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ANALYSIS

Under pressure, DuPont tries to reinvent itself

New York, December 22, 2012

By Ernest Scheyder

DuPont, the 210-year-old chemical company, is under pressure to exit its lucrative but unpredictable paint business as it focuses more on food and agriculture products.

More than a third of the company's profit last year came from the popular pigment titanium dioxide (Ti02), found in products ranging from car paint to sunscreen. But thanks to falling demand, North American Ti02 prices are down 10 per cent in the past six months, taking DuPont's profit and stock price with it.

"Investors love the business on the way up," said DuPont chief executive Ellen Kullman. "But investors don't like the turns. Turns are hard to predict in the Ti02 market."

Kullman is betting drought-resistant AquaMax corn seed, Curzate potato fungicides, Amylex beer enzymes and other food and agriculture products will make DuPont's profit less subject to the ebbs and flows of TiO2 prices and other commodity chemicals.

A big step in that direction was her $5.8 billion purchase of nutritional supplements maker Danisco, a deal that sped up the company's move into food and brought General Mills as a key customer.

Analysts support DuPont's push to achieve steadier growth. Some have begun asking: If DuPont wants to be the food sector leader, hoping to beat the likes of seed leader Monsanto Company and enzyme expert Novozymes A/S, why make pigment?

"They should sell the Ti02 business," said Deutsche Bank analyst David Begleiter. "It has paid a lot of bills the past few years, but it's served its purpose."

DuPont shares are down nearly 12 percent in the past six months, compared with a 16 percent rise in Monsanto shares and 7 percent rise in 3M shares.

The company didn't help confidence in October when it warned Ti02 demand will slip further in 2013. Wall Street doesn't expect industry profits to recover until late in 2013 or early 2014 as auto and housing bounce back.

"DuPont is not yet the consistent growth company we would like," said Hank Smith, chief investment officer at Haveford Investments, which manages more than 1.2 million DuPont shares. "They are on that trajectory, it's just taking them an incredibly long time."

DuPont has been exiting other chemical businesses and last August sold its performance coatings unit to Carlyle Group for $4.9 billion cash.

Kullman spoke passionately in an interview earlier this month about DuPont's research into soy protein and biofuels, as well as the use of farm products in non-food applications. Sorona carpet fiber, for instance, is made using sugar extracted from corn.

"When the economy is not looking good, I'll head to the labs and see what we're doing," Kullman said over a cup of tea at New York's St. Regis hotel.

Kullman would not address the TiO2 unit's future at DuPont and defended the move to increase capacity by building a new plant due to start production by 2014.

Kullman is betting that Ti02 demand will outstrip supply, something that makes investors anxious. DuPont's Ti02 margins fell 6 percentage points in the third quarter to around 22 percent.

The aggressive move into food and agriculture means more competition for DuPont, especially from rival Monsanto, now the world's largest seed producer with a popular line of herbicides.

DuPont is spending heavily to create an in-house product that allows genetically modified seeds to tolerate weed killer, but so far has had to license gene traits for Monsanto's popular Roundup weed killer.

DuPont scientists had been developing a genetically modified soybean seed that blended Monsanto's weed-killer tolerant gene traits with those developed in-house, but last year DuPont scrapped the program, partly due to a long-running lawsuit between the two companies.

A jury ruled last August that DuPont violated the Monsanto licensing agreement and was liable for $1 billion. DuPont will appeal the verdict, and in the meantime it's trying to out-hustle Monsanto in an area where it has plowed big money: seed sales.

In 2001 DuPont had 40 percent share of the U.S. corn market to Monsanto's 10 per cent, the result of its 1999 buyout of Pioneer seeds. Monsanto fought back and by 2008 it had taken 36 percent of that market to DuPont's 30 percent.

This year DuPont's regained some ground and now has 36 percent of the US corn market to Monsanto's 37 per cent.

"DuPont's not as good, but they're getting pretty darn close," said BGC Partners analyst Mark Gulley, who said DuPont should spin off its food and agricultural units from the Ti02 and other units to give investors an option to invest in the company as a pure-play food company.

If that happens, Gulley estimates, DuPont's shares could rise to about $60 per share from current levels around $45.-Reuters




Tags: agriculture | Food | paint | DuPont |

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