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Chemical Industry Performance

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This section describes the performance of Australia's chemical industry based on some indicators. For another quick overview.

See also other sections for...  
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History and development

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Industry activities

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Companies

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Activity by Australian state

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WA's chemical industry performance.

What Australia imports and exports by State Example of exports for 1999 by State.

Contact us for list of detailed chemical imports (like imports) by State.

ALSO..

What are Australia's top ten exports in chemicals for 1999

What are Australia's top ten imports in chemicals for 1999.

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Key points detailed below include....

Press to read more Quick summary
Trend Upturn, after decline in significance (since 1975)
Profits Above Australia's commercial average
Investment New investments offsetting industry rationalisation
Employment Employment down to 44 000 from 75 000 in mid 1970s
Performers Industrial gas, inorganic chemicals, pharmaceuticals and pesticide chemicals
Productive sectors Industrial gases, explosives and pharmaceuticals
Relative productivity Labour productivity outperforms Australia's manufacturing sector
Trade performance Export performance has increased - from one-sixth of imports to one-third but now declining?
Performance significance Less than 2 per cent of companies export more than 50 per cent of their sales

Background - restructuring and new investment

The chemical industry, like other Australian manufacturing sectors, has been reducing labour enabled by rationalisation of production centres, process automation and other efficiency improving measures.
bulletFor example, in the first part of the 1990s, employment at major production centres has typically reduced by one-third. Some centres closed like ICI Rhodes and many specialty chemical plants. The changes have been driven by the reversal of protectionist measures that taxed, and up to 1960, even restricted imports competing in the marketplace with chemicals (and other manufactured goods) produced in Australia. With Australian prices determined by import competition, these measures then allowed local manufacturers to raise prices well above open market levels enabling many high-cost, uncompetitive activities. (Indeed prices at 40 to 60 per cent above open market levels were once common.)

This section provides performance indicators including turnover trends, profitability, efficiency and trade performance. Resources and time permitting, we can show the key characteristics that illustrate the strengths and weaknesses providing strategic opportunities and government policies for the development of Australia's chemical industry.

We hope this stimulates some long overdue self-examination and help priorities and roles for Government. Comments always welcomed.

Significance - fallen (but bottomed!)

From the mid 1970's the chemical industry's significance (red line) has fallen by one-half (coinciding with declining import tariffs) to around 1.3 per cent of the economy. (Australian Bureau of Statistics information of industry sector value added as percentage of GDP). This has occurred even though its turnover (bars, log scale) has continued to increase since 1905.

 

graph of turnover and significance


While the industry's significance to Australia has halved, when compared to other industrialised countries, it is today broadly comparable in importance at between 1 and 2 per cent of gross domestic product. That said, it is hugely below it potential as signalled by its resource base.

One conclusion is that its value added (profitability and activities) had been overextended by trade restrictions. With new investments, there is today every indication the two decade downturn has bottomed out. We believe with Australia's resource base, it has outstanding potential!

Of course relevant to this section and elsewhere, these are macro perspectives. Major shifts in relative significance between commodity and specialty chemical producers, and between synthesis manufacturers and formulators have also occurred.

Comment
bulletFrom 1965, Australia's largest oil and gas reserves in Bass Strait, on the door step of the Altona petrochemical complex, enabled Australia to become almost self sufficient in oil and gas. We contend, it provided little more than cheap gasoline and super normal profits for some (like 106 per cent return on shareholders funds in one year). No project can be attributed to it despite very high import tariffs and over-used anti-dumping legislation. The North West Shelf reserves in Western Australia are being exploited but will they repeat Bass Strait in failing to add value? (See also 1996 Chem Systems presentation).

