4.3. Materials Sciences includes the Performance Materials and Polymer Intermediates clusters of DSM.

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3 4.3 Materials Sciences includes the Performance Materials and Polymer Intermediates clusters of DSM. The Performance Materials cluster comprises the business groups DSM Engineering Plastics, DSM Dyneema and DSM Resins. These business groups specialize in the manufacture of technologically sophisticated, high-quality products that are tailored to meet customers performance criteria. The products are used in a wide variety of end-use markets: the automotive industry, the electrical & electronics industry, life protection, the sports and leisure industries, the paint and coatings industry and the construction industry. synthetic fibers and plastics. Caprolactam is a key feedstock for DSM Engineering Plastics polyamide production. DSM Fibre Intermediates is the world s largest merchant caprolactam supplier. DSM Engineering Plastics is a global supplier of high performance engineering thermoplastic solutions. DSM Dyneema is the global supplier of the world s strongest fiber. DSM Resins is a global supplier of innovative high-quality resins, composites and fiber optical coatings. The Polymer Intermediates cluster consists of DSM Fibre Intermediates. DSM Fibre Intermediates produces caprolactam and acrylonitrile, which are raw materials for

4 4.4 Climate change and the adverse effects of dependency on fossil fuels are gaining in dominance, requiring new strategic inroads. The limited availability and the environmental impact of fossil-based fuels and raw materials creates a need for new and sustainable energy resources and raw materials. To develop these, new business models, processes and products are required. In the Materials Sciences cluster a variety of solutions to reduce CO 2 emissions and improve fuel / energy efficiency are provided. Examples of DSM innovations contributing to a sustainable future are materials for the production of windmill blades and solar panels, lightweight materials for the automotive / transportation sectors, foam for insulating buildings. EcoPaXX, DSM s new green bio-based polymer, and in fact the highest performing green polymer in the world, has a carbon footprint which is actually even below zero. The growing and aging population of the world is increasing the interest in health and wellness. DSM has leadership positions in environmentally friendly waterborne coating resins, powder coatings and also UV-curable coatings, which convert instantly from liquid to solid upon exposure to UV light. Solvent free coatings are considered much safer for both workers and the environment. An additional benefit of UV curing is that this procedure does not require traditional curing ovens, which require high temperatures and consume a great deal of energy. The quest for lighter and stronger materials, miniaturization and the ongoing electronification drive the development of new functionalities and ever better performance. Society is asking for functionalities related to e.g. connectivity and the protection of people. In the areas of safety and personal protection, the need for strong and durable materials is evident. DSM is in a position to respond to these trends based on a number of in-house-developed high performance materials, such as DSM s Dyneema, the world strongest fiber. Economic prosperity is being spread more evenly over the world. Rapid market growth in the emerging economies will continue. Growth of plastics and resins is high in these regions because of increased local demand and shifting global manufacturing bases. A substantial part of the capacity expansions of the Materials Sciences businesses have been built in emerging economies, China and India. This will enable DSM to capture the opportunities offered by the fast-growing emerging economies to its Materials Sciences businesses.

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6 4.6 The downturn in the real economy, which started at the end of 2008 following the financial crisis, had a deep impact on business conditions in Q and in the first half of In Performance Materials, volumes declined significantly in the first half, whereas prices remained at the levels of last year. In Polymer Intermediates, both volumes and prices decreased dramatically versus last year. DSM Engineering Plastics, DSM Resins and DSM Fibre Intermediates were all affected by the downturn. Some 85% of the Materials Sciences end-markets were affected, of which some 45% very heavily. Most affected were automotive, transportation, textiles, electronics, building & construction. Both DSM Engineering Plastics and DSM Resins suffered from weakness in these endmarkets. European caprolactam markets were weak too. North American caprolactam demand for the fiber segment and demand for US automotive were exceptionally weak. DIY applications focusing on repair and maintenance. Commercial Marine, sports and high performance textiles of DSM Dyneema were affected too. Resilience came from the food packaging endmarket for DSM Engineering Plastics, optical fiber and graphic arts for DSM Resins and life protection and medical devices for DSM Dyneema. Less affected, but with organic sales growth still down significantly, were the electrical end-market for engineering plastics and consumer related end markets for resins. The consumer related endmarkets are for example consumer goods and

