ANN M. THAYER, C&EN HOUSTON

While it's easy to say the chemical industry has seen it all before--cyclical markets, lagging demand, overcapacity, high costs, and poor economic conditions--2002 was, in fact, entirely different. For in this year, the business climate was in the shadow of the terrorist attacks of Sept. 11, 2001. Thus, every action taken by industry and its executives, employees, and companies at their facilities resonated with implications for physical and economic security, safety, and stability.

Whether prospects for the chemical, pharmaceutical, and biotechnology industries have turned a corner still is uncertain. A few positive indicators that the situation is improving--such as a slight upturn in earnings and a better performing stock market--have emerged at the end of this year. Nevertheless, the economy remains volatile, easily unhinged by threats of war, unresolved issues of corporate credibility, and erratic consumer confidence. So it may not be until 2004 or later that recovery takes hold.

Besides these added challenges, traditional business dynamics still were at play in 2002. Competition forced companies to make the usual changes in strategy, asset mix, production capability, technology, and products.

Late in the year, the American Chemistry Council (ACC) released a generally upbeat annual performance and outlook report. It expects indicators--including overall profits and shipments in consumer products, basic chemicals, and life sciences--to be up for 2002 and suggests that growth will continue and perhaps accelerate in 2003.

"Since chemical industry performance is often an engine of growth and an indicator of economic health," says Gregori Lebedev, ACC's new president and chief executive officer, "it is good news, indeed, that we are seeing evidence that the chemical sector is beginning to rebound."

CHEMICAL ECONOMY. Chemical producers were optimistic at the start of the year that 2002 would turn out better than 2001. But that said, in January, ACC's projections were still placing sales and earnings growth below where they were in 2000. These projections were based on a survey of 95 ACC members representing $187 billion in annual sales.

Overall chemical sales were predicted to grow about 2.1%, with life sciences growing more than 7%, specialties nearly 4%, and basic chemicals less than 2%. However, the sectors' contributions to an overall 42.5% growth in net operating income were reversed: Basic chemicals were seen enjoying a 56% rise in income, while specialty chemicals were to be up about 11%, and life sciences were expected to fall about 0.5%.

Cost cutting eventually helped improve earnings for many companies. For the first nine months of 2002, sales for a group of 25 leading U.S. firms fell 3.4%, but earnings rose 9.3%. There had been no gains until the third quarter, when sales rose 2.2% and earnings jumped 43.2%. Chemical earnings at the five major U.S. oil companies soared 159% over nine months.

"It is good news, indeed, that we are seeing evidence that the chemical sector is beginning to rebound."

Major European producers BASF, Bayer, and Degussa showed assorted earnings results, often because of special charges from divestitures and restructuring, whereas some specialty chemicals firms in the region reported higher operating income despite declining sales. Leading Japanese companies also offered up a mixed picture for nine-month results.

A positive outlook for the full year is still in question. Many European specialty producers anticipate that results will be better than in 2001. In the U.S., Dow Chemical and DuPont temper their optimism because of geopolitical uncertainties, volatility in feedstock and energy costs, and a slower pace of economic growth.

A survey conducted a few months into 2002 found that nearly two-thirds of the chemical industry CEOs and analysts responding did not expect the business environment to improve significantly until 2003 or beyond. The state of the economy, they said, is a more important issue than energy prices, the environment, and public perception. Nearly half the executives were still looking to fix things through cost cutting, rather than growing through innovation.

Future-oriented business spending, often considered necessary to fuel an upturn, has been depressed. Industry R&D spending is expected to be down by a few percent for the year, while capital expenditures might show only a "bare bones" rise of just over 2%. However, ACC predicts that a recovery in profits will set the stage for increased expenditures in 2003.

The chemical industry has been working against high feedstock and energy costs and a lackluster economy all year. U.S. chemical production had been trending upward for most of the year, but began to slide downward in August. However, it generally remained above 2001 levels. Demand began to fall off slightly late in the year, and the inventories-to-shipments ratio began to rise in the second half. Nearer to the year's end, ACC reported that U.S. industry shipments were up 2%.