 

Profits - recovered (a little)

profitability of the commodity sector

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Since 1974 tariffs have been reducing to a maximum of 5 per cent leading to big declines in profits and employment. The profitability of the synthesis sector of the chemical industry since 1976 is shown in the above graph. (The chemical sector of the Plastics and Chemical Industries Association [PACIA], derived by ACTED from their publications "Facts and Figures" to 1996 and their Performance Surveys to 1998. Their survey is based on around 32 chemical manufacturers (though only two-thirds are significant manufacturers). Margins during 1998 had increased while capacity utilisation had fallen from 93 to 86 per cent.

To be updated: 

It shows that for the last five years including 1998, that sector of the chemical industry averaged a 10.0 per cent return on shareholders funds. Over the five years including 1996, Australia's largest firms (those with public disclosure) achieved only a 5.1 per cent weighted return. Orica, as the country's largest chemical firm, achieved 11.9 per cent over 5 years and Millennium Inorganic Chemicals (formerly SCM Chemicals) 25 per cent also over the same period. (Source IBIS Business Information "Secrets of Spectacular Success", Business Review Weekly Feb 17, 1997).

Given the reductions in tariffs which slashed potential gross operating margins, the status of the industry today is little short of remarkable. It should be contrasted against the predictions made by industry spokespersons about the consequences of reduced protection.

Much of the resilience can be attribute to reducing the labour intensity, especially of the larger operations. Management practices helped. Byvest purchased Penrice Soda Products, that had been operated for fifty years under a single owner, and its shareholders were returned 42 per cent per year over six years until sold in 1996 (to A G Harris). Also the performance of Symex Holdings.

More generally, though only for the year 1995, the industry represented by ANZSIC 25 (Petroleum, coal, chemical and associated product manufacturing) achieved an 8.1 per cent operating profit before tax on sales turnover which is the same as all manufacturing sectors. (ABS Cat 8221.0 Table 3).

It is worth noting that the formulators of chemicals (i.e.. the larger balance of the chemical industry not involved in synthesis) have experienced a smaller decline in employment.

The following table shows some data published by Business Review Weekly October 1997 (showing data prepared by IBIS Business Information Services using latest available data ranked by sales). A 1998 update is shown where available.

Company Revenue (A$ millions) 1997 19988 update 1999 Net profits after tax % shareholders funds 1998 update 1999 update 1 year SROR* %pa (to 1999) 5 year SROR* %pa (to 1999) 10 year SROR* %pa (to 1999)
Orica (ICI Aust) 3508 2722 3960 13 15 11.7 -8.8 1.5 9.7
Incitec 955 905? 1028 23 23 7.6 13.9 11.4 19.4
BOC Gases 781 782 28 25.6
Wattyl 547 7.0
Kemcor Olefins 326 5
Koppers 296 64.8
Dow Chemical 275 269 11 -163
Millennium Inorganic Chemicals 239 198 (est) 17
BASF 236 239 0.1 8.7
Basell 214 239 9 3.3
Huntsman Chemicals 247 14
Australian Chemical 188 7
APS Chemicals 158 117 219 12 5 7.8 -15 11.1 -
Penrice 158 26.5

Note:*=SROR is the annualised return to shareholders from maintaining their investment by returning all returns such as dividends, participating in rights issues and selling stock as required so as not to contribute to any new capital. 

This table is reproduced below for the commodity chemical producers in the above table (ranked from largest on left).

ChartObject After tax return on shareholders funds(companies ranked from large to small)

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Ownership

It is relevant to note that Australia's chemical synthesis industry is overwhelmingly owned by multinational companies. From the late 1930s, multinationals either purchased or invested in Australian activities using trade barriers to exploit the profitable domestic market. Strong links with government, especially at the federal level was important to ensure the maintenance of protection to offset lack of international competitiveness (and sometimes operational inefficiencies). With a decline in protectionism, multinationals have been investing based on Australia's competitiveness and their global strategies.

Between 1991 and 1996, the share of foreign companies in the Top 1000 (IBIS Business Information) revenue doubled from 13 per cent to 24 per cent (to return the levels of 1980) - a shift not reflected in multinational investment in Australia's manufacturing sector. In the chemical industry it is estimated that foreign ownership exceeds 70 per cent - higher for some sectors such as soaps and detergents at 90 per cent.

