
Soybean Rice
12% Corn 9%
Rice 20% Soybean
18% 18%
Source: Deutsche Bank, BASF, Source: Deutsche Bank, BASF
The largest participants in conventional seeds are Monsanto, DuPont, Syngenta, Limagrain,
Bayer and Dow. It should be noted that this market is fragmented, with 14% of the seeds
sold by state owned/quasi state owned companies/cooperatives, 10% of seeds being farmer
owned (retained from previous crops) and a further 16% from a number of small producers.

Figure 528: Global total seed sales (Conventional +Biotech Seeds)
Others
16%
Monsanto
24%
Farmer owned
10%
State/Co-ops
14% Du Pont
17%
Dow
3%
Bayer Syngenta
Limagrain 9%
3%
4%
Source: Cropnosis

The conventional seed market is forecast to show growth estimated at approximately
3% p.a. slightly ahead of that of the agrochemical industry as a whole.
We anticipate further consolidation in the seed market as a way to capture market for
companies producing GM plants. The key acquisitions in this direction includes Stoneville
and Athenix acquisition by Bayer in 2007 and 2009 respectively, acquisition of Triumph
Seed Co. Inc, and Dairyland Seed Co. Inc. & Bio-Plant Research Ltd. by Dow in 2008 and
acquisition of Nandi Seeds Private Limited by Dupont in 2009. Despite these acquisitions
the market still remains largely fragmented, particularly in Asia-Pacific although demand
for conventional seeds is expected to remain strongest in this region due to lower
adoption of GM seeds.
Along similar lines to genetic modification (output traits - altering the crop to improve its
qualities) is the “smart breeding”- another practice used by the seed companies using
marker assisted selection. Although using the same principle as the cross-breeding
traditionally undertaken, smart breeding uses biotechnology to understand and select the
desired gene combination for breeding a product with desired attributes (rather than
genetically modifying the germplasm). Once a genetic sequence is identified, that is
linked to a particular trait (e.g. drought resistance); the producer can avoid testing every
offspring plant for this trait. They only need to look at the marker through a rapid DNA
test and can rapidly ascertain which plants have that trait or not. This significantly
reduces the development time and allows breeding of complex traits. Examples of this
to date include a seedless watermelon (Syngenta) and many smaller than normal
products and higher sugar content sugar beet from KWS Saat. This appears an area of
strong growth given higher public acceptance of these seeds.
New areas of plant breeding (e.g. novels food, functional foods, naturaceuticals) and use
of plant for the production of biomolecules, including medically relevant substances
using biotechnology are some new opportunities for the seed companies although
research is still in its infancy stage in these areas.

Agricultural Biotechnology / Genetic Modification (GM)

Figure 529: Ag-biotech at a glance
Growth rate relative to the sector High
Margin prospects Remaining high
Watch out for ... Who pays for the technology, adoption by more countries, increase in cross-
licensing agreements
Ag-biotech is the use of biotechnology to alter a plant’s genetic structure in order to improve
its inherent properties, for example create resistance to pests, diseases, chemicals or to
boost crop yields. Although ag-biotech research has been conducted for some time, its large-
scale commercialisation has occurred only since 1997. Since that time the ag-biotech has
grown to a value of $12bn in 2010.
Figure 530 shows an example of where a gene is extracted from a bacterium (blue square)
and inserted into the germplasm of a seed. In this case the gene transferred allows the plant
(once it has germinated) to produce a particular toxin. When the targeted insect eats any of
the plant it is poisoned and hence eats no more. This significantly reduces pest damage to
the plant and can be used as an alternative to spraying with insecticides.
Figure 530: Genes are taken from an organism and inserted into the germplasm of a
Seed in order to give that Seed a particular property such as insect resistance
Target cell
Source: Syngenta
There are distinct areas of ag-biotech focus, which are currently at differing stages of
development. Due to the large R&D commitment necessary to participate in any area, most
companies tend to focus only selectively.
Input traits. Scientists concentrate on the alteration of plant genetics in order to create a
stronger/more resistant plant, thereby increasing overall crop yield. The value to the farmer
may not only be increased yields but also lower costs of agrochemical products required to
generate that yield. Input trait alteration does not affect the final properties of the crop or
food produced. To date input traits are the most commercialised ag-biotech application and
are currently most prevalent in the crops of soybean, corn and cotton. The main companies
operating in the input trait market are Monsanto, Syngenta, Dow and Bayer.

Examples of input traits include:
Herbicide resistance: Twenty years ago after a crop had emerged from the ground only
certain selective herbicides could be used to control unwanted weed foliage. This
created the requirement for several different herbicides to be used to control the
multiple weeds encountered. By inserting a gene into a plant to make it resistant to a
certain type of non-selective herbicide, that one herbicide can then be used to kill the
weeds but leave the crop unharmed. The renowned examples include Monsanto's
Roundup ready (resistant to glyphosate herbicide) and Liberty Link (resistant to
glufosinate herbicide) from Bayer Crop Science.
Insect resistance: Plants are given a resistance to certain insects through the insertion
of a gene that allows the plant to create its own internal insecticide. Leading products
that include insect resistant traits are Smartstax, Bollard III for cotton and Roundup ready
for sugarcane.
Output or quality traits. This activity uses genetic engineering to change the chemical or
nutritional ‘quality’ of the final crop/product. Innovations include corn with higher oil or amino
acid content, corn with higher ethanol yield (e.g. amylase corn from syngenta), higher omega
3 oil in soybean, vegetables (including tomatoes) with improved food qualities (for example
flavour, shelf life, and so on) or enhanced pro-vitamin A in golden Rice. These traits can
create value for animal feeders (reduced costs due to higher energy value of grain) or
personal care companies (oils for soaps and gels). Over time this market may also develop to
include nutraceuticals (foods with beneficial health effects). Major players in output trait
technology include Monsanto, Syngenta, Dow and BASF.
Value for the ag-biotech/chemical producer can be achieved in two ways (separately or in
combination).
A royalty (gene fee) can be charged for each bag of genetically modified seed sold to the
farmer. In a number of cases this tends to be the only method of payment, for example
insect resistance, output traits.
Value can be captured through selling larger quantities of chemical herbicide (which is
used in combination with the modified crop), for example Monsanto and Roundup
(glyphosate).
Figure 531: Global value of the biotech seed market ($ in Figure 532: Biotech seeds market by player (2011E)
billions)
Others
14 11%
12 Dow Agro
10 6%
Monsanto
8
38%
6 Syngenta
4 12%
2
0
1996
1998
2000
2002
2004
2006
2008
2010
DuPont
33%
Source: : ISAAA Brief 42, Cropnosis, Deutsche Bank Source: Cropnosis

Figure 533: Global biotech seed market by crop, 2010 Figure 534: Global biotech seed market by trait, 2010
(area planted) (area planted)
Canola
Cotton 5% Insect
14% resistance
varities
18%
Soybean
49% Double &
Herbicide
triple stack
Tolerant
22%
Maize 60%
32%
Source: ISAAA Brief 42, Deutsche Bank Source: ISAAA Brief 42, Deutsche Bank
Figure 535: Global biotech seed market by crop, 2010 Figure 536: Global biotech seed market by trait, 2010 (by
(by value) value)
Others
Canola 1% Insect
3% resistance
Cotton 10%
11%
Herbicide
Maize Tolerance
50% 47%
Soybean Mixed traits

35% 43%
Figure 537: Global GM seed sales by region (2010E) Figure 538: Global GM seed sales by region (2015E)
Rest of Far East- Rest of

World Pacific Far East- World Europe
Latin 4% 4% Pacific 4% 2%
America Latin 5%
13% America
10%
N orth
N orth America
America 79%
79%

Figure 539: Global area of biotech crop by country (million hectares)

Country Area (million hectares) % of total Biotech Crops
USA 66.8 45.1% Maize, soybean, cotton, canola, sugarbeet,

alfalfa, papaya, sqash
Brazil 25.4 17.2% Soybean, maize, cotton
Argentina 22.9 15.5% Soybean, maize, cotton
India 9.4 6.4% Cotton
Canada 8.8 5.9% Canola, maize, soybean, sugarbeet
China 3.5 2.4% Cotton, papaya, poplar, tomato, sweet pepper
Paraguary 2.6 1.8% Soybean
Pakistan 2.5 1.7% Cotton
South Africa 2.2 1.5% Maize, soybean, cotton
Uruguay 1.1 0.7% Soybean, maize
Others 2.8 1.9%
Total 148 100.0%
Source: ISAAA Brief 42, Deutsche Bank
Since its commercial inception in 1997 the ag-biotech seed market has grown to a value
of $11.7bn by 2010, an impressive CAGR of 16% from 2000-10. This represents 22% of
the US$51.8 billion global crop protection market in 2010, and 33% of the approximately
US$34 billion commercial seed market. 2010 biotech seed sales increased by 10% YoY.
Going forward growth is anticipated to continue albeit only at a mid-single digit level,
driven by adoption of biotech seeds in other countries (12 more countries expected to
adopt biotech seeds from 2011-2015), further penetration of biotech seeds in four
leading crops (maize seeds, cotton and canola) outside US and a spate of new product
launches from major players.
Globally, Soybean has the highest planted acres for GM seeds in 2010 (at 49%)
followed by Maize at 32% and Cotton at 14%. In terms of traits herbicide tolerant traits
has been the most common trait across all traits (60%in 2010), followed by double and
triple stack product (22%) and insect resistant traits (18%).
Farmer acceptance of herbicide resistant soybeans has been significant – 93% of US

soybean is now GM. Global herbicide resistant soybean penetration is also fairly high at
77%.
GM corn penetration in the US has grown rapidly in last five years reaching 86% in
2010; however global corn penetration is still very low (26%) with significant growth
potential in Latin America, particularly in Brazil, and Argentina.
GM cotton penetration in the US reached 93% in 2010 which is significantly above the
global average (49%). Bt cotton penetration in key producing countries like India (86%)
and China has also increased in the recent years (69%).
Stacked traits is the fast emerging segment in the biotech seeds as most of the top
producers are now focusing their R&D budgets on these products. Stacked seeds,
including double stack (provides resistance to one pest and herbicide tolerance), triple
stack (resistance to two pests plus herbicide tolerance) and multi stack seeds (e. g.
biotech maize seed Smartstax which has eight genes that include resistance against
several pests alongside herbicide resistance traits), provide more variety to the farmers
for effective pest control besides improving yield. There is now a wider choice of traits
available, not only from Monsanto but also from other major players such as Syngenta,
Dow Agrosciences - Mycogen, Bayer BioScience and DuPont - Pioneer.

Further growth of biotech seeds hinges on the adoption of biotech traits in key cereal
crops like rice and wheat. Although biotech rice (also called “golden rice”) is close to
commercial approval in Philippines (expected to be available in 2013) biotech wheat is
still far from reality with the first commercial product expected only in the second half of
this decade.
Europe has the lowest planted acres of GM seeds (approximately 1.5m hectares).
Significant growth of generically modified product is not anticipated in the near term
mainly due to conservative stance taken by EU and respective governments on biotech
seeds. The trigger for greater acceptance could be the development of output traits (e.g.
biotech potato “Amflora” which provides higher starch content already approved in EU)
– where the customer can see the benefit.
The ongoing research on new traits targeted at alleviating abiotic stress e.g. enhanced
drought tolerance/water optimization and improved nitrogen efficiency offers new
market growth opportunity (e.g. Syngenta launched AgrisureArtesian in 2010, the first
product offering water saving in irrigated areas) for biotech seed companies.
Cross-licensing agreements between seed companies are required in order to facilitate

the development and distribution of genetic modifications to the end-market. Over the
past few years the top tier companies are collaborating more actively for the joint
development of new traits or in-licensing/out licensing of existing traits in their native
products. (e.g. Syngenta’s singed an out-licensing deal with Dupont in Dec-2010 for its
MIR604 (CRW) trait).
Figure 540: US Biotech planting penetration of the planted acres

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 % Change 2010/2009
Corn total 25.0% 26.0% 34.0% 40.0% 47.0% 52.0% 61.0% 73.0% 80.0% 85.0% 86.0% 1.0%
-Insect resistant 18.0% 18.0% 22.0% 25.0% 27.0% 26.0% 25.0% 21.0% 17.0% 17.0% 16.0% -1.0%
-Herbicide tolerant 6.0% 7.0% 9.0% 11.0% 14.0% 17.0% 21.0% 24.0% 23.0% 22.0% 23.0% 1.0%
-Multi-trait stacked 1.0% 1.0% 2.0% 4.0% 6.0% 9.0% 15.0% 28.0% 40.0% 46.0% 47.0% 1.0%
Cotton 61.0% 69.0% 71.0% 73.0% 76.0% 79.0% 83.0% 87.0% 86.0% 88.0% 93.0% 5.0%
-Insect resistant 15.0% 13.0% 13.0% 14.0% 16.0% 18.0% 18.0% 17.0% 18.0% 17.0% 15.0% -2.0%
-Herbicide tolerant 26.0% 32.0% 36.0% 32.0% 30.0% 27.0% 26.0% 28.0% 23.0% 23.0% 20.0% -3.0%
Soybean total 54.0% 68.0% 75.0% 81.0% 85.0% 87.0% 89.0% 91.0% 92.0% 91.0% 93.0% 2.0%
-Insect resistant 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
-Herbicide tolerant 54.0% 68.0% 75.0% 81.0% 85.0% 87.0% 89.0% 91.0% 92.0% 91.0% 93.0% 2.0%
Source: USDA, Deutsche Bank

Fertilizers
Figure 541: Fertilizers at a glance
Growth rate relative to the sector Below the chemical sector on average
Supply/Demand Tight short-term due to high crop prices but likely to weaken beyond 2011 due
to new capacity
Margin prospects Should moderate long-term from current ‘’peak type’’ levels
Watch out for ... New Middle Eastern nitrogen capacity in 2012, high European natural gas prices
could squeeze European nitrogen producers margins, new potash capacity in
2012-15 and large phosphate Ma’aden project start-up in H2 2011, further
consolidation, new entrants (potash and phosphate)
A fertilizer is a solid, liquid or gaseous substance containing one or more fertilizer

nutrients which, when added to the soil, provides nutrition for the growth and
development of crops. There are different types of nutrients: soil (those that already exist),
organic nutrients (e.g. manure) and mineral (on which the chemical companies focus).
The use of fertilizer is driven by farmer economics. The correct application of fertilizer can
significantly improve the profitability of crops, with a net return on investment in fertilizer of
over 1100%. It should be noted that some crops require higher proportion of nutrients than
others, e.g. corn requires three times the fertilizer that soybean requires.
Figure 542: Economic gains from fertilizer utilisation
Treatment Grain yield (t/ha) Revenue* Fertilizer cost Profit
($/ha) ($/ha) (EUR/ha)
No fertilizer 2.1 532 0 532

Mineral fertilizer 192 kg N/ha 9.3 2390 157 2233
Source: Deutsche Bank* Assuming grain market price: 257 $/tonne
Figure 543: US farmer production costs (2011E)* Figure 544: Consumption of fertiliser (N+P+K) by crop
Other Others Fruit & Veg

General Power &
6% 16% 17%
overheads Machinery
3% Sugar crops
28% 4%
Agchems
4% Cotton
Labour 4% Wheat
6% 15%
Other
cereals
Seeds
5%
12%
Oil Seeds
Maize
Fertilizers Land 10%
Rice 15%
17% 24%
14%
Source: USDA * average production cost for wheat, soybean and corn. We note Agchems consumption is Source: FAO, (2007/08), Yara
relatively lower for a US farmer given the US of GM seeds. For a European farmer, agchem typically represent
10-15% of overall costs.
While a variety of nutrients are necessary, the global fertiliser industry centres around the
three primary nutrients – nitrogen (manufactured through a chemical process), phosphorus
and potassium (both mined).
Nitrogen is produced from natural gas and may be applied to the soil in gaseous form
(ammonia) or more commonly solid (urea, ammonium nitrate) or liquid (nitrogen
solutions) form. Nitrogen is involved in protein formation and is a major component of
chlorophyll. Use of nitrogen is critical in the improvement of crop size (growth and yield).
Due to leaching and volatility losses, nitrogen must be applied every growing season
except for certain crops, such as soybeans (fix nitrogen from the atmosphere).

After nitrogen, phosphorus is the second most consumed plant nutrient and helps to
promote crop quality through encouraging proper root growth, cell division and fruit and
seed production. Phosphorous is vital to the transfer of energy during photosynthesis.
The most common forms of commercial phosphourus fertilizers are monammonium
phosphate (MAP), diammonium phosphate (DAP) and triple superphosphate (TSP).
Potassium is used by plants improvement of crop quality through plant growth, starch
activation, protein formation and other physiological functions. The most common form
of potassium is potash (salt mined directly from underground and marine deposits).
Nitrogen is the most important nutrient. Of all the nutrients, nitrogen is the most
important nutrient for the plants, accounting for 61% of total consumption. Each nutrient has
its own set of benefits and is required for specific functions of the plants.
Figure 545: Fertilizer consumption by nutrient type Figure 546: Nutrients characteristics
Fertilizer Primary benefit Application

Potassium
Potassium, Improve crop quality Annual application F
16%
Phosphorus
not always done
Nitrogen Increase crop size, Most Annual application

important and commonly
critical
lacking nutrient
Phosphorus
23% Nitrogen
61% Source: Deutsche Bank, Yara
Source: IFA statistic seasons 2009/10, Yara Source: Deutsche Bank
The fertilizer sector is expected to achieve nearly $80bn of sales in 2011, almost twice as
much as the global agrochemicals market. Among the key listed players in the fertilizer
market are Yara, Potash Corp (PCS), Mosaic (IMC & Cargill), Agrium, Israel Chemicals (ICL),
CF industries (acquired Terra Industries), and K+S (Kali und Salz). Other fertilizer companies
include Sinochem (China), IFFCO (India), Eurochem (Russia), Phosagro (Russia), SAFCO
(Saudi Arabia), Egyptian Fertilizer Company (EFC) and Arab Fertilizer and Chemicals Company
(AFCCO) (Egypt), Uralkali and TogliattiAzot (Russia), Cherkassy (Ukraine) and Koch (US).
Figure 547: The leading producers of fertilisers by revenues 2010 ($m)
25
20
15
10
0
Potash MosaicBelaruskali OCP Yara CF Agrium Israel Silvinit Uralkali
Corp Industries Chemicals
KCI Phosphoric Acid Ammonia
Source: Company Reports, Potash Corp

Overall fertilizer growth prospects and industry trends

Demand for fertilizers relies significantly on the near-term demand for crops and
ultimately, on a long-term basis, reflects population growth and the development of
other uses (e.g. as biofuels). With limited expected increases in available global
farmland, we expect the use of fertilizers to remain a vital factor in improving crop yields.
Global farm policy will also remain a key driver of fertilizer demand.
The fertilizer industry continues to be relatively fragmented. However, over the past
years there have been a degree of consolidation and a great deal of improved focus
(with a number of spin-offs onto the market and privatization). Significant moves in the
market in recent years include the acquisition of Terra by CF, the sale of DSM agro to
Orascom, the merger of Uralkali/Silvinit, the acquisitions of GrowHow and Sasferko by
Yara, the acquisition of Potash One by K+S. In addition, BASF recently announced its
intention to sell its nitrogen fertilizer business.
The potash market is likely to be the most stable of the three nutrients given the more
concentrated ownership structure of the industry. In addition, the fastest growing
countries in Asia (China/India) lack their own production sources and will require imports
to satisfy growing domestic needs. The nitrogen industry is particularly susceptible to
boom and bust periods given the relatively modest barriers to entry.
Figure 548: Market structure of three key fertilizers

Potash (KCI) Phosphate (P2O5) Nitrogen(NH3)
Potash Corp % of World 20% #1 in World 5% # 3 in World 2% #3 in World