BICENTENNIAL DuPont CEO Holliday (left) and Chief Scientific Officer Thomas M. Connelly Jr. celebrate the company's anniversary in 2002. PHOTO BY PETER CUTTS

Trade also has been problematic from the start; the industry began the year with a deficit. For most months, the deficit persisted, although expanding and contracting in size. A brief surplus appeared in March, and chemical trade was nearly breakeven in May and June. Through the first nine months of 2002, exports were flat at $60.3 billion, while imports grew 6% to $63.1 billion, resulting in a $2.78 billion deficit for the period.

On a positive note, chemical prices have been climbing steadily all year, coming out of a trough hit in December 2001 and January 2002. In the start of the fourth quarter, prices were up 4.1% from the same period last year, according to Commerce Department data. Prices for industrial chemicals, the largest single segment of the industry, have risen 7.4%.

Chemical company stock performance during the year reflected the dismal situation in the chemical economy. In the first quarter, when there still was optimism that the economy would rebound, a group of 25 leading chemical stocks tracked by C&EN gained more than 9% and outpaced the broader stock market.

However, in the second quarter, corporate scandals, global unrest, and a lack of confidence took their toll. By the end of September, C&EN's chemical stock index had turned down 14%, although it was still doing better than the Dow Jones industrial average, which was off 24%.

A brief uptick in the stock market that brought the Dow Jones index up about 12% between Sept. 30 and early December helped boost chemical stocks by about 5% as well. Although Cambrex, Crompton, and Solutia continued to lose ground, several companies had double-digit increases in their share prices, including DuPont, which jumped nearly 20%.

EMPLOYMENT CUTS. Many chemical and pharmaceutical companies attempted to improve their financial performance through cost cutting, and that included shrinking employee rolls. However, the number of announced cuts lessened some in 2002 compared with 2001. ACC predicts that better company performance will lead to a slight rise in employment in 2003.

Labor Department data show U.S. chemical employment for October 2002 at 1,006,000 workers. Employment actually was fairly stable, staying close to an average of 1,008,200 over the first 10 months of the year. In contrast, Labor reports employment fell by 16,000 in 2001, with most of the decline in the past six months.

Globally, redundancies, arising largely from mergers, led to companies announcing nearly 50,000 job cuts in 2001, not including 27,000 at Sinopec (China Petroleum & Chemical Corp.) alone. In 2002, planned job eliminations at major chemical and drug firms totaled about 23,000, with more than 60% of the total at European and Asian firms.

Bayer accounted for many of the planned cuts--300 at operations in Canada and 1,300 in its troubled pharmaceuticals business (on top of 1,300 announced last year). Later in the year, following the acquisition of Aventis' agribusiness unit, Bayer announced another 4,700 layoffs, again in pharmaceuticals and in its crop science business. By 2005, the company intends to cut 15,000 jobs, or 12% of its workforce--5,300 in polymers, 4,000 in crop protection, 3,000 in health care, 1,300 in chemicals, and 1,000 in service operations.

Targeting ailing business units, DuPont decided to shed 2,000 jobs in textiles and 650 in coatings. Rohm and Haas increased its planned cutbacks to 1,860, up from about 1,300 it had indicated in 2001. Similarly, Akzo Nobel said it would trim another 1,500 on top of 2,000 scheduled in 2001.

Linde will cut 1,550 jobs, while Dainippon Ink & Chemicals projects slashing 3,500 over three years. And Eastman Kodak intends to shave 1,500 R&D jobs. Likewise, BASF is revamping crop research and will reduce R&D staff by 1,130 employees in the next three years.

Besides Bayer, other pharmaceutical firms will pare operations. Late in the year, Abbott said it would eliminate 2,000 positions, while Akzo Nobel will drop 300 at its Organon unit. Bristol-Myers Squibb decided to shutter its Wilmington, Del., R&D site, acquired with its late 2001 purchase of DuPont Pharmaceuticals. It will offer jobs to about 100 of the 655 employees affected and has invited the rest to apply for 200 R&D openings at other locations.

Meanwhile, at the annual Society of Chemical Industry meeting in October, European executives worried about how to attract and retain the young scientists needed by their companies. In its competition with other business sectors for employees, the industry is encountering an apparent lack of enthusiasm from prospective employees about working for chemical companies.

Dow employees may have to be satisfied with just having jobs in the current environment, since the company has decided to freeze salaries next year, including that of CEO Michael D. Parker, as part of a cost-cutting program. This year, Dow and DuPont disclosed that Parker and DuPont CEO Charles O. Holliday Jr. did not receive bonuses for 2001--about half of their annual compensation--but did receive salaries of nearly $1 million each and stock options.

