Report of the Directors
Business Review

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Process Technologies

Process Technologies delivered good growth in the year with sales 19% up at £401 million. The business benefited from another excellent year from DPT and from a full year’s contribution from the Additives business (formerly Intercat), which was acquired in November 2010 and supplies speciality products to the petroleum refining industry. Operating profit was also well ahead of last year, boosted by the very strong performance from the higher margin DPT business.

In the Ammonia, Methanol, Oil and Gas (AMOG) business, which includes the Additives business, sales of its catalysts, absorbents and speciality additives were 27% ahead at £256 million. Excluding Additives, sales would have been 3% up. Catalyst sales to ammonia customers grew well in the year and were 8% ahead at £45 million, however as we expected, sales of methanol catalysts were lower at £42 million, 14% down on those in 2010/11 which saw commissioning of a number of new plants in China and the Middle East. Sales of catalysts to hydrogen customers grew strongly again this year, up 40% to £67 million. Legislation requiring lower sulphur levels in fuels and the continued trend of processing dirtier, heavier crude in refineries supported demand for hydrogen which in turn generated an increase in our sales. Demand for gas purification products, used to remove contaminants such as sulphur and mercury from gas streams, was impacted, with sales 33% down on last year, as the business continued to feel the effect of delayed investment in large gas processing projects.

The Additives business made a good first full year’s contribution to AMOG and is performing ahead of our expectations at the time of acquisition. We are already leveraging technology synergies between our additives and refinery catalysts and are drawing on the customer relationships in both businesses to create new opportunities for the combined product range.

Process Technologies continued to benefit from energy security concerns in China which are driving projects to monetise coal reserves in the country. This has supported sales of our catalysts for producing both chemicals and substitute natural gas (SNG) from coal. In other parts of the world, particularly the USA, the extraction of shale gas has contributed to lower gas prices compared with those of oil. This provides new opportunities for our syngas catalysts.

The business saw continued success in the development of catalysts for gas to liquids (GTL) applications. It signed a ten year agreement with CompactGTL to develop, manufacture and supply catalysts for its modular GTL commercial scale plants which can be used for remote oilfields in onshore and offshore locations to convert gas into sulphur free liquid fuels.

DPT had an excellent year, building on its strong performance in 2010/11. This higher margin business delivered sales of £94 million, which were 42% ahead of prior year, and secured licence and engineering contracts for 14 new plants across its portfolio of technologies. Increased demand for petrochemicals in China continued to drive growth in DPT and the business won contracts for ten plants there, including two SNG plants, four methanol plants and two oxo alcohols plants. Outside of China, DPT also secured licences for speciality chemicals plants in Malaysia and in the Netherlands, and oxo alcohols plants in France and Saudi Arabia.

In recent years a significant amount of chemical manufacturing capacity has been installed, especially in China, and this has benefited DPT. We expect that the number of new plants and hence licences available to DPT will be maintained in 2012/13 but is likely to reduce thereafter. Despite this, the outlook for DPT remains positive as global drivers, such as increasing wealth in emerging markets and energy security, support demand for its technologies. Furthermore, the business continues to invest in the research, development and commercialisation of new process technologies, including those which utilise sustainable feedstocks, to maintain its leading global position. This year saw DPT commercialise three new technologies which now are under construction, including a process which converts waste oils and fats into second generation biofuels.

Tracerco recovered well after difficult trading conditions in 2010/11. Its sales in 2011/12 were 22% ahead of prior year as the business benefited from renewed activity in global oil and gas markets supported by the high oil price. This has encouraged oil and gas companies to exploit more difficult to recover resources and has boosted demand for Tracerco’s specialist technologies.

Fuel Cells

Our Fuel Cells business was adversely affected by a slowdown in demand for stationary combined heat and power units this year as our customers delayed their product deployment programmes.

The development of fuel cell technology for transport applications, especially cars, continues. Advances in both vehicle development and hydrogen fuelling infrastructure around the world remain on track for initial market introduction of fuel cell powered vehicles within around five years. Components for automotive applications remain an important opportunity for Johnson Matthey and we have continued to increase our investment in R&D for automotive applications during the year.

As a result of slower demand and our increased R&D expenditure, the net expense of our Fuel Cells business increased by £4.3 million to £9.2 million this year.

Global drivers, particularly those relating to environmental and energy security issues, continue to support interest in fuel cell technology for transport and for heat and power applications in buildings. Furthermore, our strong relationships with system developers and our investment in manufacturing infrastructure position us well in the developing fuel cell market where high performance platinum group metal catalysts and technology are key.

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