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THE SHAREHOLDERS' RIGHT TO KNOW MORE
2006 UPDATE
DESPITE DUPONT'S RECENT CONCESSIONS TO EPA,
SHAREHOLDER VALUE REMAINS AT
RISK FROM PFOA
Sanford Lewis, Strategic Counsel on Corporate Accountability
for DuPont Shareholders for Fair Value
(DUPONT SHAREHOLDERS FOR FAIR VALUE LOGO)
Dear Shareholder,
The enclosed report updates DuPont investors on important issues
of disclosure and financial impact on share value. As you may
know, perfluorooctanoic acid (PFOA) is the controversial chemical
intermediate involved in the production of numerous DuPont
products, including stain and grease resistant coatings for
consumer products such as carpets, textiles and food packaging.
There has been significant media attention to some aspects of
this issue over the last year, but the forward looking financial
impacts are largely unexamined and in our opinion have not been
well disclosed by DuPont.
Although DuPont management has taken several actions regarding
PFOA, including a record $16.5 million settlement of civil
charges brought by EPA and a commitment to reduce emissions and
develop PFOA product content caps over the next ten years, this
report describes imminent market, reputational and liability
concerns through which shareholder value remains at risk.
DuPont Shareholders for Fair Value (DSFV), the issuer of this
report, is an informal group of DuPont shareholders organized by
the United Steelworkers (USW) and concerned with proper
disclosure and accountability on the issues relative to PFOA.
DSFV includes Amalgamated Bank, United Steelworkers, Sisters of
Mercy, Merion Regional Community, Merion, PA and Green Century
Capital Management.
We hope that after you read the report you will join with us in
pressing DuPont management for more expeditious action and more
complete disclosure on these matters.
Sincerely,
/s/ Sanford Lewis
Sanford Lewis, DuPont Shareholders for Fair Value
SYNOPSIS
PFOA (perfluorooctanoic acid) is a chemical used to help make
fluoropolymers and fluoroelastomers. E. I. du Pont de Nemours &
Co. (DuPont) is the only US producer of PFOA. Fluoropolymers are
used in architectural fabrics; chemical processing piping and
vessels; automotive fuel systems; telecommunications and
electronic wiring insulation; and computer chip processing
equipment and systems, and consumer products such as cookware and
apparel. PFOA is used as a processing aid in the manufacture of
fluoropolymers for use in non-stick surfaces such as Teflon
coated cookware. Fluoroelastomers are synthetic, rubber-like
materials used in gaskets, O-rings and hoses. This report follows
up on a prior report, THE SHAREHOLDER'S RIGHT TO KNOW MORE: E. I.
DU PONT DE NEMOURS AND THE GROWING FINANCIAL CHALLENGES OF PFOA
(April 2005).
In January 2006, DuPont voluntarily agreed with a U.S.
Environmental Protection Agency request to work toward
eliminating emissions of PFOA, and to gradually cap the levels of
PFOA in DuPont products. Contrary to widely reported news,
DuPont did not commit to phase out the use or production of PFOA.
Indeed, from the terms of its commitment expressed in a letter to
EPA, it is apparent that some so-called "trace" quantities of
PFOA may remain in DuPont products for the foreseeable future.
In addition, the company recently settled civil charges filed by
the U.S. Environmental Protection Agency relating to alleged
concealment of information regarding health and environmental
impacts of PFOA, an intermediate used in the production of
various DuPont products. In February, the EPA's scientific
advisory board, a panel of independent experts convened by the
EPA, announced its determination that PFOA be declared a "likely
human carcinogen."
Despite the recent DuPont concessions to EPA, shareholder value
remains at risk. To date, DuPont has failed to detail any actual
impacts on shareholder value or company earnings resulting from
consumers concerns, reputational damage or market fluctuations
related to PFOA. This document describes threats to shareholder
value that may have imminent impact, despite the
company's commitment to a ten year phase-out schedule:
- MANUFACTURER, RETAILER AND CONSUMER MIGRATIONS FROM
DUPONT'S PFOA PRODUCTS. Major retailers, such as Wal-Mart
and McDonalds, have recently indicated intentions to reduce
PFOA in products sold. DuPont's Teflon non-stick cookware
products continue to receive media scrutiny.
- ENTRY OF COMPETITORS INTO DUPONT MARKETS. The search for
alternatives is driving DuPont's competitors, who are
bringing PFOA-free products to market.
- POSSIBLE EXPEDITED US, STATE OR FOREIGN REGULATORY ACTION.
On March 7, the USEPA published a Federal Register notice
asserting that it can no longer presume that long chain
polymers similar to PFOA 'will not present an unreasonable
risk to human health or the environment.' The agency
proposed withdrawing a longstanding exemption to
premanufacture notice under the Toxic Substance Control Act
for those seeking to manufacture or import new substances
of this kind.
- POTENTIAL LIABILITY RELATED TO CONSUMER AND ENVIRONMENTAL
EXPOSURES TO PFOA AT DUPONT AND OTHER COMPANIES.
BACKGROUND ON DSFV
DuPont Shareholders for Fair Value (DSFV), the publisher of this
report, is an informal group of DuPont shareholders organized by
the United Steelworkers (USW) and concerned with proper
disclosure and accountability on the issues relative to PFOA.
USW is a DuPont shareholder, and also represents approximately
1,800 DuPont employees in New York, New Jersey, Delaware and
Kentucky. DSFV includes Amalgamated Bank, United Steelworkers,
Sisters of Mercy, Merion Regional Community, Merion, PA and
Green Century Capital Management. Collectively this group
holds over 411,000 shares of DuPont stock.
Some members of DuPont Shareholders for Fair Value have filed
complaints with the Securities and Exchange Commission regarding
the failure of DuPont management to disclose information
historically and recently known to the company regarding the
financial, health and environmental risks associated with PFOA.
Disclosure of such information may have better informed
shareholders regarding the extent to which the management's
adherence to PFOA chemistry has harmed shareholder value. Some
members of DSFV have also filed shareholder resolutions for
annual meetings in 2005 and 2006 related to disclosure of issues
related to PFOA.
AUTHOR BACKGROUND
Sanford Lewis, the author of this report, is an attorney and
expert on corporate environmental disclosure issues, including
requirements for disclosure under the securities laws. The
author wishes to acknowledge the assistance of Nathaniel Johnson,
Shawn Gilchrist and April Dreeke in the preparation of this
document.