RESTRUCTURING MOVES. Another approach chemical companies took to improve profitability has been to restructure their businesses through mergers, acquisitions, and divestitures. Nevertheless, this year saw few "megamergers" on the scale of the Dow-Union Carbide combination or those that created new top 10 producers TotalFinaElf and Degussa in previous years.

Dow ranked this year as the largest global chemical company, with nearly $28 billion in annual chemical sales. The company focused on further integrating the Carbide operations acquired in 2001 and said it will make the significant shift of distributing its high-value, end-market-oriented growth businesses among its more traditional operations. Likewise, former top producer BASF, now number three, was actively managing its portfolio to maintain financial strength.

Number two DuPont celebrated its 200th anniversary, but not without a major overhaul that will involve shedding a historical mainstay of the company. It plans to sell or spin off its $6.5 billion fibers business by the end of 2003. It's realigning its remaining wide-ranging businesses into five growth units--coatings and white pigments, performance materials, electronics and communications, safety and protection products, and agriculture and nutrition--with a goal of 10% annual earnings-per-share growth and 6% revenue growth starting next year.

ASSETS Dow Chemical's Freeport, Texas, site is the company's largest integrated operation, producing 40 billion lb of products annually. DOW PHOTO

A major transformation is also under way at Bayer, which in fourth position is adopting a management holding company structure with four legally independent operating subsidiaries--polymers, health care, crop protection, and chemicals--by July 2003. It chose the new structure after increasing pressure from shareholders and the investment community to make changes.

For the rest of the industry, merger activity in the first six months was down compared with first-half 2001. Tight credit, the economic slowdown, low profitability, and lower valuations affected both the number and value of larger deals. As for value, large-deal transactions in the first half of 2001 totaled $16 billion, compared with $27 billion for the first half of 2001.

Transactions often involved smaller business units as companies trimmed and added pieces to reposition themselves. C&EN reported the announcement or completion of at least 100 such deals in chemicals, compared with less than half that in 2001. Areas of activity--much of it taking place in Europe--included fluoroproducts, catalysts, fibers, paint, water treatment, fertilizers, and agrochemicals.

There were a few notably large transactions. Saudi Basic Industries Corp. (SABIC) acquired DSM's petrochemicals unit for $1.8 billion and gained a European foothold. And DSM, now focused on specialties and life sciences, is buying Roche's vitamins business for about $2.2 billion.

Bayer completed its $6.6 billion purchase of Aventis CropScience in June; subsequently, it sold product lines and other assets to meet regulators' demands. It later sold its Haarmann & Reimer fragrances subsidiary for $1.7 billion to a private equity fund that will merge it with competitor Dragoco.

Solvay bought the Ausimont fluoroproducts business from Montedison for $1.2 billion and is expected to sell its 50% stake in a polyethylene venture to partner BP. Hercules, whose fortunes waned after it purchased BetzDearborn in 1998, turned around and sold the business to GE in June for $1.8 billion.

In the Asia-Pacific region, except for a financially strong Shin-Etsu, many chemical producers shuffled assets. Teijin will adopt a holding structure by April 2003, while in China Sinopec began increasing control over its separate subsidiaries. Mitsubishi announced a complex reorganization designed to take place over five years and return it to profitability. Dainippon, after a spate of acquisitions, looks to boost profits by cutting costs and focusing on core businesses.

Mitsui Chemicals and Sumitomo Chemical merged their polyolefin operations as the first step toward a full merger in 2004. Samsung is selling 50% of its South Korean petrochemical complex to Atofina for $750 million. And, in a regional industry struggling to compete internationally, India's Reliance Industries bought a 26% stake and management control in its closest rival, Indian Petrochemicals Corp., for $304 million.

