Business Overview

▪ 2009

Introduction

Automobiles.

      The American automotive industry began 2008 in precarious condition, and as the year unfolded, the situation went from bad to worse. First, gasoline prices of $3.50 to $4 per gallon throughout much of the United States during the spring and summer of 2008 crushed the already-declining demand for sport-utility vehicles (SUVs), pickup trucks, and minivans. Then the credit markets dried up, which affected both automakers, whose borrowing costs spiked, and consumers, who faced tighter lender standards and a reduction in available leases. In June alone, automobile sales in the U.S. fell 18% year on year, and in October they fell 31.9%. By late in the year, facing the prospect of running out of cash, the heads of the Big Three automakers testified before the U.S. Congress to request billions of dollars in government-provided loans to stay afloat. Although the Senate turned down the companies, in mid-December U.S. Pres. George W. Bush drew on a fund primarily intended to help bail out the financial sector to provide General Motors and Chrysler up to $17.4 billion in emergency loans with strict conditions, such as a requirement to cut labour costs. Ford, in the best financial shape of the Big Three companies, opted not to take any federal assistance, but it supported the loans since a failure of either GM or Chrysler would also threaten Ford's suppliers. The ongoing worldwide economic crisis helped push vehicle sales in the U.S. down more than 35% in December year on year, and total sales for 2008 were the lowest in about 50 years.

      Although Ford experienced record quarterly losses on the heels of a $2.7 billion loss in 2007, it had a line of credit of about $11 billion that it had negotiated in 2006, and in March 2008 Ford completed the sale of its Jaguar and Land Rover units to India's Tata Motors, which netted Ford $2.3 billion. CFO Don Leclair and two board members abruptly left Ford in October, which suggested to analysts that the Ford family (which controlled 40% of shareholder votes) was attempting to tighten control over the automaker.

      Since the late 1990s General Motors had bet heavily on the SUV for its profits, so when the sale of SUVs collapsed, GM was left stranded. In late 2007 its primary SUV plant, in Janesville, Wis., produced 20,000 SUVs per month, but a year later the monthly output was only about 3,000 SUVs, and the plant was slated to be closed. GM posted a loss of $15.5 billion in the second quarter, and by late in the year the company was losing cash at a pace of more than $1 billion per month. Although GM stood to gain from wage-and-benefit concessions that were negotiated with the United Auto Workers in 2007, those cuts would not take effect until 2010. After preliminary merger discussions with Ford collapsed in September, GM considered merging with its other Big Three rival, Chrysler. The deal would in theory create a new automaker with $250 billion in annual revenue, a 30% share of the American market, and—most important—about $30 billion in cash reserves. It would also likely entail massive layoffs and downsizing, since GM and Chrysler had several overlapping brands and competing production facilities. The proposed merger soon hit a wall, however, when GM and Cerberus Capital Management, Chrysler's owner, said that they were unable to find investors and banks to provide financing for the deal. As GM struggled to become profitable, it received the first $4 billion of its federal assistance on December 31.

      For Chrysler the proposed GM merger came when it also was running out of options. The automaker, which Cerberus had acquired in the spring of 2007, had cut production costs in anticipation of a market slowdown in 2008. The breadth of the market's collapse, however, left Chrysler reeling, and the company said that it would lay off 25% of its white-collar employees by the end of the year. Over the first eight months of 2008, Chrysler lost $400 million as sales slipped by 24%. In September Cerberus approached Chrysler's former owner, Daimler, about purchasing Daimler's remaining 19.9% stake in Chrysler, and it later entered into negotiations with Japan's Nissan and France's Renault to form a manufacturing and development alliance, but no agreements were reached. Chrysler announced in mid-December that it was idling all 30 of its North American manufacturing plants for at least a month to save cash, and at year's end the company anticipated soon receiving its initial $4 billion of federal assistance.

      Japanese automaker Toyota profited from the stumbles of its American rivals and was set to outsell GM for the year and become the world's largest automaker. Through June Toyota sold about 300,000 more vehicles than GM worldwide. Nevertheless, Toyota was far from immune to the collapse of the American market, and in December its vehicle sales in the U.S. were down almost 37%. By the end of the year Toyota forecast that it would report its first-ever annual operating loss.

      Thanks to sales of passenger cars such as the Civic and Accord sedans, Honda's sales in the U.S. were up 1.7% in the first eight months of 2008, but by year's end it also had recorded a decline in sales, with a drop of 8.2% for the year.

      Many European carmakers were hit with declining revenue as buyer demand worsened in the second half of the year. France's Peugeot-Citroën experienced a 5.2% drop in its third-quarter sales and said that it would slash its European car production by 30%. Sweden's Volvo's net profit fell 37% in the third quarter, and the company noted that it had almost as many order cancellations as it did new orders.

      The most dramatic growth potential in terms of new-car production and sales was in India and China. India swiftly emerged as a major production hub for small cars, including the Nano, introduced by Tata Motor's chairman, Ratan Tata (Tata, Ratan ), in January. Among the manufacturers that were operating plants in India were Nissan and Suzuki from Japan and Hyundai from South Korea. In China overall car sales rose 7.3% for the year to about 6.8 million. China's passenger-car sales shot up 24% in March alone, after foreign automakers introduced 13 new models in the first quarter. In three years China's domestic car sales had expanded by more than half.

Airlines.

      For 2008 the aviation industry was buffeted on one side by skyrocketing energy prices and on the other by a souring economy with diminished ridership. At least 25 global airlines either were sold or went bankrupt in 2008, and the remainder struggled to keep solvent with a combination of higher fares, reduced flights, and new fees (such as fuel surcharges and checked-bag surcharges). At the start of the decade, an average 15% of the cost of an airline ticket paid for jet fuel, but by the summer of 2008, as the price of oil peaked, the figure had risen to 40%. With the higher ticket costs, ridership was down; the U.S. Federal Aviation Administration (FAA) estimated that about 2.7 million fewer people would fly in the summer of 2008 than in the previous summer. (As fuel prices subsequently declined through autumn, many airlines removed their fuel surcharges only to raise their base fares by about the same amount.)

       Delta Air Lines and Northwest merged to form a carrier with more than $35 billion in revenue and a fleet of 800 aircraft. UAL (the parent of United Airlines) spent much of the year in negotiations with U.S. Airways and floated the idea of acquiring Continental, but no deals were reached.

      In the United States, energy costs leveled the playing field between legacy carriers and newer discount airlines. A combination of spiraling fuel bills and a decreased ability to tap the capital markets led to the shutdown or bankruptcy of more than a half dozen discount airlines, including Frontier, Skybus, Aloha, and ATA. The once fiercely independent JetBlue Airways sold off a 19% stake to Lufthansa. Even Southwest Airlines, formerly the best performer of the sector, encountered turbulence. In March the airline was forced to ground 38 of its planes because it could not determine whether safety inspections had been performed adequately, a controversy that led the FAA to fine Southwest $10.2 million and to propose new safety rules that affected about 1,200 wide-body jetliners.

      European airlines also suffered. Ryanair posted only its second quarterly loss as a public company in June. Silverjet, a British business-class-only airline, shut down in May after only 18 months of service. Alitalia, which had not reported a net profit since 2002, was placed in bankruptcy in August. CAI, a consortium of Italian investors, agreed in December to purchase the airlines' main assets.

Aircraft.