In PACIA's Performance Survey '98, table 4.2.7 shows that only 20 per cent of companies in their survey, are independent of "overseas initiatives"! (70 per cent have more than 50 per cent dependence).

Para 4.2.5 could be indicative as well. This section identifies extent of remuneration for use of intellectual property or provision of technical or management assistance of services. Some 60 per cent of surveyed companies pay OR receive remuneration (no distinction on direction). We estimate that by value, 85to 95 per cent of income is paid out to overseas principals.  

Investment

It is worth noting that WMC has invested some A$700 million in an ammonium phosphate plant in Queensland and Dyno and/or Wesfarmers in an ammonia/ammonium nitrate plants in Queensland and Western Australia. There are feasibility studies for large world-scale ammonia/urea plants in Western Australia and Victoria. 

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Recent announcements on new investment.

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Chem Systems report to CIP.

Turnover profile

For more industry description

Click on the graph to see as a pie graph

The chemical industry represents about 8 per cent of manufacturing activity (5 per cent by employment) having declined to about 1.3 per cent of the Australian economy (by GDP). At this level it is typical of other industrialised nations (though below it potential given Australia's resource base).

Manufacturing turnover in 1997-98 was A$17 billion so that the Australian market for chemicals is around $25 billion of which three quarters is locally manufactured (see trade profile).

Equally interesting is the change in its profile in the fifteen year period since 1982. The commodity chemical sector has declined substantially largely due to reductions in import tariffs.

signifchange.gif (11247 bytes)

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Employment

In 1997-98 the chemical industries employed 45 200 down 38 per cent from 70 000 in the mid 1970s reflecting substantial rationalisation and change.

Basic chemical synthesis activities employed 13 000 down 25 per cent from 20 000 in 1971-72 and chemical formulating 32 000 down 25 per cent from 40 000 in 1971-72.

The following graph provides an indication of growth for each sector in the period 1996-97 compared with 1994/95. 

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Structure

As in most countries, the industry is broadly divided into manufacturers that mix chemicals and those that manufacture by a process of chemical synthesis. The Australian chemical industry in 1997-98 had a turnover of A$18 billion.
bulletBy turnover, two-thirds of Australia's chemical industry is represented by manufacturers that combine chemicals to achieve desired characteristics. Included are manufacturers of paints, adhesives, detergents and pesticides. Their competitiveness is derived by manufacturing close to markets using locally available solvents and diluents often helped by close customer relations.
bulletThe other third of the chemical industry manufactures by chemical synthesis - a process that changes the chemical identity. This industry is dominated by petrochemicals such as synthetic resins and rubbers. A broad range of petrochemicals are produced depending on available feedstocks, markets and investment timing.
 

The scope of the chemical industry is defined by the Australian Bureau of Statistics to include the petroleum industry. It excludes the manufacture of aluminium oxide (ie. alumina) but includes titanium dioxide pigment. Metals too are excluded though produced by chemical means - some like titanium, tungsten, nickel and tantalum by sophisticated means. The boundaries of the chemical industry are arbitrary broadly starting with raw materials such as salt, limestone, sulfur, fossil fuels (such coal, gas and petroleum), minerals (such as phosphates) and ending with end products arbitrarily defined. The chemical industry is generally its own major customer.

The statistics about the chemical industry can be misleading not only because they bring together those that manufacture by chemical reaction (synthesise) with those that mix to customer requirements (eg. detergents, adhesives, sealants, paints etc) but also of heavy industry with light and more valuable products.
bulletThe heavy chemical industry includes the manufacturers of plastic resins (eg. polythene plastic resin, sulfuric acid) where the scale of operation is large with few employees evident.
bulletThe light chemical industry tends to use more people and produces more valuable products at smaller scales. Australia has both type of industries.