BACKGROUND ON DUPONT & PFOA
PFOA (perfluorooctanoic acid) is a surfactant, a
water-soluble chemical that can emulsify oils or liquids in
water, suspend small particles in water or act as a wetting
agent. APFO (sometimes referred to as C-8) is the ammonium salt
of PFOA and the chemical form used in fluoropolymer
manufacturing. In this document, we will refer to PFOA generally
to include interchangeably the salts (APFO and C-8) as well as
its other formulations. E. I. DU PONT DE NEMOURS & CO. (DUPONT)
IS THE ONLY CURRENT U.S. PRODUCER OF PFOA.
PFOA is used to help make fluoropolymers and
fluoroelastomers. Fluoropolymers are used in architectural
fabrics; chemical processing piping and vessels; automotive fuel
systems; telecommunications and electronic wiring insulation; and
computer chip processing equipment and systems, and consumer
products such as cookware and apparel./1/ PFOA is used as a
processing aid in the manufacture of fluoropolymers for use in
non-stick surfaces such as Teflon coated cookware.
Fluoroelastomers are synthetic, rubber-like materials used in
gaskets, O-rings and hoses.
Animal and human studies have found a likely association of
PFOA with a wide array of health harms, ranging from elevated
cholesterol, to liver damage, birth defects, and cancer. As a
result of these studies, most involving animal testing, PFOA has
come under increasing scrutiny in regulatory, consumer and judicial forums.
VOLUNTARY CAPPING OF PFOA IN PRODUCTS
In 2005, DuPont management announced a commitment to reduce
the presence of PFOA in certain products. DuPont announced that
it had developed a new technology to reduce the presence of PFOA
in aqueous fluoropolymers applications, thereby reducing the
emissions of PFOA that could occur at processors by 90%.
However, this reduction in direct emissions of PFOA still left
the company vulnerable due to the continued presence of PFOA in
DuPont products. In addition, even though a product may contain
no PFOA, available evidence suggests that various DuPont products
may break down into PFOA in the environment or in the human body.
On January 25, 2006, EPA invited DuPont and several other
companies to participate in the "2010/15 PFOA Stewardship
Program" involving a voluntary commitment to goals set by EPA.
The EPA program sets interim goals for 2010 of 95% reduction of
PFOA emissions and PFOA and PFOA precursors in product content.
It also calls for companies to commit to working toward the
elimination of PFOA, PFOA precursors, and related higher
homologue chemicals from emissions and products by five
years thereafter, or no later than 2015.
In order to commit to the program, companies are required to
submit a letter describing their commitment. The DuPont letter
talks about REDUCING PFOA emissions and residual product content
over the next decade. In the letter, the company did not
commit to ELIMINATE the use and production of PFOA and its
precursors by 2015. Instead, the company discussed emissions
reduction measures and caps on the amount of PFOA and its
precursors in company products.
1
In short, a commitment to cap PFOA RESIDUALS in products is
not the same as a commitment to eliminate the USE OR PRODUCTION
of PFOA. Since DuPont is the sole producer of PFOA in the U.S.,
it is unfortunately ambiguous from their letter whether the
company is committed to end PFOA production.
The DuPont letter to EPA also makes vague reference to the
company's hope to develop new "breakthrough" and "sustainable"
luorotelomer products. But nowhere in the letter does the
company's stated interest in developing such new products
explicitly link with a commitment to move out of PFOA chemistry,
PFOA production, or the complete elimination of the use of PFOA
and its precursors.
The management's "commitment" also hinges on what it views
as "feasible." What the management deems feasible is a concept
freighted with the interpretation and discretion of the
management. For instance, in 2001 the management chose to BEGIN
producing PFOA despite its competitor's decision to phase out the
production of the chemical in light of the environmental concerns
associated with it.
It is certainly not clear that DuPont is committed to
eliminate the use and production of PFOA on the EPA's ten year
timeline. The focus of the DuPont letter on emissions and
residuals rather than on eliminating PFOA use and production
leave doubt as to the firmness and scope of the DuPont
"commitment."
THE DUPONT COMMITMENT TO CAP PFOA RESIDUALS IN PRODUCTS IS NOT
THE SAME AS A COMMITMENT TO ELIMINATE THE USE OR PRODUCTION OF
PFOA.
Moreover, in other press materials the management of DuPont
has referred to its commitment to EPA regarding PFOA in products
as a commitment to "virtually" eliminate the presence of PFOA.
Given that it regards current amounts of PFOA in products as
trace quantities, we believe that the company might assert that
it has already "virtually" eliminated the presence of PFOA. Yet
it appears that the presence of those quantities is sufficient to
affect market acceptance and potentially also to affect
liability.
What is missing from the management's discussion is a clear
statement of commitment to eliminate the chemicals in question as
expeditiously as possible. While DuPont's efforts to manage the
growing controversy over its products that contain PFOA
or PFOA precursors are understandable from a crisis management
standpoint, we believe DuPont is merely prolonging its problems.
We believe that the public will only accept total elimination of
PFOA and related materials from its products-not "capped" product
content levels.
The voluntary agreement with EPA does not resolve the
question of the pace at which DuPont may otherwise be forced to
withdraw these materials from the marketplace. This paper will
review DuPont's vulnerability under this timeline - the
formidable impacts of market and regulatory trends, and of
potential liability associated with the use or emission of PFOA.
2
CIVIL SETTLEMENT
On December 14, 2005, DuPont signed a $16.5 million
settlement of a civil case by the EPA. The civil case alleged
DuPont's failure to disclose information to the EPA regarding
potential risks of perfluorooctanoic acid (PFOA) to health and
the environment. Under the terms of the settlement, DuPont
admitted to no legal liability.
The agreement reached between DuPont and the EPA resulted
from multiple allegations of violations of section 8(e) of the
Toxic Substances Control Act (TSCA) which states that:
"Any person who manufactures (includes imports), processes
or distributes in commerce a chemical substance or mixture
and who obtains information which reasonably supports the
conclusion that such substance or mixture presents a
substantial risk of injury to health or the environment
shall immediately inform the (EPA) Administrator of such
information unless such person has actual
knowledge that the (EPA) Administrator has been adequately
informed of such information."