      Aircraft manufacturers in 2008 faced a number of challenges, from the impact of high oil prices to operations that were shut down by strikes. Although industry leaders Boeing and Airbus had compiled a backlog of 7,000 aircraft orders over the previous few years, they faced the potential of cancellation of up to one-third of their bookings as airlines downsized in the face of the declining economy. In February Boeing lost out on a $40 billion air force contract for aerial refueling tankers to a partnership that included Airbus and Northrop Grumman. Boeing, aided by the finding by the U.S. Government Accountability Office that the air force had improperly run the bidding process, pushed to reenter the bidding, and a new competition was set for 2009. About 27,000 Boeing machinists walked off the job in September after talks broke down for a new three-year contract. The strike, which lasted until November 1, was driven in part by machinists' discontent with the delays in Boeing's 787 Dreamliner program, which was kept to a slow pace partly owing to missed deadlines by Boeing's outsourced suppliers. Airbus spent the year trying to reduce costs, with its parent EADS pushing to cut costs by €2.1 billion (about $3.25 billion) by 2010. The measures would include the elimination of 10,000 jobs.

      Both Boeing and Airbus also had to contend with a new potential rival. In May the Chinese government launched Commercial Aircraft Corp. of China (CACC). Aircraft manufacturers expected that China would require up to 2,800 new planes in the next 20 years, and CACC was founded to ensure that Chinese manufacturers secured a substantial share of that market.

Hotels.

      Hotel companies, facing a worsening economy, tightened their belts. Starwood Hotels & Resorts Worldwide posted a 12% drop in its third-quarter 2008 profits, which prompted Starwood to close three of its vacation-ownership sales centres and suspend its share-buyback program. Marriott International posted a 28% decline in the third quarter and said that it expected its performance to worsen in 2009, predicting that it would experience a 3% drop in revenue per available room. The hotelier's mainstream lodging operations held steady, but it faced a substantial drop in its limited-service hotels that catered to budget travelers—an indication that such travelers were forgoing traveling entirely.

Metals.

      The fortunes of metals producers through the first half of 2008, from steel to copper, depended in great part on the impact of rising commodity prices. Producers walked a thin line between welcoming price inflation, since it boosted their own bottom lines, and fearing it, since inflation meant increased energy-related costs and, ultimately, lessened demand.

      Steelmakers, for example, saw general improvements in their balance sheets over the summer as months of steel-price increases helped reduce the pain of increasing raw material and energy costs. (Global prices rose 40% to 50% between December 2007 and May 2008.) U.S. Steel posted second-quarter net income of $668 million, a more than 100% increase year on year. Luxembourg's ArcelorMittal, the world's largest steelmaker in terms of production, earned a record $13.09 billion in the first half of 2008 and was on pace to match that amount in the second half. As the year waned, however, there were signs of flattening demand.

      There was also growing tension between miners and producers. Australian top mining companies Rio Tinto and BHP Billiton pushed for massive increases in their benchmark prices. In early summer, for example, they demanded and received an 85% increase for iron ore in negotiations with China's biggest steelmakers. As demand decreased in the summer and fall, however, China's steel mills began postponing iron-ore deliveries, and analysts predicted that the slowdown could reduce sales by 10% by year's end. BHP spent much of the year attempting to carry out a $130 billion hostile takeover of Rio Tinto.

      Other metal sectors also faced dwindling demand. Copper hit a three-year low of $2 per pound in October after Chinese demand waned. The price further fell to below $1.30 per pound in mid-December. From July to September aluminum prices fell more than 20% to $2,500 per metric ton, while producer inventories increased by 40%. By the end of the year, prices dropped to less than $1,500 per metric ton. China, which experienced electric-power shortages, was forced to cut aluminum output by 10%. Even Russia's RUSAL, the world's largest aluminum producer, considered shuttering some of its high-cost smelters. The largest American producer, Alcoa, was slammed by increased costs of production and raw materials and declining demand from automakers and other manufacturers. In the third quarter Alcoa posted a 52% profit decline and said that it would reduce capacity and halt all nonessential capital projects.

      Even gold, once considered a safe haven in times of economic volatility, was unpredictable. By March gold futures contracts had reached $1,000 per troy ounce. In the summer, however, with demand collapsing (jeweler demand for gold fell 24% in the second quarter alone), gold prices began to deflate, and by August gold futures had given up all of the year's accumulated gains. Even more frustrating to gold investors, the commodity's price was wildly volatile in the third and fourth quarters, bouncing up to $986 per troy ounce and down to $700.

Chemicals.

      The leaders of the global chemicals industry in 2008 largely managed to keep a steady pace as the economic turmoil began, thanks to a combination of price hikes and increased diversification. Dow Chemical posted a 6.2% gain in third-quarter net income, since it was able to use two major across-the-board price hikes in the summer to offset increased energy costs, which rose by 48% during the third quarter alone. Dow hoped that its acquisition of specialty-chemicals maker Rohm and Haas would help widen its profit margins. In December, however, Dow said that it would be reducing its workforce by about 11%, or 5,000 jobs. DuPont was also managing to keep afloat despite the slump in automobiles and housing, and it posted an 18% increase in first-half earnings. The company had sought product diversification with moves into areas such as biofuels, but it also reduced its workforce late in the year, cutting 2,500 jobs.

Petroleum and Natural Gas.

      In 2008 the global energy sector both benefited and suffered from the caprices of energy prices. For much of the first half of the year, oil and gas prices were at record highs. Oil peaked at $147 per barrel in early July. By August, however, indications of a global recession had appeared, and prices began to collapse. Much of the drop was the result of declining consumption—the U.S. Department of Transportation said that the total distance driven in the U.S. in August fell by 5.6% year on year, the biggest drop reported since 1942, the year data began to be collected. Crude oil fell to $120 per barrel in August and to less than $70 per barrel by the end of October. The price drop prompted OPEC to slash its output by 1.5 million bbl per day, but the price continued to fall, and in late December it slipped to as low as $36 per barrel.

      Many analysts expected a wave of consolidation among oil and gas producers, in part because the “supermajor” oil companies such as ExxonMobil and BP and the “superindependents” such as Occidental Petroleum had massive cash reserves. (The five largest Western oil companies had $72.6 billion in cash at the end of second quarter 2008.) Their likely targets included newer companies such as Petrohawk Energy that relied on a mix of debt and equity to finance their growth. With the banks essentially shuttered in terms of lending in the latter months of 2008, such companies faced difficulty in finding capital to keep their wells active.

      The top global energy companies also began to address a long-simmering problem—the fact that their production and their oil and gas holdings were leveling off or declining, which left much of the world's untapped oil reserves in the hands of state-owned energy companies. The 10 largest holders of petroleum reserves in the world were all state-owned companies, including Russia's goliath Gazprom, whose daily crude-oil and gas production was greater than that of Saudi Arabia. By contrast, even at the height of the oil-price boom in the second quarter, ExxonMobil said that its production of oil and gas fell by 7.8%.

      Oil- and gas-rich countries flexed their muscles, often at the expense of the former top oil producers and would-be competitors. In February Venezuela's state-owned oil company, Petróleos de Venezuela, cut off sales of oil and gas to ExxonMobil in retaliation for a legal dispute. Russia forced top global producers to beg for scraps: Total and StatoilHydro agreed to stringent terms with Gazprom (they would not own the gas and would have to sell all the gas they produced to Gazprom) in order to have access to the Shtokman gas field. Moreover, the Russian government tightened its grip on BP's Russian joint venture, TNK-BP, and several top executives of TNK-BP resigned. The loss of control over its half of TNK-BP could prove catastrophic for BP, since the joint venture had come to account for nearly one-fifth of BP's reserves and about one-quarter of its oil production.

Utilities.