Though a major manufacturer of raw materials, Australia manufactures less than one-half of its needs of chemicals. Again though often exporting most of its potential raw materials, exports of chemicals are generally less than one-tenth of its production, generally discounted to be competitive in the world market. Compared to overseas countries, Australia's chemical industry has underperformed. As shown later, this has largely been an outcome of past protectionist policies that encouraged the manufacturing industry to be oriented to the home market - fragmenting production units in favour of large scale, cost effective, manufacture so necessary to enter world markets.

For Chemical Industry association structure

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Performance

Relative growth (1992-1998)

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Internal comparative performance

Over the same period between 1996/97 compared with 1994/95, there has been a marked variation of employment and labour-intensity in the chemical sectors.

The following graph shows shows the variation in turnover compared with variation in employment. The chemical industry's weighted average was set at 1.00 with adjustment for other sectors.

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In the following graph the turnover growth and productivities have been combined for the period 1982 compared with 1994.

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Note that these figures were estimated on turnover. During the course of the 12 year period used in the above evaluations, import tariffs reduced by around 30 per cent for the commodity chemicals, deflating their prices compared with the formulated chemicals. Though formulated chemicals also incurred tariff reductions, the potential price benefit of tariff assistance was often underutilised with local, rather than foreign, competition determining market prices. Accordingly, the previous two graphs may tend to understate growth for commodity chemicals (and overstate it for formulated chemicals). A quantity (mass) or corrected valued added analysis would provide a clearer estimate. A large contributor to this performance profile is of course industry rationalisation that in recent years has promoted greater change than indicated in this 12 year profile.

The pattern confirms that consolidation of production centres has provided greater growth than efficiency improvement at individual centres through automation and other measures to reduce the labour intensity.

Outperforms manufacturing sector

The chemical industry has outperformed other sectors of Australia's manufacturing industry. The industry represented by ANZSIC 25 (Petroleum, coal, chemical and associated products) from 1989-90 to 1994-95 increased its gross product (turnover) per employee by 21 per cent compared with Australia's manufacturing average of 19 per cent. (ABS Cat 8221.0 Table 4).

It is worth noting that in 1960, Australia's labour productivity in manufacturing value added per hour was 51 per cent of the US, 91 per cent of West Germany but 270 per cent compared with Japan. In 1995 it had remained about same as US, at 52 per cent of the US, fallen by one-third compared to Germany at 64 per cent and fallen behind Japan to just one-quarter the 1960 value at 71 per cent. (Source OECD, The Economist). Given the generally small scale of chemical manufacturing in Australia, the productivity in the chemical industry can be anticipated to be comparable, and with a trend comparable to all manufacturing.

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December 2001 update

Australia has been ranked the 12th most expensive country in which to do business, according to the Economist Intelligence Unit which assessed business operating costs in 31 key countries around the world, giving Japan a rating of 100 because of high labour, rents and expatriate costs while Australia rated just 38.3. The United States is in second place on 66.3, just ahead of Germany (66.0) - both of which have high labour costs. The United Kingdom is fourth on 64.0, largely because of high transport costs and office rents.

Apart from Japan, Australia is slightly more expensive than many Asian regions because of its high labour costs with Hong Kong (14th place with a rating of 27.3), South Korea (15th with 27.1), Taiwan (16th with 26.6) and Singapore in 17th place with 22.4 all offering better value for companies seeking to set up business. The report said Singapore benefited from some of the lowest costs in terms of taxes, corruption, telecoms and transport. China is in 28th place with 7.7 points, Thailand is 29th on 7.3 while Indonesia is 30th at 1.7. Hungary is the cheapest country of the 31 surveyed and was given a rating of 1.0. 