7 4.7 At this moment, we estimate that 35% of the end-markets are still down. None of DSM s businesses are, however, reporting a further decline in demand in their end-markets. For DSM Resins, the transportation, trucks, marine yachts end-markets are still down (related to capital investments). Building & construction too, is still not showing signs of improvement for the Materials Sciences businesses. With 50% of the end-markets improving from the lows of the crisis, the current situation is clearly more positive than that of a few months ago. However, with 35% of the business still down, demand for the moment is still significantly below pre-recession levels. Improvements are reported in the automotive end-markets for engineering plastics, where DSM is gaining market share because of its highly innovative portfolio and because DSM continued its customer focus during the economic storm. The impact of governmental stimulus is visible in the sales of passenger cars especially in the smaller and fuel efficient cars which is supportive for both plastics and resins sales. The end-markets for DSM Dyneema that were affected in the second quarter are currently bottoming out. DSM Fibre Intermediates textile and tire cord segments in Asia started to bottom out in the first quarter. Demand in Asia has already picked up strongly. The European demand for caprolactam as well as the European markets for acrylonitrile are also showing improvement. This could be partly due to restocking.

8 4.8 DSM Engineering Plastics is coming out of the storm stronger. The business group has clearly gained market share in key segments by staying focused on innovation and staying close to customers. While DSM Engineering Plastics has brought costs in line with the new reality within 6 months, it has kept its innovation and customer interface potential. The recently introduced EcoPaXX, is the highest performing green polymer in the world. It has a neutral carbon footprint and is capable of bringing carbon neutral green solutions to very demanding applications such as automotive engine parts. Through a high focus on sustainability, such as halogen free solutions, DSM Engineering Plastics has gained significant pieces of business. The swap with Mitsubishi on PA6 will give DSM Engineering Plastics a leadership position in Japan in PA6, and will further strengthen DSM s global leadership position in this product line. DSM Engineering Plastics new green field plant in India is running very well, and supporting DSM s leadership position in India. Market development in Stanyl ForTii is progressing well, and DSM Engineering Plastics will quadruple capacity of the pilot plant for this product by year-end to keep up with demand.

9 4.9 DSM Dyneema has shown overall resilience in most end-markets during the downturn. Life protection and medical applications have been relatively unaffected. Commercial marine, sports and high performance textiles, however, experienced some short-term weaker demand. Based on the weaker demand, DSM Dyneema is expecting lower sales in In order to optimize working capital, DSM Dyneema is reducing its inventories by temporarily shutting down a limited number of production lines. DSM Dyneema will partly delay the US$ 450 million investment program. This is driven by DSM s strong focus on generating cash an thus reducing and/or delaying capex. The delay is not endangering growth of DSM Dyneema as the success of DSM s Advanced Manufacturing Program has enabled DSM Dyneema to increase the output of existing lines. These capacity benefits vastly exceeded projected results and began to take effect from Q DSM Dyneema s course has remained unchanged. DSM Dyneema continues to penetrate with Dyneema in existing applications and to enter into new markets (geographies & end-uses) by replacing traditional materials by Dyneema. The impressive innovation efforts of DSM Dyneema have remained untouched. Establishing strong relationships with key value chain players is part of this strategy, as well as extending the brand value of Dyneema. DSM Dyneema s intellectual property strategy enables it to rapidly drive innovation and to maintain a course far ahead of the competition. This delivers value not only to DSM Dyneema, but also to its business partners who benefit from DSM s extensive patent portfolio. DSM Dyneema remains highly vigilant in identifying any moves that may threaten its IP. DSM Dyneema is committed to vigorously defending its IP rights in all markets and business segments in which it is active. The DSM Dyneema patent portfolio currently consists of well over 100 inventions protected by over 500 filed patents and patent applications worldwide and is continuously expanding all the time. Recent IP victories such as in The Hague (NL) in 2004, Paris (FR) in 2006 and Texas (US) in 2008 have all resulted in court rulings forbidding the sale of infringing products in their respective countries or regions.