      The global utilities market endured a turbulent year marked by wild price swings. As the year ended, utilities braced for an anticipated massive wave of industry consolidation. In October Exelon made a $6.2 billion unsolicited bid to buy NRG Energy, a combination that would create the largest American power company, with $68.8 billion in assets.

      Driving the potential of consolidation was the fact that many power companies that sold electricity in deregulated markets were crushed by the stock market collapse in September and October. For example, the market capitalization of Reliant Energy (Houston) fell by 75% in a single month, and the shares of several other major utilities sold at a fraction of the actual value of their power plants, let alone their companies. The credit-market crunch also hurt utilities, many of which relied on the debt markets to finance at least one-half of the costs of building power plants.

      Other blockbuster deals included Warren Buffett's Berkshire Hathaway's $4.7 billion purchase of Constellation Energy Group (Baltimore, Md.), which outbid the French utility Électricité de France (EDF). EDF in turn agreed to buy the British Energy Group for $23 billion, a deal that could spur the revival of the British nuclear power industry. EDF said that it intended to build up to five nuclear reactors in Britain.

Pharmaceuticals.

      In 2008 drug manufacturers readied themselves for a future of limited promise. Top manufacturers, whose profits had been under siege by generic-drug manufacturers, faced within a few years the end of patent protection to more than three dozen of the industry's top-selling drugs, a change that could wipe out $67 billion of annual sales by 2012. Unhappy with the lack of new drug prospects, top manufacturers began downsizing their research and development (R&D) units. GlaxoSmithKline said in October that it would eliminate up to 850 jobs in R&D, about 6% of its R&D staff, and that it would likely increase its use of outside research units. Merck announced that it planned to gut 12% of its workforce and said that it would shutter three research sites as part of the downsizing. Pfizer disclosed that it would abandon research into heart disease (which had resulted in its cholesterol-lowering drug Lipitor), obesity, and bone health to focus on more profitable areas such as cancer research.

      Drug manufacturers also claimed that increased regulations by the U.S. Food and Drug Administration (FDA) had further hobbled new drug development. (In 2007 the FDA approved only 19 new medicines, the lowest number in 24 years.) As part of its regulatory function, the FDA followed the recommendation in July 2008 by an agency panel to impose stricter approval standards for diabetes drugs, which threatened the development of new drugs by AstraZeneca and Bristol-Myers Squibb.

      Leading manufacturers spent 2008 looking for stopgap solutions to their longer-term woes. GlaxoSmithKline, for example, worked to modify and find new uses for the drugs it already sold, a strategy that had accounted for 27% of its sales growth over the previous seven years. Pfizer extended the profitable life of its blockbuster Lipitor drug by cutting a deal with Indian generic manufacturer Ranbaxy Laboratories. Ranbaxy agreed to keep its generic version of Lipitor off the U.S. market until late 2011. The arrangement would provide Pfizer 20 additional months of exclusivity to Lipitor, which generated $13 billion in revenue annually. In return, Ranbaxy was granted the right to sell a generic version of Pfizer's Caduet seven years before the expiration of its patent.

Tobacco.

      As they had for much of the previous decade, tobacco manufacturers spent 2008 contending with declining American smoking trends and looking to expand into emerging markets and diversifying their product lines. Manufacturers were betting on continued growth in less-developed countries such as China and India. Philip Morris International, which became a stand-alone company in March (separating from its parent Altria Group), began an aggressive global push of its products in countries such as Pakistan (where smoking had increased 42% since 2001) and Ukraine. By contrast, Altria's American cigarette-manufacturing operation, Philip Morris USA, faced declining domestic cigarette sales of 2.5% to 3% annually.

Finance.

      The credit crisis that began in 2007 and the failure of several large banks and other financial institutions, combined with soaring oil and food prices, pushed the world economy into a global recession in 2008. (See Special Report (Financial Crisis of 2008 ).) Stock markets fell throughout the year, with all major bourses down by at least 30% and some plummeting 50% or more. In the U.S., the Dow Jones Industrial Average closed at 8776.39, a drop of 33.8% for the worst annual loss since 1931, and a plunge of 37.7% from the all-time high of 14,087.55 set in October 2007. (For Selected Major World and U.S. Stock Market Indexes, see Table (Selected Major World Stock Market Indexes1).)

Christopher O'Leary

▪ 2008

The prices of oil and gold continued to rise sharply, and a crisis in subprime mortgages roiled credit markets. Toyota briefly topped General Motors in world sales, and American automakers reached agreements for union-run trust funds to pay retiree health costs. Consolidation was a major trend, particularly in the metals sector.

      The collapse of the subprime mortgage market by mid-2007, though long predicted, wreaked havoc on both the housing and financial industries (several major banks posted mortgage-related losses in the billions of dollars) and resulted in a major credit crunch that impaired many businesses' ability to secure short-term financing. (See Sidebar (Subprime Mortgages: A Catalyst for Global Chaos ): United States.)

      In 2007 automakers suffered through a bad summer of sales—the worst in a decade—for which they blamed the chilling effect of the subprime mortgage crisis and high gasoline prices. Light-vehicle sales in the U.S. ended the year at 16.1 million after almost a decade of annual sales of about 17 million. As a possible sign that consumers were convinced that oil prices would remain high, in May more cars than light trucks were sold in the United States for the first time since 2002.

      The Big Three American automakers continued to face the erosion of their once-dominant grip on the U.S. market. In July the combined share of the Big Three's traditional American brands fell below 50% for the first time. There were signs everywhere of the diminishing presence of the top automakers. For example, in the wake of the bankruptcies of Tower Automotive and Delphi, several auto-parts manufacturers wound down businesses that catered exclusively to automakers. They included PPG Industries, which sought to sell its windshield business, and Motorola, which sold its automotive sensor-and-control business to Germany's Continental.

      The Big Three achieved a major restructuring of their employee health care obligations, which had been a major cost burden on the companies. After a two-day strike in September against General Motors by the United Auto Workers, GM reached an agreement on a new contract with the UAW in which the company would shift liabilities for UAW-retiree health care into an independent trust. The trust, known as a voluntary employee beneficiary association (VEBA), would be administered by the UAW. Chrysler and Ford subsequently reached similar agreements with the UAW in creating VEBA trusts, and together the three companies would transfer about $100 billion in current and future health care liabilities to the trusts.

      GM appeared to turn a corner with the restructuring of its employee health care obligations, but it still had to close a major profitability gap with its foreign rivals; it made a mere $65 in profit per car sold, compared with the $1,200 per car netted by Toyota and Honda. For the third quarter of 2007, GM reported a loss of about $39 billion, its largest loss ever.

      A symbolic moment occurred in October for Chrysler when DaimlerChrysler, its former owner, officially changed its name to Daimler. The change marked the epilogue to a contentious decadelong partnership that had come to an end. Daimler spun off Chrysler in July to private equity firm Cerberus Capital Management, which hired former Home Depot CEO Robert Nardelli (Nardelli, Robert ) as chairman and Toyota's top American executive, James Press, as vice-chairman and president.

  Ford, after having posted a $12.7 billion loss in 2006, faced repeated setbacks in 2007; its sales were down every month of the year except November, for a total decline of 12%. Its most critical redesign, the F-Series pickup, was not expected to reach dealerships until late 2008. Ford did experience some improvement in the first half of 2007, when it posted a $468 million net profit. For the year, however, Ford's reported U.S. annual sales figure of 2.57 million vehicles was surpassed by Toyota's 2.62 million, which meant that Ford had slipped from its long-held position as the number two American carmaker. Ford looked to bow out of the luxury-car market. It sold off Aston Martin in March, put Jaguar and Land Rover up for sale, and even considered selling its Volvo car unit. These brands made up Ford's Premier Automotive Group, which as of July 2007 had posted losses of $4.8 billion since 2004.