Capacity*
# of Production Countries 12 ~40 ~60
Raw Material Cost Volatility Low Moderate-High Low-High
% Government Control 20% 50% 51%
Time for Greenfield (including Minimum 7 Years 3-4 years 3 years
ramp-up)
Cost for Greenfield (excluding CDN $ 2.8 billion** US $1.6 billion*** US $1.4 billion****
infrastructure)
2 million tonnes KCI 1 million tonnes P2O5 1 million tonnes NH3
Cost for Greenfield***** CDN $3.5-5.0 billion US $2.0-2.3 billion US $1.5-1.7 billion
(Including Infrastructure)
2 million tonnes KCI 1 million tonnes P2O5 1 million tonnes NH3
Source: Deutsche Bank, Fertecon, British Sulphur, AMEC, PotashCorp., *Based on nameplate capacity which may exceed operational capability (estimated annual
achievable production level), ** Estimated costs for conventional Greenfield mine in Saskatchewan, ***Phosphate rock mine, sulfuric acid plant, phosphoric acid plant
and DAP/MAP granulation plant, ****Ammonia/urea complex, ***** Including infrastructure outside plant gate (rail, road networks, utility systems, port facilities, etc.)
and, if applicable, cost of deposits

Nitrogen
Figure 549: Nitrogen at a glance
Growth rate relative to the sector Below the chemical and fertilizer sectors on average
Supply/Demand Tight short-term due to high crop prices, delay in new capacity and high Chinese
export tariffs but likely to weaken beyond 2011 due to new capacity
Watch out for ... Significant Middle Eastern nitrogen capacity in 2012, high European natural gas
prices which could squeeze European nitrogen producers margins, further
consolidation, especially in Western Europe and US
The different types of nitrogen-based fertilizers can be classified into three main categories:
basic nitrogen-based fertilizers, multi-nutrient products and specialty fertilizers.
1) The principal nitrogen-based fertilizer products are:
Ammonia: used as a fertilizer and a raw material for other nitrogen products, including
intermediate products for industrial applications and finished fertilizer products.
Ammonia, a gaseous material contains 82% nitrogen and is injected into the soil as a
gas. Anhydrous ammonia (82% N) can be injected directly into the soil. The direct
application of ammonia requires a considerable investment by farmers in pressurized
storage tanks and injection machinery.
Urea: is a combination of ammonia and carbon dioxide (CO2) and is normally produced
as a solid product (containing 46% nitrogen). Urea can be combined with ammonium
nitrate solution to make liquid nitrogen fertilizer (UAN).
Ammonium nitrate (AN): produced by reacting nitric acid, an intermediate chemical

feedstock produced from ammonia, with ammonia to form a concentrated, watery
solution that is subsequently solidified in a prilling or granulation process. Ammonium
nitrate is a solid fertilizer (containing approximately 34% nitrogen) typically applied in
solid form. Ammonium nitrate is water soluble and used in various fertilizer solutions.
Calcium ammonium nitrate (CAN): a mixture of AN and calcium or magnesium

carbonate (containing 25- 28% nitrogen), produced by mixing calcium and/or magnesium
carbonate into an ammonium nitrate solution before the solidification process. The lime
content of CAN also helps to neutralize soil acidity.
Nitrogen solutions (mainly UAN): water solutions of selected nitrogen chemicals

(ammonia, ammonium nitrate and sometimes urea and other soluble compounds of
nitrogen) that are blended, rather than being the products of chemical reaction. Although
nitrogen solutions tend to be somewhat more expensive per N unit than other forms of
nitrogen fertilizer, they have the advantage that they can be applied via irrigation at the
exact time during the growing cycle that the application will have maximum impact. They
can also incorporate pesticides. The most common form UAN contains 28% to 32% N,
and is used where distribution and application techniques suit liquid fertilizer use.
Ammonium sulphate (AS) has a relatively low N content (21%) and contains sulphur
(24%). It is used where the lack of sulphur in the soil is a limiting factor in plant growth.
2) Multi-Nutrient products (‘NPs’,’NPKs’ etc.)

Multi-nutrient products refer to fertilizers that contain more than one primary nutrient thereby
enabling proper plant nutrition. The main types of multi-nutrient fertilizers include the
following:
Complex fertilizers: Consists of fertilizers containing at least two of the primary

nutrients, obtained by chemical reaction. The granules that result contain a declared ratio
of nutrients. The examples for this type of product include MAP, DAP and
nitrophosphate products.

Compound fertilizers: Refers to fertilizers containing at least two of the primary

nutrients, obtained by chemical reaction, blending or a combination of both. The granules
produced may contain different nutrients in varying ratios.
Blended fertilizers or bulk blends: These are obtained by the dry mixing of several
materials and do not involve any chemical reaction. They involve the mixing of granules
of consistent size, weight and surface treatment to avoid segregation, which is
undesirable because it reduces the agronomic efficiency of the product.
Complex fertilizers are more efficient in achieving balanced nutrition as they contain a
declared grade of primary nutrient in each granule and allow an even application owing to
their stable granule quality and consistent granule size. While these are more expensive
products, their contribution to greater crop yield and quality (mainly in case of cash crops)
more than offset the cost and offers higher margins than blends.
3) Specialty Fertilizers
Specialty fertilizer products (such as calcium nitrate and potassium nitrate) are beneficial for
cash crops. The most advanced applications integrate fertilizer application and drip irrigation
and adjust input (i.e., the amounts and mix of major and minor nutrients, and trace elements)
to optimise plant performance continuously. There has been a growing demand
(approximately 5% per year over the last several years) for speciality fertilizers due to better
margins from cash crops as compared to food crops. Their use increases the grower’s
return, helps meet the market demand for quality crops, and enables higher margins than
those normally achieved with high-volume fertilizers. The most common types of specialty
fertilizers are:
Calcium nitrate (CN): produced by dissolving a calcium salt such as limestone or the
calcium phosphate of phosphate rock in nitric acid. In the latter case, it is a co-product
with nitrophosphate products. CN is used to remedy plant deficiencies in calcium and
ameliorate soil acidification. It contains 15.5% nitrogen in nitrate form and 19% water-
soluble calcium. The product is water soluble and particularly suited for water-born
fertilizer application systems.
Potassium nitrate (PN): produced by reacting sodium nitrate with potassium chloride.
Potassium nitrate is used as a potassium and nitrogen fertilizer. Potassium nitrate
contains 13.5% nitrogen and 45% water-soluble potassium as K2O. The water suitability
makes it particularly suited for liquid-based applications. Because of their chemical
similarity, AN, CAN, CN and PN are often collectively referred to as “nitrates.”
Nitrogen fertilizer production process
Ammonia is produced through Haber-Bosch process that involves combining nitrogen

(available in the air) with hydrogen in natural gas, under high temperature and pressure
and in the presence of catalysts. Ammonia forms the basis for production of nitrogen
fertilizers such as urea, nitrates and NPK.
Urea: Carbon-di-oxide from ammonia process is reacted with ammonia at high pressure
and temperature to form a urea solution.
Nitric acid: Ammonia in the presence of air is passed over a platinum catalyst at high
temperature to produce nitrous oxide. The nitrous oxide is reacted with oxygen to form
nitrogen dioxide, which is then cooled and absorbed in water to form nitric acid.
Ammonium Nitrate: Nitric acid is neutralized with ammonia to form ammonium nitrate
solution
NPK fertilizers are produced through integrated "Nitrophosphate" process which

produces compound fertilizers containing ammonium nitrate, phosphate and potassium
salts. The integrated process starts with the dissolution of the rock phosphate in nitric
acid.

Phosphorus is produced from phosphate rock by digesting the latter with a strong acid.
It is then combined with ammonia to form Di-ammonium phosphate (DAP) or Mono-
ammonium phosphate (MAP) through a process called ammonization.
Figure 550: Nitrogen fertilizer production process
Natural Gas
Ammonia plant
Air CO2
NH3 Urea
Air Nitric acid plant
HNO3 Ammonium nitrate
Rock Nitrophosphate plant

Calcium nitrate
Salts of K, Mg, S
NPK Fertilizers
Rock Phosphoric acid plant
H2PO4
H2SO4 DAP/MAP
Rock Sulphuric acid plant

Triple Super Phosphate
Rock
Source: Yara, Deutsche Bank
Figure 551: Nitrogen fertilizers production factors

To produce 1 short ton of: Requires
Ammonia 32.5 MMBtu natural gas

Urea 24.0 MMBtu natural gas
Ammonium Nitrate 17.2 MMBtu natural gas
UAN Solution (32% N) 13.7 MMBtu natural gas
Urea Solution 0.58 tons ammonia 0.78 tons CO2
Urea Prills (46% N) 1.01 tons urea solution
Nitric Acid (22% N) 0.29 tons ammonia
Ammonium Nitrate Solution 0.80 tons nitric acid 0.22 tons ammonia
Ammonium Nitrate Prills 1.01 tons ammonium nitrate solution
UAN Solution (32% N) 0.45 tons ammonium nitrate solution 0.35 tons urea solution
Source: Deutsche Bank, Potash Corp
Nitrate is the most commonly used fertilizer in Europe while urea is most important in
warm regions such as India and China. Urea first needs to be transformed to ammonium
and then nitrate while ammonium and nitrate are readily available to plants. The
transformation process is slow and difficult to predict with resulting nitrogen and efficiency
losses. On the other hand, nitrates are easily absorbed by the plants with minimum losses.
Hence, nitrates are the most suitable fertilizer for European conditions. Field trials have
shown that higher nitrate content in the fertilizer results in higher yield especially in arable
crops and high value cash crops such as fruits and vegetables.

Figure 552: Nitrogen fertilizer usage globally Figure 553: The more nitrate, the higher the yield
Other
9.0
Ammonia 11%
4%
Grain yield (t/ha)

8.8
DAP/MAP
6%
8.6
NPK
9% Urea 8.4
57%
AN/CAN
8% 8.2
UAN Urea UAN CAN CN
5%
Source: IFA 2009/10 (nutrient total) and 2008 (product split), Yara Source: Levington Agriculture, UK (1999) 15 trails from 1994-1998 on winter wheat in UK on a nitrogen
application of 160kg/ha
Figure 554: Nitrogen consumption in EU 25 Figure 555: Nitrogen consumption in the US
Urea NPK Other

Nitrates
15% 13% 11%
(AN/CAN)
4%
Nitrates
Other (AN/CAN) Urea
46% 21% Ammonia
20%
26%
NPK
UAN
19%
25%
Source: Yara Source: Yara
Figure 556: Nitrogen consumption in China Figure 557: Nitrogen consumption in India
ABC NPK
26% 6% Other
6% Other
Nitrates 15%
(AN/CAN)
1% NPK
3%
Urea
Urea 82%
61%
Source: Yara Source: Yara
We expect nitrogen demand to grow by 2.5% growth p.a. (in volume)

Nitrogen global demand CAGR over the past 30 years has been at 2.6%. Going forward, we
forecast global nitrogen demand to grow at a similar rate, around 2.5% p.a. The fastest
growth is anticipated in Asia and Latin America, with North America and Europe forecast to
stay approximately stable. Cereals (wheat, rice etc) and corn are particularly nitrogen
intensive (Figure 558) so nitrogen demand will be positively influenced by high prices/acreage
for these crops. China and the US are the largest nitrogen fertilizer markets in the world.

Figure 558: Nitrogen consumption by crop, 2010E Figure 559: Global nitrogen use by country, 2010E
Wheat RoW
Other 17% 18%
coarse
grains Other
5% crops
Brazil
18%
Other 4% China
oilseeds Corn
Germany 45%
5% 17%
5%
France
Fruits & 6%
Vegs Rice
15% Sugar cotton 16% US
crops 4% 22%
3%
Source: IFA, Deutsche Bank Source: International Fertilizer Industry Association
Nitrogen typically displays a more stable demand profile compared to other nutrients
This is due to a shorter ‘’life expectancy’’ as nitrogen is a volatile nutrient which is not
retained in the soil beyond a few months of application. In addition, the yield response to
nitrogen is fast and direct (before the optimum point) unlike potash and phosphate However,
yield benefits do diminish when nitrogen application has passed the optimum point. These
factors result in nitrogen being applied every year at stable application rates.
Figure 560: Steep initial response of US corn yields to Figure 561: Yield benefits diminish at higher levels of N
N*
180
160
140
120
Bushels/acre
100
80
60
40
20
0
0 50 100 150 200 250
lbs/acre of nitrogen applied
US Corn Yields
Source: Iowa State University 2006. * based on 5-year averages of yield trials, 2006 Source: International Potash Institute
Within nitrogen, urea and specialty fertilizers should grow faster

As shown on Figure 562, urea is the largest finished nitrogen fertilizer product (57% of
total) and is expected to grow at a 3-3.5% CAGR (above the nitrogen average). Over the
past 10 years, urea growth has significantly exceeded the growth over other types of
nitrogen-based fertilizers due to its higher N content per unit (which makes it lighter and
cheaper to transport), the fact that it is more widely available/traded and it is safer to
store and handle compared to ammonium nitrate (AN). We expect this to continue.
Specialty fertilizers or higher-value cash crop segments such as calcium nitrate and
higher-end complex NPKs are growing at a 5% CAGR rate due to the better margins that
tend to be achieved by growers of cash crops relative to those achievable with food
crops. The contribution to quality and nutritional content is equally important to yield.
Cash crops is a fast growing segment is China.

Figure 562: Nitrogen fertilizer consumption by type of product (1000 tonnes nutrients)
50,000
45,000
40,000
35,000
30,000
25,000
20,000
15,000
10,000
5,000
-
1994/95
1995/96
1996/97
1997/98
1998/99
1999/00
2000/01
2001/02
2002/03
2003/04
2004/05
Urea Com pounds (NPK…)
Nitrates (AN, CAN) Other straight N
Nitrogen solutions Am m onia direct applic.
Am m onium sulphate
Source: IFA, Deutsche Bank
Urea (most widely used and traded nitrogen fertilizer) is the key determinant for other
nitrogen fertilizer prices. International urea prices are influenced by the following key
factors:
The market supply/demand balance; i.e. what price the market will bear at any
particular time. When the international market is strong, the supply/demand balance
rather than the level of costs is the primary influence on prices.
The cost profiles of major export suppliers; i.e. determining the level of prices at
which individual exporters will stop selling in the international market. This is important
when the market is weak. Ukranian suppliers and increasingly Chinese suppliers are the
major source of marginal export supply.
The cost profiles of domestic suppliers in free markets; i.e. determining the level of
import prices at which domestic suppliers will stop producing. This is important when
the market is weak. North American producers are the major source of domestic supply
which in the past have been vulnerable to displacement by low priced imports.
The largest urea producing countries are also the largest consuming ones, namely
China and India. While China is self sufficient in line with the government’s policy, we note
India is the second largest importer of urea in the world (see Figure 567). The urea market is
very fragmented with the top 7 players accounting for less than 15% of global capacities.
Figure 563: 11 largest urea producers, mt, 2011E Figure 564: 10 largest urea consumers, mt, 2011E
60 60
50 50
40 40
30 30
20
20
10
10
0
0
US
China
India
Indonesia
Pakistan
Bangladesh
Canada
Iran
Germany
Brazil
China
India
Russia
Pakistan
Iran
Indonesia
Arabia
US
Canada
Egypt
Saudi
Source: Fertecon Source: Fertecon

Figure 565: Top urea producers (by company) m tonnes urea (2010)
5.0
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
Yara
NFL
Qafco
Pusri
Potash
RCF
IFFCO
industries
Kaltim
Agrium
Corp
CF
Source: Fertecon, Yara, Company Reports. Note: March ending 2010 data for NFL, RCF and IFFCO, 2009 data for Kaltim and Pusri
The main urea exporters are gas rich countries/regions with small domestic markets,
with the exception of China. Between 2005 and 2010, new urea capacity in China has
increased by 55% (due to the government’s desire to achieve self sufficiency) which has
caused a significant oversupply in the domestic market. Due to the size of its urea market,
China is seen as a significant risk to the global urea balance as small deviations in the
domestic balance can create large waves in the global market, when the domestic surplus is
exported or the deficit is made up by imports. However, most of this surplus has and is
expected to stay within China due to prohibitive export tariffs. During the period of strong
domestic demand this export tax generally increases. For 2011 the window for lower export
taxes have been reduced from 6 to 4 months (7% urea export tax from 1st July 2011 to 31st
October 2011 and 110% export tax for the remaining part of the year) in light of the urea
production curtailments as a part of Chinese government move to improve energy efficiency.
North America, India, LatAm and South East Asia are the main importing regions.
Figure 566: Urea: 10 largest exporters, mt, 2011E Figure 567: 10 largest importers, mt, 2011E
6 7
5 6
4 5
4
3
3
2 2
1 1
0 0
Mexico
Venezuela
Brazil
Egypt
Turkey
China
Russia
Arabia
Qatar
Ukraine
Iran
India
Canada
Thailand
Bangladesh
Australia
France
US
Oman
Vietnam
Saudi
Source: Fertecon Source: Fertecon

Figure 568: Short-term urea balance impacted by Figure 569: Main urea flows, 2009
Chinese export taxes
200% 1600
180% 1400
160% 1200
140%
120% 1000
100% 800
80% 600
60% 400
40%
20% 200
0% 0
May
May
May
May
May
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Sept
Sept
Sept
Sept
Sept
Jan-11E
Monthly urea exports Chinese export duty
Source: Deutsche Bank, Yara, Fertecon Source: Yara
Urea supply/demand ex China should weaken from 2012

2012 is likely to be a weak year as new supply starts impacting the market. Over the next five
years (2011-15E) Fertecon forecasts global urea capacity ex China to expand by 25% (4.6%
p.a. on average) with African & Middle Eastern investments representing 51% of the planned
investments, the rest being spread over Asia ex China (27%) and FSU (11%). During the
period, our forecast urea demand growth of 3-3.5%% p.a. should not be sufficient to absorb
new capacity which should push global effective operating rates (ex China) below 90% in
2012-2015E.
The long-term visibility on urea additions (4-5 years lead time for a typical urea
investment) means that the risk of supply exceeding our forecasts is low.
Higher capital & gas costs reducing the profitability of new projects. Rising capital and
gas costs in historically low cost region are reducing the profitability of current projects which
could continue causing delays and cancellations as has been seen recently:
Higher capital costs…: As there are only 3 main suppliers of infrastructure (Kellog
Braun Rook – KBR – is the largest one, German company Uhde and Italian company
Snamprogette) serving many more industries that just ammonia/urea and a highly
significant increase in the number of projects, investment costs and lead times have
been increasing. The investment cost for a world-scale greenfield 1m tonnes integrated
ammonia/urea plant has doubled recently from below US$1bn to US$1.5bn.
… and gas costs: Middle Eastern ammonia/urea production is increasingly competing
with more economically attractive gas supply projects. With higher international oil & gas
prices, growing domestic demand and the desire for greater diversification, gas
producers are looking more carefully at the comparative economics of gas monetisation
alternatives such as LNG, local utilities, gas-to-liquid schemes some of which being more
economically attractive projects on gas supply, in particular LNG (though the LNG upfront
investment cost is significantly higher than for ammonia/urea).
Increasing oil & gas prices in historically low-cost regions - further capacity closures or
project cancellations cannot be ruled out. Surging natural gas prices in the US and Western
Europe have resulted in the closure of a significant portion of urea capacity in these regions in
the early 2000s. The same could happen to China and Eastern Europe which have become
the highest cost producers globally.
In China, there is a significant number of relatively inefficient and expensive (sub-scale)

producers operating in the country (over 70% operate out of coal). With rising costs
pressure (steel, labour, and more importantly feedstock such as coal) we cannot rule out
capacity closures or projects being written-off.
The same is true for some Eastern European players who produce urea out of oil-linked
contracts and could therefore be forced to close non-economic urea capacity.