The rankings are published in a new report, Worldwide Business Cost Comparisons, which analyses the costs of doing business around the world, focussing on the countries which attract the most direct investment or have the potential to do so. The report examined statistics relating to eight categories: labour costs; business travel; costs for expatriate staff; corporation taxes; perceived corruption levels; office and industrial rents; telecommunications; and transport costs. The costliest country was given a score of 100 and the cheapest a score of 1 with the variables then weighted and combined to produce an overall score. Apart from Japan, the US and Canada in ninth place, European countries made up the rest of the top 11 with Spain the cheapest in western Europe with a score of 39.5.

 

Trade performance - national

Example of exports for 1999 by State. Contact us for list of detailed chemical imports (like exports) by State.

ALSO..

What are Australia's top ten chemical exports for 1999

Product $ % total
Medicaments (excl.antibiotics,hormones,steroids, alkaloids, derivatives thereof), in doses or for retail sale 902081713 23%
Pigments and preparations based on titanium dioxide 388380079 10%
Alkaloids of opium and their derivatives; salts thereof 119398348 3%
Medicaments cntg hormones, (excl. insulin, adrenal), steroids used as hormones, in doses or for retail sale 116861459 3%
Wheat gluten 89266443 2%
Casein 77400518 2%
Aluminium hydroxide 72714457 2%
Blood fractions (incl. antisera); vaccines 63877491 2%
Preparations for use on the hair 59870397 2%
Silicon 56728246 1%

What are Australia's top ten chemical imports for 1999.

Product A$ % Total
Medicaments (excl.antibiotics,hormones,steroids, alkaloids, derivatives thereof), in doses or for retail sale 2048779246 17%
Heterocyclic compounds, with nitrogen hetero-atom(s) only, nes 248781392 2%
Beauty or make-up preps for skin (excl. medicaments, incl. sunscreen/suntan preps); manicure/pedicure preps 246456448 2%
Sodium hydroxide in aqueous solution (soda lye or liquid soda) 230501381 2%
Diammonium hydrogenorthophosphate (diammonium phosphate) 218995605 2%
Chemical products and preparations, nes 186360635 2%
Medicaments (excl. hormones, steroids, antibiotics, alkaloids), not put in doses or in packs for retail sale 185800936 2%
Urea 167858290 1%
Blood fractions (incl. antisera); vaccines 157515223 1%
Heterocyclic comps with nitrogen hetero-atom(s) only, cntg pyrimidine, piperazine, triazine ring; nucleic acids 154813754 1%

A summary of trade is summarised in the following graph for the nine principal sectors of the chemical industry (SITC groupings).

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Generally imports exceed exports by a factor of three with the exception of colouring matter which is represented by rapidly growing exports of titanium dioxide pigment.

Over a long time frame, industry restructuring is promoting the growth of exports at a faster rate than imports. Imports now exceed exports by three having only recently been six-times greater than the value of exports. Since 1994, imports have grown faster than imports.

Imports and exports % industry turnover 1905 -1995

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Export growth (Is this the most important graph on this page?)

Trade figures by industry sector are shown in the following graph showing the ratio of the value of exports to the value of imports by industry sector from 1989 to 1999 for all Australia.

expimp.gif (23041 bytes)

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This important graph shows that since 1989...

  1. Exports have increased about 50 per cent faster than imports. Exports have increased from one-fifth to one-third the value of imports of all chemicals in that eight year period.
  2. Some of the faster growing sectors are inorganic chemicals and plastics in non primary forms (ie. worked plastics) with exports doubling compared with imports.
  3. The colourants sector (largely titanium dioxide pigment) has achieved a trade balance with exports approximately equal to imports (though underperforming compared with potential).
  4. The petrochemical sector for plastics in primary forms has increased by 50 per cent though still importing three-times more than it exports. It is worthwhile to note that the primary form (pre moulding and extrusion) is performing better than plastics in non-primary forms (eg. sheets, tubes etc).

By product - petrochemicals

By petrochemical exports can be summarised in the following table. Only polypropylene is exported with imports assuming a substantial share of the the market ranging to 100 per cent! (Data 1997).