       Japanese carmakers, in contrast, continued to thrive even in the face of sales declines. Toyota, in the first quarter of 2007, became the world's largest carmaker in terms of sales, besting longtime champion GM. Through the first nine months of the year, however, GM sold 7.06 million vehicles to Toyota's 7.05 million. Toyota said that it planned to sell 10.4 million vehicles worldwide in 2009, which, if accomplished, would make Toyota the first auto company to sell more than 10 million vehicles in one year and would beat GM's record of 9.55 million set in 1978. Toyota posted a 32% rise in net profits in its fiscal first quarter, ended June 30, while its sales for the first nine months of 2007 were up by 7%. The two other major Japanese automakers, Honda and Nissan, also soared. Honda, which sold more than half of its cars in North America, made $1.8 billion in net income in the quarter ended September 30 (a 63% increase), and Nissan increased its operating profit by 12% in the same period, largely because of increased sales in Russia and China.

       European automakers also generally prospered. Fiat, for example, had a greater market value than GM and Ford combined, although the two American companies each made three times as many cars. Fiat, having recovered from the collapse of its partnership with GM in 2005, signed new alliances in the U.S. and India and accelerated the rollout of its new minicar, the 500.

       German carmakers such as BMW (which planned to increase worldwide sales by 40% in the next 12 years) and Volkswagen stepped up U.S.-based production, in part as a hedge against currency-exchange rates in the face of a weakened dollar. BMW said that it would increase the annual production capacity of its only American factory from 104,000 to more than 200,000 vehicles, and Volkswagen, which had not built cars in the U.S. since the 1980s, was considering opening a U.S.-based plant. On October 23 the European Union's highest court struck down a 47-year-old German law that protected Volkswagen from a takeover, which meant that Porsche, which already owned 31% of Volkswagen, would likely purchase a majority stake in the automaker.

      All automakers were watching developments in India and other emerging markets. India could soon become the fastest-growing car market, and India's Tata Motors was close to rolling out a $2,500 “people's car.” China's state-owned SAIC hired the head of GM's Chinese operations to step up production; SAIC intended to have 30 different models on the market by 2010. Chrysler aimed to double its sales in China in 2007, and Honda planned to launch a new brand of car by 2010 with its Chinese partner, Guangzhou Automobile Group. By then China could have surpassed the U.S. as the largest vehicle market in the world.

      The single-most-dominant factor in the energy sector—the price of crude oil—leapt from benchmark to benchmark. Crude oil hit $70 per barrel in July, $80 per barrel in September, a record $90 per barrel in October, and almost reached $100 per barrel in November. Analysts blamed everything from continued political tensions in the Middle East and the growing role of speculators and traders in oil futures to rising global demand, which shot up to 86 million bbl daily in 2007. OPEC did not increase its production despite the price hikes. It argued that oil refiners, which in some cases made a pretax profit of $30 per barrel of oil in the production of gasoline, were in part to blame for the price inflation.

      The global “supermajor” oil companies continued to post substantial earnings but faced an erosion of their dominance as they contended with rising costs for oil extraction and slipping volume in production. ExxonMobil, the world's largest energy company, posted a $10.2 billion profit in the second quarter of 2007. Though enormous, the figure was, nevertheless, a decline from the same period in 2006. For a total of $373 million, BP settled a number of legal claims, including a U.S. criminal probe into alleged price manipulation of propane and lawsuits that were brought in the aftermath of the 2005 explosion at BP's Texas City, Texas, refinery. BP, which was lagging behind its peers (its third-quarter profit was down 29% to $4.41 billion), overhauled its corporate structure and reduced the number of its major business segments by incorporating its natural-gas and renewable-energy units into its exploration and production unit and its refining and marketing unit.

      The supermajors, confronted with aggressive tactics from less-developed countries (LDCs) that had substantial oil and natural-gas reserves, generally lost power to state-owned companies across the board. An international oil consortium faced off against the Kazakhstan government, which threatened to remove it from developing one of the world's largest oil deposits—the Kashagan field—unless the government received a larger share of profits. ExxonMobil and ConocoPhillips were forced out of Venezuela after they refused to sign over majority stakes in development projects to state-owned Petróleos de Venezuela. In Russia, BP and Shell were pressured to give up controlling stakes in Siberian natural-gas projects to state-owned Gazprom. About 75% of the world's oil reserves were controlled by national oil companies, according to the International Energy Agency.

 Indeed, some of the biggest winners of the year were the Russian government-controlled energy colossi. Rosneft, a once marginal state-owned oil company, became a major producer by acquiring most of the assets of bankrupt Yukos (Italian firms Eni and Enel managed to buy some Yukos assets for $5.83 billion). Gazprom continued to show its power when in January it interrupted exports that passed through Belarus to Europe in a move that was reminiscent of its January 2006 temporary cutoff of gas exports to Ukraine. A joint project with Eni to build a new trans-European pipeline could give Gazprom even greater leverage over Europe. By contrast, the last of the privately owned Russian energy firms cratered; Mikhail Gutseriev, owner of RussNeft, the largest independent energy company in Russia, quit after what he deemed was harassment by the Russian police and tax authorities, and he eventually fled the country. Russia's United Company RUSAL planned to purchase RussNeft.

      In Iraq—whose unproven oil reserves might top 200 billion bbl (second only to world leader Saudi Arabia's 262 billion bbl)—the large global companies were also scrambling. Shell and Total held off new projects as they waited for the Iraqi political situation to stabilize and for privatization legislation to be enacted. Meanwhile, smaller firms, including France's Perenco and Canada's Heritage Oil, signed exploration deals in areas such as the Kurd-controlled region in northern Iraq. In June, Iraqi Pres. Jalal Talabani traveled to China to push Beijing to revive a $1.2 billion oil-exploration deal that was signed during the Saddam Hussein era.

      The utilities sector underwent some consolidation and buyouts. In the United States the most notable deals concerned Washington state's Puget Sound Energy, which was taken private by Macquarie Group for $6.1 billion, and the Texas utilities firm TXU, which was acquired by a group of private equity firms that included Texas Pacific Group and Kohlberg Kravis Roberts & Co. The private equity firms paid $32 billion for TXU and took on more than $12 billion in TXU debt, which made it the largest leveraged buyout in history. The firms sought to deter potential opposition to the buyout from environmental groups and politicians by promising to cancel a majority of TXU's proposed new coal-burning plants and by offering rate reductions to consumers. In Europe, where there had been more than $100 billion of utility mergers since April 2005, further consolidation loomed after the European Union's power sector was officially deregulated in July. The deregulation allowed utilities in each of the EU's 27 member countries to sell electricity in any other member country. The potential of heightened competition led to “national” mergers such as that of France's SUEZ and Gaz de France in 2006 and the $11.8 billion merger between Italy's AEM Milano and ASM Brescia in 2007. Germany's E.ON tried repeatedly to make acquisitions but failed to purchase Scottish Power and Spain's Endesa.