Technical start-up issues and problems with utility supply cause delays: Due to new
technologies involved in the construction of new plants and the speed at which they are
being built as well as issues with local utilities supply, pretty much every new capacity that
has come on stream has been impacted by significant delays notably in the Middle East (up
to several years). Ramp-up times have often been very slow, taking sometimes up to 18
months. Although the incidence of technical start-up issues should diminish as the
technology becomes more established, we note issues with local utilities supply continue to
delay capacity (e.g. the Iran plant expected to come on stream in April/May 2010). In addition,
the speed of construction and number of projects are likely to continue causing disruption.
Nitrogen fertilizer prices are seasonal and tend to increase the most towards Q1 as
these have to be applied to arable crops mainly during the period of active crop growth,
which is usually in the spring (other nutrient types do not necessarily have to be applied
during such a short period although a peak usually occurs in spring as these nutrients are
usually applied in combination with nitrogen). When demand is strong, urea prices can peak
as early as Q4 due to inventory build-up in anticipation of the season.
Other nitrogen fertilizer prices should move in line with urea prices. Most other nitrogen
fertilizer prices are linked to urea prices. In particular, as shown in Figure 570, usually with a 4
to 6 months lag on average, we note there is a strong correlation between urea prices and
European nitrate prices.
Figure 570: Most other nitrogen fertilizer prices are Figure 571: Strong correlation between European nitrate
linked to urea prices prices and global urea prices (US$/tonne of N)
1000
2500
800
2000
600
1500
400 1000
200 500
0 0
Mar-95
Mar-96
Mar-97
Mar-98
Mar-99
Mar-00
Mar-01
Mar-02
Mar-03
Mar-04
Mar-05
Mar-06
Mar-07
Mar-08
Mar-09
Mar-10
Mar-11
Jul-09
Jul-10
Jan-03
Jul-03
Jul-04
Jan-07
Jul-07
Jan-08
Jul-08
Jan-09
Jan-10
Jan-11
jan-04
jan-05
jul-05
jan-06
jul-06
Urea Yuzhny USD/t

CAN Germany USD/t
15-15-15 France USD/t (NPK) Urea prilled bulk fob Black Sea CAN bulk cif Germany
AN Black Sea fob USD/t
Source :Yara, FMB, Deutsche Bank Source: Yara, FMB, Deutsche Bank
Long-term, the nitrate premium (above urea price) tends to be stable. European farmers
are willing to pay only a certain premium for the preferred nitrate products than for urea, and
therefore European nitrate prices reflect a relatively stable margin (in US$ per tonne of
nitrogen) above the urea price.
Figure 572: CAN margin vs. urea (US$/tonne of N) Figure 573: Seasonality of the nitrate premium (based
on CAN prices)
36%
70%
60%
50% 32%
40%
30%
20% 28%
10%
0%
-10%
24%
Mar-95
Nov-97
Mar-99
Nov-01
Mar-03
Nov-05
Mar-07
Nov-09
Mar-11
Jul-96
Jul-00
Jul-04
Jul-08
20%
CAN over urea price premium
May
Jan
Feb
Jun
Aug
Sep
Nov
Mar
Apr
Dec
Jul
Oct
CAN over urea price premium average since 1995

Source :Yara, Deutsche Bank Source: Yara, Deutsche Bank

Potash
Figure 574: Potash at a glance
Growth rate relative to the sector Slightly higher than the average of fertilizers but below chemicals
Supply/Demand Tight short-term due to high crop prices and a catch up in demand after 1-2
years of reduced potash application but likely to weaken beyond 2011 due to
new capacity and normalization of demand
Watch out for ... New brownfield/greenfield capacity in 2012+, consolidation, new entrants
Potash is a derivative of potassium which is an element that occurs naturally in seawater or in

a number of minerals, for example, silicate rock. Although the seventh most prevalent
element in the earth’s crust, only few countries currently mine potash given the limited
availability of economic deposits. Potash fertilizer is produced by beneficiating the crushed
ore and separating the potassium-containing salts from other ore constituents.
Potash is produced from ore deposits located deep underground, using either conventional
mining techniques, or the more energy and cost intensive solution mining process. Potash
can also be harvested from salt lakes or seas. Production costs depend on geological
conditions, ore depth and thickness, energy costs, K2O content, operational capacity and
degree of automation. Mine flooding risk a risk inherent to the industry as water is probably
rock salt’s biggest enemy (e.g. as happened to the Uralkali mine in 06).
Figure 575: Potash production process
Ore from Mine
Size Reduction Remove clay Flotation to separate

Potash from salt
Sizing Dewatering
& drying
Crystallization Compaction
Soluble or Industrial Granular Standard
Solid or Liquid Fertilizer Solid Fertilizer Solid Fertilizer
Industrial
Potash is mainly used in fruits and vegetables, corn and rice. Potash helps plants develop
strong root systems and retain water and also contributes to higher yield and greater
resistance to disease and insects. Potash also helps to improve the taste and nutritional value
of food. Fruits and vegetables are extremely nutrient intensive crops and consume significant
amounts of potash. Besides fruit and vegetables potash is also used in corn, rice, sugar crops
and soybean although in lesser quantities. There are significant variations in the usage of
potash across different crops with banana, sugarcane, tomatoes and palm oil having the
highest usage per hectare. Potash application/hectare also differs from one region to another
due to the variations in the soil condition e.g. soybean production requires more potash in
Brazil than US.

Figure 576: Potash consumption by crop Figure 577: Potash uptake for selected crops (kg/ha KCl)
All other Fruits &

crops Vegetables Soybeans
23% 22% Rice
Wheat
Oil Palm
5% Corn
Oil Palm
Wheat Tomatoes
6% Corn Sugar Cane
14%
Bananas
Soybeans
8% Sugar 0 500 1000 1500 2000 2500 3000
Crops Rice
9% 13%
Source: Deutsche Bank, IPNI Source: Deutsche Bank, IPNI
We forecast medium-term demand growth at 3% p.a. Potash consumption CAGR

between 2001 and 2011E has been at 3.2%. Going forward, we forecast a similar annual
growth rate of around 3% p.a. (2012 to 2015) mainly driven by emerging markets.
Potash demand more volatile than other nutrients. As shown on Figure 578, potash
fertilizer demand tends to be more volatile than nitrogen (especially in more difficult times)
due to the possibility for farmers to take potash ‘holidays’, i.e. skipping potash application
(or reducing the quantity applied) for one or more seasons, as the yield impact from not
applying potash is not immediate, at least for relatively potash rich soils. Indeed on many
crops, one can skip or lower potash application for 2 to 3 years (depending on the crop, the
quality of the soil and the weather) and not impact the yield. The year 2009 provides the best
illustration as yields increased to (near) record levels in many regions after 1 to 2 years of
sub-optimum potash application (see Figure 579). However, after successive years of sub-
optimum potash application, yields falls steeply (see Figure 580 & Figure 581) and it takes
even more years to replenish the soil with the appropriate potash content.
Figure 578: US fertilizer use: annual percentage change Figure 579: 2009 yields at (near) record levels despite a
20-30% fall in potash application
18 6 60000
15 5 50000
4 40000
Number of Years
12
3 30000
9 2 20000
6
1 10000
0 0
3
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
0
>10% 5 to 10% 0 to 5% -5 to 0% -10 to -5% <-10% Potash Deliveries ('000 tonnes KCl), Rhs
Fertilizer Use Potash Use Corn Yield (MT/HA)- Global, Lhs
Source: PotashCorp (AAPFCO/TFI) Source: British Sulphur, USDA
Figure 580: Effect of continued elimination of K use on Figure 581: Effect of continued elimination of fertilizer
soybean yield on sandy soil in Brazil use on rice yield in various Asian countries
Source: IPNI Source: IPNI

Structural need to increase potash fertilizers consumption in emerging markets. As

shown on Figure 582, yields in India, Brazil or China are over 50% lower than in the US, a far
more mature market. One way to boost yields is to apply a proper balance of fertilizers,
measured by the ratio of P & K to N. As shown on Figure 583, potash is under-applied in
China and India and there is significant room for improvement in potash consumption in
these regions. According to the IPNI, China, India and Brazil would need to increase their
potash application by 25mt overall in order to bring their NPK ratio to a recommended 4:2:1.
This represents 45% of 2010 average demand and 38% of potash capacity.
Figure 582: Room for improvement in corn yields Figure 583: Potash under-applied in China/India/Brazil
Bu/acre mt
100 China India Brazil
160
80
120 60
40
80
20
40 0
Current
Current
Current
Potential
Potential
Potential
0
India China Brazil US
Nitrogen Phos Acid Potash

Source: Deutsche Bank, PotashCorp (IFA, USDA, PotashCorp) Source: Deutsche Bank, PotashCorp (IPNI, Fertecon, PotashCorp)
We forecast potash capacity to increase by approx 5% p.a. between 2012 and 2015. This
capacity increase will consist largely of brownfield projects from existing potash players
(especially PotashCorp, accounting for 42% of planned capacity expansion) with only one
large greenfield mine, the Eurochem one (2.3mt) included in our 2011-14 capacity forecast.
Most of the new capacities should be concentrated in Canada and in Russia/Belarus.
The potash market should remain relatively balanced for the foreseeable future. We
forecast potash operating rates at 89% in 2011 due to strong demand after two seasons of
lower application and high crop prices as well as limited capacity additions. In 2012-15, we
forecast operating rates to average 85% due to an acceleration of new supply. This remains
consistent with a tight market. Based on historic observation, 80% capacity utilization is
considered as acceptable, 85% is good to very good and >90% can cause temporary stress.
Figure 584: Global Potash supply demand (million tons)
1994 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E
Capacity 55.55 55.4 55.4 55.4 57.1 59.8 60.9 62.3 63.5 65.8 65.8 67.3 70.8 73.5 78.4 81.4
- growth -1.5% -0.3% 0.0% 0.0% 3.1% 4.7% 1.8% 2.3% 1.9% 3.6% 0.0% 2.3% 5.2% 3.8% 6.7% 3.8%
Demand 40.1 43.9 45.5 49.1 54.2 54.4 50.7 58.7 54.5 31.0 55.0 60.0 61.2 63.3 65.6 67.9
- growth 10.6% 9.6% 3.6% 7.9% 10.4% 0.4% -6.8% 15.8% -7.2% -43.1% 77.4% 9.1% 2.0% 3.5% 3.5% 3.5%
Operating rate 72.1% 79.2% 82.1% 88.6% 94.9% 91.0% 83.3% 94.2% 85.8% 47.1% 83.6% 89.2% 86.4% 86.2% 83.6% 83.4%
Source: Deutsche Bank estimates, K+S, British Sulphur, Potash Corp
Figure 585: Global Potash capacity growth (%) Figure 586: Global Potash capacity vs. operating rates
7.0% 80 100%
6.0% 75
70 80%
5.0%
4.0% 65 60%
60
3.0% 40%
55
2.0% 50
1.0% 20%
45
0.0% 40 0%
2007
2008
2009
2010
2011E
2012E
2013E
2014E
2011E
2012E
2013E
2014E
1990
1991
1992
1993
1994
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Capacity (million tons) Operating rates
Source: Deutsche Bank estimates, K+S, British Sulphur Source: Deutsche Bank estimates, K+S, British Sulphur

Potash supply is controlled by seven large producers. Potash largest producers control
81% of global capacity and the two marketing organizations (comprising of five producers)
control 64% of the market. This makes it easier for the players to manage supply with a
significant market impact when necessary (as it has been the case in 2009 when approx 50%
of global capacity was taken out of the market). Whilst potentially new entrants (EuroChem,
BHP) could affect this degree of concentration, the long lead-times (5-7 years construction
lead-times) means that supply risk is very low in the 2010-2015 period.
Figure 587: The 6 largest potash producers control 83% Figure 588: 2 marketing potash organizations (Canpotex,
of global capacity (2011E) BPC and IPC) control c70% of global capacity (2011E)
Others
Arab 5% Potash
Potash Corp ROW
5% Potash Corp
17%
Agrium 3% Arab Potash
China 3% 17%
3% 8%
ICL
China ROW Canpotex Mosaic
Uralkali* 10%
8% 36% 32% 12%
16%
ICL K+S BPC* Agrium
10% 10% 32% 3%
Ukralkali*
K+S Belaruskali 16%
10% 16%
Mosaic Belaruskali
12% 16%
Source: British Sulphur, *Pro forma including Silvinit Source: British Sulphur, IFA, PotashCorp, *Pro forma including Silvinit
Supply risk limited. The rate of new potash capacity increase appears high however we
believe the risk to global potash prices is low given 1) the majority (42%) of the 2012-15E
supply addition will be brownfield expansions from PotashCorp which controls 1/3 of the
market through Canpotex and 2) the risk of delay due to technical problems and/or
cancellations as seen in the past cannot be ruled out.
Potash industry has high barriers to entry. Due to the lack of economically viable and
quality deposits, construction costs for a new greenfield mine are substantial (typically at
least $2bn for a new 2mt capacity excluding roads, rail lines, utilities, port facilities and other
infrastructure costs – 2mt usually being the minimum size for a new greenfield project – see
Figure 589). In addition, we note the pay-back period is high (it takes a minimum of 7 years to
generate positive free cashflow out of a new mine vs. 3-4 years for nitrogen and phosphate).
Figure 589: A typical greenfield potash mine (2mt) can cost $2.5-3.5bn
Potash greenfield economics Investment
Construction of 2MM m.t. conventional mine $2bn

Cost of potash deposits $0.0 - $0.5bn*
Cost of infrastructure (rail and railcars, road networks, utility systems, port facilities, etc.) $0.5 - $1.1bn
Total investment cost $2.5-$3.5bn
Investment cost per tonne $1.25-1.75
Source: Fertecon, K+S, Potash corp, Deutsche Bank estimates, * Although Silvinit acquired a potash mine license for $1bn in 2008, we believe this was as a peak of the
cycle and such prices could not be achieved today
Brownfield expansion is the preferred route. Of the 13.2mt of new capacity scheduled to
come on stream between 2011 and 2014, all but 2.6mt are brownfield expansions.
Brownfield projects tend to be far less expensive than greenfield projects although prices can
vary very significantly depending on the type of investment (see Figure 557). We estimate
brownfield capacity costs approx $500m for 1mt.

Figure 590: Estimated capital costs for brownfield

Type of investment Typical capacity (mt p.a.) Investment cost ($bn) Investment cost per tonne ($bn)
Debottlenecking 0.3-0.7 0.05-0.7 0.2-0.7
Expansion (no new shaft) 0.5-1.0 0.3-1.0 0.3
Expansion (new shaft) 1-2 0.8-1.8 0.8-0.9
Average 0.5
Source: Deutsche Bank estimates, Fertecon
We expect potash prices to remain above production cash costs. Potash prices are
currently over 3.5 times higher than the 2005 price level when operating rates were similar.
This is due to the significant market discipline with players’ willingness to sustain low
operating rates in order to support prices (as was seen in 2006 and 2009). We believe that
this market discipline has been enhanced as private ownership has eclipsed government
control (e.g. Canada) leading to a greater focus on return on capital and driving greater short-
term discipline in the face of demand fluctuations. Going forward, we expect long-term
potash prices to remain comfortably above operating cash costs (currently prices are 3-3.5x
higher than average cash costs) due to the players’ discipline and re-investment economics.
Potash producing countries are not the key consumers of potash. Potash production is
primarily controlled by former Soviet Union (mainly Russia and Belarus), Canada and Germany
due to the availability of potash ore in these regions. However, most of the potash
consumption is located outside these regions with China, US, Brazil and India as key
consumers of potash. So, in addition to supplying the local consumers, producers in FSU,
Canada and Germany also supply to Latin America and Asian countries. Since 80% of the
potash produced is exported, transportation cost is also as also a key influence on potash
prices.
Figure 591: Leading Potash producers (2011E) Figure 592: Leading potash consumers (2011E)
Others
Jordan 6% China
4% Others 19%
US
28%
3% Canada
Israel 37%
6% Malaysia
3% US
China
17%
6%
Russia
3%
Germany
7% Indonesia
3% India Brazil
FSU 12% 15%
31%
Source: Deutsche Bank, British Sulphur Source: Deutsche Bank, British Sulphur

Phosphate
Figure 593: Phosphate at a glance
Growth rate relative to the sector Below the chemical average
Supply/Demand Tight short-term due to high crop prices but likely to weaken beyond 2011 due
to new capacity
Watch out for ... Ma’aden project start-up in H2 2011
Phosphate is an important plant nutrient and plays a key role in photosynthesis and provides
improved root growth, increased yields, higher crop quality, earlier maturity of grains and
better water use efficiency. Commercial phosphate fertilisers are produced in a multi-step
process. Production of phosphate requires three key raw materials phosphate rock, sulphur
and ammonia. First, phosphate rock is reacted with sulphuric acid to create phosphoric acid.
Typically, a further reaction with ammonia leads to MAP (MonoammonIum Phosphate) or
DAP (Diammonium Phosphate). Alternatively, combining phosphoric acid with additional
phosphate rock creates TSP (Triple Super Phosphate). DAP is the most important
phosphate fertilizer. It has an N-P-K composition of 18-46-0. MAP is a solid fertilizer with a
typical N-P-K composition of 13-52-0. TSP is a solid fertilizer produced from phosphate rock
and phosphoric acid and has a typical N-P-K composition of 0-46-0.
Figure 594: Phosphate fertilizer process flow diagram
phosphate rock
sulphuric acid
phosphoric acid
am m onia
TSP DAP M AP
triple superphosphate diam m onium phosphate m onoam m onium phosphate
Source: Company data
Figure 595: Phosphate fertilizers production factors

To produce 1 short ton of: Requires
Sulfuric Acid (100% H2SO4) 0.33 tons sulfur
Phosphoric Acid (100% P2O5) 2.8 tons sulfuric acid,
3.5-4.0 tons phosphate rock
Diammonium Phosphate (46% P2O5) 1.175 tons of wet phosphoric acid(40% P2O5)
or 4.7 tons P2O5,
0.23 tons ammonia
or in raw material form:
1.65-1.90 tons phosphate rock,
0.44 tons sulfur,
0.23 tons ammonia
Monoammonium Phosphate (52% P2O5) in raw material form:
1.71-1.96 tons phosphate rock
0.53 tons sulfur
0.145 tons ammonia

Most of the phosphate rock is used for the production of fertilizers for use in agriculture
while a small amount for phosphate (15%) is also used for the non-fertilizer applications
mainly as feed grade phosphate in animal feed apart from some industrial applications.
Figure 596: Phosphoric acid (P2O2) uses Figure 597: Phosphate fertilizer use by crop
Other crops
Food & 15% Fruits &
Oil Palm
Industrial 1%
Vegetables
Feed 9% 17%
DAP Sugar crops
6% Wheat
35% 4%
16%
Cotton
Other
4%
fertilizer Rice
Other coarse 13%
19%
grains
5%
TSP Other oil
5% MAP seeds Soybean Corn
26% 5% 7% 13%
Source: Potash Corp Source: Deutsche Bank, IPNI, Mosaic
Rock reserves, production, and exports. Access to economically-recoverable

phosphate rock is the key bottleneck in phosphate production. Phosphate rock
availability worldwide is less limited than potash, but not as abundant as nitrogen.
Greenfield mine development is less costly than for potash, requiring approximately half
the capital and startup time. While known rock reserves are (47bn m.t.) enough for
hundreds of years, only 15 countries have significant (> 1/2 bn m.t.) economically-
recoverable quantities with China, Morocco and the US accounting for two-thirds of
world production. Approximately 30% of global phosphate producers have no rock
supply and rely on imports or domestic purchases. Morocco and Jordan dominate
phosphate rock exports with Morocco alone typically accounting for more than 40% of
exports.
Figure 598: Phosphate rock reserves by country, million Figure 599: Phosphate rock production by country,
tons (2008) million tons (2008)
25,000 80
70
20,000
60
15,000 50
40
10,000 30
5,000 20
10
- 0
US
China
Russia
Australia
Syria
Tunisia
Canada
Israel
Brazil
Senegal
RoW
Morocco
South
Jordan
Egypt
Togo
US
China
Russia
Tunisia
Syria
Australia
Canada
Israel
Senegal
Brazil
RoW
Jordan
South
Togo
Morocco
Egypt
Source:USGS Source: USGS
70% of phosphate fertilizer producers are vertically-integrated. 30% of global rock

production goes to non-integrated producers. Because non-integrated producers face higher
costs they are effectively the world’s marginal phosphate capacity. Rock consumption
statistics for non-integrated producers correlate with phosphate production volumes but
move more dramatically.

