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MEMORANDUM To: File

From: John G. Narkin Re: Titanium Dioxide Industry Overview

Date: July 18, 2007 ______________________________________________________________________________ Co-counsel have informed us that direct purchasers of titanium dioxide (TiO2) suspect that prices for this product have been artificially inflated during the past several years by collusive conduct among TiO2 producers. While we are unaware of any formal investigation undertaken by the United States Department of Justice or the European Commission with respect to this allegation, our preliminary research into TiO2 industry does indicate that prices for TiO2 have risen significantly since 2002 (with a uniform, across-the-board $.05 price increase announced in June 2007), and the structural characteristics of the market for this product (i.e., production is highly concentrated among a few major global producers; TiO2 is a commodity product with limited substitutability; and there are substantial barriers discouraging potential competitors from entering the industry) suggest that this industry is at least arguably susceptible to price-fixing activity. 1. The Product

TiO2 is the most extensively used white pigment, or coloring agent, in the world. It is used primarily in the production of paints, printing inks, paper and plastic products. TiO2 is also used in many white or colored products including foods, cosmetics, UV skin protection products, ceramics, fibres, rubber products and more. TiO2 pigments are inert, do not react with other materials and are thermally stable, non-flammable and non-toxic. TiO2 has a high refractive index and an high reflectance. It offers maximum opacity or hiding power as well as imparting whiteness and brightness to the products in which it is used. It helps paint to cover or mask other materials. It is what makes plastic packages pure white and opaque. It prevents show-through on printed paper materials, making it easy to read brochures and literature. It also affords protection from UV degradation. The following chart accompanies a Form 8-K (Tronox Form 8-K) filed by Tronox Incorporated (Tronox)1 with the Securities and Exchange Commission on March 28, 2007:

1 As discussed further below, Tronox and four other major global producers collectively accounted for 65%

of the global market for TiO2 in 2006, with Tronox (a Delaware Corporation headquartered at One Leadership Square, Suite 300, 211 N. Robinson Road, Oklahoma City, Oklahoma 73102) being the worlds third-largest TiO2 producer and marketer).
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2.

Manufacturing Process

An excellent description of the TiO2 manufacturing process is contained in the Tronoxs 10K for the year ended December 31, 2006 (Tronox Form 10-K), at 5-6:
Production Process. TiO2 is produced using a combination of processes involving the manufacture of base pigment particles followed by surface treatment, drying and milling (collectively known as finishing). There are two commercial production processes in use: the chloride process and the sulfate process. The chloride process is a newer technology and has several advantages over the sulfate process: it generates less waste, uses less energy, is less labor intensive and permits the direct recycle of a major process chemical, chlorine, back into the production process. In addition, as described below under Types of Titanium Dioxide, TiO 2 produced using the chloride process is preferred for many of the largest end-use applications. As a result, the chloride process currently accounts for substantially all of the TiO 2 production capacity in North America and approximately 55% of worldwide capacity. Since the late 1980s, the vast majority of TiO 2 production capacity that has been built uses the chloride process. In the chloride process, feedstock ores (titanium slag, synthetic rutile, natural rutile or ilmenite ores) are reacted with chlorine (the chlorination step) and carbon to form titanium tetrachloride (TiCl 4 ) in a continuous fluid bed reactor. Purification of TiCl 4 to remove other chlorinated products is accomplished using a distillation process. The
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purified TiCl 4 is then oxidized in a vapor phase form to produce base pigment particles and chlorine gas. The latter is recycled back to the chlorination step for reuse. Base pigment is then typically slurried with water and dispersants prior to entering the finishing step. In the sulfate process, batch digestion of ilmenite ore or titanium slag is carried out with concentrated sulfuric acid to form soluble titanyl sulfate. After treatment to remove soluble and insoluble impurities and concentration of the titanyl sulfate, hydrolysis of the liquor forms an insoluble hydrous titanium oxide. This precipitate is filtered, bleached, washed and calcined to produce a base pigment that is then forwarded to the finishing step. Types of Titanium Dioxide. Commercial production of TiO2 results in one of two different crystal forms, either rutile or anatase. Rutile TiO 2 is preferred over anatase TiO 2 for many of the largest end-use applications, such as coatings and plastics, because its higher refractive index imparts better hiding power at lower quantities than the anatase crystal form. Although rutile TiO 2 can be produced using either the chloride process or the sulfate process, customers often prefer rutile produced using the chloride process because it typically has a bluer undertone and greater durability. Anatase TiO2 can only be produced using the sulfate process and has applications in paper, rubber, fibers, ceramics, food and cosmetics. It is not recommended for outdoor applications because it is less durable than rutile TiO 2 . Raw Materials. The primary raw materials that we use to produce TiO2 are various types of titanium-bearing ores, including ilmenite, natural rutile, synthetic rutile, titanium-bearing slag and leucoxene Other significant raw materials include chlorine and petroleum coke for the chloride process, which we obtain from many suppliers worldwide, and sulfuric acid for the sulfate process, which we produce ourselves.