      The global steel industry also had a wave of cross-border mergers: Brazilian steelmaker Gerdau bought American steelmaker Chaparral Steel for $4.22 billion; India's Essar Global purchased Canada's Algoma Steel for $1.58 billion and Minnesota Steel for an undisclosed amount; and U.S. Steel bought Canada's Stelco for $1.1 billion. Steel prices remained relatively high—in July hot-rolled steel was priced at $575 per metric ton, compared with $175 per metric ton in 2001—and demand for steel was expected to grow in 2008 by 4% in most of the world. Dutch ArcelorMittal remained the world's largest steel company, but it faced challenges from the rising power of the Indian steel industry, including JSW Steel, which was planning to triple production over the next five years, and Tata Steel, which became the world's fifth largest steelmaker after its 2007 takeover of London-based steel producer Corus Group. Other emerging global steel powers included Germany's ThyssenKrupp and South Korea's Posco, which was considering international acquisitions.

      Consolidation was also prevalent in other metals sectors. For example, gold, whose price was at 28-year highs (gold hit $787 per troy ounce in September), experienced a wave of mergers, including Newmont Mining's takeover of Miramar Mining for $1.53 billion in October and Yamana Gold's $3.6 billion purchase of Meridian Gold in September. Newmont and Yamana used the mergers to strengthen themselves against market leader Barrick Gold. Gold producers also looked for ways to simplify operations and focus purely on gold-mining functions; Newmont, for example, discontinued its merchant-banking business unit.

      In the aluminum sector, the top producers spent much of 2007 in a bewildering series of courtships. In May Alcoa made an unsolicited $26.9 billion bid to acquire its rival Alcan, which had rejected Alcoa's earlier overtures. The prospective merger would have created a company with $54 billion in annual revenues. Alcoa's takeover bid was trumped, however, by Australia's Rio Tinto, which eventually prevailed with a $38.1 billion offer. Having lost its attempt to nab Alcan, Alcoa spent the rest of the year considering other partners and selling off noncore businesses such as its 7% stake in Aluminum Corp. of China (Chalco). United Company RUSAL, the world's largest aluminum producer, planned a $9 billion initial public offering, which it abruptly canceled in September because of market conditions.

      The airlines in 2007 seemed at last to have recovered from the misfortunes of the early 2000s, when many large American carriers fell into bankruptcy. From January to August, however, more than 25% of domestic flights arrived late, the worst performance since such data began to be collected in 1995. In August alone about 30% of flights were delayed. SkyWest's Delta Connection had a 55% on-time arrival rate, the industry's lowest.

      AMR, which owned American Airlines, earned $175 million in the third quarter, up from $15 million in the same period in 2006, a performance in part aided by increased passenger fares. Higher fares also boosted UAL, United's parent, whose net income rose 76% in the third quarter. Delta Air Lines, which emerged from bankruptcy protection in April, stepped up its international flights, which were its most profitable. More than 33% of Delta's seat capacity was outside the U.S. as of the end of September, up from 24% in 2005. Delta's chairman stated publicly that the airline would consider making an acquisition as well as perhaps sell off its Conair subsidiary. Most of the major American airlines were facing a costly upgrade to their aging fleets; the average age of their jets was 12.2 years at the end of 2006. Northwest, for example, had 109 DC-9s whose average age was 35 years.

       Southwest Airlines spent the year contending with high fuel costs. Southwest for years had been able to reduce fuel costs via a system of price hedges that were generally regarded to be the best in the industry. With energy prices having been high for over four years, such hedges eventually lost some of their effectiveness, however. (For example, while Southwest managed to lock in fuel at mainly $43 per barrel in the fourth quarter of 2006, it had contracts for $51 per barrel on average in the fourth quarter of 2007). Furthermore, Southwest's labour force had become among the highest paid in the industry because many of Southwest's bankrupt competitors had been able to slash labour costs.

      Many European and Asian airlines considered consolidation. In India four state-owned carriers merged—Air India, Indian, Air India Express, and Alliance Air—to form a new airline that would have 121 aircraft and be among the world's 25 largest carriers. In Europe carriers hoped to take advantage of a new “open skies” treaty between the EU and the U.S. in which previously restricted trans-Atlantic routes were opened to competition. The Italian government said that it would sell off its controlling stake of unprofitable Alitalia, and at the end of the year, it endorsed sales negotiations between the airline and Air France–KLM.

      The rivalry between the two top global aircraft manufacturers, Boeing and Airbus, took a number of twists over the year as recovering airlines at last began to place substantial orders for new aircraft. Boeing started in strong shape, with its first-quarter profit up 27% as it delivered its largest order of planes in five years and was sold out of new aircraft until 2011. In October, however, Boeing suddenly announced that its new wide-body jet, the 787 Dreamliner, would face delays of at least six months because of parts shortages and other problems. The company, which had promised that the first 787s would be delivered in May 2008, stated that it would deliver 109 planes by the end of 2009. (By October 2007 Boeing had booked 710 orders for the 787 from 50 customers, and Delta Air Lines stated that it would consider ordering up to 125 by year's end.) Many airlines were counting on the 787 as the key to upgrading their fleets in the following decade, since the 787 was reportedly 20% less expensive to operate and maintain than comparable aircraft.

      Boeing's delay came almost simultaneously with Airbus's delivery of its first A380 superjumbo jetliner after it had endured two years of production delays and gone $6.8 billion over budget. Airbus, which had seen five chief executives in 27 months, spent the year struggling to revive its business. Its parent company, European Aeronautic Defence and Space (EADS), had experienced a 94% decline in profit in 2006, primarily because of production delays. EADS scrapped its dual French-German management structure in favour of a single CEO and chairman, and Airbus streamlined operations, increased outsourcing, and sold off some of its production facilities. Airbus also increased investment in the A350, its rival to the Boeing 787, which was planned to be in service in 2013.

      Both Boeing and Airbus were watching developments in China, which announced in March that it had approved a large commercial aircraft production program with the goal of producing large aircraft by 2020. China planned test flights of its first-ever commercial jet aircraft, a midsized regional jet, in 2008. Since China, a large importer of commercial jets, was expected to buy 2,230 planes in the next 20 years, its domestic manufacture of large aircraft could seriously threaten future sales for Boeing and Airbus.

      The toy industry suffered a wave of recalls and scandals after large numbers of Chinese-manufactured toys were discovered to be hazardous. Most seriously affected was Mattel, which recalled more than 21 million Chinese-made toys—including Fisher-Price infant toys and Barbie dolls—because of lead paint and other potential hazards. The recall cost the manufacturer more than $40 million worldwide. The violations increased suspicion that the Chinese toy industry, which supplied 80% of the toys sold in the U.S., was not adequately enforcing safety standards and prompted calls in the U.S., Canada, and other countries for increased regulation.

      In March the administration of Pres. George W. Bush took what appeared to be the most aggressive stance against Chinese imports in two decades and said that it would impose steep tariffs on government-supported Chinese exporters. It immediately placed duties on two high-gloss- paper manufacturers, but the duties were later removed when the U.S. International Trade Commission ruled against them. Meanwhile, the housing slump hurt a number of wood-product manufacturers, such as Weyerhaeuser, whose second-quarter net income fell by 89%. Weyerhaeuser said that it would close three plants by year's end. Boise Cascade sold its paper, packaging, and newsprint division for $1.63 billion to Aldabra 2 Acquisition, a private equity group.

      American textile companies fought legislation introduced in the U.S. Congress in October that would extend liberalized trade benefits to impoverished countries. The New Partnership for Development Act would grant duty-free and tariff-free access for products from as many as 50 LDCs. American textile companies worried that the legislation would boost imports from Bangladesh and Cambodia, which already were, respectively, the second and eighth largest sources by volume for U.S. apparel imports.