Figure 600: About 1/3 of phosphate rock production Figure 601: Key phosphate rock export companies (2008)
goes to non-integrated producers
Domestic ROW
sales 23%
12%
Phosagro,
Russia OCP,
Exports 5% Morocco
18% 45%
Ferphos,
Algeria
6%
Integrated JPMC,
Gecopharm
producers Jordan
, Syria
70% 11%
10%
Source: British Sulphur, Potash Corp Source: British Sulphur
Global trade in phosphoric acid and fertilizers. Downstream of phosphate rock, significant
amounts of phosphoric acid and fertilizers are traded annually. High-grade phosphate
deposits that are also close to sulphur and ammonia supplies and port facilities are not very
common. The two most important exporting regions for phosphates are Morocco and the
United States. On a global scale, the United States is the leader in DAP/MAP exports while
Morocco leads in phosphoric acids. As with rock, India dominates trading in phosphoric acid
importing 6.1mt of phosphate in 2010. A key feature of the health of the phosphate industry
is demand in China and India, which can represent two-thirds of US DAP exports. Given the
uncertain policy issues surrounding fertilizer subsidies, import quotas and so on, this can lead
to dramatic swings in producer fortunes.
Figure 602: Phosphoric acid exports by country (2011E) Figure 603: Phosphoric acid imports by country (2011E)
Others
China
6%
4% Others
Jordan 25%
5%
Senegal
7% Brazil
Morocco
3%
USA 47%
France India
9% 4% 58%
Turkey
South 4%
Africa
Pakistan
10% Tunisia
6%
12%
Source: British Sulphur Source: British Sulphur
Figure 604: Top 10 DAP+MAP exporters (000s mt., Figure 605: Top 10 DAP+MAP importers (000s mt.,
2011E) 2011E)
6.0 10.0
5.0 Top 10 total =21.9mt 8.0 Top 10 total =15.6mt
4.0 Rest of World=0.4mt Rest of World=6.6mt
6.0
3.0
4.0
2.0
2.0
1.0
0.0 0.0
Brazil
Turkey
Australia
India
Pakistan
Argentina
Canada
Thailand
China
Vietnam
Mexico
Morocco
Russia
China
Arabia
Tunisia
Lithuania
USA
Jordan
Australia
Saudi
Source: British Sulphur Source: British Sulphur

Phosphate demand should grow at 3% p.a. in 2011-15. By region through 2019 we expect
global phosphates demand growth to be led by Latam, driven by strong growth in Brazil
which currently imports roughly 1/3 of its phosphate needs.
Figure 606: We forecast global phosphates demand will Figure 607: Forecast increase in phosphate (P2O5)
increase at 2.8% annual rates through 2019E demand 2010-2019E by region
60 50 4.0
50 3.5
40 3.0
40 2.5
30
30 2.0
20 1.5
20
10 1.0
10 0.5
0 0 0.0
2007
2008
2009
2010
2011E
2012E
2013E
2014E
2015E
2016E
2017E
2018E
2019E
Middle
South
SE Asia
FSU
Europe
Africa
East
Central
America
America
America
Asia
Western
Central
Europe
Asia
East
South
North
Phosphate Demand (LHS)
DAP, product tons (RHS)
MAP, product tons (RHS)
Source: British Sulphur, IFA, Deutsche Bank Source: British Sulphur
India subsidies support strong demand (for now). Through the ups and downs of global
fertilizer prices/demand, consumption in India has remained high, and India’s share of global
phosphate imports has risen from 1/3 in 2008 to c37% in 2010. This resilience has been
largely driven by India’s government subsidy system, which pays manufacturers and
importers a subsidy to compensate them for losses plus a return on capital. Indian
government introduced the nutrient based subsidy (NBS) system in 2010 linking all
phosphate prices to the base price for DAP. The new system has decontrolled the phosphate
prices to the farmers and replaced the old maximum retail price system that was fixed by the
government. However government still watches the retail price so that the prices does not
increase more than 5% in any year. The current retail price of subsidized fertilizers at the farm
is currently at c$220 which is significantly below international phosphate prices of $620.
Small farmers in India represent just over 50% of total fertilizer consumption, and this
subsidy system is thought to strongly underpin their fertilizer demand as well as their total
crop output. However given the huge subsidy burden Indian government has no option but to
reduce the subsidies (although gradually as this is a politically sensitive issue) over time.
Figure 608: Cost of fertilizer subsidies in India (USD billions)
$30
$25
$20
$15
$10
$5
$-
00-01 01-02 02-03 03-04 04-05 05-06 06-07 07-08 08-09 09-10
Source: British Sulphur

DAP and MAP capacity growing 2.1% and 2.3% respectively worldwide. Over the 2011-
2015 period British Sulphur expects global DAP capacity will grow at a 2.1% annual rate led
by the Ma’aden project in Saudi Arabia which will add 2.9mt, or 6%, to global DAP supply
and 18% to the 16mt traded DAP market when it comes on-stream in Q2 2011 although
commercial production is expected to began in Q3 11 (reaching full capacity in 2012). We
expect additional significant DAP expansions over this timeframe will occur in China (5% of
2010 capacity) and Africa (Egypt and Morocco, adding 3%). Meanwhile, British Sulphur
expects MAP capacity will grow at 2.3% CAGR during this period, led by expansions in
Morocco and Saudi Arabia. This may look modest following a 10% increase in global MAP
capacity in 2010 driven mainly by the Chinese expansions. With DAP prices exceeding the
roughly $350pt and $400pt required to justify brownfield and greenfield integrated DAP plant
construction, respectively, we expect the majority of planned expansions will proceed.
Figure 609: MAP+DAP capacity global ranking MMT p.a.

12
10
PotashCorp
CF Industries
Mosaic
OCP
Phosagro
GCT
EuroChem
Agrium
MAP+DAP capacity global ranking MMT p.a.
Source: Eurochem
Chinese exports limited by export tariffs. Historically, China has been the world’s biggest
importer of phosphate fertilizers. Due to the government’s policy of becoming self-sufficient
(as for urea), phosphate capacities have increased substantially, from virtually nothing in 1993
to 16.6m tones in 2010 (34% of global capacity). Self-sufficiency was achieved in 2006 and
China became a major net phosphate fertilizer exporter in 2007 as supply grew faster than
demand. However, similarly to urea, in order to keep its phosphate resources for the local
agriculture and keep local prices as low as possible, the Chinese government has increased
export duties on phosphate fertilizers. Export tariffs on MAP/DAP currently stand at 110%
during the peak of the season (January to May and October-December) and 7% from June to
September. TSP tariffs are at 7% through the year. For 2011 total DAP and MAP exports are
expected to decline 9% year-on-year due to shortage of phosphate rock and reduced
operating rates which is likely to restrict supply to the domestic markets.
Figure 610: Chinese phosphoric acid capacity (m tones) Figure 611: Chinese DAP and MAP trade (m tones)
25 5.0
20 4.0
3.0
15
2.0
10
1.0
5 0.0
0 -1.0
2007
2008
2009
2010
2011E
2012E
2013E
2014E
2015E
2016E
2017E
2018E
2019E
-2.0
2007 2008 2009 2010 2011E 2012E 2013E
DAP Exports MAP Exports DAP Imports
Source: British Sulphur Source: Yara, IFA, British Sulphur

Integrated producers have a cost advantage. Phosphate fertilizer producers that are not
integrated to rock and/or sulfur face significantly higher costs. With 30% of global rock output
going to non-integrated producers, these producers represent the marginal capacity in
phosphate, and the input costs they face are a key driver of DAP pricing. Note that the
overwhelming majority of new production capacity in phosphate fertilizer is coming from
producers who are integrated into rock.
Figure 612: DAP producer cash cost profile
700
600
500
400
300
200
100
0
Integrated Non-Integrated Scenario # 1 Non-Integrated Scenario # 2 Non-Integrated Scenario # 3
Rock = $75/mt Rock = $150/mt Rock = $225/mt
Rock Sulfur Ammonia Other
Source: Deutsche Bank, Potash Corp. Other costs assume a large plant operating at capacity and freight to port

Industrial Gases
Figure 613: Industrial gases at a glance
Growth rate 400-500 bps above Industrial production

Supply/Demand Tightening on less speculative capacity
Margin prospects Secular improvement
Watch out for ... Capex trends, mega energy opportunities
Industry background
A disciplined and consolidated industry. The industrial gases industry has undergone
significant structural change since the investment excesses of the 1990s. Consolidation and
management change at the top six companies have underpinned improved investment
discipline with companies increasingly focusing on either products or regions to drive
improved returns. Despite lower over-the-cycle capex, the rate of annual growth for the tier
one global players accelerated to 8% through 2006-2008 supported by new less capital
intensive, higher growth gas applications emerge (such as hydrogen, healthcare and
consumer applications) alongside on-going strong growth in emerging markets (Eastern
Europe, Asia and increasingly Middle East). Through the financial crisis the higher focus on
long-term take-or-pay contracts (on-sites) alongside the growing shift towards less GDP
dependent end-users culminated in a sales decline of only 5-8% in 2009 for the global
majors. Helped by an easy base effect, growth in 2010 for the industry was around 12%.
Industry growth has accelerated through the past five years. Despite lower over-the-
cycle industry capex through the past few years, we believe the rate of growth for the global
tier one players has accelerated to 7-8% per annum (excluding the impact of the financial
crisis). 2010 was a year of c.12% growth (helped by the easy 2009 base) which implies
global industry sales of approximately $70bn. While this is partly driven by improvement in
macro demand on a low 2009 base, we believe this is also supported by new less capital
intensive, higher growth gas applications (such as hydrogen, healthcare and consumer
applications) alongside strong growth from emerging markets (Eastern Europe, Asia –
particularly China and Middle East) driven not only by local GDP but also the on-going
migration of customer capacity to these regions.
Figure 614: Sales by market share (2011E) Figure 615: Industry sales by region (2011E)
Other
Others 5%
Air Liquide
20% 24%
Asia Am ericas
26% 36%
Airgas
6%
TNS
4%
Air Linde
Products 22%
11% Praxair Europe
13% 33%
Source: Deutsche Bank estimates, company data, Spiritus Consulting. TNS = Taiyo Nippon Sanso. Data Source: Spiritus Consulting, Deutsche Bank estimates, company data
includes share of sales from associate participations and JVs
The industrial gases market is a ’local’ global market. The industrial gases market is a
global market – an issue that has driven consolidation over the past few years – but it is
primarily managed on a local basis because of high distribution costs involved in the industry.
Most industrial gases are not traded across borders and oceans like traditional chemicals.

Most industrial gas players are not yet truly global with exposure to key regions still missing –
such as Air Products (Europe, part of Latin America and Asia), Praxair (parts of Asia, Europe),
Airgas (Europe, Asia, Latin America), Air Liquide (parts of Asia, Latin America) and Linde
(limited exposure to North America, particularly southern US petrochemical region)
We note the on-going trend of buyers towards globalised preferred supplier relationships in a
bid to strengthen their client relationships and improve efficiencies. While this is not a pre-
requisite for strong financial performance at the moment, global relationships between
customers and industrial gas companies are becoming more prevalent.
Figure 616: 2011E market share data

Company Europe Germany E. Europe France UK US Lat Am Asia (ex Japan)
Air Liquide 35 38 7 71 23 21 16 16
Air Products 11 4 11 6 18 24 7 12
Linde 35 41 29 11 55 9 22 20
Praxair 9 10 3 3 0 26 41 10
Other 10 7 50 8 4 20 14 42
Total 100 100 100 100 100 100 100 100
Source: Deutsche Bank estimates, company data, Spiritus Consulting. Eastern Europe includes Russia
Global players still making the best margins in regions of highest market share (often
‘home’ regions). The local nature of businesses and the increasing role of IT and logistics
mean that critical mass in a small region is key to maximising profitability. We note that most
of the global players are strongest (and most profitable) in their home regions, or where they
have the greatest market share – Linde in Germany/UK/Scandinavia, Praxair in Latam and Air
Liquide in France. We estimate that companies can generate 200-500bps higher margins in
the areas with strongest local dominance. With critical regional mass as a key determinant of
profitability, the global gas players are constantly rationalising activities and exiting countries
where they do not have the required critical mass.
The industrial gases market is highly concentrated. The wave of consolidation in the
industry in the late 1990s and early 2000s further concentrated the industry and the industry’s
highly consolidated nature has been a key factor reducing the possibilities for consolidation.
The top five players now account for 76% of the global market compared to 51% in 1980 –
Figure 617 below shows the steady consolidation of the industry over the past 30 years. This
“global” share analysis only tells half the story as the industry is a local industry so looking at
the local market share positions the shares are even higher with most industrial basins in the
world covered by just two gas players. In our view, further global mergers are unlikely for
anti-trust reasons but piecemeal disposal of non-core businesses and local scale
consolidation is still possible, but on a much smaller scale than in the past decade.
Figure 617: History of market share in gas industry

% market share by value 1980 1985 1990 2000 2003 2005 2006 2007 2008 2011E
Air Liquide 15% 14% 19% 19% 20% 22% 22% 22% 23% 24%
BOC 10% 16% 17% 14% 13% 13% 13% 0% 0% 0%
Praxair/Union Carbide 13% 14% 11% 14% 14% 13% 14% 15% 14% 13%
Linde 3% 3% 4% 11% 11% 11% 10% 21% 21% 22%
APD 10% 11% 9% 9% 9% 11% 11% 11% 12% 11%
Airgas 0% 0% 3% 3% 3% 3% 4% 5% 6% 6%
'Top 5' market share 51% 58% 63% 70% 70% 73% 74% 74% 76% 76%
Source: Spiritus Consulting, Deutsche Bank estimates

Distribution methods
Industrial gases are distributed in three main ways: On-site/pipeline, merchant (bulk)
and cylinder (packaged). The type of distribution method used is dependent on the volume
required and the distribution distance:
On-site/pipeline is used for high volume users – such as chemical plants – where the
product is piped into a site directly or is produced by an on-site unit. The high capital
commitment is offset by a long-term take-or-pay contract (15–20 years).
Merchant/bulk is for intermediate volume requirements or more variable requirements.

In this form, there is no take-or-pay contract (more useful for volatile customers) and
contracts are shorter (one to five years), with the gas delivered by cryogenic units
contained on railroads/trucks. This is the most cyclical/commoditised distribution method
because regional surpluses can be moved around, although, given the requirement for
the freezing of the gas, distribution is not economically viable in excess of 200kms.
Cylinder refers to the lowest volume requirement and can be used for higher-value
gases. This method is more people intensive, but does involve a more stable income
flow due to rental income from the cylinder which can account for around 15%–20% of
the total revenue from the cylinder.
Figure 618: A comparison of on–site, merchant and cylinder

On–site/pipeline (tonnage) Merchant (bulk) Cylinder (packaged)
Volumes Large (>50 tpd) Medium (1–50 tpd) Low (<1tpd)

Delivery distance Can be high if pipelines, but distance is low Medium, 200km Low, <100km
in on–site
Type of gases Generally oxygen, hydrogen and nitrogen; Gases in this sector tend to be supplied in Higher–value gases in developed markets or
cryogenic and non–cryogenic. Lower cost cryogenic form – at very low temperatures in all gases in developing market where the
gases specially insulted tanks. local infrastructure is poor.
Typical end–users Steel mills, petrochemical and refining Steel mills, smaller on–site customers, Welding, semi–conductor industry, retail
industries hospitals, food and beverage gases
Revenue Stream Stable: Normally covered by take–or–pay Volatile: Sold in spot markets or under short– Moderate volatility: Revenues are derived
contract lasting 10–15 yrs because of capital term contracts (up to 5 years). Surplus from cylinder rental charge (20) and charges
commitment from producer. Contracts capacity from on–site can be sold into for gas product itself (80). Cylinders are
contain fixed facility charge with variable merchant market ('piggy–backing') which has always in circulation so revenue stream is
charges for quantities in excess of threshold caused regional price erosion less volatile than for merchant
Pricing per unit Low 10x On–site/pipeline 100x on–site/pipeline
Pricing volatility Low – contracts have clauses for pricing High – Suffers the highest pricing pressures, Low – Local network of delivery means that
changes in line with inflation, volume usage because this distribution method has low customer relationships and logistic skills are
and electricity prices barriers to entry key
Fixed costs High Medium Medium
Variable costs Low Medium–High High
Risk Low: Covered by take–or–pay contracts High: Exposed to cyclicality Medium: Fixed revenue stream from rentals
Barriers to entry High Medium/low Medium/low
Source: Deutsche Bank estimates and company data

Improved industry-wide capital efficiency

Capital intensity has improved in the industry. In Figure 619, we detail the working
capital/sales and sales/capital employed ratios of global gas companies. For most names we
have seen a sustained improvement in both ratios over the past few years. We do not expect
further structural improvement in working capital but expect the focus to remain on ensuring
that the improvement in the past few years does not slip as the focus of many names turns
more towards growth --- but we do expect more improvement of sales/capital employed due
to the greater impact from less capital intensive areas of gas
Figure 619: Working capital and capital intensity ratios

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011E 2012E
Working capital/sales (%)
Global industry average 11.8 12.7 14.5 13.5 12.7 13.7 12.0 11.4 10.1 9.7 8.8 7.8 7.4 6.7 5.7 6.0 5.6 5.8 6.0
Air Liquide 10.3 11.3 11.6 9.8 11.5 12.4 10.8 12.3 10.3 10.4 11.3 8.6 9.3 4.5 3.2 1.9 2.8 2.8 2.8
BOC 10.9 11.0 13.0 12.2 6.5 7.8 8.2 6.8 5.6 5.3 3.4 3.6 na na na na na na na
Linde 19.9 21.2 23.9 22.6 20.5 22.4 22.8 24.4 19.7 16.8 12.2 11.8 5.1 4.9 4.0 3.9 1.9 2.7 3.4
Air Products 10.3 12.3 13.2 13.8 15.6 16.1 13.8 13.1 15.1 13.8 12.8 12.0 10.1 11.9 10.1 11.2 10.6 9.9 9.5
Praxair 11.6 10.6 15.4 12.0 10.6 10.6 9.2 7.5 7.5 9.6 9.4 8.9 9.0 9.3 7.0 8.9 8.5 9.0 9.3
Airgas 8.1 9.8 10.2 10.6 11.4 12.7 7.2 4.4 2.6 2.3 3.4 1.7 3.3 2.7 4.5 3.9 4.0 4.4 4.7
Sales/capital employed (%)
Global industry average 143.9 141.7 132.9 124.4 122.0 101.0 103.0 105.4 106.3 113.0 120.9 122.3 119.5 117.8 122.2 101.8 106.6 108.6 109.2
Air Liquide 109.5 108.7 106.3 101.8 93.4 86.8 97.1 96.2 93.4 105.3 102.6 93.5 93.8 96.3 96.0 83.4 88.7 88.4 90.1
BOC 123.2 125.3 120.0 108.5 100.6 94.7 99.2 103.0 110.4 116.5 127.9 131.8 na na na na na na na
Linde 243.8 231.5 213.3 202.6 208.0 126.2 108.0 106.2 102.6 110.2 125.0 127.0 131.7 121.2 145.7 125.1 125.1 121.1 122.6
Air Products 107.8 112.2 110.4 123.5 129.2 103.6 95.4 101.7 94.7 103.4 111.7 116.1 120.6 117.3 115.6 92.6 99.7 105.6 101.4
Praxair 114.9 120.0 105.3 82.2 80.8 79.8 90.3 92.3 95.1 99.7 98.6 95.7 100.4 107.2 114.0 89.7 90.6 90.6 90.9
Airgas 164.5 152.5 142.1 127.9 119.7 114.7 128.2 133.0 141.4 143.1 159.8 169.7 151.0 147.2 139.5 118.1 128.7 137.1 141.1
Source: Deutsche Bank estimates and company information
Capex boomed in the mid-to-late 1990s. Gas industry capex boomed through this period
due to a mixture of lower management controls, aggressive globalisation strategies and
surplus cash driving expansions into new regions. Given the time lag between building new
capacity and achieving profits, this led to an inevitable depression of RoCE. In addition, the
competitive expansion policies also led to pricing erosion, particularly in Northern Europe/US.
The new investment discipline is here to stay. A spate of senior management changes at
all industrial gas companies in the early 2000s (Air Liquide, BOC, Praxair, AGA, Air Products,
Linde and Messer) prompted the change towards capital discipline. This led to improved
internal controls and a more disciplined investment process that persists today. As a result,
despite modestly rising capex, we expect the discipline to remain. Through the boom of the
1990s, Messer and AGA were aggressive investors but these were consolidated away a long
time ago (AGA was bought by Linde, Messer by Air Liquide).
Figure 620: Capex/sales for AGA and Messer were the Figure 621: AGA/Messer invested particularly heavily in
most aggressive capex investors the US
30% 16%
25% 12%
20% 8%
15% 4%
10% 0%
1996 1997 1998 1999 AGA M esser APD Praxair AL BOC
AGA & Messer average Industry average
CaGR in US LIN/LOX capacity - 1995 to 2000
Source: Company data Source: Spiritus Consulting