3.

The Industry

The major global producers have a substantially similar view of the TiO2 industry and of their position of dominance within it. According to the Tronox Form 10-K at 5:
The global TiO2 market is characterized by a small number of large global producers. In addition to our company, there are four other major producers: E.I. du Pont de Nemours and Company, Millennium Chemicals Inc., Huntsman Corporation and Kronos Worldwide, Inc. These five major producers accounted for approximately 65% of the global market in 2006, according to reports by these producers. Based on reported industry sales by the leading TiO2 producers, we estimate that global sales of TiO 2 in 2006 exceeded 4.9 million tonnes, generating approximately $10 billion in industry-wide revenues. Because TiO 2 is a quality of life product, its consumption growth is closely tied to a given regions economic
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health and correlates over time to the growth in its average gross domestic product (GDP). According to industry estimates, TiO 2 consumption has been growing at a compounded annual growth rate of approximately 2.8% over the past decade. Although there are other white pigments on the market, we believe that TiO2 has no effective substitute because no other white pigment has the physical properties for achieving comparable opacity and brightness or can be incorporated in as costeffective a manner. In an effort to optimize TiO 2 s cost-to-performance ratio in certain applications, some customers also use pigment extenders, such as synthetic pigments, kaolin clays and calcium carbonate. We estimate that the impact on our total sales from the use of such extenders is minimal.

The chart below also accompanies Tronoxs Form 8-K:

Until earlier this month, Millennium Chemicals, Inc. (Millennium) was owned by Lyondell Chemical Company (Lyondell), a Delaware Corporation headquartered at 1221 McKinney Street, Suite 700, Houston, Texas 77010, which on July 7, 2007 sold its TiO2 business for $1.2 billion to Cristal, a privately held company based in Jedda, Saudi Arabia. http://www.khaleejtimes.com/DisplayArticleNew.asp?xfile=data/business/2007/July/business_July2 46.xml&section=business&col= Before this acquisition, Cristal was the ninth largest TiO2 producer
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in the world. Id. According to Lyondells Form 10-K for the year ended December 31, 2006 (Lyndell Form 10-K) at 22:
The major competitors for sales of TiO2 are DuPont, Huntsman Tioxide (Huntsman Tioxide, a business unit of Huntsman Corporation), Kronos Worldwide, Inc, (Kronos).and Tronox Incorporated (formerly a business unit of Kerr-McGee Corporation). Lyondell estimates that collectively, as of December 31, 2006, DuPont, Lyondell, Huntsman Tioxide, Kronos and Tronox accounted for approximately 64% of the worlds TiO2 production capacity. Lyondell is the second largest producer of TiO2 in the world, based on published rated capacity.