       Drug manufacturers in the U.S. faced challenges on a number of fronts—from federal regulators, who gained greater supervisory powers and shot down a number of promising new drugs; from legislators, who voted to allow LDCs greater access to generic drugs; and from generic manufacturers, which continued to prosper by taking away market share. Some drugmakers made major purchases of biotech firms—such as AstraZeneca's acquisition of MedImmune for $15.6 billion—in a sign that brand-name pharmaceutical companies were looking for generic-proof alternatives. In the post-Vioxx environment, regulators were quicker to consider shutting down potential problem drugs. For example, a U.S. Food and Drug Administration (FDA) advisory panel voted in October to ban cough and cold medicines for children under six years of age, and another FDA panel decided to back a cardiologist's claim that GlaxoSmithKline's diabetes drug Avandia posed possible heart-attack risks. Such decisions often translated into serious hits to drugmakers' bottom lines. GlaxoSmithKline, for example, saw Avandia sales (which were $3 billion worldwide in 2006) fall by 38% in the third quarter alone. In some cases, drugmakers themselves withdrew their products. In October Pfizer scrapped its inhaled-insulin product Exubera, which had not performed to expectations since its 2006 rollout, and took a $2.8 billion charge to kill the product.

      The tobacco industry contended with many of 2007's major trends—consolidation and regulation. As the U.S. Congress edged toward granting the FDA the authority to regulate cigarettes, some tobacco companies prepared for the future. In August Altria Group said that it would spin off its Philip Morris International arm, which would create a European- and Asian-based manufacturer that would be isolated from any new U.S. regulations and would be able to benefit from rising rates in smoking in countries such as Russia and China. Philip Morris International produced 831.4 billion cigarettes in 2006, compared with Philip Morris USA's 183 billion.

      Despite skyrocketing oil prices and a widening credit crisis, stock markets in most countries rose in 2007, with the notable exception of Japan. In the U.S. the Dow Jones Industrial Average closed up 6.4% after a volatile year that included an all-time-high closing of 14,164.53 on October 9 and the bench-mark index's first fourth-quarter decline in a decade. (For Selected Major World and U.S. Stock Market Indexes, see Table. (Selected Major World Stock Market Indexes))

Christopher O'Leary

▪ 2007

Prices of oil and other commodities rose sharply, and merger activity in some sectors created new industry giants. The Big Three automakers struggled during the year, while in July Toyota surpassed Ford in U.S. sales for the first time. Boeing saw its prospects brighten in contrast to those of European rival Airbus. Most major world stock market indexes showed double-digit increases.

      Historians might look back at 2006 as the year when the automobile era dominated by the Big Three automakers ended for good. Ford, General Motors, and, later in the year, DaimlerChrysler together faced massive layoffs, credit downgrades, declining sales, production slowdowns, botched alliances, and executive reshuffling in what made 2006 truly an annus miserabilis for the former kings of the auto industry.

 Ford, which had been showing signs of recovery in 2005, began 2006 with hopes for continued improvement. Instead, it posted a first-quarter loss of $1.19 billion, in part because of a continued downturn in the popularity of sport utility vehicles (SUVs), which had been the linchpin of Ford's sales. Ford's operations continued to be at a serious cost disadvantage with respect to some of its international rivals. For example, in mid-2006 Ford's Focus compact car commanded an average sales price of $13,990, about $3,000 less than the average compact car. Meanwhile, a Ford worker in 2005 earned about $65 an hour in wages and benefits, compared with roughly $47 an hour for a comparable Toyota worker. In July 2006 Toyota outsold Ford in monthly sales for the first time ever in the United States, and in the third quarter Ford posted a loss of $5.8 billion, its worst quarterly result in 14 years. Shaken to the core, Ford pushed forward its restructuring plan, made plans to reduce its North American workforce by 40% (through buyout offers to all 75,000 of its hourly workers), suspended its dividend payments in the fourth quarter, and began considering shuttering ailing brands such as Jaguar. In September, William Clay Ford, Jr., the great grandson of Henry Ford, gave up his position as CEO to an outsider—Alan Mullaly—a former senior executive of Boeing with little experience in automobiles. One of the first challenges Mullaly faced was a revolt by Ford's auto-parts suppliers. Squeezed for years by Ford and the other Big Three firms for cost reductions, many of the suppliers—most recently Dana Corp.—had fallen into bankruptcy.

       General Motors, which had a $10.6 billion net loss in 2005, found its condition in 2006 less dire. Early in the year GM sold a majority stake in General Motors Acceptance Corp. (GMAC), its profitable finance arm, to hedge fund Cerberus Capital Management. In 2004 GMAC had provided 80% of GM's total net income. The cash infusion from the sale (believed to be in the range of $14 billion after various settlements) and a deal with the United Auto Workers to make buyout offers to 131,000 employees (47,600 were accepted) helped stabilize GM, and the company posted its first profitable quarter in two years. In June the company's largest single shareholder, Kirk Kerkorian, proposed that GM enter into a partnership with two foreign automakers, Nissan Motor and Renault. Kerkorian's belief was that GM would benefit from the insight of Carlos Ghosn, the renowned CEO of the two companies, and from reductions in supply-related costs that would result from the partnership. The initial proposal called for Nissan and Renault each to take a 10% stake in GM, but negotiations soon bogged down over how much Nissan and Renault would pay GM. GM's board eventually weighed against the alliance, and the negotiations collapsed in October. GM continued to face cost hurdles; no American company besides GM was spending as much on employee health care—$5.4 billion in 2005, or roughly 0.4% of health care costs in the U.S. In 2005, for the first time, GM sold more vehicles outside North America than in its home market; South Korea was a particularly receptive market.

       DaimlerChrysler stumbled when its Chrysler unit suffered a $1.5 billion operating loss in the third quarter, more than double its initial forecasts. It was a strange fate for a company that had begun the year with two profitable quarters and in the spring had even started to recall some laid-off employees. Chrysler shocked investors in September when it announced that it would cut its production schedule by 16% for the rest of 2006 because of sluggish sales. The entire DaimlerChrysler company reduced its profit forecast by about $1.2 billion, largely because of Chrysler's misfortunes. The sources of Chrysler's woes were the same as those that plagued its Big Three rivals: high gas prices, falling demand for SUVs and trucks, and growing benefit-related cost burdens.

      By contrast, 2006 was a year of triumph for top Japanese automaker Toyota; it became the third biggest carmaker in terms of market share in the United States, a first for a foreign car manufacturer. Toyota's victory over DaimlerChrysler for the year and, even more shockingly, over Ford in two months of sales, could be regarded simply as overtures to Toyota's master plan, which was to outpace GM and become the world's largest automaker by 2008. Toyota's sales increases came at the expense of the Big Three. In July 2006 Toyota's RAV4 outsold Ford's Expedition SUV 14,755 units to 6,075, whereas in July 2005 the Expedition had outsold the RAV 15,733 to 7,394. Toyota opened its newest American manufacturing plant in San Antonio, which was relatively close to a top GM plant in Arlington, Texas. Although both plants had the same production capacity, Toyota's labour cost was about $1,000 less per vehicle than GM's, and its workforce was made up of 1,600 nonunion employees, compared with GM's 2,800 United Auto Workers-affiliated employees.Toyota's net income for the six months ended Sept. 30, 2006, rose by 32% to $4.25 billion. The company produced approximately 8.85 million vehicles globally in 2006 and planned to increase that total to 9.8 million by 2008. By comparison General Motors sold 9.2 million vehicles in 2005.

