The Industrial Chemicals cluster consists of DSM Fibre Intermediates, DSM Melamine, DSM Agro and DSM Energy.

DSM Fibre Intermediates, DSM Melamine and DSM Agro produce chemicals in large-scale, capital-intensive production facilities. Essential features of these businesses, which operate plants in the Netherlands, Asia and the United States and are thus global in scope, are strong customer relations (often geared to the long term), keen cost awareness and careful planning of any capacity expansions.

Our caprolactam and melamine businesses are among the global leaders in terms of sales and technology. Our acrylonitrile business is a major player in Europe. DSM Agro, our fertilizer company, is active in Northwestern Europe. DSM Energy has small but profitable stakes in various oil and gas fields in the Dutch part of the Continental Shelf.

Solid performance in caprolactam and acrylonitrile

• Good demand for caprolactam and acrylonitrile
• Higher acrylonitrile prices in line with raw-material costs
• Acrylonitrile debottlenecking project successfully executed

DSM Fibre Intermediates produces caprolactam and acrylonitrile, which are raw materials for synthetic fibers and plastics.

Caprolactam is the raw material for polyamide 6. This is a versatile material, which in the form of fibers is used in sports and leisure clothes, tires and carpets. It is increasingly used as high-performance construction material in, for example, the electronics and automotive industries and in packaging materials.

Polyamide 6 has reached the mature phase of its life cycle, where market demand and selling prices are strongly influenced by supply/demand cycles. It is facing competition from other materials, such as polyamide 6, polyester and polypropylene. DSM Fibre Intermediates, with plants in the Netherlands, the United States and China, is the largest merchant caprolactam producer in the world with a market share of 20%. In addition, the business group produces about 1.2 million tons per annum (tpa) of fertilizer (ammonium sulphate) as a co-product.

Acrylonitrile is a raw material used in textile fibers, ABS plastics, latex rubber and water-purification products. The business group’s acrylonitrile production capacity is 260,000 tpa. DSM Fibre Intermediates also produces about 25,000 tpa of sodium cyanide, which is used in detergents and in the synthesis of vitamins. With a market share of 25%, DSM is a major player in the merchant acrylonitrilemarket in Europe.

DSM Fibre Intermediates’ distinguishing characteristics are its process technology, reliability and service. The business group aims to exploit its global cost and technology leadership position in caprolactam while growing its position in China parallel to a further strengthening in Europe and North America in close cooperation with DSM Engineering Plastics, for which caprolactam is a very important raw-material. For acrylonitrile we aim to strengthen our manufacturing base in Geleen (Netherlands).

Global demand for caprolactam was good. DSM Fibre Intermediates’ caprolactam sales growth in 2007 was limited compared to 2006 due to planned and unplanned caprolactam production outages. Prices were on average at the same level as in 2006 as demand was good even in the face of high raw-material prices. The prices of energy-related raw-materials such as ammonia remained volatile and high compared to historical levels, but declined slightly compared to 2006. The business overall showed good results.

Demand for acrylonitrile was comparable to 2006. The steady rise in raw-material prices, especially for propylene, could be recouped with higher selling prices. Following the course set out in 2006, the business group was able to close the year 2007 with a solid performance. Sales increased by 3%; operating profit increased as well.

By expanding our caprolactam plant in Nanjing (China) to 140,000 tpa on the basis of DSM’s HPO^Plus® technology, we have become the leading supplier in the rapidly growing Chinese market, and an additional expansion beyond 200,000 tpa to support this market growth is being planned. We expanded our acrylonitrile plant in Geleen (Netherlands) by 25,000 tpa to 260,000 tpa.

Measures to reduce COD (chemical oxygen demand) discharges in Nanjing were taken. Investments to bring DNCC in China up to the highest standards are scheduled for 2008. In the United States substantial energy reductions have been realized over the last couple of years. The feasibility of further projects focusing on energy reductions and better use of raw materials is being evaluated. In Europe a series of investments within the framework of a lifetime extension project will improve the reliability and the integrity of the plant. Recently, in acrylonitrile a catalyst exchange and a debottlenecking resulted in a reduction in the usage of raw-materials and energy.

Strong improvement in operating profit

• Improved global supply-demand balance
• Higher prices of competing exports from China
• Margins recovering but not satisfactory yet

The main application of melamine is in wood-based panels and laminates used for furniture and flooring. Melamine is also used in car paints, durable plastic tableware and flame retardants. The growing number of consumers in emerging economies, notably China, is driving demand.

Melamine is used in impregnating resins and adhesive resins for the wood-processing industry. It boosts the scratch, moisture and heat resistance of wood products. Melamine can be combined with softwood from rapidly growing trees to obtain high-quality panels that can replace hardwood. The growing scarcity of hardwood stimulates the use of melamine. Stricter legislation on emission of formaldehyde is expected to have a positive impact as well.

The market for melamine is growing at an average rate of 4% per annum. Several new plants of a small scale are being built in China. Total capacity in China still exceeds local demand. In addition, new world-scale plants will be built in areas with low-priced natural gas in the next few years.

With a market share of close to 20%, DSM Melamine is the global market leader. It has sophisticated technical service and logistical infrastructure in place for serving customers on a global basis.