Putting a somewhat different spin on the characteristics of the TiO2 industry, Lyondales Form 10-K at 22 asserts that (a) [t]he bases for competition in the inorganic chemicals industry are price, product quality, product performance, product delivery, customer service; (b) [i]n certain applications, TiO2 competes with other whitening agents that are generally less effective but less expensive. These alternate products include kaolin clays, calcium carbonate pigments and synthetic polymers materials; (c) [s]ulfide-process plants are generally less competitive than chlorideprocess plants, whose products are favored by customer during periods of industry oversupply; and (d) [g]enerally, new plant capacity in the TiO2 industry are slow to develop because of the substantial capital expenditure required and the significant lead time (three to five years typically) for a new plant needed for planning, obtaining environmental approvals and permits, construction of manufacturing facilities and arranging for raw material supplies. Comparable information appears in the Form 10-K filed by Huntsman International LLC 2 on March 7, 2007 (Huntsman Form 10-K) at 29 (The titanium dioxide industry currently has five major producers and a large number of small regional producers) and at 30 (The global markets in which our pigments business operates are highly competitive. Competition is based primarily on price. In addition, we also compete on product quality and service. The major global producers against whom we compete are DuPont, Tronox, Kronos and Lyondell). Huntsmans competition with Kronos is not entirely unqualified because both companies are 50 partners in a manufacturing joint venture located in Lake Charles, Louisiana, in which the companies share offtake and operating costs of the plant equally, while supposedly marketing their respective share of the production independently. Huntsman Form 10K at 30. Here again, the corporate face of TiO2 global market leadership is changing. On July 12, 2007, Huntsman issued a press release reporting that it had reached a definitive merger agreement with Hexion Specialty Chemicals, Inc. (Hexion), an Apollo Management, L.P. portfolio
2 Huntsman acquired ICIs TiO2 business in 1999, and it completed an initial public offering in 2005. Huntsman Form 10-K at 1. Huntsman is a Delaware corporation with headquarters at 500 Huntsman Way, Salt Lake City, Utah 84108. 5

company, pursuant to which Hexion will acquire Huntsman in a transaction with a total value of approximately $10.6 billion, including the assumption of debt. http://ir.huntsman.com/phoenix.zhtml?c=186725&p=irol-newsArticle&ID=1025595&highlight= Other pertinent (and contrasting) observations made about the TiO2 industry in Huntsmans Form 10-K include: (a) the chlorine process accounts for 60% of global production capacity and is the dominant process used in North America; while both the chlorine and sulfate manufacturing processes compete effectively in the marketplace, capacity varies by region and regional market preferences typically favor processes that are locally available (at 28); and (b) because the sulphate-based process is widely available, barriers to entry, apart from capital availability, may be low and the entrants of new competitors into the industry may reduce [the ability of primarily sulphate-based manufacturers like Huntsman] to capture improving profit margins in circumstances where capacity utilization in the industry is increasing (at 31). As reflected in its 2006 Form 10-K filed with the SEC on March 13, 2007 (Kronos Form 10-K) at 10, Kronos,3 Huntsmans joint venture partner, takes a slightly more expansive view of its competition in the TiO2 industry, and it provides a revealing perspective on present and future trends in the industry: The TiO2 industry is highly competitive. Our principal competitors are E.I.
duPont de Nemours & Co.; Millennium Inorganic Chemicals, Inc. (a subsidiary of Lyondell Chemical Company); Tronox Incorporated, Huntsman Corporation; and Ishihara Sangyo Kaisha, Ltd.These competitors have estimated individual shares of TiO2 production capacity ranging from 4% (for Ishihara) to 24% (for DuPont), and an estimated aggregate share of worldwide TiO2 production volume in excess of 60%. DuPont has about one-half of total North American TiO2 production capacity and is our principal North American competitor. We compete primarily on the basis of price, product quality, technical service and the availability of high performance pigment grades. Although certain TiO2 grades are considered specialty pigments, the majority of our grades and substantially all of our production are considered commodity pigments with price generally being the most significant competitive factor. Worldwide capacity additions in the TiO2 market resulting from construction of Greenfield plants require significant capital expenditures and substantial lead time(typically three to five years in our experience). We are not aware of any TiO2 plants currently under construction. We expect that industry capacity will increase as we and our competitors continue to
3 Kronos is a Delaware corporation with headquarters at 5430 LBJ Boulevard, Suite 1700, Dallas, Texas 75240-2697. The company claims to be the second largest producer of TiO2 in Europe, with a 20% share of European sales volume and an estimated 15% share of North American TiO2 sales volume. Kronos Form 10-K at 8. Kronos common stock trades on the New York Stock Exchange; as of December 31, 2006, 59% of Kronos common stock was owned by Valhi, Inc. (NYSE: VHI) and 36% of Kronos common stock was owned by NL Industries (NYSE:NL). 6