LEADERS First three among Global Top 10 flip-flop
RANK			2001 CHEMICAL SALES
2001	2000	COMPANY	($ BILLIONS)
1	3	Dow Chemical	$27.8
2	2	DuPont	26.8
3	1	BASF	24.7
4	5	Bayer	18.3
5	6	TotalFinaElfa	17.5
6	4	ExxonMobil	15.9
7	8	Shell	14.3
8	7	Degussaa	11.6
9	10	BP	11.5
10	9	ICI	9.2

A few deals went through some interesting gyrations, such as the acquisition of ChemFirst by DuPont, which was on, then off, then on again as the result of an explosion at a ChemFirst plant. But the most circuitous of deals has been Degussa's potential takeover by German mining company RAG. The agreement is still contingent on E.ON, Degussa's current majority owner, getting government and court approval to buy RAG's shares in natural gas supplier Ruhrgas.

Several companies also went through transitions--Dow Corning, Penn Specialties, and Sterling Chemicals prepared to emerge from bankruptcy, whereas Borden Chemicals & Plastics was liquidated. And International Specialty Products Chairman Samuel J. Heyman moved closer to taking ISP private by signing an agreement to buy the 20% he does not already own.

On the flip side, Noveon made plans for an initial public offering and Monsanto emerged as an independent company again after Pharmacia spun it off. Eastman canceled its IPO and instead adopted a divisional structure for what were to have been separate commodity products and specialty chemicals companies.

Huntsman Corp., the largest privately held chemical producer, faced some of its greatest challenges. The company started the year in deep financial trouble but eventually resolved its issues through negotiating with lenders and restructuring its debt. Saving the company and avoiding bankruptcy came at a cost, however: job cuts, reorganization, and a loss of independence after selling nearly half the company to third-party investors.

PRODUCTION SHIFTS. Amid all the changes and challenges, chemical producers still announced nearly twice as many expansions as shutdowns in manufacturing operations. C&EN reported nearly three dozen closures or plant idlings during the past 11 months, compared with more than 60 start-ups or planned expansions. Even Huntsman opened its first "grassroots" chemical plant, a $92 million titanium dioxide facility in England.

Commodities and plastics--particularly polyethylene, polypropylene, ethylene oxide, styrene, and polystyrene--were trimmed back more than specialty chemicals, and in many cases the cutbacks came at U.S. locations. The U.S. petrochemical industry has been facing significant challenges to its competitive position compared with other regions because of overcapacity and more expensive feedstocks. Late in the year, however, BP countered the trend and announced that it would expand its Chocolate Bayou, Texas, ethylene cracker.

In contrast to the U.S. situation, petrochemical projects in Asia-Pacific and the Middle East advanced. Even in Mexico, the national oil company Pemex offered plans for an ethylene complex. It expects to involve foreign partners and begin construction in 2005. The company is also considering an ethylene derivatives plant and styrene and p-xylene capacity.

Recently, Shell Chemicals and China National Offshore Oil Corp. got the final go-ahead to build their $4.3 billion petrochemical complex in southern China. BASF was issued a business license for new tetrahydrofuran plants in the Shanghai area. The company and its partners are also planning a $1 billion polyurethane complex there. And Ellba Eastern, a joint venture of Shell and BASF, started a propylene oxide/styrene complex in Singapore.

Qatar Petroleum, Chevron Phillips Chemical, and Atofina signed joint-venture agreements for new ethylene, polyethylene, and a-olefins plants set to open in Qatar in 2007. An earlier venture between Qatar Petroleum and Chevron Phillips already has plans for ethylene, polyethylene, and 1-hexene units in the country.

However, negotiations among major Western oil and petrochemical companies and the Saudi Arabian government to develop natural gas fields in the region hit snags during 2002. Although unrelated, SABIC announced its own plans to raise its total product output 37%, to 48 million metric tons per year, by 2010. The expansion is to come via organic growth and through acquisitions.

Separately, Chevron Phillips and Saudi Industrial Investment Group are planning a $1 billion expansion of their venture's benzene, cyclohexane, styrene, and propylene complex in Al Jubail. And Japanese engineering firm Chiyoda will build a big methanol plant for a venture between Saudi and Japanese partners.

Although petrochemical projects were larger and more costly, many plant expansions and start-ups were announced in areas a bit removed from the basic petrochemical commodities. Industrial gases fared well, with several major projects planned that will feed expanding chemicals production. Other areas of activity included specialty plastics and intermediates, catalysts, and electronics-related chemicals such as nitrogen trifluoride.

FINE CHEMICALS GROW. In general, the fine chemicals business was marked by asset shifts, alliances, new ventures, and capacity changes. However, different niches saw different approaches to growth. For example, fine chemicals producers were still sorting out their assets and business plans because of tough market conditions, whereas bioprocessors typically were increasing capacity to meet growing demand.