EPA alleged that among other things, the following
information was not reported by DuPont as required by law:
- In 1981, the 3M Company, DuPont's supplier of PFOA,
advised DuPont about the potential for PFOA to cause birth
defects in rats. Specifically, 3M advised DuPont that
researchers observed what appeared to be treatment related
damage to the eye lenses of some rat pups.
- In 1981, the company observed PFOA in blood samples taken
from pregnant workers at the Washington Works facility,
in West Virginia where Teflon is manufactured, and at
least one woman had transferred the chemical to her fetus.
- DuPont detected the chemical in public water supplies as
early as the mid-1980s in West Virginia and Ohio
communities in the vicinity of the Washington Works
facility. By 1991, DuPont had information that the
chemical was in water supplies at a greater level than
the company's exposure guidelines indicated would cause
no effect to members of the community.
- In 2004, DuPont had data concerning human serum sampling
of twelve members of the general population living near
the Washington Works facility after it had obtained this
information from its contractor, Exygen. The study shows
that on average, Teflon chemical serum levels in this
group - all of whom had consumed tap water contaminated
with the Teflon chemical from DuPont's Washington
Works operations and only one of whom had ever worked at
the facility - were 12 times higher than levels measured
previously from the general population (67 ppb versus 5
ppb)./2/
Although DuPont denied that it had a duty to disclose this
information, it settled the claims for $16.5 million, the largest
civil administrative penalty settlement the EPA has obtained to
date. The amount included a $10.25 million penalty and a
commitment by DuPont to spend an additional $6.25 million on
environmental projects./3/
3
ONGOING CRIMINAL INVESTIGATION RELATED TO DISCLOSURE
The EPA civil settlement may not resolve all claims against
DuPont regarding its concealment of information on this matter.
DuPont is also the subjedt of a PFOA-related Department of
Justice grand jury probe. In May 2005, DuPont was served with a
grand jury subpoena from the U.S. District Court for the District
of Columbia. The subpoena ordered DuPont to release documents
related to PFOA, its salts, C8, ammonium perfluorooctanoate, and
FC-143. This investigation is apparently still ongoing as this
paper goes to press, and could ultimately result in separate
criminal charges being brought against DuPont or its officers.
SHAREHOLDERS HAVE ASKED THE SEC TO INVESTIGATE DUPONT'S FAILURES
TO DISCLOSE HISTORICALLY AND CURRENTLY KNOWN INFO REGARDING
HEALTH AND FINANCIAL RISKS OF PFOA.
SHAREHOLDER CORRESPONDENCE WITH SEC
In addition, some members of DuPont Shareholders for Fair
Value have filed letters of complaint with the Securities and
Exchange Commission requesting an investigation of DuPont
management's failure to disclose information material to
investors regarding PFOA. The correspondence with the SEC
requests an evaluation of whether the company should have
disclosed to investors, or should now be ordered to disclose,
information including the following:
- Liability indicators such as environmental contamination
and blood tests associated with all DuPont facilities
where PFOA is used or produced;
- A more balanced description of the scientific evidence
arrayed against PFOA, which suggests that it is likely
to be harmful to human health despite the
company's reiterated denials of such effects;
- Regulatory and market trends, including regulatory
developments in Canada, Europe and Australia, and
consumer and retail developments that may restrict
markets for DuPont products.
LIKELY CARCINOGEN DETERMINATION BY EPA SCIENCE ADVISERS
On February 16, 2006, the EPA's scientific advisory board, a
panel of independent experts convened by the EPA, announced the
board's determination that PFOA be declared a "likely human
carcinogen." The advisory board's determination that PFOA is a
"likely human carcinogen" went beyond EPA's prior assessment that
PFOA should be listed as a "suggested human carcinogen."/4/
IMPACT ANALYSIS
CONCERN OVER PFOA IS ALREADY DRIVING CHANGE IN MARKETS
VULNERABLE DOMESTIC FOOD PACKAGING MARKET
Companies who use food packaging containing DuPont products
with PFOA or PFOA precursors are facing pressure to eliminate
these materials in their packaging.
4
In November 2005, a former DuPont chemical engineer named
Glenn Evers made national news when he disclosed information and
documents related to DuPont's Zonyl paper coating products.
Evers appeared on ABC World News Tonight and in the Washington
Post, among other outlets, discussing how popcorn products, fast
food, pizza boxes, and various other food packaging products
expose consumers to fluorotelomers that are believed to break
down to PFOA in the body. The whistle-blower also brought
to light his knowledge that the company had been developing
alternatives to PFOA decades ago, but that those have apparently
not been widely deployed to substitute for PFOA.
In a January 30, 2006, Wall Street Journal article a
representative of McDonald's corporation reported the company's
intention to reduce its use of PFOA-related products./5/ On
February 2, 2006, the Toronto Globe & Mail reported that
McDonald's Canada said its packaging suppliers had begun a
phase-out, and that McDonald's Canada will be using alternatives
that are PFOA-free./6/
The pressure to curtail or outright eliminate PFOA content
in food packaging and product lines is also being felt by major
retailers such as Wal-Mart. Wal-Mart is the current subject of a
campaign by the consumer-rights group, Ohio Citizen Action, which
is urging its members to contact Wal-Mart to request the
retailer: "...use its considerable clout to ensure that the first
order of business in the phase-out is to remove these
chemicals from food packaging, such as microwave popcorn, candy
wrappers, and frozen foods."/7/ Wal-Mart has recently stated
that it is exploring its options with respect to reducing the
presence of PFOA in products it carries in its stores. In a
February 14 Los Angeles Times article, Wal-Mart spokesperson
Karen Burke told reporter Jerry Hirsch: "We are working with our
suppliers and the regulatory agencies to reduce the presence of
PFOA in products in our stores."/8/
IN FEBRUARY 2006, DUPONT ATTEMPTED TO ALLAY DOMESTIC CONSUMER
CONCERNS ARISING FROM PFOA-RELATED PUBLICITY WITH FULL PAGE AD-
BUYS IN THE NEW YORK TIMES AND OTHER MAJOR PAPERS.