debottleneck our existing facilities. We expect the average annual increase in industry capacity from announced debottlenecking projects to be less than the average annual demand growth for TiO2 during the next three to five years.

Like Tronox (supra, chart at 2) and other industry observers, Kronos describes TiO2 as a quality-of-life product with demand and growth affected by gross domestic product and overall economic conditions inmarkets in various parts of the world. Kronos Form 10-K at 7. The following charts that accompany Tronoxs Form 8-K provide a visually informative illustration of capacity trends, demand and consumption patterns in the TiO2 market as of year-end 2006:

Of the global TiO2 producers discussed above, DuPont is the most significant, both in the United States and throughout the world. DuPonts TiO2 business is conducted as part of the companys Coatings and Colors Technologies business unit through an organization known as DuPont Titanium Technologies. DuPont Titanium Technologies web site reports that DuPont has been making titanium-based white pigments for paper, coatings, plastics and specialty applications since 1931 and is currently the world's leading producer. Today the company's plants in Starke, Florida; EdgeMoor, Delaware; New Johnsonville, Tennessee; DeLisle, Mississippi; Kuan Yin, Taiwan and Altamira, Mexico produce about a quarter of the world's TiO2 pigments. See http://www.titanium.dupont.com/NASApp/TTPORTAL/Mediator?action=220. DuPont, the 73rd largest company on the Fortune 500 list for 2006, is a Delaware corporation with principal executive offices at 1007 Market Street, Wilmington, Delaware 19898. DuPont Titanium Technologies is located at Chestnut Run Plaza 728/1229, P.O. Box 80728, Wilmington, Delaware 19880-0728. DuPonts domination of the TiO2 market has been so pronounced historically that it was the subject of an action brought by the Federal Trade Commission (FTC) under its aggressive law enforcement program in 1978 undertaken by former Commissioner Michael Pertschuck. Citing DuPonts control of more than 40% of domestic TiO2 production in a highly concentrated market in which the top four firms account[ed] for more than 80% of production, and the fact that DuPont was protected by high [b]arriers into the relevant market, the FTC charged DuPont with engaging in unfair competition by using its dominant position, size and economic power in an attempt to monopolize the TiO2 market in violation of Section 5 of the Federal trade Commission
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Act, 15 U.S.C. 45. In re E.I. DuPont de Nemours & Co., 96 F.T.C. 653 (1980), 1980 WL 339053. In a landmark administrative decision, the FTCs complaint was dismissed on the ground that the DuPonts effective use of its technological capacity and market opportunities was not unreasonable and it did not, standing alone, rise to the level of a violation of the law. Id. Although the FTC decision is now almost three decades old, DuPonts dominant position within the industry does not appear to have diminished appreciably with the passage of time. In at least three respects, DuPont appears to enjoy new competitive advantages. While DuPont accounted for more than 40% of domestic TiO2, it now has about one-half of total North American TiO2 production capacity according to the Kronos Form 10-K at 10. Moreover, DuPont is the only one of the few major global TiO2 producers that devotes 100 percent of its production capacity to the preferred chlorine process technology. See Tronox Form 10-K at 10:

2006 Production Process Mix 2006 Global Market Share DuPont Millennium Tronox Kronos Huntsman Others Sulfate % % % % % % 23 17 28 69 87 % % % % %