ISP, wanting to sell some assets, eventually sold its Israel-based FineTech drug development business to Pharmaceutical Resources, but ended up keeping a Columbus, Ohio, plant. Meanwhile, Eastman decided to shut its Hong Kong plant when a buyer couldn't be found, and Lonza decided to close its Los Angeles plant.

Industry competition also led to other strategic changes. Dow continued to carve out a position in the active pharmaceutical ingredients (API) market by adding a range of capabilities. To focus on different market segments, DSM split its fine chemicals operations into two. Mitsubishi made plans to spin off part of its API business and merge it with another to take greater advantage of customers looking to outsource production.

It may not be until 2004 or later that economic recovery takes hold.

A few fine chemicals expansions were announced: Lonza, Bayer, DSM, and Albany Molecular Research all boosted kilo-scale services to supply APIs for preclinical and early-clinical drug development. Solutia started fast-track synthesis and pharmaceutical development services and began construction on a new high-potency API plant. Organichem will build a high-potency unit as well and started up a large-scale API unit late in the year.

Biopharmaceutical manufacturers--including Lonza, DSM, Avecia, Cambrex, and Genencor--added production capacity. Cambrex announced a series of expansions this past summer that should start to come onstream within a year. Avecia completed expansion of a new DNA medicines facility and began construction of a $100 million microbial fermentation unit in England. And Lonza is investing $225 million in both microbial and mammalian cell-based production.

Genencor, already a leading industrial enzyme producer, made known its plans to enter the pharmaceutical protein business. It will build a $10 million facility to open in 2004 for clinical-scale production. Overall, the company intends to spend up to $50 million over five years, with the scope of its investment dependent on the success of its own drug development program.

Genencor also gained two new alliance partners--Seattle Genetics and Johns Hopkins University School of Medicine--in cancer and vaccine therapeutics, respectively. Albany Molecular Research struck drug discovery deals with Merck and with biopharmaceutical developer Genzyme. Microbia will work with Teva Pharmaceutical to speed up the process development cycle for microbial-derived pharmaceuticals and fine chemicals.

Enzymes producer Novozymes has been using acquisitions to build a microorganisms business large enough to invest in major research. During 2002, it spent about $10 million to purchase BioGaia Fermentation, which produces and sells proteins for the drug industry. Shortly thereafter, it bought microorganism and enzyme producer George A. Jeffreys & Co. and microorganism developer InterBio.

Although many small technology companies struck deals with large drug and chemical producers, Diversa clearly led in adding partners. Early in the year, it announced separate biocatalysis development deals with BASF, Degussa, and Givaudan. These were followed midyear by a multiyear agreement to help DuPont develop new routes for chemical production. It then ended the year with a major plant genomics collaboration with Syngenta.

PHARMACEUTICAL WOES. While custom manufacturers worked hard to meet the needs of drug producers, these customers also presented setbacks. For example, the delayed launch of an AstraZeneca product was a blow to Avecia since intermediates for the drug make up about 15% of its fine chemicals sales. However, analysts noted that Avecia was only one of several producers hit by such problems, and the risk continues as manufacturers and drug developers signed even more deals this year.

CUSTOMIZATION Specialty and fine chemicals producers kept active providing products, contract manufacturing, and other services. ALBANY MOLECULAR PHOTO

Pharmaceutical companies struggled to launch new drugs while continuing to lose ground to generic versions of once-leading products. By the end of the third quarter, combined 2002 sales for 15 leading global firms were up just 4.7% and earnings fell about 1%, compared with typical historical double-digit growth rates. Growth in the biopharmaceutical sector also slowed; although revenues still rose to record levels, increased spending to move drugs through development contributed to overall lower earnings. Reducing the time to market by speeding up drug discovery and development continued to be a major preoccupation for drug firms. Alliances that access new technologies or potential products was one approach, while mergers and acquisitions was another. C&EN reported on nearly two dozen sizable acquisitions in the drug and biotech industries, and even more collaborations ranging in value from a few million to hundreds of millions of dollars.

