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December 2006 Headlines

As 2006 comes to a close, the market is relatively quiet, with little significant activity to report. Demand is fairly steady in North America, with some softness associated with the weather patterns and margin pressure on formaldehyde. European derivative businesses appear strong, but are facing another round of increasing feedstock costs. Asian demand is steady to up slightly, with some seasonal weakness triggered by declines in consumer goods. Some minor price adjustments are occurring in key markets, with Europe quietly debating another contract price hike proposed by sellers. Spot prices in North America have fallen slightly, but sellers are not inclined to adjust contract postings yet. Northern and southern Asian markets are reacting slightly differently at present due to differing supply issues.

US natural gas prices rose sharply at the end of November, only to show a return to weaker price trends in early December. The US FERC Houston Ship Channel natural gas index increased 3.5% from November to $7.07 USD/MMbtu in December. As of the end of the first week of December, US stock levels of natural gas improved compared to the same period in 2005 and posted at nearly 9.0% above the 5-year average. In the last two weeks, the price of forward monthly natural gas has fallen about $1.00 USD/MMbtu, with prices posted for February, March and April at $7.567, $7.584 and 7.494 USD/MMbtu, respectively. The current cash spot Henry Hub price is holding near $6.82 USD/MMbtu.

The December US FERC Houston Ship Channel natural gas index was announced at $7.07 USD/MMbtu, up 3.5% from November's index. Natural gas prices that were firm at the start of the month have declined with the above-normal weather temperature patterns across sections of North America. Natural gas inventory levels are still running about 9% above the 5-year average. The recent return to colder weather patterns should have a slight impact going forward. The spot Henry Hub cash gas price was $6.44 USD/MMbtu as of the close of business on 20 December. Forward monthly natural gas pricing is still elevated, with levels for February, March and April presently at $6.949, $7.014 and $7.034 USD/MMbtu, respectively.

After initially floating the idea of a potential price increase to a level of €460 (+15%), Methanex has posted its European Posted Contract price at €440 per tonne for Q1 2007. Other than the direct influence this will have on the formula pricing inclusive of this posted factor, there is also the mental influence on the decisions still pending. A level of €440 was previously offered as a debate point by at least two other major marketers in Europe, but these levels were not yet agreed with the general consumer base. There has been mention that some of the minor European producers/marketers might be agreeable to increases in the Q1 price at a level lower than €440, but no formal settlement has been witnessed. Consumers are still fighting to keep any increase down and would prefer no change.

The European Parliament has approved the long proposed Registration, Evaluation, Authorization and Restriction of Chemicals (REACH) program for Europe. Under REACH, producers, importers and users of chemicals in volumes of 1 tonne or more per year will be required to register chemical products with the EU Chemicals Agency, to be based in Helsinki, Finland. This will include data on chemical properties, as well as handling, usage and safety information. The EU Chemicals Agency will evaluate submitted data to see if further information is required and to regulate testing so that animal testing is kept to a minimum. For products with high-concern properties, authorization will be required for further use, if no safer alternatives are or become available. Approximately 30,000 chemical substances will be subject to the program, which will begin in June 2007.

On 14 December, Degussa AG, Dusseldorf, announced that it will divest its industrial chemicals segment through a management buyout. Dr. Karsten Tiemann, the Managing Director of Goldschmidt TIB GmbH (Mannheim, Germany), will take over the industrial chemicals activities in Germany and Mexico. The US business is expected to sell in a separate transaction. Pending board approvals, the deal should be complete by the end of this year. No financial details were released.

At the end of November, Lurgi announced it had secured two contracts from Chinese companies for the first commercial-scale plants based on Lurgi technology for the production of plastics from coal. The project for Datang International Power Generation Co., Ltd. is targeting start-up in late 2008, while the Shenhua Ningxia Coal Industry Group (SNCG) plant is scheduled for an early 2009 start. Both plants will use Lurgi technologies for raw gas conditioning, methanol synthesis (5,000 tonnes/day using Lurgi's MegaMethanol® process), and for Methanol-to-Propylene (MTP®), with both units to ultimately produce 500,000 MT/year of polypropylene from coal. Along with the technology licenses, Lurgi will supply engineering and special equipment.

According to a recent company announcement, expansion work began last month at New Oriental Energy & Chemical Corp.'s DME unit in the Hunan Province. The project, the third expansion undertaken at the site this year, will bring total DME production there to 100,000 MT/year, with the work expected to be complete by mid-2007. Ultimately, New Oriental Energy & Chemical hopes to increase capacity at the location to 600,000 MT/year by 2010, with the total cost of the expansion work estimated at $10.2 million.

At a recent investor presentation, Celanese Corporation outlined several moves it will undertake to strengthen its business, including furthering its position in Asia and revitalizing certain product areas. To help streamline its focus, the company announced it will divest its oxo products and derivatives businesses to Advent International for approximately $630 million USD. Also, Celanese will reorganize its business into three new segments: Advanced Engineered Materials, which includes Ticona's technical polymers and the engineered polymers equity affiliates; Consumer and Industrial Specialties, covering the acetate products and industrial specialties businesses of emulsions and polyvinyl alcohol; and, lastly, Acetyl Intermediates, which includes acetic acid, VAM and acetic anhydride. The strategic management offices for the Acetyls Intermediates segment will be relocated from Dallas, Texas to Shanghai, PR China in 2007, with current President of Acetyls Mr. John O'Dwyer to serve as President of Celanese Asia. In comments on the move, Celanese President and CEO Dave Weidman stated, "Celanese's future in Asia extends beyond our key positions in China, Singapore, Japan and Korea, and through this latest strategic action, we expect to capitalize on upward economic trends in the Asian emerging markets." Celanese aims to increase revenues from Asia to more than 30% and earnings to between 45% and 55% of the company's total by 2010.

Early in December, Degussa AG, Dusseldorf announced plans to build a Verbund (integrated production network) MMA unit at the company's Shanghai Chemical Industry Park site in China. The 100,000 MT/year unit is expected to take two years to construct and will come online in 2009. Output from the plant will be used to produce highly refined methacrylate specialties and polymers. Total project cost is estimated at €250 million. A week after announcing this project, Degussa AG Dusseldorf announced the divestment of its industrial chemicals business via a management buyout.