Report of the Directors
Business Review

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Process Technologies

Process Technologies’ sales of its catalysts, technology licences and services were £406 million, slightly ahead of prior year. Return on sales, and hence operating profit, was well ahead of last year, benefiting from lower raw material prices, a good result from our higher margin DPT business and improved operational efficiencies.

In the Ammonia, Methanol, Oil and Gas (AMOG) business, sales of its catalysts, adsorbents and speciality additives were 4% down on last year at £246 million. In this business our customers typically require replacement catalysts every three to five years depending upon their market sector and on how hard their plants are working. As a result, catalyst sales are reasonably predictable but can often be lumpy. This year, sales of catalysts to ammonia customers grew strongly by 19% to £51 million, supported in part by some market share gains, but our sales of methanol catalysts were 21% lower at £37 million. We expect these trends to reverse in 2013/14. Sales of hydrogen catalysts were down 19% to £55 million, partly as a result of the timing of our customers’ catalyst replacements, but also from a slowdown in the rate of new plant builds for refinery hydrogen production. The market drivers for hydrogen catalyst sales remain positive.

Our speciality additives help to improve the efficiency and environmental performance of the refinery fluid catalytic cracking (FCC) process and are continuously added to the FCC reactor, resulting in more consistent demand throughout the year. In 2012/13, our volumes increased but our sales were 6% down at £63 million due to a reduction in the price of ceria, a key pass through raw material in our products.

Demand for purification products, which are used to remove harmful impurities such as sulphur and mercury from gas streams, recovered well in 2012/13. Sales were up 48% to £31 million and the business supplied product to a number of new projects during the year.

The markets served by the AMOG business offer good growth opportunities over the coming years supported by key global drivers. Environmental concerns will continue to drive the need for hydrogen catalysts, additives and purification products whilst further economic development and population growth will support the methanol and ammonia sectors, although the current geopolitical issues in the Middle East may have a short term impact on our business.

During the year we have continued to invest in our manufacturing facilities in Clitheroe, UK and Panki, India to meet future capacity requirements, including for catalysts for substitute natural gas (SNG) plants in China where demand is expected to grow strongly in the coming years. We expect to complete these investments by the end of 2013/14. We have also commenced a major expansion of our additives plant in Savannah, USA which we expect to be completed in the second half of 2013/14.

DPT performed well again this year and reported a 7% increase in sales to £100 million. The business benefited from a further seven licences this year, six of which are in China. These included licences for one methanol plant and one butanediol plant. The remaining five projects are all for new oxo alcohols plants, one of which marked the 50th oxo licence for DPT and its licence partner. The oxo alcohols produced using this technology are mainly used as plasticisers and continued economic growth and development of the chemical industry in China has driven demand. We have invested in R&D to constantly improve our oxo technology and this has enabled us to maintain our strong position in China. In one of our more recent oxo technology developments we have established a route for the production of 2-propylheptanol (2PH), a higher value oxo alcohol which is used to manufacture high performance plasticisers used in the construction industry. This 2PH technology features in one of the oxo licences signed during the year. Following the high level of oxo capacity introduced in China in recent years, we expect that the number of new plants and, hence, licences available to DPT will reduce from 2013/14 onwards.

Increasing access to unconventional gas (including that extracted from shale) and the resulting lower gas prices is encouraging activity in syngas projects, particularly in North America. During the year DPT has entered into engineering contracts for the design of two new methanol plants in the USA. R&D investment remains a key priority at DPT to enable it to enhance its existing technologies and bring new technologies to market. Work has continued in a number of new areas to support the expansion of DPT’s portfolio, particularly in the area of biorenewables.

Tracerco had a very good year with sales 17% ahead of last year at £60 million. The business saw strong demand from the oil and gas industry for its specialist measurement and process diagnostic services which our customers use to help them improve the efficiency and environmental performance of their operations.

Energy security concerns, especially in China and North America, remain a strong driver for Process Technologies. Our business is also starting to benefit from the consequences of sustained lower gas pricing as a result of unconventional gas extraction in North America and we expect that over time, Europe and China will also seek to exploit their reserves.

In March 2013 Johnson Matthey acquired Formox, a leading global provider of catalysts, plant designs and licences for the manufacture of formaldehyde which is an important chemical intermediate. It has developed a range of metal oxide based catalysts for the production of formaldehyde from methanol and provides process technology for metal oxide based formaldehyde production plants with an installed base of around 130 plants worldwide.

Formox’s technologies complement Johnson Matthey’s existing strengths in process catalysts and in plant design and licensing. The acquisition enhances our position as a leading supplier of technology for a range of syngas and other chemical processes. Formox provides exciting opportunities to integrate and expand our technology and catalysts into a broader range of chemical processes. Its expertise in selective oxidation catalysis, a technology that has applications in a number of other catalyst areas, also provides additional opportunities for Johnson Matthey to grow its position in the global petrochemicals market.

Formox employs around 90 people and has manufacturing, R&D, engineering and sales facilities in Sweden.

In the year to 31st December 2012 Formox had sales of £50 million and adjusted EBITDA (earnings before interest, tax, depreciation and amortisation) of £12.6 million.

Fuel Cells

Sales in our Fuel Cells business increased slightly this year to £6 million, benefiting from new opportunities in the backup power and consumer electronics markets, although growth was held back as a result of continuing delays at our customers in the deployment of combined heat and power systems in the USA.

Fuel cell technology for transport applications, especially cars, remains an important opportunity for Johnson Matthey and major car companies have reaffirmed their interest in fuel cell powertrains as part of a balanced portfolio of electric vehicles. We have continued to develop technology for automotive membrane electrode assemblies and our products have been well received by car companies, providing cost and performance characteristics in line with their needs.

The net expense of our Fuel Cells business increased by £1.3 million to £10.5 million.

Battery Technologies

Our Battery Technologies business was formed during 2012/13 and comprises Johnson Matthey’s R&D programmes in advanced battery materials and Axeon, which was acquired in October 2012 and specialises in the design, development and manufacture of integrated battery systems.

Johnson Matthey’s capabilities in materials science fit well with Axeon’s understanding of the applications engineering of battery systems and the integration of Axeon into the group is progressing well.

Our Battery Technologies business, which made a small loss in 2012/13, delivered sales of £31 million primarily to the power tools and e-bikes markets and we expect these markets to continue to grow in the next few years. Axeon has also made some initial progress with automotive customers.

Our R&D programmes are focusing on the development of improved materials for lithium-ion chemistries and on next generation materials. During the year we have expanded our R&D efforts and work is underway to add further laboratory facilities for materials testing and cell prototyping. We are also pursuing other bolt-on acquisition opportunities to further enhance our position in this market.

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