      Toyota's rise was not a solitary feat; besides Toyota, the other members of what the auto industry termed the J-Three, Nissan and Honda Motor, also had solid years. Honda said it planned to boost its worldwide annual car sales to 4.5 million by 2010, up from 3.4 million as of March 31, 2006, and that it expected at least one-third of that growth to come from North America. Nissan's second-quarter profits soared by 31%, in part because of the sale of its stake in Nissan Diesel Motor to Volvo. The 12 top Japanese automakers for the first time produced more cars abroad than they did in Japan—having built 10.93 million vehicles abroad, compared with 10.89 million vehicles built in Japan for the year ended March 2006. The push toward overseas manufacturing was driven by a number of factors, including Japanese automakers' desire to reduce shipping costs and currency-related complications.

      The condition of European automakers was not nearly as solid as that of their Japanese counterparts. An exception was the surprise revival at Fiat, which boosted sales 19% in the first nine months of 2006 and recorded a profit. The largest European automaker, Volkswagen, earned $29.1 million in the third quarter and was attempting to reduce material costs by $1.3 billion by the end of the year.

      For the first seven months of 2006, the airlines were on track to post their best overall performance since the Sept. 11, 2001, terrorist attacks. In the second quarter the industry posted an overall profit of $1.6 billion, and ridership was on the rise. Then came August, when British authorities foiled what they described as a plot by terrorists to destroy a number of aircraft in mid-flight. A host of London-based flights were grounded for days, and the repercussions of the shutdown were felt throughout the industry. British Airways canceled more than 1,100 flights, a disruption that reduced its annual profit by approximately $95 million. The prospect of further international disruptions cast a pall on the strategy of a number of U.S.-based airlines such as Delta Air Lines and Continental, which had expanded their cross-Atlantic service in a bid to increase ridership.

      Terrorism-related troubles aside, the performance of American legacy airlines remained on the whole positive; AMR, the parent company of American Airlines, managed to post a $15 million net profit in the third quarter, whereas Continental, helped by a 17% increase in passenger revenue, posted $237 million in net income for the same period. Although US Airways Group, the newly merged US Airways–America West Airlines, reported a net loss of $78 million in the third quarter, its revenue had more than tripled to $2.97 billion.

      Low-cost airlines, which had prospered over the past few years at the expense of the legacy airlines, faced their own challenges, including rising fuel costs and overexpansion. As a result, JetBlue Airways, Southwest Airlines, Spirit Airlines, and AirTran Holdings all increased fares in 2006, which in some cases made their fares more expensive than the corresponding ones of legacy carriers. JetBlue, blaming higher operating expenses, posted a $500,000 net loss in the third quarter, but Southwest's third-quarter earnings slid 77%, to $48 million.

      Many European and Asian airlines also faced challenges. Japan Airlines, for example, reported a group net loss of $93 million when the year began, and Singapore Airlines said that its 15% drop in profits in the July–September period was mainly the result of the $1.3 billion it spent on fuel in that period, a 27% year-on-year increase. There was some merger activity as well, as evidenced by Ryanair's $1.8 billion hostile bid for its rival Irish airline Aer Lingus.

      For the top two global aircraft manufacturers, 2006 was a tale of contrasts. Boeing, which had been tarred by scandal and eclipsed in performance by its international rival Airbus, returned to form, while Airbus had a year marked by misfortune. Boeing's success was driven in part by its 787 Dreamliner model. The first new Boeing commercial airplane in a decade was set to go into service in 2008. The first three years of 787 production had already been sold, with 60 of 345 planes going to various Chinese airlines. Analysts expected that Boeing would easily recoup the $8 billion it and its partners had invested in developing the 787. The aircraft had a number of advantages for air carriers that were facing rising fuel costs. Its engines had fans of increased size that improved fuel efficiency, and its fuselage was made of a carbon-fibre hybrid, which was lighter than the aluminum fuselage of most aircraft.The skies were not entirely clear for Boeing, which posted a 31% drop in third-quarter earnings, in part because of its decision to kill its troubled in-flight Internet service. Boeing's overall resurgence, however, spurred it to make its most substantial acquisition since the late 1990s—a $1.7 billion purchase in May of aircraft parts and service company Aviall. The deal was intended to bolster Boeing's already-substantial aircraft-parts sales businesses, which generated $9 billion in sales in 2005.

       Airbus had an ill-fated year largely because of problems with two of its models—the A380, which experienced a number of costly manufacturing delays, and the proposed A350, which faced criticisms from potential customers. In the summer Airbus announced that the A380, which would be the world's largest passenger jet when completed, faced an additional six months in production delays that its owner, European Aeronautic Defence and Space (EADS), estimated would cost $2.5 billion in profits between 2007 and 2010. Worse, in October the A380 was delayed yet again, with EADS warning that the assembly-line problems would cut earnings by $6.1 billion over the 2007–10 period. The delays created chaos at Airbus's top levels. Britain's BAE Systems decided to exercise its right to force EADS to purchase BAE's 20% stake in Airbus, ending a decades-old partnership and making EADS almost the sole owner of Airbus. Airbus CEO Gustav Humbert admitted that Airbus had underestimated the Boeing 787, and soon thereafter Humbert and co-CEO Noel Forgeard were forced out. The new Airbus CEO, Christian Streiff, lasted a mere three months before he resigned, his departure apparently prompted by disagreements with the Airbus board over the pace of the company's turnaround program.

 The energy sector had a topsy-turvy year that was marked by price fluctuations, changing political tides, and many high-volume mergers. Oil prices hit $70 a barrel in April, with gasoline prices in many parts of the U.S. at times hitting the $3-a-gallon mark. The price hikes had a number of causes, which included continued turmoil in the Middle East, the damage that Hurricane Katrina had wreaked on infrastructure in 2005, and China's growing appetite for oil. (China's crude-oil imports for the first half of 2006 were 15.6% higher than for the same period in 2005.) Another factor was the growing influence of energy-price speculators such as hedge funds and institutional money managers, who were betting on continually rising oil futures. Oil prices peaked at $77 a barrel in August and then began to tumble and reached a year low of $57 a barrel in late October before closing the year almost where they began, at $61.05.

      Most top oil producers had another stellar year in terms of profits. ExxonMobil continued to post overwhelmingly large quarterly earnings, with $10.36 billion in the second quarter alone and $10.49 billion in the third quarter, the latter being the second largest quarterly performance by a publicly traded American company (the largest was Exxon's $10.71 billion earnings in fourth-quarter 2005).

       BP, in contrast, continually stumbled into controversy through the year. In June the company was sued by the U.S. Commodity Futures Trading Commission because its traders allegedly manipulated the price of propane in 2004. In August, five months after a 1,000,000-litre (270,000-gal) spill at one of its Alaskan pipelines, BP suddenly had to close down its Prudhoe Bay oil field—the largest in the U.S.—because of corroded pipes and a small leak. The shutdown, which contributed to the spike in oil prices to their year-high $77 a barrel, caused BP to reduce its production forecast for 2006 to 3.95 million bbl a day, compared with an earlier prediction of 4.1 million to 4.2 million. The Prudhoe Bay shuttering also was mainly responsible for BP's 3.6% decline in profits for the third quarter, when it posted a still-substantial $6.23 billion in net income.

      A continuing problem for the top oil companies was a growing wave of nationalism and its impact on untapped oil reserves. About 90% of the world's untapped conventional oil reserves were owned either directly by governments or by government-controlled companies, such as Russia's Gazprom, which in a matter of a few years supplanted the bankrupt Yukos to become Russia's largest energy company and possessed the largest oil and natural-gas reserves worldwide. Gazprom flexed its newfound muscles in the natural-gas market in late 2005, when it briefly cut gas supplies to Ukraine in a pricing dispute, and again in December 2006, when it threatened to cut off gas supplies to Belarus and Georgia unless they agreed to much higher gas prices. In April Venezuela, the third largest OPEC producer, seized control of oil fields owned by France's Total and Italy's ENI and demanded more-favourable lease terms. In May Bolivia nationalized its natural gas industry after seizing control of all privately owned gas fields by military force.