In addition to requesting action from Wal-Mart and food
retailer Kroger and numerous local grocery retailers, consumers
have addressed their concerns directly to DuPont as part of Ohio
Citizen Action's campaign. As of February 15, 2006, a total of
15,090 people had sent handwritten letters and petitions to
DuPont demanding the company take Teflon (PFOA) chemicals off the
food packaging market. In addition, 13,437 people have sent
handwritten letters and petitions to local grocery stores urging
them not to carry products with the PFOA-related chemicals in the
packaging./9/
NONSTICK COOKWARE
The potential health risks that may be associated with the
use of Teflon non-stick cookware products continue to receive the
bulk of PFOA-related scrutiny in the major media and lifestyle
publications. In a growing number of cases concerns over
potential health risks associated with Teflon are finding a
receptive audience in America's kitchens and altering consumer
behaviors. Home cooks like Janeen Cunningham of Seal Beach,
5
California have stopped using Teflon pans altogether and returned
to using stainless steel cookware. Cunningham told Los Angeles
Times reporter Jerry Hirsch that "I stopped using those pans
because of what I have heard about Teflon and carcinogen
properties over the past few months."/10/ Such actions are
proving alarming to major cookware manufacturers. T-Fal, a New
Jersey based subsidiary of French Cookware SEB recently launched
a line of uncoated pans as a diversification move. "The concern
is that there is a steady drip-drip about this and it will become
part of the common knowledge about cookware even though people
won't get PFOA from cookware," said Scott Meyer, President of
T-Fal./11/ (Note, however, that some experts assert that trace
residues of PFOA can escape from some Teflon cookware heated to
between 600 and 752 degrees Fahrenheit. According to the
Environmental Working Group, a Teflon pan can reach 600 degrees
on high heat in two to five minutes.)
There have been hundreds of articles in U.S. papers covering
DuPont and PFOA, with a number of those articles focusing on
concerns related to Teflon coated cookware. In early February
2006, DuPont attempted to respond to domestic consumer concerns
arising from PFOA-related publicity with full page ad-buys in the
New York Times and other major papers./12/
PFOA ALTERNATIVES ENTERING MARKETPLACE
The search for product alternatives to replace PFOA is
driving research and product development among DuPont's
competitors, who are bringing PFOA free products to the market.
On February 9, 2006 Asahi Glass announced the introduction of
AsahiGuard E-series, a line of telomer chemicals that serve as
fluorinated WATER AND OIL REPELLENTS FOR TEXTILE AND PAPER.
Asahi Glass claims that these products are free of PFOA, and PFOA
precursors. The company has commenced production of AsahiGuard
E-series products at a dedicated large scale manufacturing
facility which at capacity will equal 1/4 of AsahiGuard's current
manufacturing capacity./13/
Much of the research and development currently underway
concerns the development of products which utilize short-chain
fluorosurfactants instead of long-chain fluorosurfactants.
Long-chain fluorosurfactants enter the body more readily, stick
to blood proteins, and can break down to PFOA./14 The 3M Company
replaced a long-chain with a short-chain fluorosurfactant, known
as C4 when it reformulated Scotchguard in June of 2003./15/
According Dr. Scott Mabury of the University of Toronto, a
leading expert in the study of the environmental effects of PFOA,
the key to controlling the problem is to reduce: "...chain
lengths to avoid bioaccumulation, and prudently select linkage
chemistry for stable non-releasing materials."/16/
At least one company, Omnova Solutions of Fairlawn, Ohio has
aggressively pursued product development of these more
environmentally friendly short-chain fluorosurfactants, which it
asserts can deliver comparable product performance in many
applications. Omnova has obtained new chemical regulatory
approval in the U.S. and Europe, and has achieved partial
approval in Japan. The company is pursuing regulatory
approval in China, Korea, and Australia./17/ Bill Beers, Global
Chemical Regulatory Manager for Omnova, states that: Omnova
Solutions has: "...tailored structures that meet both the demands
of our customers for performance and the demands of the global
regulatory authorities to assure that there are no environmental
issues."/18/
6
Omnova's Polyfox surfactants are now commercially available
products utilized as alternatives to PFOA in a range of
applications such as VARNISHES AND STAINS, AUTOMOTIVE CLEAR
COATS, ELECTRONIC COATINGS, POWDER PIGMENT DISPERSIONS, AND
ADHESIVES./19/ In conjunction with partners, Omnova Solutions is
pursuing stain-resistant treatments for textile, carpet, and
paper industries, among others./20/
Interest in developing non-stick cookware alternatives to
non-stick cookware utilizing DuPont's Teflon brand has also been
driving product development. Ferro Corporation, a world leader
in the ceramic glaze coating business, has announced that it
has developed RealEase(TM), a CERAMIC-BASED, NONSTICK COATING.
Ferro claims it has developed a non-stick surface that delivers
the ease of cleaning commonly associated with Teflon-based
nonstick cookware combined with the improved heat resistance and
abrasion and scratch-resistance of enamel./21/
CONSUMER TEFLON PANIC IN CHINA
Consumer responsiveness to concerns over potential threats
to health posed by the presence of PFOA in Teflon non-stick
cookware is by no means limited to domestic markets. The
international press has also shown a marked readiness to cover
PFOA-related stories with hundreds of PFOA-related articles
published internationally. Consumers in important international
markets such as China have demonstrated intense concern over the
potential presence of PFOA in Teflon non-stick cookware with
important consequences for future growth and the DuPont brand's
international reputation. Concern about Teflon-coated cookware
caused widespread panic in China beginning in July of 2004. A
December 9, 2004 report from the Financial Times global newswire
reported that Chinese manufacturers of non-stick cookware
suffered 90% drops in sales in August and September as Chinese
consumers shunned Teflon in favor of iron woks and ceramic rice
makers./22/ In the July-August 2004 period Chinese department
stores reportedly began removing Teflon-coated cookware from
their shelves and Guangdong-based Elecpro Electrical Appliance Co
Ltd reportedly stopped selling its Teflon-coated rice cookers and
was planning to seek $10 million in compensation./23/
A July 22, 2004 article in THE STANDARD reported on the
reactions of Chinese consumers and retailers during the period:
"After some news reports saying a substance in Teflon-coated
pans potentially poses health risks, we started to remove
the related non-stick frying pans from our shelves," an
official at a ParknShop in Guangzhou's Tianhe District said.
Some individual homeware stores in Guangzhou's Tianhe and
Wangfujing shopping centres also said they started to send
Teflon-coated cookware back to warehouses as a temporary
measure until the concern abates.