Consolidation among the larger companies has slowed, but Pfizer's surprise $60 billion bid for Pharmacia in July ignited speculation that it would start again. The transaction, which will create a new industry leader, is still undergoing regulatory review. Getting regulatory approval this year was biotechnology's biggest deal ever--Amgen's $13 billion acquisition of Immunex, which further cemented Amgen's position as the top biopharmaceutical producer.

Roche obtained a significant position in the Japanese market by combining its subsidiary there with Chugai Pharmaceuticals; Roche owns 50.1% of the combination, now the fifth largest Japanese drug firm. In other cross-border transactions, Serono purchased the French genomics firm Genset, while Novartis acquired the Slovenian generic drug producer Lek.

Bayer's pharmaceutical business became one of the most talked about during 2002. Liabilities and litigation related to the recall of its cholesterol-lowering drug Baycol, which cost it $1 billion in sales this year, dogged the unit. It put a series of new managers at the helm and finally conceded it may need a majority partner to help boost its fortunes. GlaxoSmithKline is often rumored to be the most likely suitor.

Despite the bad taste left by Bristol-Myers Squibb's problematic deal with ImClone Systems, major drug firms also sought partnerships with small companies. The pairings in 2002 included Aventis and Genta, Glaxo and Gilead Sciences, Glaxo and Exelixis, Eli Lilly and Isis Pharmaceuticals, Lilly and Amylin Pharmaceuticals, Merck and Celera Genomics, Pfizer and Tripos, and Roche and Kosan Biosciences. Number two biopharmaceutical producer Genentech became a partner to a number of smaller firms, including Xenova, Seattle Genetics, and Dendreon.

The desire to foster integrated drug R&D capabilities drove acquisitions and collaborative deals among smaller companies as well, especially the early gene sequencers, which now want to be drug developers. These genomics companies reached critical turning points in 2002, with new managers scaling back database licensing businesses and building R&D operations instead.

An important deal that didn't happen was Merck's spin-off of Medco, its pharmacy benefits management business. Although it set a price for the stock offering, it ended up delaying the split because of market conditions. The planned move did bring Merck's sales and earnings into greater focus since the company reported separate results for its drugs and benefits management sides. It also brought unfavorable scrutiny on exactly how Medco was booking revenues.

Merck wasn't alone in facing such scrutiny. Elan's bookkeeping came under fire and eventually led to a complete company restructuring. Schering-Plough was investigated both for possible insider trading violations and manufacturing problems, while regulators also looked into manufacturing issues at two Johnson & Johnson facilities. And several states sued Bristol-Myers over limiting access to generic versions of its anticancer drug Taxol.

INDUSTRY FOCUS. Beyond economic and operational concerns, chemical companies faced several issues that have broad business ramifications. Not the least of these were post-Sept. 11 considerations of plant security and safety, corporate disclosures and ethics, wide-ranging litigation, and public perception of the industry.

In June, ACC proposed a security code that will require companies to screen their facilities, assess vulnerabilities, identify and take steps to improve security, and obtain third-party verification. The code will become part of Responsible Care and makes enhanced security mandatory for all ACC members. The industry also set up a data-sharing center with the Federal Bureau of Investigation to exchange and analyze critical threat and incident information. The Synthetic Organic Chemical Manufacturers Association has been working on a counterterrorism proposal as well.

COMPETITION Generic drugs had a significant impact on the sales and earnings of the major pharmaceutical producers. ANDRX PHOTO

Meanwhile, various government agencies considered taking action but eventually signaled that the industry code may be used, at least temporarily, in lieu of legislated requirements. Mandatory measures, such as those proposed in Senate bill S. 1602, would have put the Environmental Protection Agency in charge of a site security program.

An issue for EPA has been that ACC represents only about 1,000 of the 15,000 chemical sites of concern. During 2002, EPA developed site security guidelines that might have become mandatory under a new Clean Air Act regulation, but later backed a voluntary program under which the agency will assist and encourage companies to develop antiterrorism measures. The Department of Justice also released a guide offering vulnerability assessment methodology.

While not connected to terrorism, a few accidents that occurred during the year fueled safety worries in general. Although the industry had few fatal accidents in 2002, the U.S. Chemical Safety & Hazard Investigation Board released studies in which it found serious gaps in regulations to prevent accidents. Incidents it said were avoidable included a March 2001 explosion that killed three people at BP's Augusta, Ga., plant. In addition, the consequences of past tragedies persisted. Survivors in Bhopal, India, now want Dow, as the acquirer of Union Carbide, to pay for the consequences of Carbide's 1984 chemical leak there. Groups also protested a possible lowering of still-outstanding charges against former Carbide executives.