Maintenance capex has been reduced permanently—more of the capex is translating

through to growth. Spiritus Consulting estimates that maintenance capex is currently
around 5-7% of sales for the global industry, depending on asset mix (cylinders require less,
merchant and on-site require more). This is much lower than the estimated 9-10% of sales
for the global industry that was observed through the late 1990s. Newer asset bases and
specific company initiatives (improved truck utilisation, global cylinder asset utilisation
programmes) have enabled companies to reduce maintenance spending for the foreseeable
future and allow a greater proportion of capex to translate directly into reported growth. This
should ensure that while capex is now increasing companies should never have to increase
capex spend to the levels in the 1990s to continue to deliver higher growth than seen
historically.
Capex now increasing but risks attached to new investments much lower than in the
past. We expect a greater proportion of industry capex to be diverted towards on-site
dedicated customers (which means that much of the gaseous product is effectively pre-sold)
rather than free-standing merchant gas investments. These free-standing investments were
often built without substantial dedicated customer contracts for supply, and so once the plant
was built the gas was often aggressively sold into the market – this was a key driver of some
of the price erosion in the industry (particularly US merchant market) through the 1990s.
Figure 622: Capex/sales for the industry has been permanently lowered (1990–2012E)
Capex/sales (%) 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 ‘11E ‘12E
Linde Gas 20.8 29.0 22.8 23.8 26.4 24.5 30.9 23.9 22.6 34.5 20.4 11.4 10.3 10.3 13.2 14.3 13.0 11.5 15.2 11.5 13.0 13.0 13.0
BOC 11.4 13.4 12.6 11.5 10.5 11.5 14.2 17.7 17.3 16.0 11.6 9.3 9.6 7.6 5.8 9.4 na na na na na na na
Air Liquide 11.0 10.0 10.6 11.0 9.2 11.2 16.9 20.1 20.1 17.3 11.2 9.2 8.0 8.9 9.3 9.3 10.3 11.5 14.6 11.8 10.7 11.5 11.5
Air Products 21.3 19.5 14.8 19.9 18.7 23.3 28.7 19.8 16.3 19.9 13.8 12.7 12.3 9.8 9.8 11.5 14.1 10.4 10.3 14.6 11.4 14.3 14.3
Praxair na 16.9 12.8 9.8 12.0 19.1 20.1 19.0 16.2 14.1 14.0 11.5 9.7 11.5 10.1 11.5 13.2 14.6 14.9 15.1 13.7 15.5 14.3
Airgas na 4.1 3.6 4.1 7.8 4.9 9.3 10.4 6.7 4.2 4.0 3.6 3.8 4.9 7.0 7.5 7.6 6.7 8.1 6.5 5.4 5.5 6.1
AGA na na na 11.7 13.6 20.0 22.7 19.9 13.3 na na na na na na na na na na na na na na
Messer 15.0 14.0 14.0 15.0 14.0 15.5 17.0 37.8 31.4 31.6 19.0 7.9 8.9 8.5 na na na na na na na na na
Industry average 15.9 15.3 13.0 13.3 14.0 16.2 20.0 21.1 18.0 19.7 13.4 9.4 9.0 8.8 9.2 10.6 11.7 11.0 12.6 11.9 10.9 11.9 11.8
Source: Deutsche Bank estimates and company information. Note the Messer data for 2004 is pro forma for the divestment of the assets to Air Liquide. Note: Airgas March ending 2010 is taken as 2009
Industry RoCE should continue to improve. Industry RoCE weakened through the late
1990s due to the higher capex spend and the more aggressive price cutting. Looking
forward, with an increased focus on investment discipline and lower over-the-cycle levels of
capex RoCE for the industry should now steadily improve.
Figure 623: Capex is now increasing very modestly… Figure 624: …but should not stop RoCE from
improving in the industry
25% 20%
16%
20%
12%
15%
8%
10%
4%
5% 0%
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011E
2012E
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011E
2012E
Source: Company data, Deutsche Bank estimates. Source: Company data, Deutsche Bank estimates. Data for Linde is shown excluding intangibles from the
BOC acquisition.

Price discipline is expected to continue in the industry

Pricing is a critical issue for the global gases industry. The industry is characterised by
high fixed and low variable costs, which create a significant pressure on companies to
operate plants at high rates. With gas pricing more sensitive to the capital cycle than straight
GDP, not surprisingly, product prices weakened considerably during the 1990s as new
capacity was added. Price pressure was most severe in the more commoditised merchant
market. Among on-site and cylinder customers, pricing pressure was less severe because of
the fixed contracts for on-site distribution and the greater importance of customer
relationships. With significant consolidation and improved investment discipline, pricing in
most markets (particularly Northern Europe, US merchant) improved through the 2000s.
There are three key methods of price increases implemented by gas companies:
The capital argument. Following price erosion through the 1990s, prices became so
low that new investments could not be justified. Companies have now reverted to asking
customers (including the GDP-sensitive ones) for price increases. Companies have
shown their customers (with whom they often have longstanding relationships) that if
price increases are not successful, they cannot justify the capital commitment to their
customers. Due to the local nature of the industry (the distribution radius for gases is
200km at maximum) customers have been more willing to accept higher prices.
The service/value-added argument. While the capital argument has been used most
readily over the past decade (particularly in US merchant gases), the customer is also
beginning to ask for more value in return for higher prices. This is being addressed in the
form of extra services, better quality, etc. Electronic gases provide an example of
potential 'value-added' pricing. The cost of industrial gases in the manufacturing process
of a semi-conductor is around 1–2% of the total manufacturing costs. However, given
that gases are critical for purity of the semi-conductors, there is considerable room here
for price increases if companies demonstrate improvements in efficiency. Similar
examples can be seen in Healthcare.
Raw material pass-through (electricity). For some types of gas distribution agreement
there can often be a specific contract clause stipulating the straight pass-through of
higher energy costs to the customer. Often this is linked to a local energy index. This
type of contract agreement is typical for all long-term on-site investments and is also
common for most US merchant contracts. However, in cylinders and merchant (outside
the US) these contracts do not tend to exist which means that the company’s ability to
pass through the higher energy costs is based on individual customer discussions.
Pricing discipline continued through the downturn. Despite the volume slowdown in
2009 all of the major gas names delivered positive pricing progression. Air Liquide reported
2.5% pricing growth in their merchant business while Linde also highlighted positive pricing
(we estimate 1-2%) for 2009. US peers also reported pricing growth through 2009 with Air
Products reporting a pricing growth of 1% while Praxair also reported pricing growth of 2%
2009. Pricing discipline has continued through 2010 with both Air Liquide and Linde
highlighting positive pricing.
Figure 625: Pricing growth in Gas industry

2002 2003 2004 2005 2006 2007 2008 2009 2010
Air Liquide na na na na na +ve +ve +ve +ve
Linde na na na na +ve 1-2% 1-2% 1-2% +ve
BOC na 1.0% 1.0% 1.0% na na na na na
Praxair 2.0%* 3.0% 2.0% 4.0% 4.0% 3.0% 4.0% 2.0% 0.0%
Air Products na na 0.0% 1.0% 1.0% 0.0% 2.0% 1.0% -1.0%
Source: Deutsche Bank, *Includes small acquisition in Healthcare

Despite modestly increasing capex we do not expect a cessation of the price discipline.
Positive momentum for price increases exists within the industry and we expect it to
continue despite the current increases in capex. The important issue to note is that the new
capex invested is almost totally directed to dedicated customer investments where the gas
product is effectively pre-sold (mainly on-site) rather than the more speculative merchant
free-standing units, which are often built and then the product is aggressively sold in the
market (as seen in the late-1990s). This should ensure that even if economic demand
weakens materially the industrial gas industry should not end up dumping surplus gas
product onto the market.
Air separation process for production of industrial gases

An air separation unit separates atmospheric air into its components, primarily
nitrogen and oxygen but also argon and some other gases (trace noble gases xenon,
neon, argon and krypton). There are two technologies of air separation; cryogenic air
separation and non cryogenic air separation. Most commonly used and preferred technology
for this separation process is cryogenic process which produces nitrogen, oxygen, and argon
as gases and/ or liquid products and supposed to be the most cost effective technology for
high production rate plants. In the non cryogenic process, there are methods such as
Membrane, Pressure Swing Adsorption (PSA) and Vacuum Pressure Swing Adsorption
(VPSA), which are typically used to separate a single component, such as oxygen, from air.
Figure 626: Composition of dry atmospheric air
Argon
0.93%
Oxygen
20.9% Carbon Dioxide
0.038%
Neon
0.0018%
Helium
0.0005%
Hydrogen
0.00005%
Krypton
0.0001%
Nitrogen
78.08% Xenon
0.000009%
Source: Linde
Cryogenic Process. The cryogenic air separation process produces purified gases and liquids
by taking air from the atmosphere. The air is compressed and purified then cooled and then,
relying on different boiling points, separated into its elemental components in the form of
liquid oxygen, argon and nitrogen. However, there could be different variations in the process
depending on what gases are required to be produced (whether simply oxygen or nitrogen,
both oxygen and nitrogen, or nitrogen, oxygen and argon), degree of purity etc. The process
has the following features:
Compression: This step involves filtering and compressing atmospheric air to remove
dust. Since the compressor heats up the air, it is cooled again in a heat exchanger to
ambient temperatures. In some cases it is cooled in a mechanical refrigeration system to
a much lower temperature. This leads to a better impurity removal, and also minimizing
power consumption, causing less variation in plant performance due to changes in
atmospheric temperature seasonally.

Purification: The processed air is generally passed through a molecular sieve bed, which
removes any remaining water vapour, as well as carbon dioxide. They are to be removed
before the air enters the distillation portion of the plant which would freeze in the
cryogenic equipment otherwise. There are two basic methods to get rid of water vapor
and carbon dioxide - molecular sieve units and reversing exchangers.
Cooling & Distillation: Process air is passed through an integrated heat exchanger and
cooled against product (and waste) cryogenic streams. The air is then cool enough to be
distilled in a distillation column. The formation of liquid air in the cryogenic equipment
requires some refrigeration. Cryogenic air separation units are built to provide one or
both of nitrogen and oxygen although argon is also often produced. Liquid nitrogen "LIN",
Liquid oxygen "LOX" and liquid argon can be produced if sufficient refrigeration is
provided for in the design. Finally the product gases are warmed against the incoming air
to ambient temperatures.
Product supply and storage: There are a number of distribution methods for produced
air gases including pipelines to large industrial users adjacent to or nearby to the
production plant or through cylinders (for smaller quantities). If a viable pipeline system
does not exist, long distance transportation of products is usually done as a liquid
product for large quantities.
Figure 627: Cryogenic Air Separation Process
Source: Air Products
Non-cryogenic air separation. While cryogenic technology is a more traditional method and
requires large sized plants for its processing, the non cryogenic process is considered to be a
convenient, efficient, and economical method to buying gas in high pressure cylinders or for
purchasing bulk liquid products to be vaporized. This process is preferable for many small
scale users of oxygen or nitrogen. There are three main technologies involved in non
cryogenic process. They are Pressure Swing Adsorption (PSA) used in nitrogen and oxygen
generators, Vacuum-Pressure Swing Adsorption (VPSA) used in oxygen generators and
Membrane Separation, used to produce nitrogen gas. Non cryogenic gas processing is
growing though it remains the less used technology.
An increasing focus on the on-site business

On-site is the key area for expansion. As shown in Figure 630, in order to reduce the
cyclicality of their earnings, industrial gas companies have been emphasising their on-site
exposure with 70% of the growth capex being directed to on-site today as opposed to 50%
in the 2000. As a result most names have an increased focus on on-site (which is now on
average around 30-40% of sales for the industry) which is pre-sold capacity. This is
particularly important in higher risk markets (such as emerging markets) as the growth in
these markets for the on-site business is almost guaranteed once a contract is signed.

Figure 628: Sales by distribution channel

2000 2011E
On-site Merchant Cylinder On-site Merchant Cylinder
Linde 21 29 50 29 23 48
Air Liquide 30 24 46 36 23 41
Air Products 29 37 34 40 22 38
Praxair 27 35 38 32 30 38
Air Gas 0 0 100 0 0 100
Average
Source: Deutsche Bank estimates, Datastream. Linde data shown including share of associate sales.
Figure 629: Industry capex was weighted equally to on- Figure 630: Industry cpaex now weighted heavily to on-
site and merchant/cylinder site (2011E)
Cylinder Cylinder
15% 10%
Merchant
20%
Onsite
50%
Merchant
35% Onsite
70%
Source: Deutsche bank estimates, company data Source: Deutsche bank estimates, Spiritus Consulting
Energy prices
Electricity is a key input cost for industrial gases. Electricity is a key raw material for
industrial gas companies and can account for up to 50% of industrial gas companies’
production costs. The question on whether these higher electricity prices can be passed onto
customers requires a discussion centering on the type of distribution method used for
industrial gas. In general, much of the electricity price increase can be passed onto
customers due to energy price clauses in most supply contracts in the on-site business.
However, passing these costs onto customers in the cylinder and the merchant gas business
is generally more difficult. We discuss each of these distribution methods separately:
Cylinders: We estimate that this method has the lowest exposure to energy prices—
these costs are equivalent to approximately 10% of sales—as the labour costs and
associated distribution costs are proportionally higher. The ability of a company to pass
these costs onto customers generally depends on the strength of a company’s position
in the local market as there is normally no pricing clause in customer contracts.
Merchant/bulk: This distribution method has a higher emphasis on energy costs—we

estimate that costs equivalent to 20–30% of sales relate to energy. The ability to pass on
these increases depends on the region and the type of customer. In the US, most supply
contracts contain clauses for the passing on of energy costs (up or down), so this region
will tend to see less net impact (although there can sometimes be monthly timing
differences). In Europe, contracts are only being slowly shifted to include energy price
clauses and it generally can take longer to pass on costs here. Success on passing
through pricing increases typically rests on the company’s local market power.
On-site: This method of distribution has the highest emphasis on energy costs (up to
50% of sales), but the contracts will almost always include specific clauses for the
transmission of higher (or lower) energy costs through to the customer. Therefore, the
net impact on the gas company of higher (or lower) energy costs should be immaterial.

Figure 631: Electricity costs as a per cent of sales by distribution method
60%
50%
40%
30%
20%
10%
0%
On -site M erch an t Cy lin d ers
Electricity co sts as a % o f sales
Source: Spiritus Consulting, BOC, Linde, Deutsche Bank estimates
Increasing exposure to high growth and less GDP sensitive users

Oxygen and nitrogen remain the most important gases. The industry has a broad end-
user base but ~50% of the industry’s sales relate to oxygen and nitrogen. Higher-growth
gases are beginning to become more important, such as hydrogen and gases for consumer-
related applications (such as soft drinks, frozen food, packaged foods, medical applications).
Figure 632: Industrial gases market shares, properties and end–markets
Gas (market share) Attribute Important markets/uses
Oxygen (28%) Reactive properties Steel (decarbonisation of cast iron to produce steel), chemicals (plastic production), metal
f bi i ( i d ldi ) i l (bl hi f l l li )
Sustaining life Medical (treatment of respiratory insufficiencies, intensive care), fish farming, waste-water
Nitrogen (20%) Inert properties Electronics, chemicals (protection of products and facilities), food processing (preservation
d i ) l f b i i (h f i l )
Cryogenic properties Food freezing, healthcare (low-temperature preservation of living tissues and cells)
Hydrogen (11%) Reactive properties Refining oil, enhanced oil recovery, fibre–optics, food processing (production of food oils),
l f b i i (h ) l d i ( li hi )
Fuel Space programme (fuel for cryogenic rocket motors), fuel cells (transport fuel)
Argon (9%) High–temperature inert properties Stainless steel, metal fabrication (protection of welds against oxidation; fume reduction).
Carbon dioxide (8%) Inert properties Metal fabrication (protection of welds against oxidation), steel, chemicals, food processing.
Solubility properties Beverage carbonation.
Cryogenic properties Food freezing, dry ice
Other Fire extinguishers, Ph regulation of waste water.
Acetylene (6%) Reactive properties Metal fabrication (cutting and welding), glass production (lubrication of glass moulds).
Helium (3%) Cryogenic properties Research, aerospace (cryogenic tank pressurisation), superconductivity.
Inert properties Diving breathing mixtures, electronics
Lifting properties Balloon inflation.
Other (15%) Nitrous oxide Anaesthesia, breathing problems

Silane, NF3 Electronics, thin film photovoltaic
Source: Linde, Praxair, Deutsche Bank, Spiritus Consulting, SRI
The focus on ‘higher-value’, ‘higher-growth’ and less GDP sensitive customers is increasing.
Along with the increased focus on less capital intensive activities, many gas companies have
also been actively increasing their relative exposure to higher growth and less GDP sensitive
end-users, as shown in Figure 633. This is not only to increase the growth rates of the
underlying businesses, but also an effort to reduce the inherent cyclicality of corporate
earnings. A transition away from traditionally cyclical end-users such as the steel industry
(although this is still a large end-user for many companies, particularly Praxair) and an

expansion into areas such as medical gases and consumer type end-users (e.g. carbon
dioxide and high purity oxygen in food) are clear examples of this. As a result, while the
industry remains exposed to heavy cyclical end-users such as chemicals and steel, it is
important to note that many of the numerous end-users are not that cyclical or GDP
dependent such as Healthcare, some consumer applications, green energies etc).
Figure 633: End-user profile is changing—less emphasis on GDP and IP sensitive end-users
30%
25%
20%
15%
10%
5%
0%
Manufacturing
H/C
Metallurgy
Food
Others
Electronics
Consumer
Chemicals
Industry
Sales by end user 2003 Sales by end user 2011E

Source: Deutsche Bank, Spiritus Consulting, Company data
Annual growth for the tier one gas companies has accelerated to approximately 7-8%
from 5-6% in 1990s/early 2000s. Numerous key end-users offer sustainable growth rates in
excess of 2x Industrial Production and should continue to support high single-digit top-line
growth forecasts for many of the individual industrial gas companies. Some of these
applications offer gas demand of double digit, whereas some also offer the potential for non-
gas revenue growth (such as in the services area — e.g. customer training). We note
tightening regulations in many areas are driving structural growth (e.g. Hydrogen). We have
highlighted in Figure 634 some examples of these types of uses for industrial gases.
Figure 634: Examples of higher-growth applications for industrial gases
Industry Application/driver Annual growth
Environmental Energy conservation, control of emissions, water quality >10%
Refining and petroleum Hydrogen for clean fuels & upgrading heavy crudes, enhanced oil recovery >10%
Foods & beverage Ready meals, food safety, process technology, Asia 5-10%
Medical Regulatory environment, cost pressure, home therapy, improving living >5%
Hospitality Outsourcing, safety legislation, industry restructuring, product quality 5-10%
Electronics New technology, communications, compound semi-conductors >10% (long-term)
Source: Deutsche Bank, company data.
Out-sourcing by customers is increasing. Around 50% of the global industry remains

captively produced. We would estimate that the steady outsourcing of this type of business
continues should continue in the foreseeable future (and may even accelerate as customer
try to get capital off their balance sheets) especially in emerging markets when the proportion
of outsourced gas is relatively low. The decision as to which company wins a piece of
outsourced business more often is dependent on the strength of the customer relationship,
not just the price offered.