Chloride

20 13 12 10 10 35

100 77 83 72 31 13

In addition, as has been disclosed in every Form 10-K filed by DuPonts primary competitors, DuPont is now in the process of constructing a world-class titanium dioxide (TiO2) plant representing a total investment of $1 billion in the city of Dongying, China. See http://www2.dupont.com/Media_Center/en_BR/news_releases/2005/article20051121c.html. 4. Regulatory Concerns

Several years after its well-publicized defeat in In re E.I. DuPont de Nemours & Co., 96 F.T.C. 653 (1980), 1980 WL 339053, the FTC approved a merger of two other TiO2 manufacturers, which was the later subject of an April 1992 report issued by the FTCs Bureau of Economics that identified a potentially large anti-competitive impact arising from the merger. See Laurence Schumann, Robert P. Rogers and James D. Reitzes, Case Studies of the Price Effects of Horizontal Mergers (FTC Bureau of Economics, April 3, 2002). http://www.ftc.gov/opa/predawn/F93/mergerstu8.htm; http://www.ftc.gov/be/econrpt.shtm. The FTC officially summarized the report, in part, as follows:
[One] case focuses on the merger of two firms that produced titanium dioxide, a pigment used in the manufacture of paints, paper, plastic and other materials. The combined post-merger firm became the second largest company in this highly concentrated industry -- owning 25 percent of total domestic capacity -- with the largest firm owning 57 percent. The merger may have created significant efficiencies through the transfer of superior low-cost technology; yet, according to
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the report, the merger resulted in large and statistically significant increases in titanium dioxide prices.

Because this 1992 Bureau of Economics report is not readily available online, we have formally requested a hard copy of the document from the FTC. In 1999, a few years after publication of the Bureau of Economics report, the FTCs objections to a proposed sale of TiO2 assets in a transaction involving DuPont, NL Industries Inc. and ICI PLC led the transacting parties to abandon their proposed arrangement. See Alex Tullo, DuPont and NL Nix Sale of ICI Tioxide Assets, Chemical Market Reporter (January 1999), http://www.highbeam.com/doc/1G1-53570337.html, and NL Industries, ICI and DuPont End TiO2 Agreement, NL Industries, Inc., Press Release dated January 4, 1999, http://www.secinfo.com/d26fd.6e.d.htm. This reflects authoritative recognition that the narrow concentration of the TiO2 industry among a select few global producers raises serious antitrust concerns. 5. Price Movement and Industry Trends