DSM Melamine has plants in Geleen (Netherlands) and in Bontang (Indonesia). The latter plant is a joint venture with P.T. Pupuk Kalimantan Timur and P.T. Barito Pacific Lumber Company.

Sales increased by 3% in 2007; operating profit increased strongly. Margins improved significantly in 2007, mainly due to the increase in selling prices in the second half of the year. Supply-demand conditions, which had been unfavorable since 2004, changed for the better in 2007. The prices of material exported from China increased strongly over the year. The reasons are a change in Chinese VAT legislation, the higher cost of transport and an unforeseen reduction in production capacities.

In the United States we succeeded in maintaining our market position based on imported material. Production at the DSM Kaltim Melamine joint venture plant in Indonesia was restricted by low on-stream factors of connected plants on site. In Geleen (Netherlands) we realized a production level that was higher than in the previous year.

DSM Melamine’s objective is to consolidate its leading position and improve profitability. In China we intend to establish a position in the high end of the market based on locally sourced products. For this purpose DSM Melamine is developing a 49/51 joint venture with Shanxi Fengxi Fertilizers.

DSM will continue its efforts together with customers to grow the market via innovation. Examples are cost reduction across the value chain, exploitation of the handling advantages of melamine-based resins over competing glue systems based on phenol or isocyanates, and the use of alternative fibers for panels.

Higher grain prices drive demand

• Reversal of demand decline of nitrogen fertilizers in Northwest Europe supported by growth of bio-energy crops
• Plants upgraded to reduce greenhouse-gas emissions by 80%
• Strong improvement of financial performance

DSM Agro is specialized in supplying products and services for responsible fertilization. The company produces and markets nitrogenous mineral fertilizers and industrial products, mainly for the Northwest European market. DSM Agro operates production sites at Geleen and IJmuiden in the Netherlands. DSM Agro produces and sells about 2.4 million tons of fertilizers per year. DSM Agro also produces products that serve as raw materials for other DSM business groups.

DSM Agro benefited from the change in market sentiment in the course of the year. A strong worldwide market positively influenced the Northwest European market. Driven by a growing global food and feed demand as a result of positive economic developments in the large new economies in Asia, world grain prices rose considerably, leading to increasing demand for fertilizers.

The growing trend towards bio-fuels further strengthened this development. This in turn had a positive effect on international fertilizer prices. As a result, DSM Agro improved its operating profit in comparison with previous years. Sales rose by 6%.

Towards the end of 2007 the nitric acid plants in both Geleen and IJmuiden were upgraded in order to significantly reduce greenhouse-gas emissions.

Apart from being ISO 9001 certified, DSM Agro is also a member of EFMA (European Fertilizer Manufacturers Association) and complies with its Product Stewardship requirements.

The Product Stewardship program is to ensure that fertilizers and their raw materials, additives and intermediate products are processed and manufactured, handled, stored, distributed and used in a safe way with regard to health, occupational and public safety, environment and security. This includes supplying plant nutrients which satisfy society's requirements with regard to safe food production and animal feed.

DSM Agro promotes good agricultural practices by encouraging farmers to use correct amounts of fertilizers of the required quality at the required time, applied by means of properly adjusted fertilizer spreaders. To this end, DSM Agro provides its customers with high-quality fertilizers plus services to ensure that these are used in a responsible manner.

Operating profit at continued high level

• Better-than-expected performance
• New field (G14-C) taken into production

DSM Energy participates in the exploration and production of oil and gas on the Dutch Continental Shelf. The business group is also involved in the transportation of oil and gas through its ownership of pipelines on the Shelf. DSM participates as non-operator with a stake of up to 25% in the oil and gas joint ventures and up to 40% in pipeline systems. At year-end, the business group had a share in twenty producing oil and gas fields and participated in two gas field developments. All fields are located in fifteen production licenses. DSM Energy’s strategic mission is to maximize cash flow by minimizing cost and maximizing production in the existing licenses.

The oil market saw very large price increases at the end of the year. Over the entire year the price was higher than in 2006. Due to a very mild winter, the market prices for natural gas were below 2006. Nevertheless the business group’s operating profit was at a high level, although lower than in 2006.

In 2007 an exploration well was drilled in offshore block Q1 as a follow-up to the Q1-B gas discovery. Unfortunately the well was dry. A well in block F17-S1 was still being drilled at year-end. Studies for a possible well on Horizon West have nearly been completed and drilling is planned for 2008. One development project, G14-C, was carried out successfully with first gas mid November 2007. Two further development projects, the A12a and M7-A fields, are in progress with first gas expected early 2008 and year-end 2008, respectively.

The business group’s total production of 1.9 million barrels of oil equivalent in 2007 was slightly less than in 2006. The remaining reserves at the end of the year were about 8.1 million barrels of oil equivalent, of which 7.4 million in the producing fields.

In 2007 three master theses on coal development were finalized with DSM Energy’s assistance. Together with RWTH Aachen (Germany) and Delft University of Technology (Netherlands) investigations into the CO₂-capturing capabilities of coal were started.

DSM Energy became one of the founding members of the DAP foundation (Delft Aardwarmte Project). Wells will be drilled to produce warm water for the energy benefit of the entire Delft University campus.