Gas intensity increasing. While demand for gas continues to accelerate we also note that
the intensity of the amount of gas used in basic industrial processing continues to increase.
Industrial gases are often synonymous with the quality of the end product and with
increasing demand across most end-users for better quality end-product, the use of gases is
becoming more intensive. An example of this is in steel and highlighted below in Figure 635.
In addition to this as economies develop and the consumer power grows we also note that
the amount of “gas” used by an individual consumer also increases strongly (Figure 636).
Figure 635: Gas consumption increasing with the Figure 636: Gas intensity still low in emerging markets
technology development
O2 Demand/ ton Steel Gas Value Intensity
O2 Consumption
Developed Markets
Developing Markets
Technology Development
Source: Spritius Consulting Source: Spritius Consulting
Opportunities in Mega Energy support long-term growth

With the growing global energy requirements the key challenge will be to secure future
energy supplies while protecting the environment. This has led research into exploring new
sources of energy which could substantially change the current energy mix heavily focused
on non-renewable sources to more sustainable energy sources (e.g. solar power, wind
energy etc.) which could meet the future energy requirement over a longer period of time in
an environment friendly manner. Figure 637 shows below assumptions over the likely energy
requirements over the next 20 years.
Figure 637: Global energy requirements expected to grow
Source: World Energy Outlook 2009 (International Energy Agency IEA), Linde

Industrial gases are leveraged to many of the new energy drivers. The advent of new
energy sources alongside the constant drive towards cleaner fuels and reduced emissions is
creating massive opportunities for the industrial gas industry – most of these will have a
material impact in the coming 5-10 years. These so-called “mega energy” trends will
continue to support the long-term growth in gas industry. Some of the key examples of these
technologies includes carbon sequestration (carbon storage, capture and disposal), increased
focus on environmental friendly oxy-fuel combustion technology, coal-to-chemicals and coal-
to-liquids, biomass to liquid, desulphurization, enhanced oil recovery, LNG, GTL,
photovoltaics to fuel cells. Although some of these opportunities (e.g. carbon capture
technologies) may be 5-10 years away from commercialization others are impacting order
books now. We expect these areas to be a big driver of the industry’s growth in the coming
years and so have discussed the various opportunities across this space in the coming
pages. In Figure 638 overleaf we have provided a summary of the seven areas of investment
opportunity and expected timescale.
Figure 638: A summary of the opportunities in “mega energies” over the next ten years
Product Type Global industry investment opportunity Timescale
Natural Gas Liquid Natural Gas (LNG) Euro 10bn+ 2010-2020
Gas-to-liquids (GTL) Euro 10bn+ 2012-2020
Coal Coal to Chemicals (coal Euro 10bn+ 2010-2020

gasification)
Coal to liquids (CTL) Euro 5bn+ 2015-2020
Hydrogen HyCO (syngas) HyCO market should continue to offer strong growth – we 2010-2020
estimate around 10% per annum with a strong focus on
emerging markets
Desulphurisation Market should offer 10%+ growth per annum depending on 2010-2020
the rate of refinery capacity expansion
CO2 management Carbon Capture & Euro 5bn+ 2015-2020

Sequestration
Photovoltaics and Silicon Silane Market should offer 5-10% growth per annum 2010-2020
Photovoltaics Market should offer at least 10% growth per annum 2010-2020
depending on energy prices and tariff support
Biomass Biomass to liquids and Potentially more than Euro 1bn 2015-2020
biofuels
Other EOR and Gas Well Fracturing Euro 1bn 2012-2020

Fuel Cells Euro 1bn+ after 2020
Source: Deutsche Bank estimates, Spiritus Consulting, Linde, Carbon Capture Journal, Statoil, Air Liquide
Many energy investments will be large – plant only sale of JVs may reduce the risks.
For many of the opportunities the investment cost in the gas site could be in excess of Euro
500m which for some of the gas companies may present too high an initial upfront
investment cost, particularly if the investment is within a region where the prospect of further
industrial investment is low and so the chances of maximizing returns by providing additional
gases to other end-users is also low. In these situations gas companies may also go down
the “plant only” sale route or look to JVs (with the customer) to diversify risk.

Natural rubber
Figure 639: Natural rubber at a glance
Supply/Demand Tight
Margin prospects Healthy
Watch out for ... Further supply shocks, long term substitution to synthetic rubber
Natural rubber (NR) is a naturally occurring elastomeric polymer of isoprene. The tire market
dominates world consumption of natural rubber. It has excellent resistance to abrasion,
impact, tear and heat build up. However, natural rubber is not very resistant to oxidation,
ozone, weathering, and a wide range of chemicals and solvents.
Production of natural rubber is particularly susceptible to weather conditions, causing

volatility in supply and prices. Nearly 2,000 species of trees, plants, shrubs and vines produce
natural rubber latex in the world. Asia dominates the world supply of natural rubber,
averaging greater than 90% of total world production. The largest producing countries of
natural rubber include Thailand, Indonesia and Malaysia.
Figure 640: Share of world NR production Figure 641: Natural rubber TSR 20 prices ($/ton)
Other
4% 6,000
5,000
Other Asia Thailand 4,000
25% 31%
3,000
2,000
1,000
0
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Malaysia
11%
Indonesia
29% North America Southeast Asia
Source: Deutsche Bank estimates, SRI Source: Deutsche Bank, CMAI
Natural rubber prices have been very volatile, increasing significantly with strong demand
from China and the US (better than expected growth in automotive segment) further
exacerbated by production declines due to poor weather (heavy rains in rubber producing
countries such as Thailand, Malaysia, India). Supply constraints may persist due to ageing
plantations and the low level of replanting. This volatility is supportive to synthetic rubber
long-term as customers will over time substitute to synthetic rubber to avoid volatility in raw
materials costs and benefit from more stable pricing.

Synthetic rubber
Figure 642: Synthetic rubber at a glance
Long-term growth rate 1.5xGDP
Growth rate relative to the sector Slightly higher
Supply/Demand High performance rubber to remain tight,low cost (ESBR) tightening from low base
Margin prospects High perf stable at a high level due to tight supply, others stable but lower
Watch out for ... Asian auto growth rates, tyre labeling legislation
Synthetic rubber is primarily produced from petrochemicals and its main end use is in the
manufacture of tyres. The tyre market itself comprises OEM (c.30% of the market) and the
replacement market (c.70% of the market) with the majority of tyres sold being replacement.
Demand for tyres, (where the majority of synthetic rubber is used) remains robust with 5%
CAGR forecast globally for 2010-2015, with over 9% CAGR in Asia forecast in the same
period.
There are two different types of styrene-butadiene rubber: solution (S-SBR) and emulsion (E-
SBR). E-SBR is not used in performance rubber applications as it does not have the
appropriate characteristics. S-SBR, polybutadiene rubber (PBR) and butyl are performance
grade rubbers.
Figure 643: Styrene Butadiene rubber prices expected to Figure 644: Poly-butadiene rubber prices expected to
remain strong (US$/ Metric tonne) remain strong (US$/ Metric tonne)
4,000 5,000
3,500 4,000
3,000
2,500 3,000
2,000 2,000
1,500
1,000 1,000
500 0
0
Jan-00
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Jan-00
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Asia North America Asia North America West Europe

Drivers for the industry are mobility, urbanization and a growing middle-class in emerging
countries. There is a general trend towards using more high performance tyres due to their
beneficial fuel efficiency, longer lifetimes, better wet grip and lower exterior noise. We
expect tyre labeling legislation to result in a positive impact on growth as it makes innovation
in rubber grades visible to the customer.
Historically, the replacement tyre market has grown on average 200-250bps higher than
global auto growth due to an increase in the number of miles driven shortening replacement
times. Furthermore, high performance rubber should grow faster than this due to increased
number of miles driven, increased use of its performance rubber, supported by tyre labeling
legislation in Europe and our expectation of voluntary adoption in other regions/countries.

Figure 645: Limited substitution risk from natural rubber Figure 646: Oil, natural and synthetic rubber prices
show some degree of correlation
Low substitution risk High substitution risk 700
600
500
EPDM 400
300
NBR 200
100
E-SBR
0
Feb-90
Feb-92
Feb-94
Feb-96
Feb-98
Feb-00
Feb-02
Feb-04
Feb-06
Feb-08
Feb-10
Feb-12
S-SBR
PBR1
BTR Crude Oil Brent

Natural Rubber #3 Smoked Sheet
Polybutadiene Rubber
Styrene Butadiene Rubber 1502
Source: Deutsche Bank, LANXESS Source: CMAI
There is a limited short term substitution between natural rubber and synthetic rubber.
Natural rubber and synthetic rubber are two distinct and separate products with different
properties influencing the applications. In tyres for instance, truck tyres use mainly natural
rubber (>80% by weight) since it has a better resistance to sharp impacts than synthetic
rubber. Synthetic rubber though is the main raw material in passenger tyres with over 90% of
the rubber in a tyre being synthetic because of its superior wear, rolling resistance and wet
grip as compared with natural rubber. It is because of these different properties that only
limited substitution is possible between natural and synthetic rubbers, approximately 5%.
Styrene-butadiene rubbers (E-SBR & S-SBR)

Of the two styrene-butadiene rubbers, E-SBR is a low cost non-performance grade rubber
and S-SBR is a performance grade rubber. Emulsion grade styrene-butadiene rubber
continues to lose ground to solution grade since due to increasingly stringent specifications
of high-performance tires.
E-SBR is produced via emulsion polymerization and is not used in performance rubber
applications as it does not have the appropriate characteristics. S-SBR is produced via
solution polymerization. E-SBR and S-SBR are produced through the copolymerization of
butadiene with styrene at a ratio of about 3:1.
Figure 647: E-SBR and S-SBR production processes

Solution polymerization Solution styrene butadiene
Butadiene & styrene
ru bber (S-SBR)
Em ulsion polymerization Em ulsion styrene butadiene

Butadiene & styrene
ru bber (E-SBR)
Source: Deutsche Bank, LANXESS
70% of SBR rubbers are used in tyres with the rest used in mechanical and other
applications. Just over half of performance butadiene rubber demand is from Asia-Pacific,
with the other half more or less evenly split between the Americas and EMEA.

Figure 648: SBR rubber end market split Figure 649: Worldwide E-SBR market 2010
Kumho
Other Group
13%
10%
SINOPEC
8%
Mechanical
Goods ISP
17% Other 7%
Tyres and 47%
Tyre Lanxess
Products 6%
70% Goodyear
6%
CNPC
Gazprom TSRC 6%
5% 5%
Source: Deutsche Bank, SRI Source: Deutsche Bank, CMAI
E-SBR is a low cost commoditized product which is produced in a competitive, relatively

fragmented market.

We expect S-SBR to grow at 7% 2011-2015. S-SBR rubber growth is driven by a
continuing shift to using more high performance synthetic rubber as well as tire labeling,
growth in retreading, energy efficient tires and e-mobility.
We expect limited capacity additions to result in further tightening in solution styrene

butadiene rubber (S-SBR). A favourable supply/demand has led to and should continue to
result in operating rates above 90% and strong pricing power.
We expect emulsion styrene-butadiene rubber (E-SBR) to grow at 4% 2011-2015. We

expect further tightening but operating rates to remain ~60%, with the rubber product
continuing to suffer from substitution to S-SBR.
Polybutadiene rubber (PBR) and Nd-PBR

PBR production is based on different catalysts e.g. nickel, cobalt, titanium and neodymium,
which gives different properties to the rubber produced. Neodymium PBR (Nd-PBR) gives
improved performance particularly with respect to reduced energy consumption, reduced
tyre abrasion and improvements in rolling resistance, while nickel, cobalt and titanium
catalysed PBRs are generally considered lower value products.
Figure 650: PBR end uses Figure 651: Top 15 PBR/SSBR producers (2011E)
Lifestyle &
Technical leisure 20%
rubber* 6%
15%
7%
10%
5%
Plastics
16% 0%
Lanxess
Goodyear
Styron
Michelin
KKPC
Sibur
JSR
Petrochina
TSRC
Asahi
BSFS
Sinopec
NKNK
Efremov
Ploimeri
Tire
71%
Source: Deutsche Bank estimates, LANXESS, *e.g. industrial and mining Source: LANXESS, CMAI, Deutsche Bank

Most commercial production of PBR is produced via solution polymerization of butadiene.

The isomer composition of the final product depends on several factors, the most important
of which are the catalyst system and the reaction medium (solution or emulsion
polymerization).
Figure 652: PBR production process

Solution polymerization
Butadiene Pol ybutadiene rubber
Most producers have multipurpose production units that can be used to produce BR or SBR
or/and other related polymers. Thus, plant capacities can vary depending on market
conditions.
Figure 653: Supply/demand for PBR Figure 654: Top Nd-PBR producers (2011E)
60%
50%
40%
30%
20%
10%
0% Lanxess
Sibur
KKPC
NKNK
Polimeri
Carbochem
Source: LANXESSestimates based on CMAI, SRI, LMC Source: LANXESS, CMAI, Deutsche Bank

We expect limited capacity additions combined with strong demand growth to result in
further tightening in polybutadiene rubber(PBR). A favourable supply/demand has led to
and should continue to result in high operating rates and strong pricing power.
Increasing demand for PBR and Nd-PBR is driven by trends towards greater mobility and
the demand for higher environmental and safety standards in performance tyres. Nd-PBR
reduces energy consumption and tyre abrasion also enhancing fuel efficiency and wet
grip compared with conventional SBR tyres.

Butyl rubber
Butyl is a high quality rubber that is impermeable to gas and moisture with high chemical
resistance and excellent mechanical properties. Butyl rubber is mainly used in the tyre
industry as an inner liner for car, truck, bus and airplane tyres. Special applications include
protective clothing, medical devices and chewing gum. The market in 2011 will be worth
around E2.2bn globally.
The butyl market is oligopolistic with key competitors including ExxonMobil Chemicals,
Sinopec, Nizhnekamskneftekhi and Sibur Holding.
Figure 655: Butyl rubber end uses 2010 Figure 656: Butyl rubber market
Others
Gum 9% 600 50%
4% 500 40%
400
Pharma 30%
300
11% 20%
200
100 10%
0 0%
Exxon
Lanxess
JSR
Sibur
NKNK
Sinopec
Tire
76%
Capacity (-000- metric tons) Market share
Source: Deutsche Bank estimates, LANXESS Source: Deutsche Bank, LANXESS
There are two types of butyl rubber, regular butyl rubber (Butyl) and Halobutyl rubber
(chlorobutyl, bromobutyl). It is manufactured from isobutene and isoprene. Key butyl rubber
products include regular butyl and halo butyl. Halobutyl, used in the innerliners of tyres, is a
more profitable product for rubber producers.
Figure 657: Butyl/Halobutyl production process

Co-Monomers:
Polymerization Ha logenation
Isobutene R egular B utyl Rubber Ha lobutyl Rubber
Isoprene + C hlorine or
B rom ine

Globally we expect the butyl rubber market will grow at 7-8% on average with
Asia/Pacific being the key growth region. Within butyl rubber demand for regular butyl
rubber is expected to grow low/mid single digit while halo butyl rubbers (bromobutyl and
chlorobutyl) are expected to grow at a high-single digit rate driven by the radialization of
truck and bus tyres in markets like India, China and Eastern Europe. Demand is also
increasing from pharma, particularly in China driven by the government’s focus on
improving healthcare systems.
We expect global supply/demand for butyl rubber to remain tight for the foreseeable
future helped by steady demand growth and disciplined capacity expansions. We
forecast industry operating rates to remain above 90% in 2011 and 2012 before easing
slightly in 2013 when new capacity comes on-stream. We expect supply/demand for
halo butyl rubbers (chloro and bromo butyl) to remain tighter as the majority of new
capacity (except Lanxess) is focused production of regular butyl rubber.

Figure 658: Estimated supply/demand for butyl rubber
Source: CMAI, SRI, LANXESS estimates 2010
Other rubber products

The value of the market for other rubber products market is approximately EUR4bn. Other
specialty elastomers include: hydrogenated nitrile-butadiene rubber, chloroprene rubber,
ethylene-propylene diene rubber and ethylene-vinyl acetate.
Figure 659: Other rubber products production process

Polymerization
Hy drogenation
Butadiene & acrylonitrile N itrile-butadiene Hy drogenated nitrile-
rubber (NBR) buta diene rubber ( HNBR)
Polymerization C hlorination
( Poly-) C hloroprene
Butadiene & chlorine C hloroprene m onomer
rubber (CR)
Polymerization
Ethylene & propylene Ethylene-propylene
& diene monomer diene rubber ( EPDM)
Polymerization
Ethylene-vinyl acetate
Ethylene & vinylacetate
rubber (EVM)
The market has grown at approximately 4-5% from 2011-2015, driven by Asia (~8%) and
EMEA and Americas at around 2-3%. These products are used in automotive, engineering,
construction, electronics, oil exploration, and aviation industries. They end up being used in a
wide range of applications – seals, hoses, profiles, cable sheathing, special films &
adhesives.
Figure 660: Other rubber end uses Figure 661: Other rubber global demand 2010
Others
17%
Americas
Construction Automotive 28%
38% Asia Pacific
4%
40%
Plastics
5%
Electro/
electronics
6%
Footwear EMEA
13% Mechanical
engineering 32%
17%
Source: Deutsche Bank estimates, LANXESS Source: Deutsche Bank, LANXESS estimates

Autocatalysts
Catalytic converters are fitted to exhausts to reduce emissions
A catalytic converter or catalyst is used to reduce emissions from an internal combustion
engine. Catalysts are fitted to passenger cars, heavy duty diesel (trucks and vans) and non-
road diesel (construction and mining equipment). The four main exhaust pollutants that
catalysts reduce are carbon monoxide (CO), hydrocarbons (HC), oxides of nitrogen (NOx) and
particulate matter (PM). Emissions limits of all four are regulated.
Carbon monoxide (CO) is a gas which is highly poisonous to humans.
Hydrocarbons (HC) include known carcinogens and photochemically active species that
contribute to the formation of ground level ozone and smog.
Nitrogen oxides (NOx) emissions are associated with smog, acid rain and health risks
such as respiratory problems.
Particulate matter or soot (PT) is solids emitted by an engine. Soot contains a large
number of ultra-fine particles that are invisible to the naked eye. PM comprises mostly of
carbon and absorbed hydrocarbons. These smaller particles, when inhaled are
aggravating and cause lung and heart conditions. Diesel engines tend to produce more
PM than petrol engines.
Catalysts convert emissions to carbon dioxide, water and nitrogen
Catalysts installed in engine exhausts will cut these pollutant emissions either by oxidizing or
reducing them to carbon dioxide (CO2), water (H20) and nitrogen. Catalysts can reduce car
emissions by over 90%. A catalyst is the active component of the catalytic converter. It
consists of a substrate with a large surface area coated in an extremely thin coating of finely
dispersed, very small particles of precious metal, such as platinum, palladium or rhodium is
coated onto this support. The main objective is to minimize the amount of precious metal
used but maximize the amount of precious metal surface area for gas molecules to come into
contact with. Catalysts are not consumed but actively promote reactions.
Performance depends on the air/fuel ratio in the catalyst

When there is more air than fuel in the combustion process, the exhaust gas is said to be
lean. In contrast, when there is more fuel, the exhaust is fuel rich. Under lean conditions, the
autocatalyst will function as an oxidation catalyst, oxidizing CO and HC into CO2 and water.
Under rich conditions, the catalyst will preferentially reduce NOx to nitrogen.
Gasoline engines simultaneously convert HC and CO (oxidation) and NOx (reduction)

For gasoline engines it is possible to very accurately control the air to fuel ratio so that
complete combustion can take place. Under these conditions the autocatalyst can
simultaneously operate as an oxidation and reduction catalyst. This type of catalyst is known
as a ‘three way catalyst’. A catalytic converter in the exhaust of a modern car will often cut all
three pollutants by more than 99% once at normal operating temperature.