Although some large retail chains including Wanjie,
Trust-Mart and Carrefour stores in Guangzhou still sell
non-stick frying pans, their sales dropped more than 60 per
cent in the past week, store employees said.
7
An official with one of the Wanjie stores in Guangzhou said
sales of China-made brands of Teflon-coated cookware fell
by more than 60 percent over the past week.
"Today, no one shows any interest in non-stick cookware,"
he said. This is because the worries that using
Teflon-coated pans might increase the risks of cancer
have not been dispersed.'' Safety concerns have also
delayed China cookware makers' new-product promotions.
An official with Aishida, one of the largest cookware
producers in China, said the company suspended the promotion
of its new non-stick frying pans amid the increasing worries
on non-stick cookware.
But the official, who declined to be named, said the Teflon
controversy did not seriously affect its non-stick cookware
sales because 90 per cent of its production is exported./24/
While widespread concern may have subsided after the Chinese
Academy of Inspection and Quarantine (CAIQ) declared that it
found no PFOA in any of the non-stick cookware examined/25/ the
listing of PFOA as a likely human carcinogen may fuel renewed
concerns over the safety of non-stick cookware in China and in
other parts of the world.
The awareness and sensitivity of Chinese consumers to risks
associated with DuPont products may be counter to DuPont's
interest in investing and growing in China. Further analysis is
needed to assess the extent to which DuPont's reputation has been
undermined with Chinese consumers, and how this may affect
expansion of demand in that crucial growth market.
ADDITIONAL REGULATORY ACTION IS LIKELY IN U.S. AND ABROAD
In its 10K report to shareholders, published February 28,
2006, DuPont notes:
...there can be no assurance that the EPA or any other
regulatory entity will not in the future choose to regulate
or prohibit the production or use of PFOA. Products
currently manufactured by the company representing
approximately $1 billion of 2005 revenues could be affected
by any such regulation or prohibition.
Though the U.S. Environmental Protection Agency has so far
set the voluntary ten year "Stewardship" program as discussed
above, neither the EPA nor other regulators may wait for more
expeditious, mandatory and restrictive action.
A week after DuPont published its form 10-K, on Tuesday
March 7, 2006, the USEPA proposed one such restriction -- a new
rule under the Toxics Substances Control Act which would require
any person who intends to manufacture (or import) certain new
long chain substances related to PFOA to file a premanufacture
notice with the EPA./26/
8
Any such substance "not already on the TSCA Inventory would
have to complete the TSCA premanufacture review process prior to
commencing the manufacture or import of such polymers. EPA
believes this proposed change to the current regulation is
necessary because, based on recent information, EPA can no longer
conclude that these polymers 'will not present an unreasonable
risk to human health or the environment,' which is the
determination necessary to support an exemption under TSCA...."
EPA notes that:
ON MARCH 7, 2006, EPA PUBLISHED A FEDERAL REGISTER NOTICE STATING
THAT IT CAN NO LONGER PRESUME THAT LONG CHAIN POLYMERS SIMILAR
TO PFOA WILL NOT PRESENT AN UNREASONABLE RISK TO HEALTH AND THE
ENVIRONMENT.
Biological sampling recently revealed the presence of PFOS
and PFOA in fish, birds, and mammals, including humans
across the United States and in other countries. The
widespread distribution of the chemicals suggests that PFOS
and PFOA may bioaccumulate. PFOS AND PFOA HAVE A HIGH LEVEL
OF TOXICITY AND HAVE SHOWN LIVER, DEVELOPMENTAL, AND
REPRODUCTIVE TOXICITY AT VERY LOW DOSE LEVELS IN EXPOSED
LABORATORY ANIMALS. (EMPHASIS ADDED)
If the rule takes effect, EPA would require each company
making or importing the affected fluoropolymers to submit a
premanufacture notice the same as any businesses do
for new chemicals other than exempted polymers. EPA reviews
exposure and toxicity information on each chemical and can ask
companies for more data, can require protective equipment for
workers, or can restrict the uses of the target substances.
The Food and Drug Administration, state governments, and the
governments of other countries may set more stringent and
mandatory timelines for restriction or elimination of PFOA
exposures or products.
PROPOSITION 65 PETITION
For example, on February 22, 2006, a petition was filed with
the state of California seeking to require a listing of PFOA
under Proposition 65 as "a chemical that is known to the state to
cause cancer." The petition was filed by a coalition of
organizations including the United Steelworkers, Sierra Club,
Environmental Law Foundation, Environment California, U.S. Public
Interest Research Group (PIRG), Natural Resources Defense Council
(NRDC) and Environmental Working Group (EWG). If the listing
petition prevails, businesses would be prohibited from knowingly
discharging the chemical into sources of drinking water, and be
required to provide warnings before knowingly exposing anyone to
PFOA, unless they could show that the exposures create no
significant risk of cancer.
ON FEBRUARY 22, 2006 PETITIONERS ASKED THE STATE OF CALIFORNIA TO
LIST PFOA UNDER PROPOSITION 65 AS "A CHEMICAL THAT IS KNOWN TO
CAUSE CANCER."
INTERNATIONAL REGULATORY ACTIVITIES
In 2004, Canada's environmental protection agency
temporarily banned three
9
fluorotelomer chemicals used as stain repellents. This was the
first time any government had banned such chemicals. PFOA and its
relatives are now under increasing scrutiny by the environmental
authorities in USA, UK, Norway, Sweden and Denmark. Further
consideration of permanent regulatory restrictions is underway in
Canada. In Norway, the Pollution Control Authority has announced
that in the course of 2006 it will obtain more information about
the health and environmental effects of PFOA in order to evaluate
regulation of its use. The agency will also ask the Norwegian
Institute of Public Health and the Norwegian Institute for Water
Research to provide an overview of the available information on
the health and environmental effects of related compounds and
use this information as a basis for evaluating whether it is
necessary to introduce regulatory measures for other substances
belonging to this group.
