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JOSEPH CHANG Global Editor ICIS Chemical Business

The State of the Chemical Industry + M&A Outlook. ISM Chemical Group Mid-Winter Conference Galveston, Texas February 27, 2008. JOSEPH CHANG Global Editor ICIS Chemical Business. Forecasts from March 2007. Forecasts:. Verdict:. Commodity profits strong, stocks to rise.

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JOSEPH CHANG Global Editor ICIS Chemical Business

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  1. The State of the Chemical Industry + M&A Outlook ISM Chemical Group Mid-Winter Conference Galveston, Texas February 27, 2008 JOSEPH CHANG Global Editor ICIS Chemical Business

  2. Forecasts from March 2007 Forecasts: Verdict: Commodity profits strong, stocks to rise Somewhat true Specialty profits continue momentum, but cautious on stocks True Attempts to take public companies private True Record year for M&A On the money!

  3. 2007 – A Tale of Two Halves • 1H 2007 • US economy started out strong • Supply/demand fundamentals favorable in chemicals • M&A activity at a record pace • Credit widely available at cheap rates

  4. The Cookie Crumbles • 2H 2007 – Early 2008 • Credit crisis triggered by collapse in US subprime mortgage market • Slowing US economy and potential for recession • Crude oil surges to $100/bbl • Impending petrochemical overcapacity

  5. Q4 2007 Earnings Snapshot Source: Yahoo! Finance

  6. Wall Street Outlook Source: Yahoo! Finance *Prices as of close of 2/20/08 ** Based on estimated 2008 EPS

  7. US Petrochemical Cycle Source: Probe Economics, Inc.

  8. Many analysts expect the next peak to occur in 2002 or 2003, and be predominantly monomer driver. By this time NOVA Chemicals will have approximately 2.5 times the polymer production capacity we had in 1995. Our growth, through construction and acquisition, has been timed to take full advantage of the expected peak in the earnings cycle. Why the Peak Never Came in 2003 Source: Nova Chemicals

  9. 2003 – A Peak in Pessimism “In the previous ethylene trough of 1991 to 1992 and the peak of 1995 to 1996, US chemicals have been fortunate enough to enjoy a favorable oil to natural gas price ratio. Those lucky days seem to have gone. Higher ethylene feedstocks could mean that cash margins at the next cyclical peak are lower than in previous peaks.” June 2003 “The US is the highest cost ethylene producing region in the world at current natural gas price levels. Directionally, we expect the North American petrochemicals industry to become a high-cost globally uncompetitive producer serving a large local market.” June 2003

  10. Nova Chemicals (NCX) Ultra-Bearish Forecasts Jun 2003 Source: Yahoo! Finance

  11. Capital Spending as % of DepreciationMajor/Commodity Chemicals Source: ICIS Chemical Business

  12. Why a Crushing Downturn is Unlikely • North American producers have vowed never to build new local capacity • High natural gas prices – no reason to build • Strong balance sheets • Weak US dollar

  13. Runway on the Dollar

  14. Export to Prosperity • US chemical exports up 14% to $154bn in 2007 • US chemical trade deficit shrinks from $7.7bn to just $1bn in 2007 • Ex pharma, trade surplus nearly doubles to $19.2bn

  15. Ready to Weather a Storm? *As of Q3 2007 Source: SEC Filings, ICIS Chemical Business

  16. Predictions 2008 • No US recession, but growth slowdown • Commodity chemical companies will post surprisingly solid profits as the downcycle is delayed again. Stock prices will rise • Specialty chemical firms to continue earnings momentum. Stock prices to rise

  17. Mergers and AcquisitionsWhat’s Next After the Credit Crisis?

  18. 2007 – A Record Year Global Chemical M&A bn • Source: Young & Partners

  19. Mega Deals 2007 Source: ICIS Chemical Business

  20. Private Equity Revival 1H 2007 • 28% of total number of deals versus 15% in 2006 • 36% of dollar volume vs. 17% in 2006 • High leverage with low rate, covenant-lite debt • Banks and debt holders take the big risk Source: Young & Partners, ICIS Chemical Business

  21. 2H 2007: Bonds Shoot Blanks POP! • Credit crisis has slammed the brakes on mega deals • Credit markets recovering, but very slowly in the high yield market • All quiet on the bond front

  22. Debt Offerings – Where Art Thou? • Rohm and Haas $1bn (Sept 2007) • Investment grade • SABIC Innovative Plastics $9.2bn (Aug 2007) • Special situation – banks want relationship with Saudi government

  23. Ticking Time Bomb • LyondellBasell • Deal completed using $8bn in interim financing • Financing agreement stipulates that the interest rate will rise by 0.5% every 3 months, starting in May 2008 • Apollo (Hexion)/Huntsman • Extended agreement with Huntsman stipulates that the purchase price of $6.5bn will rise by a rate of 8% annually starting on July 4, 2008

  24. SHOW ME THE MONEY! • Solutia sues Citigroup, Goldman Sachs and Deutsche Bank for failing to come up with $2bn in exit financing • Banks say debt market conditions have materially changed

  25. M&A Outlook • M&A to slow in 2008 • Private equity buyouts put on hold • Strategic buyers with strong balance sheets in prime position • Mid-market deals under $500m remain strong • Middle Eastern and Asian companies to continue to seek deals in the US and Europe

  26. Thank You! JOSEPH CHANG Global Editor 360 Park Avenue South New York, NY 10010 T: (212) 791-4224 E: joseph.chang@icis.com

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