Figure 662: Autocatalyst mechanics (three-way)
Source: Johnson Matthey
Autocatalysts start working within 15 to 20 seconds of a cold start

The waste heat generated from burning fuel means that the exhaust is very hot and quickly
heats the catalyst to the operating temperature required. The closer the catalyst is to the
engine, the quicker it heats up and begins to operate. Oxidation involves 1) carbon monoxide
reacting with oxygen to form carbon dioxide and 2) hydrocarbons reacting with oxygen to
form carbon dioxide and water
Diesel engine emissions reduction

Diesel engines produce high amounts of PM and have limited effect on NOx
Diesel engines normally run lean (more air than fuel) and therefore a diesel autocatalyst
usually operates as an oxidation catalyst only (which is why it is known as a diesel oxidation
catalyst or DOC), cutting CO and HC emissions by more than 90%. It only has a limited effect
on NOx emissions as a result. Plus diesel engines produce particulate matter (soot). So other
technologies have to be used to reduce emissions of PM and NOx from diesel engines.
Diesel particulate filters (DPF) reduce particulate matter emissions

A DPF traps the PM, or soot, from the diesel exhaust and stops it leaving the tailpipe. It is
necessary to periodically increase the temperature in the filter so that the trapped soot will
burn off and prevent it from blocking. This process is called regeneration and ensures that the
vehicle continues to run smoothly and efficiently and that the filter itself is not damaged.
Filters can reduce the mass of emissions by more than 90% and the number of particulates
by more than 99%.

Figure 663: Autocatalyst with diesel particulate filter (DPF)
Source: Johnson Matthey, Deutsche Bank
Diesel particulate filters are honeycomb like filters

The structure of a DPF is similar to an autocatalyst, but differs in that at least a portion of the
exhaust gas is passed through a physical filter. The most common and well known are wall-
flow filters, typically using a ceramic honeycomb substrate of cordierite or silicon carbide.
Half of the channels are sealed at the inlet face in a chessboard pattern and the remaining
alternate channels are sealed at the outlet face of the substrate. Exhaust gas cannot pass
straight through the device, but instead is forced through the walls between the channels and
the particulate matter deposited on the walls.
DPF’s can work via active or passive regeneration

The material trapped in the filter is mostly carbon particles with some absorbed
hydrocarbons. There are two principal techniques for removing the particles, active
regeneration and passive regeneration. Active regeneration involves the combustion of
carbon with oxygen by rising the temperature to 600ºC often by the direct injection of fuel
into the exhaust stream. Passive regeneration involves the combustion of carbon with
nitrogen dioxide at 250-300ºC and only uses the exhaust gas stream, without additional
inputs.
Secondary systems can be employed to reduce NOx emissions

Due to diesel engines running lean, they are very inefficient at reducing NOx emissions.
Catalysts can also be included in the after treatment system to reduce NOx. There are two
main strategies for removing NOx from a diesel exhaust:
Selective catalytic reduction (SCR) systems work by chemically reducing NO and NO2
using a reductant such as urea solution, which is added to exhaust gas.
NOx adsorber catalysts (NACs) remove NOx from a lean gas stream by chemical
adsorbtion onto a catalyst and subsequent removal under stoichiometric or rich
conditions. Adsorbtion is the adhesion of a thick layer of molecules to the surface of a
solid or liquid.

SCR systems
For ammonia SCR systems, urea is the most common source of ammonia. Ammonia SCR
systems combine ammonia (NH3) with NOx to form nitrogen and water. For hydrocarbon
SCR systems, diesel fuel is the source of hydrocarbon. Hydrocarbon SCR systems use
hydrocarbons as a reductant. These may already be present in the exhaust gas or added to it.
Figure 664: Urea SCR system
Urea SCR system
Auto catalyst + DPF
Source: Johnson Matthey, Deutsche Bank
NOx adsorber catalysts (NACs)

NACs can remove NOx from a lean gas stream by chemical adsorbtion onto a catalyst. The
process of adsorbtion releases CO2 that is re-absorbed later in the process. The NAC has a
finite capacity for NOx adsorbtion but it can be regenerated by changing to a rich gas stream.
Under these conditions, two reactions happen: First the catalyst releases the NOx and is
thereby regenerated, and then the NOx is reduced to nitrogen.
Catalysts and filters should last for the lifetime of the vehicle
They remain effective for the whole period as long as the vehicle is serviced properly.
Vehicle emissions regulations contain a durability requirement in that the emissions must
remain within the limits for a given mileage. This varies around the world but can range from
80,000 km to double that.
Structure of industry
There are four main catalyst markets at different stages of maturity. These are autocatalysts
(light duty; either gasoline or diesel), heavy duty diesel catalysts (HDD), non-road diesel
catalysts (NRD) and process catalysts. Autocatalysts are the most established, being
catalysts to reduce emissions on gasoline and diesel passenger cars (light duty). The effect of
tightening emissions legislation on heavy duty diesel and non-road diesel should drive growth
over the next 10 years. Autocats will still have growth potential because of tightening
emissions legislation and auto production but this is likely to be below HDD and NRD.

Autocat market: Johnson Matthey, Umicore and BASF have equal shares
The main players in the autocatalyst market are Johnson Matthey, Umicore and BASF all with
relatively equal market shares of around 30% and other producers accounting for 8% of the
market.
Figure 665: % of global auto production by region (2010) Figure 666: Global autocatalyst market shares (2010)
South Other Others

America 4% 8% Johnson
Eastern 6%
Matthey
Eeurope
31%
8%
Asia/Pacific
36%
Japan BASF
13% 30%
Western
Europe North
16% America Umicore
17% 31%
Source: Deutsche Bank, JD Power Source: Deutsche Bank
HDD market: Johnson Matthey is the market leader

Unusually for a market of this type, Johnson Matthey stole a considerable technical lead over
its peers (Engelhard and Umicore) to gain a near 65% market share. We view that level of
market share as unsustainable however given the quality of the competing peer group and
the desire from customers to have strong competition between suppliers and we expect the
HDD market to settle down into a similar market share split to autocats although JM is likely
to remain the leading player. We expect JM’s market share to decline from around 65% to
the high 30’s, though this will take a number of years.
Figure 667: Approximate HDD market share 2010
Others
8%
BASF
22%
Umicore
5% Johnson Matthey
65%

Autocatalyst growth driven by auto growth and legislation

Global auto production growth expected to average 7% p.a. 2011-15
JD Power forecasts North American light vehicle production up 8.3% in 2011 and 8.1% in
2012. Western European light-vehicle production is forecast to rise by 0.4% in 2011 and
1.8% in 2012. Collectively, these two regions are approximately 34% of the global market. In
Asia incl. Japan (50% of the global market), production is expected to rise by 7% per annum
and will continue to be the main driver behind growth in the sector.
Figure 668: Auto production growth forecasts
2009 2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E
North America -32.2% 38.9% 8.3% 8.1% 6.8% 4.9% 1.9% 1.5% 1.4% 0.9%
South America -2.3% 12.6% 11.5% 1.9% 9.8% 6.9% 2.5% 2.1% 1.9% 0.9%
Western Europe -17.9% 12.1% 0.4% 1.8% 2.6% 5.1% 4.7% 3.6% 4.3% 2.8%
Eastern Europe -25.8% 22.7% 6.8% 8.4% 13.7% 11.4% 5.0% 4.1% 1.7% 2.5%
Asia 1.4% 28.4% 4.3% 15.4% 7.4% 6.3% 6.7% 6.1% 5.4% 4.5%
Other 1.0% 2.6% 2.4% 4.8% 2.0% 4.1% 3.6% 3.7% 3.5% 16.1%
World -11.8% 24.8% 5.1% 10.5% 7.2% 6.3% 5.1% 4.5% 4.1% 3.3%
Source: Deutsche Bank, JD Power
Autocatalyst growth driven by Asia/Pacific auto growth

The forecasts in Figure 11 shows that auto growth in Asia/Pacific auto growth is the major
driving force behind global growth as the region with the highest share of auto production
and growing at the fastest rate. Much of this is likely to be driven by China where we expect
passenger vehicle volumes to grow at low double digit rates as we believe the penetration
rate growth will continue if not accelerate in 2nd/3rd tier regions.
Tightening emissions standards drive autocat growth above auto production
Vehicle emission standards continue to tighten although at a slightly slower, more
sustainable, rate. Figure 14 shows the timelines for the main vehicles emission legislation
globally. Due to this tightening legislation, the rate of autocat market growth should be above
that of global vehicle production. Each tightening of the emission standards represents a
substantial reduction of the targeted pollutants. However the step-changes targeted are too
large to be achieved near-term by simply engineering more efficient autocats, so the only
other solution is to increase the precious metal content of each autocat unit to cut emissions.
All precious metal cost sits with the OEM producer so each step-up in emission standards
further pressures slim OEM margins. Critically precious metals make up around 80% of the
production cost of an autocats and to reduce costs, the OEMs incentivise the autocats
companies to cut precious metal content – a process called thrifting.
Figure 669: Timeline of emission legislation across the world
Source: Johnson Metthey

Thrifting reduces costs to the OEM and drives further autocatalyst profit growth
More importantly, cutting the high level of precious metal content in an autocat is key to
winning new business. Tighter standards require ever higher rates of precious metals which
drive up costs for the OEM. Successful thrifting (lowering precious metal content) reduces
OEM costs, helping an autocat company to win production platforms while potentially
boosting the coating charge (by receiving a share of the achieved savings through thrifting)
and the autocat company’s EBIT margin. Thrifting is an ever present part of the autocatalyst
industry and is necessary since it is not feasible without doing it due to high cost of PGM’s.
For example with tougher legislation now in place, it might be expected that the average
catalyst loading would be much higher than the early 1980s, however better technology and
thrifting means that PGM loadings are similar today despite the much tougher legislative
requirements. Even with thrifting the average PGM loading per catalyst (which varies with
type of catalyst and application) is 4-6g. This business model is practicable for as long as
emissions standards continue to tighten- at least ten years in our view.
Breakdown of catalyst materials
Autocatalyst manufacturers have traditionally used platinum as the precious metal
component since this has the greatest effect in reducing emissions from engines. However
over time advances in technology have allowed the use of less efficacious but cheaper
materials to replace platinum and still maintain the efficiency of the overall catalyst unit, a
trend which is exacerbated by high platinum prices. In particular palladium has replaced
platinum to a large degree in gasoline catalysts and is beginning to replace platinum in diesel
catalysts as well (although to a far lesser extent).
Figure 670: Global autocat cost by substrate, PM and Figure 671: Thrifting drives profitability- Precious metal
coating charge content and cost is reduced- coating charge rises
100
Subs trate c ost
100 Subs trate c ost
Subs trate c ost
80 C oa ting charge
80 C oa ting charge C oa ting charge
60
60
Prec ious metal cost Prec ious metal cost
40 Prec ious metal cost 40
20 20
0
0
Autocat cost structure Start Point Post-Thrifting
Source: Deutsche Bank and Johnson Matthey Source: Deutsche Bank and Johnson Matthey
Heavy duty diesel (HDD)

The heavy-duty diesel (HDD) market for emissions catalysts continues to grow
Historically cars and other light-duty vehicles have had their emissions regulated by tough
government regulations in the US, Europe and other selected regions, while truck and bus
emissions were not as tightly controlled. This situation changed with requirements from 2006
in Europe and 2007 in the USA for new trucks and buses (heavy-duty vehicles) to produce
drastically lower levels of nitrous oxides (NOx), carbon monoxide (CO) and particulates (PM).
The emissions tightening program of Europe and the USA is being copied in other key global
regions with Japan, South Korea, China and India following similar programs but a few years
behind. A summary of major HDD legislation is displayed in Figure 19. These new standards
have resulted in the need for after-treatment catalysts systems – heavy-duty diesel catalysts.
Heavy-duty diesel catalysts are similar in principal to autocats already used in light-duty
vehicles. However they are significantly more advanced technically, given the far greater
emission management loads being placed on them. This in turn drives a significantly higher
profit per unit opportunity for the autocat suppliers.

Figure 672: HDD emissions legislation by region has Figure 673: Number of vehicles affected by HDD
tightened for Particulates (y-axis) and NOx (x-axis)* legislation (2010 and 2012E)
* China is expected to implement EUIII regulations in selected cities from 2008 while India is expected to Source: Deutsche Bank, JD Power
implement EU III nationwide in 2010. Source: Johnson Matthey
The HDD Market should grow to $1.4bn by 2014

Generally all vehicles over 3.5 metric tonnes are covered by heavy-duty legislation. Between
Europe and the US alone this will cover over one million vehicles. Heavier trucks require
larger engines and hence higher values of catalyst. Based on modeling the new legislation on
a regional and truck type basis we believe the market is likely to rise from $400m in 2009/10
to $1.4bn in 2015.
Figure 674: Global HDD Market Size (US$m)by region Figure 675: Global HDD Market size (US$m)by truck
(2005-2015E) type (2005-2015E)
1500 1500
1200 1200
900 900
600 600
300 300
0 0
2005
2006
2007
2008
2009
2010E
2011E
2012E
2013E
2014E
2015E
2005
2006
2007
2008
2009
2010E
2011E
2012E
2013E
2014E
2015E
USA W.Europe New EU-10 Japan Korea China India
GVW 3-6t GVW 6-15t GVW 15t+
HDD regulation development varies across countries

Figure 676 illustrates the development of HDD regulation with the latest wave in early 2010
in the US and the next major wave in 2012 in Europe. As with light duty emissions
regulations, the various standards will be implemented as different times and with different
degrees of severity in the different countries.

Figure 676: HDD regulation development

New Models All Models
Europe
Euro 4 1-Oct-05 1-Oct-06
Euro 5 1-Oct-08 1-Oct-09
United States
US2007 1-Jan-07 1-Jan-07
US2010 1-Jan-10 1-Jan-10
Japan
Short Term
2.5-12t 1-Oct-03 1-Oct-03
12 t+ 1-Oct-04 1-Oct-04
New Long Term
2.5t+ 1-Oct-05 1-Oct-05
Japan Diesel 09
2.5t+ 31-Dec-09 31-Dec-09
China
Beijing - Euro 4 2008
Rest of Country - Euro 4 2010
India
Major Cities 2010 (or earlier)
South Korea
Euro 4 1-Jan-06 1-Jan-08
Brazil
Euro 4 2009
Source: Johnson Matthey
Non-road diesel (NRD)

Following on from tighter emission regulation for heavy-duty vehicles, new regulations in the
US, EU and Japan will significantly tighten emissions for non-road diesel engines.
Figure 677: Future NRD regulation

Territory & Application Legislation Timing
North America Europe
Non-road (130-560kW) Tier 4a Stage IIIb 2011
Tier 4b Stage IV 2014
Non-road (130-560kW) Tier 4a Stage IIIb 2012

Tier 4b Stage IV 2015
Non-road (37-56kW) Stage IIIb 2013

(19-56kw) Tier 4a 2013
Figure 678: ‘Vehicle’ types covered by non-road legislation

Non-road vehicle types
Construction equipment
Material handling equipment
Mining and quarrying
Agricultural and forestry equipment
Airport ground equipment
Locomotives and trains
Inland boats

The author of this report wishes to acknowledge the contribution made by Rajiv Dalal,
Sanjeev Sharma and Mohit Khandelwal employees of Evalueserve, a third-party provider to
Deutsche Bank of offshore research support services.

Appendix: Glossary of Terms

Active ingredient The finished but unformulated pharmaceutical or agrochemical compound that 'endows' its
properties.
Aromatics An organic compound that has a benzene (hexagonal) ring of carbon atoms, for example
Benzene.
Base chemical Building blocks, such as Ethylene and Benzene, from which many downstream products are
made.
Biocides Chemicals used to kill bacteria.
Blending The mixing of chemicals/substrates.
Brownfield A site that has an existing industrial development located on it. Industry often refers to
brownfield redevelopment.
Builder A type of chemical used in the manufacture of detergents. It keeps soil away from fabrics in a
wash, once a surfactant has separated the soil from the clothes.
Capacity utilisation The percentage of available capacity being used for production. Capacity Utilisation =
(Production/Capacity)*100%.
Captive market A market that over the short term has only limited choice as to its supplier (maybe an internal
company demand).
Catalyst (& inhibitor) A substance which alters the rate of chemical reaction, making it faster (catalyst) or slower
(inhibitor) without undergoing any change itself over the reaction cycle.
cGMP A production facility that is registered as having current good manufacturing practice.
Approval bodies such as the US FDA give this certification.
Chiral An asymmetric object/molecule.
Complex intermediates Intermediates that have undergone further refining and processing.
Comonomer A monomer added to the starting material to alter the final product.
Compound A substance that is made of two or more elements chemically bonded together.
Cracker Production facility for the manufacture of large volumes of petrochemicals from oil or gas
feedstocks.
Cracking The process of splitting mixtures of long chains of organic molecules (typically naphtha) into
smaller molecules (ethylene, propylene and so on).
Crimp The curl, or waviness, placed in synthetic fibres by chemicals or mechanical action.
Denier A measure of the weight of fibres per unit length, defined as the weight in grams of 9,000m
of fibre.

Dehydration The removal of water from a substance by a chemical reaction.
Disproportionation A method used in the production of benzene whereby a compound is simultaneously

oxidised and reduced.
Distillation A method of separating two or more substances in a mixture by vaporisation followed by

condensation.
Drying Removal of small quantities of water/solvents from a sample by physical or chemical means.
Effluent The waste product produced during a chemical process. It is usually a liquid or in a solution
(see Soluble).
Electrolysis The passing of an electric current through a solution which then attracts negative ions to the
positive terminal (anode) and positive ions to the negative terminal (cathode).
Element A pure substance that cannot be broken down chemically, into anything simpler.
Ethical drug A patent-protected pharmaceutical compound whose distribution is deliberately controlled

and whose application is limited to a selected target population.
Ethylene A two-carbon molecule with a reactive double bond that can be broken to add other
molecules, that is, C = C (chemical formula C2H4 ).
Feedstock The raw material substance that is fed into a manufacturing plant for synthesis into another
product.
Fermentation The production of alcohol from sugar or similar substance, usually utilising yeast.
Fractional distillation A form of distillation that enables several substances to be separated from a mixture
simultaneously. This is the method used to split crude oil into various derivative fractions.
Fraction A substance separated in fractional distillation.
Fungicide A chemical used to control fungi.
Generic A markets Jurisdictions which recognise pharmaceutical patents.
Generic B markets Jurisdictions that do not recognise pharmaceutical patents.
Generic drug A pharmaceutical product that is not patent protected.
Greenfield A potential site location that has not previously been developed.
Halogenation The addition to a molecule of a halogen atom, that is, fluorine, chlorine, bromine, iodine or
astatine.
Herbicides Chemical used to control weed/foliage growth.
Hydrodealkylation (HDA) A method used to remove alkyl groups using hydrogen, for example in the production of
benzene.
Inorganic chemicals Non-carbon-based molecules and some small carbon-based molecules such as a carbon
dioxide (CO2 ).