POLLUTION, LIABILITY AND PUBLIC PRESSURE TO END PFOA
PRODUCTION
DUPONT'S NC PFOA PRODUCTION SITE
DuPont's Fayetteville Works production facility in
Fayetteville, North Carolina is the only site in the U.S. where
PFOA is produced. Despite the $7 million DuPont spent
on environmental controls to contain PFOA when it opened the
plant in 2002, on-site testing at DuPont's 2,200 acre property
detected PFOA in more than 25 monitoring wells, as have tests of
residential wells up to a mile from the facility. Samples taken
from the nearby Cape Fear River have also been found to contain
PFOA./27/ DuPont's testing of its workforce at the facility shows
that the average concentrations of PFOA in blood samples
rose from an average of 11 parts per billion per worker in 17
workers in 2002 to an average of 450 parts per billion in 37
workers in 2005.
Some in North Carolina have voiced suggestions that a full
DuPont phase-out should happen much sooner than the ten year
voluntary EPA schedule for phasing out of PFOA. Hope
Taylor-Guevara of Clean Water for North Carolina, responded to
DuPont's ten year phase-out plan in a statement released January
30, 2006, saying: "DuPont should start working today to wind down
all production by the end of 2008. All of the companies should
stop manufacturing uses by 2010. There should be tens of
thousands dollars in daily fines for failure to report, or to
meet deadlines for reductions, to assure the public that this
will actually happen..."/28/
ADDITIONAL ENVIRONMENTAL LIABILITIES?
DuPont has already experienced over a hundred million in
liabilities due to environmental releases of PFOA, and this may
be just the start.
AN ADJUNCT PROFESSOR AT UCLA OBSERVED CARPETS DIPPED IN OPEN
VATS OF STAIN REPELLANTS, PERMEATING THE WORKING ENVIRONMENT
AS CARPETS ARE LIFTED FROM THE VATS, AND THEN DUMPED DOWN THE
SEWERS.
DuPont's Washington Works facility in West Virginia where
Teflon is manufactured has been a source of extensive groundwater
contamination from PFOA. Since at least 1984 DuPont was aware
that PFOA was being discharged from its Washington Works
facility. The company conducted, but at the time did not
publicly disclose testing of drinking water
10
supplies in communities near the facility. These tests revealed
elevated levels of PFOA. Ground and drinking water contamination
from the Washington Works facility resulted in a 2001
class-action lawsuit brought on behalf of 80,000 West Virginia
residents. A court approved settlement of this case in February
of 2005./29/ Under the terms of the settlement, DuPont agreed to
pay a minimum of $107.6 million without admitting wrongdoing.
The settlement includes PFOA water treatment facilities for six
area water utilities and funding for a study to evaluate whether
there is a probable link between PFOA exposure and human disease.
Additional liabilities for health monitoring or personal
injuries are possible under the terms of the settlement depending
on the outcome of the initial health impact assessment.
Sites such as the Fayetteville, North Carolina facility
where PFOA has been discharged, but where environmental liability
and remediation litigation has not yet commenced, may represent a
significant future liability for the company.
POTENTIAL ENVIRONMENTAL LIABILITY FOR USERS OF DUPONT PFOA AND
RELATED PRODUCTS
In addition, sites where DuPont's PFOA products are used by
other manufacturers may represent an even larger liability pool,
not only for those manufacturers, but also for
DuPont. For example, fluorotelomer based carpet coating products
are reported to be widely used in Dalton, Georgia, the carpet
production "capital" of the U.S.
An Adjunct Professor at the UCLA School of Public Health who
toured carpet facilities in that area has described
extraordinarily lenient practices for managing stainmaster
exposures and wastes. He described how the carpets are dipped in
open vats of stain repellants containing chemicals that break
down into PFOA (or may contain PFOA), and how these carpet
facilities attempt to dry the stainmaster resulting in
contaminating the air space of workers, as carpets are lifted
from the vats, and how massive volumes of wasted (or colored)
stain master are dumped down the sewers./30/
A CLASS-ACTION LAWSUIT FILED AGAINST DUPONT IN 2005 SEEKS $5
BILLION IN DAMAGES DUE TO THE COMPANY'S ALLEGED FAILURE TO
WARN CONSUMERS OF HEALTH RISKS ASSOCIATED WITH TEFLON COOKWARE.
Some purchasers of PFOA-related products from DuPont have
also suffered negative publicity and environmental scrutiny due
to their releases of PFOA from their production process. A small
Delaware factory, PTFE Compounds, Inc., which ran a
Teflon baking operation, quietly dispersed unknown quantities of
Teflon-related pollutants for years without catching the
attention of regulators. In 1997, state regulators
finally caught up with PTFE Compounds, Inc., when they learned
the company had exceeded annual pollution limits in each of the
previous four years. Paul Foster, an environmental engineer with
the Delaware Department of Natural Resources and Environmental
Control (DNREC) estimates that the plant would have released
about 75 lbs of pollution per year. In 2003, DNREC took actions
aimed at reducing Teflon-related pollution by requiring
additional pollution control measures targeting these emissions.
Regulators say only rough estimates are available for how much
Teflon-related pollutant was released by the company into the
environment over the years. Nor is information on the levels of
worker exposure, which is monitored at similar, larger
facilities, available./31/
11
DuPont supplies various companies, both small ones similar
to PTFE Compounds, Inc. as well as larger ones. Any of these
companies may have released similar pollutants into the
environment with little or no notice from regulators until
recently. Now attention is growing on these companies, with
concomitant pressure to eliminate emissions of PFOA and PFOA
precursors.
POTENTIAL CONSUMER LIABILITY: CLASS ACTION AND "DUTY TO WARN"
NOTICES
Retailers and manufacturer purchasers of PFOA-containing
products are being made aware of potential liability associated
with sales of those products. Consumer protection laws in many
states, including statutory as well as common law, provide that
sellers of products may have a duty to warn consumers if they are
exposing them to products that pose an unreasonable risk to
health or safety.
COMPANIES RECEIVING NOTICES OF A POTENTIAL LEGAL DUTY TO WARN
CONSUMER OF PFOA EXPOSURE INCLUDED RUG DOCTOR, STANLEY STEEMER,
CONAGRA FOODS, MCDONALDS, TACO BELL, LEVI STRAUSS, GAP, W.L.
GORE, WAL-MART, SEARS, MANNINGTON, MOHAWK INDUSTRIES, AND SHAW
INDUSTRIES.