10 4.10 DSM Resins has been very successful in generating cash so far in 2009 due to its strong focus on operating working capital reduction. The cost saving plans initiated at the beginning of the downturn are in full progress. Fixed costs are being reduced by implementing programs focusing on reduction of headcount and spend, among other things. Furthermore, capex is being monitored very closely and is at significantly lower levels than in previous years. The global economic downturn has not changed DSM Resins strategic course. It continues to deliberately focus on growing its leadership in selected key segments: the right combination of end-markets, regions and technologies to capture the fastest growth. DSM Resins holds global No.1 positions in powder coating resins, liquid specialty resins and coatings for fiber optic materials. DSM Resins is the European leader in composite resins. The resins business is strongly driven by the four societal trends: climate and energy, health & wellness, functionality & performance and emerging economies. The importance of these trends in terms of demand for new materials has further emerged in the crisis. The relevance of new innovative resins for climate & energy is undisputed. Examples are lightweight composites for vehicles (metal replacement), windmill blades, eco-friendlier and safer materials such as solvent free waterborne resins, and coatings for solar cells. The waterborne resins of DSM meet the growing needs of the coatings market by being completely solvent free. This is important not only for the environment, but also for the health and wellness of customers and painters. The functionality and performance of the resin are key to the performance of the end-product. Ease of use, functionality and lower system costs are important drivers. Furthermore, with both manufacturing and end-consumer demand shifting to emerging economies, DSM Resins is actively targeting China and India to grow. In many cases, the resin is the key differentiator for the end-product. With its range of innovative specialty resins, DSM is able to differentiate from the competition. Innovation, especially in combination with sustainability, is the driver behind the growth of DSM Resins. DSM Resins ongoing focus and commitment to both customers and innovations gives DSM a strong competitive advantage versus the competition. The innovation sales target has been reconfirmed despite the crisis. The uncertainty for DSM Resins is the question: when the recession will be over and when will end-market demand return to pre-recession levels? With important end-markets, especially those related to capital investments such as building & construction, still down, uncertainty for the moment remains.

11 4.11 A strong advantage for DSM Engineering Plastics is the backward integration in DSM Fibre Intermediates. This business group delivers crucial intermediates (caprolactam and acrylonitrile) to DSM Engineering Plastics and as such provides security of supply and enables growth in all areas, provides margin stability and thus contributes to the success of DSM Engineering Plastics. Polyamide demand is growing faster than GDP, which is expected to result in ongoing expansions of PA6 polymerization capacity while expansions of caprolactam capacities are lagging behind. The strategic actions of DSM Fibre Intermediates are focused on improving the cost position of all its plants in the Netherlands, the US and China, gradually expanding caprolactam production capacity in China and nurturing close relationships with fast growing customers in Asia. The downturn in China and Taiwan was steep but shorter than in other regions. Imports of caprolactam into China started to recover as early as Q DSM Fibre Intermediates could quickly increase its sales to Asia, compensating for part of the decline in sales in other regions. Demand recovery in Europe and the Americas very much depends on the shape of the macroeconomic recovery. Total caprolactam imports into China are now exceeding pre-crisis levels.

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13 4.13 DSM s innovation strategy is founded on global opportunity areas which were identified via analysis of global mega trends as part of Vision 2010 Building on Strengths. This has resulted in a focused portfolio in which DSM s key technological skills are optimally leveraged to meet (emerging) market needs. The innovation boost has yielded a broad range of successful innovations, with above-average margins. Examples in Performance Materials are illustrated above. OEMs and NGOs are pushing strongly to come up with flame retardant systems in plastics that are halogen free. DSM Engineering Plastics is offering to the market halogen free solutions in its full range of products. There is a sharp drive in automotive to increase fuel efficiency and to reduce emissions. In addition, cars and engines are becoming more compact. All this means that the need for heat resistant plastics, for instance Stanyl is increasing. DSM Dyneema is continuously innovating its materials and introducing new applications and new products for Dyneema. Strong innovative growth is being achieved in Dyneema Tape Technology for vehicle and personal protection, in high performance textiles (including cut resistant gloves) and in medical device applications. Top projects at DSM Resins include Advanced Composites which are applied in windmill blades. DECOVERY is DSM Resins range of innovative high performance, eco-friendly waterborne resins. Current market dynamics in the coatings industry demand coatings that are environmentally friendly, whilst retaining good performance at attractive system costs. The Uralac HiTone powder coating resins product line of DSM Resins offers the possibility to formulate commercially attractive coatings with high aesthetics and good mechanical performance. This large diversified portfolio of innovations has continued to grow despite the recession. The innovation target of EUR 400 million for DSM s Performance Materials cluster is within reach and is expected to be outperformed. The portfolio of innovations is continuously being complemented by a broad range of new launches.