Insecticides Chemicals used to control pests/infestations.
Isotopes Different forms of the same element. The different forms behave identically in a chemical
manner but have a different mass.
Latex A stable aqueous dispersion used to synthesise rubbers as well as paper coatings and carpet
backing.
Liquefied Petroleum Gas One of the main feedstocks for a petrochemical cracker. It is obtained by the fractional
(LPG) distillation of crude oil.
Mammalian Description of a biotech product fermented from a mammal cell
MDI
A form of polyurethane (see Polyurethane chapter in main document).
Merchant market The external (that is, free) market in which a product may be sold.
Microbial Description of a biotech product fermented from a bacteria
Monomer A single molecule or unit that is often linked to many others. Examples include ethylene and
propylene, which are 'polymerised' into polyethylene and polypropylene respectively.
Mothballing The closure of a plant with a view to re-opening and starting manufacturing at a future date.
Naphtha One of the main feedstocks for a petrochemical cracker. It is obtained by the fractional
distillation of crude oil.
Natural gas One of the main feedstocks for a petrochemical cracker. It is obtained directly from natural
gas fields.
Neutralisation The process by which an acid and an alkali mix to produce neutral substances.
Nitration A chemical process adding nitrogen atoms to a molecule.
Original equipment Initial production market rather than a repair or secondary market. Often used in reference to
manufacture (OEM) the automobile market.
Olefin A product with straight chain hydrocarbons which may have one or more double bonds
conferring reactivity.
Organic chemicals Most, but not all, carbon compounds that at some historic point were part of living matter
(for example, oil, coal). Some small carbon compounds such as carbon dioxide (CO2 ) are
classed as inorganic.
Organometallics Compounds in which carbon or organic groups are attached to metal or metalloid atoms.
Oxidation A type of reaction where electrons are removed from a molecule or where oxygen atoms are
added to a molecule.
Photochemistry Chemical reactions brought about by the action of light.
Physical properties Melting point, boiling point, hardness, strength and so on. Properties not concerned with the
chemistry of a product.

Pigment Coloured, insoluble substance (either organic or inorganic) used to impart colour.
Plastic See Polymer.
Polymer Substances created by linking individual molecules (monomers) into long chains (polymers).
Otherwise known as plastics.
Polymerisation The process of creating a polymer (long chain of molecules) from a monomer (individual
molecules).
Propylene A three carbon molecule with a reactive double bond, that is, C=C=C (C3H6 ).
Reduction A type of reaction where electrons are added to a molecule.
Separation The uncoupling of chemicals or compounds.
Soluble If a substance will dissolve in a given liquid it is said to be soluble. The result is a solution.
Solvent A liquid that dissolves another substance to form a solution.
Sulphonation A chemical process that adds sulphur atoms to a molecule.
Surfactant Short for 'surface active agent’, a molecule that has both 'water-loving' and 'water-hating'
properties.
Synthesis gas A mixture of carbon monoxide, hydrogen, carbon dioxide and other gases.
TDI A form of polyurethane (see Polyurethane chapter in main document).

Appendix 1
Important Disclosures
Additional information available upon request
Disclosure checklist
Company Ticker Recent price* Disclosure
BASF BASFn.DE 64.14 (EUR) 12 May 11 1,6,7,8,14,15,17
Air Liquide AIRP.PA 94.93 (EUR) 12 May 11 6,14,17
*Prices are sourced from local exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies.
Important Disclosures Required by U.S. Regulators

Disclosures marked with an asterisk may also be required by at least one jurisdiction in addition to the United States. See
“Important Disclosures Required by Non-US Regulators” and Explanatory Notes.
1. Within the past year, Deutsche Bank and/or its affiliate(s) has managed or co-managed a public or private offering for this
company, for which it received fees.
6. Deutsche Bank and/or its affiliate(s) owns one percent or more of any class of common equity securities of this company
calculated under computational methods required by US law.
7. Deutsche Bank and/or its affiliate(s) has received compensation from this company for the provision of investment
banking or financial advisory services within the past year.
8. Deutsche Bank and/or its affiliate(s) expects to receive, or intends to seek, compensation for investment banking services
from this company in the next three months.
14. Deutsche Bank and/or its affiliate(s) has received non-investment banking related compensation from this company within
the past year.
15. This company has been a client of Deutsche Bank Securities Inc. within the past year, during which time it received non-
investment banking securities-related services.
Important Disclosures Required by Non-U.S. Regulators

Please also refer to disclosures in the “Important Disclosures Required by US Regulators” and the Explanatory Notes.
1. Within the past year, Deutsche Bank and/or its affiliate(s) has managed or co-managed a public or private offering for this
company, for which it received fees.
6. Deutsche Bank and/or its affiliate(s) owns one percent or more of any class of common equity securities of this company
calculated under computational methods required by US law.
7. Deutsche Bank and/or its affiliate(s) has received compensation from this company for the provision of investment
banking or financial advisory services within the past year.
17. Deutsche Bank and or/its affiliate(s) has a significant Non-Equity financial interest (this can include Bonds, Convertible
Bonds, Credit Derivatives and Traded Loans) where the aggregate net exposure to the following issuer(s), or issuer(s)
group, is more than 25m Euros.
For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this
research, please see the most recently published company report or visit our global disclosure look-up page on our
website at http://gm.db.com/ger/disclosure/DisclosureDirectory.eqsr.

Analyst Certification
The views expressed in this report accurately reflect the personal views of the undersigned lead analyst about the subject
issuers and the securities of those issuers. In addition, the undersigned lead analyst has not and will not receive any
compensation for providing a specific recommendation or view in this report. Tim Jones
Historical recommendations and target price: BASF (BASFn.DE)

(as of 12/05/2011)
120.00 Previous Recommendations
Strong Buy
Buy
100.00 1 Market Perform
Underperform
Not Rated
80.00 Suspended Rating
S ec ur it y P r ic e
17 Current Recommendations
15 16
14
13 Buy
60.00
1011 Hold
2 7 8 9 12
6 Sell
4 5 Not Rated
3
*New Recommendation Structure
20.00 as of September 9, 2002
0.00
May 08 Aug 08 Nov 08 Feb 09 May 09 Aug 09 Nov 09 Feb 10 May 10 Aug 10 Nov 10 Feb 11
Da t e
1. 26/6/2008: Buy, Target Price Change EUR54.00 10. 9/4/2010: Buy, Target Price Change EUR53.00
9. 25/2/2010: Buy, Target Price Change EUR51.00

Historical recommendations and target price: Air Liquide (AIRP.PA)

(as of 12/05/2011)
120.00 Previous Recommendations
Strong Buy
13 14 15 Buy
100.00 10 Market Perform
1 2 11 12
9 Underperform
8 Not Rated
80.00 3 7 Suspended Rating
S ec ur it y P r ic e
4 5 6 Current Recommendations
Buy
60.00
Hold
Sell
Not Rated
*New Recommendation Structure

20.00 as of September 9, 2002
0.00
May 08 Aug 08 Nov 08 Feb 09 May 09 Aug 09 Nov 09 Feb 10 May 10 Aug 10 Nov 10 Feb 11
Da t e
1. 12/6/2008: Hold, Target Price Change EUR85.00 9. 3/12/2009: Hold, Target Price Change EUR84.00
8. 12/10/2009: Hold, Target Price Change EUR74.00
Equity rating key Equity rating dispersion and banking relationships
Buy: Based on a current 12- month view of total share-

400 48% 49%
holder return (TSR = percentage change in share price from
current price to projected target price plus pro-jected
dividend yield ) , we recommend that investors buy the 300
stock.
200 40% 39%
Sell: Based on a current 12-month view of total share-holder
return, we recommend that investors sell the stock 100 3% 28%
Hold: We take a neutral view on the stock 12-months out 0
and, based on this time horizon, do not recommend either a
Buy or Sell. Buy Hold Sell
Notes:
1. Newly issued research recommendations and target Companies Covered Cos. w/ Banking Relationship
prices always supersede previously published research.
European Universe
2. Ratings definitions prior to 27 January, 2007 were:
Buy: Expected total return (including dividends) of 10%
or more over a 12-month period
Hold: Expected total return (including dividends) between
-10% and 10% over a 12-month period
Sell: Expected total return (including dividends) of -10% or
worse over a 12-month period

Regulatory Disclosures
1. Important Additional Conflict Disclosures
Aside from within this report, important conflict disclosures can also be found at https://gm.db.com/equities under the
"Disclosures Lookup" and "Legal" tabs. Investors are strongly encouraged to review this information before investing.
2. Short-Term Trade Ideas

Deutsche Bank equity research analysts sometimes have shorter-term trade ideas (known as SOLAR ideas) that are consistent
or inconsistent with Deutsche Bank's existing longer term ratings. These trade ideas can be found at the SOLAR link at
http://gm.db.com.
3. Country-Specific Disclosures
Australia: This research, and any access to it, is intended only for "wholesale clients" within the meaning of the Australian
Corporations Act.
Brazil: The views expressed above accurately reflect personal views of the authors about the subject company(ies) and
its(their) securities, including in relation to Deutsche Bank. The compensation of the equity research analyst(s) is indirectly
affected by revenues deriving from the business and financial transactions of Deutsche Bank.
EU countries: Disclosures relating to our obligations under MiFiD can be found at
http://globalmarkets.db.com/riskdisclosures.
Japan: Disclosures under the Financial Instruments and Exchange Law: Company name - Deutsche Securities Inc.
Registration number - Registered as a financial instruments dealer by the Head of the Kanto Local Finance Bureau (Kinsho) No.
117. Member of associations: JSDA, The Financial Futures Association of Japan. Commissions and risks involved in stock
transactions - for stock transactions, we charge stock commissions and consumption tax by multiplying the transaction
amount by the commission rate agreed with each customer. Stock transactions can lead to losses as a result of share price
fluctuations and other factors. Transactions in foreign stocks can lead to additional losses stemming from foreign exchange
fluctuations. "Moody's", "Standard & Poor's", and "Fitch" mentioned in this report are not registered credit rating agencies in
Japan unless “Japan” is specifically designated in the name of the entity.
New Zealand: This research is not intended for, and should not be given to, "members of the public" within the meaning of
the New Zealand Securities Market Act 1988.
Russia: This information, interpretation and opinions submitted herein are not in the context of, and do not constitute, any
appraisal or evaluation activity requiring a license in the Russian Federation.

European locations
Deutsche Bank AG London Deutsche-Bank AG, Deutsche Bank AG Deutsche Bank Sim S.p.a
1 Great Winchester Street 3, Avenue de Friedland Equity Research Via Santa Margherita 4
London EC2N 2EQ 75008 Paris Cedex 8 Große Gallusstraße 10-14 20123 Milan
France 60272 Frankfurt am Main Italy
Tel: (44) 20 7545 8000 Tel: (33) 1 44 95 64 00 Germany
Tel: (49) 69 910 00 Tel: (39) 0 24 024 1
Deutsche Bank AG Deutsche Securities Deutsche Bank AG Deutsche Bank AG

Herengracht 450 S.V.B, S.A. Stureplan 4 A, Box 5781 Uraniastrasse 9
1017 CA Amsterdam P0 de la Castellana, 42 S-114 87 Stockholm PO Box 7370
Netherlands 7th Floor Sweden 8023 Zürich
28046 Madrid, Spain Switzerland
Tel: (31) 20 555 4911 Tel: (34) 91 782 8400 Tel: (46) 8 463 5500 Tel: (41) 1 224 5000
Deutsche Bank AG, Helsinki Deutsche Bank AG Deutsche Bank AG Deutsche Bank AG, Warsaw
Kaivokatu 10 A, P.O.Bvox 650 Hohenstaufengasse 4 Aurora business park al.Armii Ludowej 26
FIN-00101 Helsinki 1010 Vienna 82 bld.2 Sadovnicheskaya street Budynek FOCUS
Finland Austria Moscow, 115035 00-609 Warsaw
Russia Poland
Tel: (358) 9 25 25 25 0 Tel: (43) 1 5318 10 Tel: (7) 495 797-5000 Tel: (48) 22 579 87 00
Deutsche Bank AG, Turkey Deutsche Bank AG, Greece

Eski Buyukdere Cad. Tekfen Tower 23A Vassilissis Sofias Avenue
No:209 Kat:17-18 6th Floor
TR-34394 Istanbul 10674 Athens, Greece
Tel: (90) 212 317 01 00 Tel: (30) 210 72 56 150
International locations
Deutsche Bank Securities Inc. Deutsche Bank AG London Deutsche Bank AG Deutsche Bank AG
60 Wall Street 1 Great Winchester Street Große Gallusstraße 10-14 Deutsche Bank Place
New York, NY 10005 London EC2N 2EQ 60272 Frankfurt am Main Level 16
United States of America United Kingdom Germany Corner of Hunter & Phillip Streets
Tel: (1) 212 250 2500 Tel: (44) 20 7545 8000 Tel: (49) 69 910 00 Sydney, NSW 2000
Australia
Tel: (61) 2 8258 1234
Deutsche Bank AG Deutsche Securities Inc.
Filiale Hongkong 2-11-1 Nagatacho
International Commerce Centre, Sanno Park Tower
1 Austin Road West,Kowloon, Chiyoda-ku, Tokyo 100-6171
Hong Kong Japan
Tel: (852) 2203 8888 Tel: (81) 3 5156 6770
Global Disclaimer
The information and opinions in this report were prepared by Deutsche Bank AG or one of its affiliates (collectively "Deutsche Bank"). The information herein is believed to be reliable and has been obtained from public sources
believed to be reliable. Deutsche Bank makes no representation as to the accuracy or completeness of such information.
Deutsche Bank may engage in securities transactions, on a proprietary basis or otherwise, in a manner inconsistent with the view taken in this research report. In addition, others within Deutsche Bank, including strategists and
sales staff, may take a view that is inconsistent with that taken in this research report.
Opinions, estimates and projections in this report constitute the current judgement of the author as of the date of this report. They do not necessarily reflect the opinions of Deutsche Bank and are subject to change without
notice. Deutsche Bank has no obligation to update, modify or amend this report or to otherwise notify a recipient thereof in the event that any opinion, forecast or estimate set forth herein, changes or subsequently becomes
inaccurate. Prices and availability of financial instruments are subject to change without notice. This report is provided for informational purposes only. It is not an offer or a solicitation of an offer to buy or sell any financial
instruments or to participate in any particular trading strategy. Target prices are inherently imprecise and a product of the analyst judgement.
As a result of Deutsche Bank’s recent acquisition of BHF-Bank AG, a security may be covered by more than one analyst within the Deutsche Bank group. Each of these analysts may use differing methodologies to value the
security; as a result, the recommendations may differ and the price targets and estimates of each may vary widely.
Deutsche Bank has instituted a new policy whereby analysts may choose not to set or maintain a target price of certain issuers under coverage with a Hold rating. In particular, this will typically occur for "Hold" rated stocks
having a market cap smaller than most other companies in its sector or region. We believe that such policy will allow us to make best use of our resources. Please visit our website at http://gm.db.com to determine the target
price of any stock.
The financial instruments discussed in this report may not be suitable for all investors and investors must make their own informed investment decisions. Stock transactions can lead to losses as a result of price fluctuations and
other factors. If a financial instrument is denominated in a currency other than an investor's currency, a change in exchange rates may adversely affect the investment. Past performance is not necessarily indicative of future
results. Deutsche Bank may with respect to securities covered by this report, sell to or buy from customers on a principal basis, and consider this report in deciding to trade on a proprietary basis.
Unless governing law provides otherwise, all transactions should be executed through the Deutsche Bank entity in the investor's home jurisdiction. In the U.S. this report is approved and/or distributed by Deutsche Bank
Securities Inc., a member of the NYSE, the NASD, NFA and SIPC. In Germany this report is approved and/or communicated by Deutsche Bank AG Frankfurt authorized by the BaFin. In the United Kingdom this report is approved
and/or communicated by Deutsche Bank AG London, a member of the London Stock Exchange and regulated by the Financial Services Authority for the conduct of investment business in the UK and authorized by the BaFin.
This report is distributed in Hong Kong by Deutsche Bank AG, Hong Kong Branch, in Korea by Deutsche Securities Korea Co. This report is distributed in Singapore by Deutsche Bank AG, Singapore Branch, and recipients in
Singapore of this report are to contact Deutsche Bank AG, Singapore Branch in respect of any matters arising from, or in connection with, this report. Where this report is issued or promulgated in Singapore to a person who is
not an accredited investor, expert investor or institutional investor (as defined in the applicable Singapore laws and regulations), Deutsche Bank AG, Singapore Branch accepts legal responsibility to such person for the contents
of this report. In Japan this report is approved and/or distributed by Deutsche Securities Inc. The information contained in this report does not constitute the provision of investment advice. In Australia, retail clients should obtain
a copy of a Product Disclosure Statement (PDS) relating to any financial product referred to in this report and consider the PDS before making any decision about whether to acquire the product. Deutsche Bank AG
Johannesburg is incorporated in the Federal Republic of Germany (Branch Register Number in South Africa: 1998/003298/10). Additional information relative to securities, other financial products or issuers discussed in this
report is available upon request. This report may not be reproduced, distributed or published by any person for any purpose without Deutsche Bank's prior written consent. Please cite source when quoting.
Copyright © 2011 Deutsche Bank AG
GRCM2011PROD022083

Chemicals For Beginners Deutsche Bank May 13, 2011

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Chemicals For Beginners Deutsche Bank May 13, 2011

Uploaded by

Copyright:

Available Formats

Europe

the back of the classroom messing

The Vth edition

Tim Jones Martin Dunwoodie, CFA Virginie Boucher-Ferte Oliver Reiff

Deutsche Bank AG/London

For beginners (and experts)

Deutsche Bank AG/London

The Global Chemical Industry .......................................................... 5

Organic chemicals ........................................................................... 10

Plastics (or Polymers)...................................................................... 60

High performance plastics and engineering resins ...................... 81

Page 2 Deutsche Bank AG/London

Table of Contents (cont'd)

Fine chemicals ............................................................................... 108

Other selected specialty chemicals ............................................. 131

Resins, paints and adhesives........................................................ 155

Inorganic chemicals....................................................................... 166

Industrial Gases ............................................................................. 230

Deutsche Bank AG/London Page 3

Table of Contents (cont'd)

Natural rubber ............................................................................... 243

Autocatalysts ................................................................................. 250

Appendix: Glossary of Terms ....................................................... 260

Page 4 Deutsche Bank AG/London

The Global Chemical Industry

Source: CEFIC and Deutsche Bank estimates

M etals & M achinery

Source: CEFIC and Deutsche Bank estimates

Deutsche Bank AG/London Page 5

Source: CEFIC, Deutsche Bank estimates

Page 6 Deutsche Bank AG/London

Figure 6: Top 100 Chemical companies (by sales) 2009

Deutsche Bank AG/London Page 7

Growth and cyclicality

Production (volume): Growth rate YoY

Chemicals Manufacturing 2009 2010 2011

Source: CEFIC Source: CEFIC

Industry cyclicality is essentially caused by any significant increase or decrease in the

Volum e changes - year-on-year Pricing changes - year-on-year

Source: Company data Source: Company data

Page 8 Deutsche Bank AG/London

60 Rubber and Plastic Products

40 Publishing, printing, reproduction of recorded media

Other transport equipment

0 20 40 60 80 100 120 140

Feedstock Fuel & Power

Source (Fig 13-16) CEFICl

Deutsche Bank AG/London Page 9

Figure 17: Base chemicals

ethylene (2 - carbon chain) benzene (6 - carbon ring)

Figure 18: The molecular structure of ethylene and benzene

carbon atoms are denoted by C, hydrogen atom s by H

Page 10 Deutsche Bank AG/London

The petrochemical industry

Figure 19: End products of the cracking process

Figure 20: Typical regional feedstocks

Deutsche Bank AG/London Page 11

As shown below, cracking naphtha, ethane, propane or butane produces different

Figure 21: Percentage of base chemicals produced by feedstock

Page 12 Deutsche Bank AG/London

Oil Refining Industry The Petrochemical Industry

Bulk Chemicals for Beginners

Source: Deutsche Bank