2.2 Operating Environment

Global economy

In 2009 the global economy was dominated by the financial and economic crisis, which led to a worldwide economic slump in the fall of 2008. The industrialized countries were particularly hard hit, with some of the emerging markets also experiencing major downturns or at least tangibly lower rates of growth.

The pace of the downswing slowed during the second quarter of 2009, in some countries more significantly than expected. This was substantially the result of extensive governmental stimulus programs. The financial markets also stabilized increasingly during the year following massive intervention by the central banks. The bottom of the cycle was reached in the summer months, and the world economy slowly recovered in the second half of the year. With business and consumer confidence continuing to improve, production in the industrialized countries expanded once more. The emerging economies again posted higher growth rates, albeit well below those of 2008. However, the worldwide recovery at year end was not nearly sufficient to offset the slump at the start of the year, with the result that global economic output in 2009 was well down on the previous year.

HealthCare

In 2009 the market for prescription medicines posted growth in the mid-single digits. Expansion slowed in the United States and the major European countries, partly as a result of more restrictive health care policies, which are leading to stricter cost controls and limiting access to certain types of treatment. Growth continued in the emerging countries, where health services are becoming available to more and more people and the need for treatment options for chronic diseases is increasing.

While growth in the global consumer health market ebbed slightly in 2009, it proved relatively stable overall thanks to some price increases. Inventory adjustments by traders had a negative effect in the first half. Market expansion in the emerging economies did not fully offset the low growth rates in the industrialized countries.

CropScience

Following the positive trend in 2008, conditions in the global seed and crop protection market deteriorated markedly during 2009. Declining prices for the major agricultural crops, lower insect and disease infestation pressure and adverse weather patterns led to a tangible drop in demand for crop protection products, particularly in the second half.

The economic situation of farmers in Latin America worsened overall in the wake of extreme drought conditions in the first half of 2009. The region’s farm economy was also hampered by an unfavorable exchange rate for the U.S. dollar and by the financial crisis. In North America, the use of crop protection products declined mainly due to above-average rainfall in the first half and a sharp drop in producer prices. In many European countries, comparatively low infestation by insect pests and fungal diseases in crops such as cereal, potatoes or grapes reduced the demand for crop protection products. Many farms in eastern Europe cut back spending on inputs due to a lack of liquidity caused by the financial crisis. In Asia/Pacific, too, business conditions in 2009 were predominantly unfavorable, especially in the region’s growth markets. Infestation pressure in China was low, particularly in rice. The erratic monsoon in the second half of the year held back growth, especially in India. By contrast, Australian agriculture saw a modest recovery from the prolonged drought of recent years.

MaterialScience

The customer industries of importance to MaterialScience experienced a slump in business in 2009 that varied in intensity from one region to another. In the first quarter, particularly, demand plummeted. The difficult economic conditions gradually improved as the year went on, mainly as a result of the extensive stimulus programs introduced throughout the world.

The automotive markets of many countries stabilized initially thanks to the governmental stimulus programs. Although production declined substantially in 2009 as a whole, these programs prevented an even worse situation. Currently, only China appears on course for sustained growth.

The electrical/electronics sector, which as a supplier industry is closely interlinked with all other industry sectors, saw a mid-single-digit decline in production worldwide in 2009. The picture varied widely from one region to another. Production in the industrialized countries fell sharply, while the emerging countries continued to show robust growth.

The global construction industry shrank in 2009 for the first time since the early 1990s. While there were clear signs of stabilization in the United States as the year progressed, some markets in western Europe slumped dramatically. Other major markets such as China and India were less affected by the crisis and continued growing at slightly slower rates.

The furniture industry suffered from a sharp drop in business, especially in the first half of 2009, with the market gradually bottoming out in the second half. In the United States and several European countries in particular, weaker consumer confidence had an adverse effect on demand. In the Asian markets, which were stabilized by extensive stimulus programs, part of the decline in exports was offset by an increase in domestic consumption.