A class-action lawsuit filed against DuPont in 2005 seeks $5
billion in damages due to the company's alleged failure to warn
consumers of health risks associated with Teflon cookware. The
suit brought in eight states alleges that the company violated
consumers' rights to be warned of known hazards of Teflon prior
to purchasing the products. Notably, based on the legal theory
of the case, the plaintiffs may not need to prove that Teflon has
caused them any specific health damage in order to prevail.
Instead the suit is based on the plaintiffs' rights as consumers
to full disclosure of information known to the seller.
In addition, consumer related liability notices have been
spread throughout the array of consumer oriented markets where
PFOA related products are sold. On August 9, 2005, the United
Steelworkers (USW) union released a statement saying they had
sent letters to major carpet cleaning retailers and wholesalers,
fast food chains, and major retail clothing companies, informing
them that they may have "A LEGAL DUTY TO WARN" their customers
about potential health risks associated with exposure to products
that contain PFOA. These letters informed recipients that they
could face legal liability in the event that consumers sue and
prove harm to their health./32/
On December 21, 2005, the United Steelworkers released
another statement, reporting that they had mailed advisory
information on potential PFOA-related health hazards to over
4,500 retail carpet dealers and to the CEOs of 35 carpet
manufacturing companies. "We sincerely hope that our efforts
will encourage carpet manufacturers and retailers to provide
warnings and thereby protect the public," said Ken Test, Chair of
the USW DuPont Council, a coordinating body for 1,800 USW members
at DuPont. "Carpet company employees who may have the highest
exposure to PFOA must also be warned and protected."/33/ USW
reports that it has sent about 40,000 "duty to warn" letters to
various firms that may be buying PFOA-containing products.
The companies who have received duty to warn notices from
USW read like a Who's Who of household consumer products.
According to USW press releases, some of the thousands of
companies receiving the notices included Rug Doctor, Stanley
Steemer, McDonalds, Taco Bell, Papa John's, Pizza Hut, KFC,
California Pizza Kitchen, Levi Strauss, Conagra Foods, GAP, W.L.
Gore, Eddie Bauer, J. Crew, Wal-Mart, Sears, Nordstrom,
Dillard's, Dalton Carpet Outlet, Carpet Giant, Carpet Land,
Mannington, Mohawk Industries, and Shaw Industries.
PFOA, SHAREHOLDER VALUE AND DUPONT FINANCIAL REPORTING
During 2005, the traded value of DuPont stock dropped nearly
a third - from a high of 54.47 on March 10 to a low of 37.60 on
October 17. The decline in stock value occurred over the course
of year with repeated bad news about PFOA - evolving news
regarding PFOA being deemed a likely carcinogen, the announcement
of the criminal subpoena by the U.S. Department of Justice, and
published studies finding PFOA in household dust, in products
and in babies' bodies. DuPont's stock price was also
harmed by rising energy prices, and Hurricanes Katrina and Rita,
which caused the company to have to close its DeLisle,
Mississippi, titanium dioxide facility for an
extended period. The hurricanes also effectively depressed some
additional markets for DuPont products. Although the chemical
industry in general was harmed by the energy and weather trends,
DuPont's share price appeared to suffer worse than many of its
competitors.
[GRAPH APPEARS HERE]
DU PONT STOCK PRICE 2005 - PRESENT
Jan. 3, 2005 $49.12
Mar. 3, 2005 $53.10
May 2, 2005 $47.74
DOJ Subpoena May 20, 2005 $46.92
July 3, 2005 $42.83
EPA SAB Draft:
"Likely Carcinogen" July 6, 2005 $42.60
Hurricane Katrina Aug. 29, 2005 $39.72
Sept. 3, 2005 $38.85
DuPont Stock Buyback Oct. 25, 2005 $39.62
Nov. 3, 2005 $43.01
ABC News Nov. 18, 2005 $42.45
Jan. 3, 2006 $43.06
EPA Ten Year PFOA
Program Jan. 25, 2006 $39.21
Mar. 3, 2006 $41.00
13
DUPONT STOCK BUYBACK TO PROP SHARE PRICE
In the midst of the share price drop, in October 2005 DuPont
management announced a stock buyback geared towards shoring up
the stock price. The repurchase of stock amounts to $5 billion,
or 12% of share value. The mechanism for conducting this
share repurchase, " accelerated share repurchase"(ASR), was
subject to financial press scrutiny in a recent article in The
Wall Street Journal. According to the Journal this mechanism has
been around for years but has newfound popularity since
accounting decision-makers in 2003 shut down some similar
loopholes. Under the accelerated share repurchase mechanism a
company is able to boost its earnings per share immediately
upon announcing the share repurchase. The Journal reports that
DuPont was one of at least 30 companies announcing a buyback via
this mechanism in the past year.
Because the full costs of the buyback only become known
later in the process, some accounting analysts have warned that
the initial per-share earnings gains from these ASR transactions
may be transitory, and the companies may be at risk for
shortfalls when the full costs of the deals become known./34/
LACK OF DISCLOSURE RELATED TO PFOA IMPACTS ON EARNINGS
DuPont has not disaggregated the impact on shareholder
value, or company earnings, resulting from concerns related to
PFOA.
In the fourth quarter of 2005, the DuPont Safety and
Protection Division, which includes production of Zonyl(R),
Forafac(R), and Foraperle(R) intermediate and surfactant
fluorochemicals reported a volume drop of $1 billion in sales
compared with the prior year. The company asserts that the volume
for the division would have increased by $3 billion in the
absence of the impacts of hurricanes Katrina and Rita. So far
the company is not accounting separately in its public financial
reporting for the losses in sales of Zonyl and other
fluorochemicals sold by the division, even though public reports
imply that some substantial customers are shifting from products.
While DuPont blames higher raw materials for its slumping
profits, Bank of America Securities analysts have stated that for
at least one of DuPont's competitors higher prices for coatings
have come close to offsetting raw material price increases.
Bank of America Securities analysts maintained their buy rating
for PPG Industries, a global supplier of coatings, chemicals, and
Fiberglas, partly on the basis that increased prices for
coatings: "...have so far offset 90% of raw material costs."/35/
In a separate statement, U.S. coatings maker Valspar, Inc,
reported a net income increase of 3% for 2005 in spite of higher
raw material costs./36/
14
There was no reporting in DuPont shareholder reports of the
financial impacts of the Chinese Teflon panic of 2004. Despite
what looked like a major market impact in China due to concern
about health effects related to Teflon, DuPont made no
qualitative or quantitative disclosure in its financial reports
related to what happened in China. According to media reports,
the company dispatched a crisis team to China to attempt to
ease concerns.