      At the same time, the oil industry proved merger-happy. Following on the heels of the merger-and-acquisition boom in 2005, when deals worth some $160 billion were announced, the energy sector witnessed some of its largest mergers since the late 1990s. Among them were Anadarko Petroleum's $21.1 billion purchase of both Kerr-McGee and Western Gas Resources, for 40% and 49% over stock value, respectively.

      Utilities continued to offer a mix of high profits, increased mergers, and political intrigues. The European Union's desire to expand competition in the European energy sector by 2007 was countered by the attempts of national governments to prevent foreign takeovers of their top utilities. In February France pushed for an expensive ($37.9 billion) shotgun marriage between SUEZ and state-owned Gaz de France in order to block a bid for SUEZ by Italy's Enel. The Spanish government attempted to foil a proposed bid by Germany's utility E.ON for the Spanish utility Endesa. In September the European Commission ruled against Spain, and E.ON returned with a larger offer, about $47 billion, to purchase Endesa.

      Mergers were also endemic in the American utility sector. Power companies that had been battered in the wake of the 2002 collapse of Enron Corp. came back with a vengeance. With the conviction of former Enron chairman Kenneth Lay (Lay, Kenneth ) and former president Jeffrey Skilling in May (and the death of Lay in July), the Enron story at last appeared over. (See Obituaries.) Mirant, which went into bankruptcy protection in the post-Enron years, demonstrated new vigour with an unsolicited $7.9 billion bid for NRG Energy, although the deal foundered. Dynegy, another company that had had hard years in the early 2000s, pared its debt load down from $13 billion to $4 billion.

      In the background, however, there was rumbling from the federal and state governments that the American utility sector had not dealt with its longer-term problems. A study by the North American Reliability Council found that electrical demand in the U.S. was rising three times faster than new resources were being added by utility companies, and state governments throughout the year held hearings to express concern about rising consumer rates in deregulated markets. Texas customers of the utility TXU, for example, experienced a rate increase of 80%.

      The chemicals industry was recovering from a rough period marked by high energy costs and, in some cases, Hurricane Katrina-related damage to infrastructure. DuPont posted a $485 million profit in the third quarter, compared with an $82 million loss in the same period in 2005, and the largest American chemical maker, Dow Chemical, beat analyst estimates with a $512 million profit in the third quarter.

      The metals sectors experienced major price increases and big-ticket mergers. In the metals and steel industry, 475 deals were announced in the first eight months of 2006 alone. A merger between the Russian aluminum producers RUSAL and SUAL Group and the aluminum unit of the Swiss firm Glencore International resulted in the formation of the largest global aluminum producer, with a 4.4 million- ton production capacity.

      The price of nickel as of August 14 had risen 103% over the previous 24 months, and the nickel sector witnessed a complex series of deals. Phelps Dodge planned to purchase Inco Ltd. and Falconbridge Ltd. for a combined $40 billion, but the deal's complexity eventually doomed it. Phelps and Inco ultimately merged, and Switzerland's Xstrata purchased Falconbridge for $17 billion.

       Gold futures prices hit a 26-year high on May 11, when gold hit an astonishing $732 an ounce. Fears about inflation, oil-price spikes, and terrorism spurred investors to drive gold to what proved to be unsustainably high prices. By October gold was trading at $582 an ounce, but it recovered to $635.20 (up 23%) at year's end. The price mania earlier in the year spurred industry consolidation, such as Goldcorp's $7.8 billion purchase of rival miner Glamis Gold to form the third largest global gold miner, after Canada's Barrick Gold and the U.S.-based Newmont Mining.

       Steel producers endured a high-octane combination of price fluctuations and massive consolidations. Steel prices rose substantially in the first six months of 2006, with cold-rolled steel in the U.S. hitting $700 a net ton in June, up from $590 a ton in June 2005, while steel imports in the first half were up 48%, to 17.58 million tons. By September, however, producers were publicly worrying about increasing stockpiles, a situation worsened by DaimlerChrysler's production cuts and by growing imports by China, which by September were up 17% year on year.

      The battle royal in the metals sector was between the industry's two largest players; Arcelor spent much of the year attempting to fend off Mittal's hostile takeover bid. At one point Arcelor floated the idea of aligning with Russia's Severstal, but ultimately, after raising its offered price, Mittal acquired Arcelor in June for $33.84 billion. The deal created a steelmaking colossus, Arcelor Mittal, with a production capacity of 110 million tons, three times greater than its nearest rivals. The deal also spurred imitators, such as Tata Steel Ltd.'s $8 billion offer to buy Corus Group, the largest foreign acquisition ever by an Indian company.

      The tobacco industry had a typical year marked by declining cigarette sales (the number of cigarettes sold in the U.S. was at a 55-year low) and endless court battles. For example, Altria's Philip Morris USA appealed to the U.S. Supreme Court in a case in which an Oregon jury awarded a smoker's widow $79.5 million in punitive damages. Tobacco companies did win a victory in July when the Florida Supreme Court upheld a lower court's decision to throw out a $145 million class-action judgment against tobacco makers, but in September a federal judge in Brooklyn approved a class-action suit that targeted makers of “light” cigarettes for having deliberately misled consumers as to the actual nature of the products. Some companies moved into the smokeless tobacco market. For example, Reynolds American's $3.5 million purchase of Conwood made it the second largest smokeless- tobacco manufacturer.

      The livelihood of many drug manufacturers depended upon the decisions of governments and courts. Merck was fighting roughly 10,000 lawsuits that involved its withdrawn pain-relieving drug Vioxx. In April three separate jury decisions in Atlantic City, N.J., and Texas left Merck contending with $21.25 million in damages. In June Merck's cholesterol-lowering drug Zocor went generic, which contributed to Merck's 34% decline in profit in the third quarter (Zocor sales had totaled $4.4 billion worldwide in 2005). There was one bright spot for Merck—federal approval of its new diabetes medicine Januvia.

      Bristol-Myers Squibb was left reeling when a deal it and France's Sanofi-Aventis had forged with generic manufacturer Apotex fell apart. The deal would have delayed until 2011 Apotex's generic version of Plavix, a blood thinner that was Bristol-Myers's top-selling drug. After state attorneys rejected the deal, however, Apotex went on the offensive and began shipping generic versions of Plavix in August at 30% below Plavix's retail price. The debacle cost Bristol-Myers at least $400 million in profits and also cost Bristol-Myers CEO Peter Dolan his job. The market share of generics was about 13% of the global drug industry, but not all name-brand-drug manufacturers were battling them. Pfizer, for one, said that it planned to offer its own generic version of Zoloft after the patent expired in June.

      In Europe it appeared that nearly every mid-tier drug manufacturer was looking for a partner as drugmakers consolidated in order to better compete with the U.S.-based goliaths. Bayer purchased Schering for $19.7 billion; Merck KGaA bought Serono for $13.3 billion; and Nycomed acquired Altana for $5.6 billion.

      Despite the summer oil-price shocks, stock markets in most major countries showed double-digit increases for the year, although Japan and South Korea lagged. In the U.S., the closely watched Dow Jones industrial average of 30 blue-chip stocks set 22 new records in the final quarter, and most international indexes closed 2006 at or near their high. (For Selected Major World and U.S. Stock Market Indexes, see Table (Selected Major World Stock Market Indexes).)

Christopher O'Leary

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