While the structural characteristics of the TiO2 industry lend facial support to a price-fixing claim by direct purchasers under Section 1 of the Sherman Act, substantial additional research must be done to identify and analyze price movements to determine the nature and extent to which major TiO2 producers did coordinate price increases over an objectively definable period of time. To this end, consideration should be given to obtaining a comprehensive (albeit expensive) commercial market report on the TiO2 industry. See http://www.mindbranch.com/Titanium-Dioxide-R2632812/. In addition, a two-day TiO2 industry conference was held in Ft. Lauderdale in February 2007, and a complete set of conference material and speaker handouts is available for purchase. http://www.intertechusa.com/pdf/TiO2_2007.pdf. Moreover, the preliminary research summarized in this memorandum, which primarily reflects information disclosed in public filings byTiO2 producers, should be extended to cover a specific historical period yet to be determined. If further research establishes that TiO2 producers engaged in repeated consciously parallel pricing behavior (and as shown in the penultimate paragraph below, they did in June 2007), it is not clear whether their claimed legitimate business justifications (e.g., see DuPont 2006 Form 10-K at 32-33, citing major plant shutdown caused by Hurricane Katrina and impact of higher raw material costs) would support a successful motion-to-dismiss on the grounds that our allegations do not suggest plausibly that parallel price increases were the logical result of an unlawful conspiracy, as opposed to innocent conduct, as now required by Bell of Atlantic v. Twombly, 127 U.S. 1955 (2007). In addition, the continuity and longevity of any price-fixing conspiracy alleged by us could be undermined by what appears to be frequent changes in corporate ownership of the TiO2 industry leaders. Likewise, given DuPonts longstanding primacy in the North American segment of the TiO2 market, it is conceivable that other industry participants employed a rational follow the leader strategy in implementing TiO2 price increases. Optimistically, however, the structural characteristics of the TiO2 industry and other relevant facts would be sufficient to satisfy the new pleading standards, as underscored by Justice Souters observation that [i]n a traditionally unregulated industry with low barriers to entry, sparse competition among large firms dominating separate
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geographical segments of the market could very well signify illegal agreement. Twombly, 127 U.S. at 1972. Although complete pricing data must be obtained and then analyzed by an appropriate economic expert, two articles in the public domain provide a general overview of trends in the TiO2 industry, which seem to indicate that this market has been in flux over the past three decades. One July 1999 article states that TiO2 prices reached a high level in 1989, attributable to supply shortages. See Lilli Manolis Sherman, Stretch TiO2, Plastics Technology Online (July 1999) (hard copy available on request). This was followed by a 10-year run of cheap and plentiful titanium dioxide caused by a slowed economy and a glut in the market, which by 1995-96 caused producers to shelv[e] expansion plans and buil[d] no more greenfield capacity. Eventually, market demand caught up with stagnant supply, which created a 10-20% price increase between in the late 90s, which was still deemed by TiO2 producers to be below the level required to support new investment in future capacity. The TiO2 market turned downward again in 2001, the year of 9/11, according to an article published in one trade publication. Alexander H. Tullo, Dark Clouds Over White Pigment, Chemical & Engineering News (October 21, 2002), http://pubs.acs.org/cen/coverstory/8042/8042paints3.html. The article leads with the statement that [t]he poor economy pushed the titanium dioxide industry into a trough in which [p]lants were closed, expansion plans were on hold, and the consolidation of the last five years had little impact. The author noted that United States consumption of TiO2 decreased by 4.6% and that poor demand, utilization, and operating rates pushed prices down by 15%. As do the public reports filed by TiO2 producers, the article states that [b]ecause TiO2 applications are so broad, a declining economy brings the TiO2 industry down with it another legitimate business justification that we can expect to be cited in a Twombly motion. The article specifically refers to previous bottoms in the TiO2 industry in 1993 and 1996-1997, which resulted in an ealier round of industry consolidation, including a sale of Bayers TiO2 business to Kerr-McGee (later resold to Lyondell, and resold again recently to Saudi Arabias Cristal). Along with the economy, demand picked up for TiO2 by 8% in the first half of 2002, with a corresponding price increase of about 5% during that time. Since 2002, the so-called dark clouds over the TiO2 industry have dissipated. Currently, prices are uniformly on the rise. See, e.g., Tronox press release dated June 11, 2007, http://www.tronox.com/media/news/archive/news2007/news_20070611.htm ($.05 per pound increase); DuPont press release dated June 4, 2007, http://www.newswire.ca/en/releases/archive/June2007/04/c8662.html (($.05 per pound increase, describing global price increase actions announced by DuPont supported by market dynamics and significant increases in raw material, energy, fuel costs, as well as reinvestment economics to meet future customer needs); Cristal press release dated June 8, 2007, http://www.millenniumchem.com/News+and+Events/_News/PriceIncreasePressReleaseGlobalJune2 007fin.htm ($.05 per pound increase); Huntsman press release dated June 11, 2007, http://www.huntsman.com/eng/News/News_archive/News_archive/Huntsman_Announces_Global_ Titanium_Dioxide_Price_Increases/index.cfm?PageID=5527&News_ID=1679&style=320; ($.05 per pound increase); Kronos press release dated June 8, 2007, http://www.prnewswire.com/cgibin/stories.pl?ACCT=104&STORY=/www/story/06-08-2007/0004604701&EDATE= ($.05 per pound increase).
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As a visual postscript to this discussion, the following additional charts prepared by Tronox provide an excellent image depicting at least one leading producers view of projected future supply and demand and capacity utilization conditions in the TiO2 industry.

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