In France, repercussions lingered from the deadly September 2001 explosion at TotalFinaElf's Toulouse fertilizer plant. While the cause of the accident is still unknown, the plant's metropolitan location has led authorities to rethink the placement of chemical operations.

For example, neighboring SNPE was allowed to reopen part of its nearby plant, but not a critical phosgene unit. The consequences were even wider for SNPE, which ultimately revamped its entire phosgene-related production worldwide and decided to close a Texas site.

Chemical producers confronted several legal challenges. DuPont was found liable for illnesses allegedly related to pollutants in Pompton Lakes, N.J., although it is appealing the ruling. Similarly, Solutia was in a protracted battle all year over polychlorinated biphenyl contamination in Anniston, Ala. Interested parties are still debating a cleanup settlement reached between the company and the government.

On an even larger scale, more than 250 defendants initially faced a massive asbestos lawsuit in West Virginia, but only Dow's Union Carbide subsidiary remains after the others settled. A jury found Carbide liable for worker exposure; a new phase of the trial, including possible damages, will begin next year. And, 18 years after settling, Dow and 12 other firms may face an agent orange-related lawsuit if the U.S. Supreme Court decides it can go ahead.

Making several chemical producers look bad were a rash of price-fixing allegations, fines, and antidumping investigations that arose during 2002. According to the World Trade Organization (WTO), chemicals were involved in nearly one-third of all antidumping probes--34 out of 104--initiated worldwide in the first half of 2002.

HAZARD REMOVAL Asbestos-related litigation and liabilities plagued many companies this past year. PHOTO BY TODD BUCHANAN

BASF finally settled remaining price-fixing claims by U.S. vitamin purchasers. Atofina was fined and an executive jailed for monochloroacetic acid price fixing. Degussa and others paid fines for methionine price fixing. Other areas probed for price fixing included European industrial gases, polyester fibers in the U.S., carbon black, and rubber chemicals.

Chemical producers, like other major companies after the Enron and WorldCom accounting scandals, had to address public and shareholder anxiety about corporate disclosures and ethics. In August, chemical executives joined those from other industries in supplying sworn statements to certify company financial statements.

During this tumultuous year, chemical companies, through ACC in the U.S. and the European Chemical Industry Council (CEFIC) in Europe, began initiatives focused on improving public perception and communicating with outside parties. These convictions, along with others on sustainable development, innovation, and globalization, moved to an international stage at the World Summit on Sustainable Development in Johannesburg in late August. REGULATION SHIFTS. Internationally, U.S. and European governments battled over European Union trade sanctions wanted in response to U.S. tax breaks for companies with foreign sales. ACC estimates that this tax break saves chemical makers $500 million to $750 million per year. WTO supported the EU's position to seek more than $4 billion in duties. However, big commodity chemicals were not on the EU's recent list for retaliatory duties.

Debate continued over Europe's plan for registering, testing, and labeling chemicals. The European Commission, the administrative arm of the EU, now expects to produce draft regulations by next spring instead of by the end of this year. The impact of the policy on world markets, international trade, production, and employment is predicted to be considerable and reach well beyond the chemical industry. The costs for testing alone have been estimated between $1.4 billion and nearly $7 billion.

While EU environmental commissioners believe the new regulations and the resulting replacement of hazardous chemicals by safer ones will stimulate innovation and new markets, industry has been less enthusiastic and optimistic. Calling the system the regulations would create "largely unworkable," ACC and CEFIC said it could lead to the withdrawal of a quarter of their products from the EU market.

In the U.S., chemical producers believe the short-term outlook might be brighter. Although the effects are yet to be fully seen, Republican control of the Congress gained in late 2002 could bring some legislative changes. Many GOP initiatives passed in the House of Representatives this year, only to be stalled later in the Senate. However, legislative success is not a sure thing, especially since the new GOP majority in the Senate is slim.