14 4.14 Stanyl ForTii, formerly known as PA4T and developed by DSM Engineering Plastics, is the first new polymer introduced in the new millennium. Stanyl ForTii is a halogen-free, flame-retardant, high-temperature polyamide that meets market trends that call for miniaturization and the convergence of electronic devices. It can be found in mobile phones and other electronic applications such as circuit boards used in personal computers. Just over a year ago the market development plant was opened. DSM now has decided to quadruple capacity by the end of 2009 to enable DSM to meet further growth in customer demand for the product. Despite the current difficult economic conditions, market acceptance of Stanyl ForTii has not slowed. DSM Engineering Plastics has further expanded its Green Portfolio by introducing EcoPaXX, a bio-based, high performance engineering plastic. EcoPaXX combines low moisture absorption with a high melting point (highest of all bioplastics), high resistance to salts and a high crystallization rate. It combines the best of both worlds and is therefore suitable for many hightech applications, for instance in the automotive and electrical markets. EcoPaXX is a green, biobased material: approximately 70% of the polymer consists of building blocks derived from castor oil as a renewable resource. EcoPaXX has been shown to be 100% carbon neutral from cradle to gate, which means that the carbon dioxide which is generated during the production process of the polymer is fully compensated for by the amount of carbon dioxide absorbed in the growth phase of the castor beans.

15 4.15 DSM Dyneema recently launched Dyneema HB80, a unidirectional (UD) composite that meets the joint US Army and Marine challenge to increase the fragmentation performance of advanced combat helmets by at least 35 percent. Dyneema HB80 also has the potential to provide law enforcement units with helmets offering existing protection at half the current weight. It is the latest product in an expanding series of materials being developed by DSM Dyneema to substantially lighten the load for soldiers and law enforcement personnel. increase fiber robustness in all temperature extremes). Optical fiber coatings are a critical component of today s high-speed fiber networks, helping to prevent signal loss as well as giving fibers a longer life and a more reliable field performance. As exploding bandwidth demand presses fiber producers to increase line speeds for higher productivity, only the most advanced coating materials will be able to meet increasingly aggressive fiber performance requirements and reduce the risk of costly network failures. DSM Desotech s patented DeSolite Supercoatings demonstrate a significant technological advancement in microbend sensitivity (to minimize a fiber's signal loss over time and distance) as well as in mechanical properties (to

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18 4.18 DISCLAIMER This document may contain forward-looking statements with respect to DSM's future (financial) performance and position. Such statements are based on current expectations, estimates and projections of DSM and information currently available to the company. Examples of forward-looking statements include statements made or implied about the company s strategy, estimates of sales growth, financial results, cost savings and future developments in its existing business as well as the impact of future acquisitions, and the company s financial position. These statements can be management estimates based on information provided by specialized agencies or advisors. DSM cautions readers that such statements involve certain risks and uncertainties that are difficult to predict and therefore it should be understood that many factors can cause the company's actual performance and position to differ materially from these statements. These factors include, but are not limited to, macro-economic, market and business trends and conditions, (low-cost) competition, legal claims, the ability to protect intellectual property, changes in legislation, changes in exchange and interest rates, changes in tax rates, pension costs, raw material and energy prices, employee costs, the implementation of the company s strategy, the company s ability to identify and complete acquisitions and to successfully integrate acquired companies, the company s ability to realize planned disposals, savings, restructuring or benefits, the company s ability to identify, develop and successfully commercialize new products, markets or technologies, economic and/or political changes and other developments in countries and markets in which DSM operates. As a result, DSM s actual future performance, position and/or financial results may differ materially from the plans, goals and expectations set forth in such forward-looking statements. DSM has no obligation to update the statements contained in this document, unless required by law. The English language version of this document is leading. A more comprehensive discussion of the risk factors affecting DSM s business can be found in the company s latest Annual Report, a copy of which can be found on the company's corporate website,