Petrochemical Market size (tonnes) Net trade as % market
Ethylene 430 000 0
Propylene 320 000 0
LDPE 140 000 9% Import
LLDPE 85 000 7% Import
HDPE 200 000 23% Import
PP 185 000 57% Export
VCM 180 000 100% Import
PVC 195 000 12% Import

Trade performance - by Australian state

There are also substantial variations between Australian states based on the performance of their industry - collectively for all their chemical sectors and by each chemical sector (SITC). The first point to note that three-quarters of the trade deficit in chemicals for Australia is represent by just two States - New South Wales and Victoria.

 It should be noted that these two States also have had the earliest and largest chemical industries in Australia. Of course being also the largest, the allocation could be justified but if recalculated on a per capita basis, the significance relationship barely changes.

It is worth commenting that in a decade the ratio of the value of Australia's exports compared with imports, has improved from just one-fifth to one-third the value of imports! A balance of trade in chemicals is still some time away (unless aluminium oxide is included).

By Australian State

A state by state comparison (five digit resolution available on request) .

bulletWestern Australia
bulletSouth Australia
bulletNew South Wales
bulletQueensland

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The contributors to Australia's trade imbalance in chemicals is clearly shown, the largest imbalance is NSW, WA the best.

Notes
bulletOf course relevant to this section and elsewhere, these are macro perspectives. Major shifts in relative significance between commodity and specialty chemicals, and between synthesised products and formulated products have also occurred.
bulletPharmaceuticals are growing but largely influenced by the export incentives offsetting in part the monopsonist status of Australia's Pharmaceutical Benefits Scheme. With some minor exceptions, Australia's pharmaceutical industry does not synthesise the active ingredients. (Note: the Government announced April 1997, that it was extending the scheme (that has cost A$1bn over past 8 years) though reducing the rebate from 25 per cent to 20 per cent. See also commentary.)
bulletIt is worth noting that by turnover, 40 per cent of establishments do not export, and only 2 per cent export more than 50 per cent of sales. (ABS Cat 8221, Table 10).

The following graph shows the value of exports of chemicals as a percentage of the value of imports this time by Australian state.

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The above chart shows that....

  1. Again with the national average shown by the red line, (exports are one-third the value of imports) Western Australia has the highest ratio with exports nearly equal to imports. However, and in contrast with the other Australian states, Western Australia's exports have failed to keep up with the growth of imports, declining from a peak of 100 per cent in 1992 to 80 per cent of imports in 1996.
  2. The best performing state is Queensland whose exports have nearly trebled compared with imports in the last eight years. Imports are still exceeded by exports by a factor of two.
  3. The states of New South Wales and Victoria, while improving are underperforming. For New South Wales the value of imports still exceed exports by a factor of more than four - the status of Australia around 1989.

 

Research and Development

UNDER DEVELOPMENT

Broadly, Australia is the 14th largest economy (ranked by GDP) but 21st in science and technology. Almost 45 per cent of business R&D is undertaken by affiliates of international companies - much on the development and adaptation of products to suit the Australian market.

In PACIA's 1998 Performance Survey; R&D outlays are expressed by size of business (large, medium and small that are defined by range) that increases with size of business. 

 

Small 0.7 per cent
Medium  0.8 per cent
Large 1.1 per cent

In the following graph, R&D by PACIA members (Red for Australia)  is compared with R&D outlays of international companies (prepared by SalomonSmithBarney in Gyrus 1999).

Surprisingly, over 80 per cent of participants of their survey indicated that the reduced reduction of the R&D tax concession (from 150 to 125 percent), would have NO impact on planned expenditure.

Comments and suggestions welcomed.


The reader should note the disclaimer

Chemlink Pty Ltd ACN 007 034 022. Publications 1997. All contents Copyright © 1997. All rights reserved. Information in this document is subject to change without notice. Products and companies referred to are trademarks or registered trademarks of their respective companies or mark holders. URL: www.chemlink.com.au/

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