Still, the chemical industry is seeing opportunities for a legislative agenda more suited to its interests. An energy policy, including greater U.S. independence, may finally move forward, but energy issues are again expected to overlap with environmental concerns. It's also anticipated that Republicans will move to moderate laws on clean air, clean water, and wildlife. EPA, for example, has already released a new source review rule relaxing existing regulations.

Global warming continued to be an issue for the Bush Administration, which has refused to join international efforts to reduce greenhouse gas emissions. Meanwhile, most industrialized countries have made progress toward meeting CO₂ emissions reductions under the Kyoto protocol, although Russia and Canada may be delaying or moving away from ratification. In other venues, climate talks failed to make much progress, and debates continue on whether to adapt to climate change or reduce emissions.

TECHNOLOGY ADVANCES. The chemical industry continues to develop new processes and products for competitive advantage, to serve as vehicles to growth, and to address regulatory and environmental concerns. In 2002, the number of collaborations between chemical producers and biocatalysis firms was evidence of the latter. Several projects involving the use of renewable resources and other green chemistry initiatives advanced as well.

Cargill Dow opened its polylactic acid plant to make plastic derived from corn. The company signed a deal with Maxygen subsidiary Codexis to develop a novel biosynthesis of the lactic acid raw material from renewable sources. Cargill Dow also won one of the 2002 Presidential Green Chemistry Challenge Awards for its polylactic acid process.

Shell, meanwhile, purchased a stake in Iogen Energy, which operates one of the world's largest ethanol-from-biomass facilities. But Dow decided to exit its World Ethanol joint venture, which makes ethanol in a traditional corn fermentation unit, and is selling its interest to partner Archer Daniels Midland, effective January 2005.

Several companies won Department of Energy funding--totaling about $80 million and to be matched by industry--for research into making ethanol and other chemicals from biomass. Biorefinery projects were the major winners--DuPont, Diversa, and partners will get $18.3 million, while ethanol maker High Plains Corp. and Novozymes got $17 million, and Cargill Dow and Shell got money to work with Iogen on a pilot-scale unit.

The related field of agricultural biotechnology was quiet for most of the year with no major upsets and--according to estimates from the Department of Agriculture, Monsanto, and others--a slight increase in planted transgenic crop acreage.

However, the development of green plants as pharmaceutical factories faced a setback when one such corn prototype was found mixed in with soybeans. Prodigene, which was involved in the accidental contamination, pledged increased diligence, as did the "biopharming" community. Dow--in collaboration with Epicyte Pharmaceutical--and Prodigene scaled up production of such crops during 2002.

GROWTH Companies are developing new--and they hope sustainable--technologies, such as those for corn-derived chemicals and fibers. DUPONT PHOTO

New technology areas were ripe for investment by major chemical companies. Emerging engineering plastic producer Cyclics Corp. inked deals this year with both Dow and Rohm and Haas. Novel polymers also came from DuPont, which offered fluoropolymers made with a new supercritical carbon dioxide-based polymerization process, and from Dow, which launched a metallocene catalyst-based stretch textile fiber.

Chemical companies participated in advancing the emerging areas of fuel cells and nanotechnology. Shell Hydrogen, Johnson Matthey, and Mitsubishi established Conduit Ventures, a venture-capital firm hoping to raise $100 million to fund start-up companies specializing in fuel cells and related technologies. Air Products & Chemicals, DuPont, Süd-Chemie, UOP, Celanese, BP, and BOC invested individually in fuel-cell ventures during 2002.

Like others dabbling in nanotechnology, NextGen Partners, an investment group backed by several large chemical firms, put capital into at least three small companies. BASF, Baxter, Rohm and Haas' Rodel unit, Sumitomo, Toray Industries, and Mitsubishi have made direct investments either internally or through alliances with several small nanotechnology developers.

Although the electronics materials industry is still going through difficult times, chemical companies saw promise for growth. Many major firms--including Sumitomo, Bayer, Degussa, Dow, BASF, Praxair, and DuPont--invested in ventures or capacity expansions to produce new materials. A particularly hot area was organic light-emitting diodes for new display technologies.

Electronic materials--as the basis for computers, home electronics, and communications--clearly suffered with the bursting of the Internet bubble and the global economic slowdown in 2001 and 2002. Still, as in other markets, companies have been positioning themselves for a turnaround and return to prosperity as economic conditions hopefully improve in coming years.

Chemical & Engineering News
Copyright © 2002 American Chemical Society