Similarly, there is no reporting in DuPont shareholder
reports as to the extent of drop in sales of Teflon in the U.S.
as negative publicity has mounted. What we do know
from public reports is that company has mounted a PR campaign to
attempt to quell public concern, both posting full-page ads in
national media, and corresponding directly with sellers of
products that may be affected, or are raising these concerns with
DuPont.
WE BELIEVE SHAREHOLDER VALUE REMAINS AT RISK AS LONG AS PFOA
IS USED IN MANUFACTURE, OR CAN BE A BREAKDOWN PRODUCT, OF DUPONT
PRODUCTS.
Despite DuPont's concessions to EPA, we believe the evidence
contained in this report shows that shareholder value remains at
risk from the company's decisions, past and present, to rely on
PFOA chemistry in its product lines. Based on the company's
disclosures, the product lines involved represent at least a
billion dollars in annual revenues. Shareholders should press the
management for a more expeditious phase-out of the use of PFOA
and of any substances that can break down to PFOA, for better
disclosure of the financial impacts the current issues are having
and of the options for expediting DuPont's movement out of PFOA
chemistry.
15
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16
ENDNOTES:
_______________
/1/ WHAT IS PFOA? From DuPont website online:
HTTP://WWW1.DUPONT.COM/DUPONTGLOBAL/CORP/DOCUMENTS/US/EN_US
/NEWS/RELEASES/PDF/WHATISPFOA.PDF
/2/ Letter from Kenneth A. Cook, President, Environmental
Working Group to Michael Leavitt, Administrator, U.S.
Environmental Protection Agency (November 17, 2004)
(Citations omitted).
/3/ Juliet Eilperin, "DuPont, EPA settle chemical
complaint," WASHINGTON POST, December 15, 2005. $5 million
of the $6.25 million committed to environmental projects
will fund the Fluorotelomer-based Product Biodegradation
Testing Supplemental Environmental Project(SEP). The EPA
states that this initiative: "will help the public to
better understand the inherent degradation potential of
fluorotelomer-based products to form PFOA and the behavior
of such products when released to the environment."
www.epa.gov/compliance/resources/cases/civil/tsca/DuPont121
405.html 2/14/2005
/4/ Randall Chase, "Teflon chemical likely a carcinogen,
panel says," ASSOCIATED PRESS, February 16, 2006
/5/ Sara Schaeffer Munoz, "EPA probes safety of key
chemical in Teflon," WALL STREET JOURNAL , January 31, 2006
/6// Martin Middlestaedt, "U.S. acts against chemical in
non-stick pans," Globe & Mail, February 4, 2006
/7/ Ohio Citizen Action,
http://www.ohiocitizen.org/campaigns/DuPont_c8/kro_mart.htm
/8/ Jerry Hirsch, "Safety concerns may stick to Teflon,"
LOS ANGELES TIMES, February 14, 2006
/9/ Ohio Citizen Action,
http://www.ohiocitizen.org/campaigns/DuPont_c8/DuPont_c8.ht
ml
/10/ Jerry Hirsch, Los Angeles Times
/11/ Ibid.
/12/ Marian Burros, "As Teflon troubles pile up, DuPont
responds with ads," NEW YORK TIMES, February 8, 2006
/13/ PR Newswire Europe, New York, February 9, 2006
/14/ Rebecca Renner, "Clean & Green," SCIENTIFIC AMERICAN,
January 2006
/15/ Rebecca Renner, "The Long and the Short of
Perfluorinated Replacements," ENVIRONMENTAL SCIENCE &
TECHNOLOGY Vol. 40 Issue 1, Jan 1, 2006
/16/ Barry Rosenbaum, "Rocket Science Gives Surfactants a
Boost," POLYMERS PAINT COLOR JOURNAL 194, vol. 4483 (Dec.
2004)
/17/ Rebecca Renner, "Technology Solutions: The Long and
the Short of Perfluorinated Replacements," ENVIRONMENTAL
SCIENCE & TECHNOLOGY Vol. 40, Issue No, 1
/18/ Ibid
/19/ Polyfox Factsheet.pdf
http://www.omnova.com/products/chemicals/documents/polyfoxF
actSheetFinal_2_06.pdf, 2/21/06
/20/ Ibid.
/21/ Charles Baldwin et al "A Novel Nonstick Porcelain
Enamel, Appliance Vol.61, No. 11, November 2004
/22/ Financial Times Information, Global Newswire Asia-
Africa Intelligence Wire, December 9, 2005
/23/ Financial Times Information, Global Newswire Asia-
Africa Intelligence Wire, August 23, 2004
/24/ Olivia Chung, "Teflon Comes Unstuck in China Mass
Panic," Global News Wire - Asia Africa Intelligence Wire,
July 22, 2004
/25/ AFX European Focus October 14, 2004
/26/ 71 FR 11484
/27/ Wade Rawlins, "Emission in ground water add to
DuPont's tasks," The News & Observer (North Carolina),
February 12, 2006
/28/ Clean Water for North Carolina press release, January
30, 2006
/29/ Associated Press, "Court Clears Settlement in DuPont
Case," February 28, 2005
/30/ Paul Rosenfeld, public comments at Mealey's C-8/PFOA
Science, Risk & Litigation Conference October 24-25, 2005.
By contrast it should be noted that some carpets, notably
Shaw Ecoworks' Carpet, have distinguished themselves by
avoiding the use of PFOA related products. Healthy
Building News, February 23, 2006.
/31/ Jeff Montgomery, "Delaware plant releases C8-type
chemicals," THE NEWS JOURNAL (Wilmington, Delaware),
February 4, 2006
/32/ United Steelworkers Press Release, August, 9, 2005
/33/ United Steelworkers Press Release, December 21, 2005
/34/ "Stock Buyback Now May Spur a Big Bill Later," Wall
Street Journal, January 31, 2006 page C1.
/35/ (ICIS) Chemical News & Intelligence, "Bank of America
keeps PPG rating on better coatings margin," Nov. 9, 2005
/36/ (ICIS) Chemical News & Intelligence, "US Valspar"s
fiscal "05 profit up 3%, sales up 12%," November 21, 2005
17