Can China Save the Market?

Can China Save the Market? Update on Chinese Economy & Petrochemical Industry Insert Consultant Picture Paul Pang Managing Director CMAI China ppang@cmaiglobal.com May 14, 2009 Seoul, South Korea Singapore Shanghai 2009 Houston APIC New York CMAI London Seminar Düsseldorf Dubai

Economic Stimulus Packages GDP Growth Rate 14 12 10 8 6 4 2 0-2 -4 US$585 Billion US$780 Billion 0 3 5 8 10 13 15 18 2008 GDP in Trillion U.S. Dollars (2004 Constant Dollar)

Can China Save the Market? Status of the country s economy Economic stimulus package Status of the Petrochemical Industry Industry Outlook

Size of the Major World Economies 2008 GDP in Trillion U.S. Dollars (2004 Constant Dollar) 4.9 2.9 26.2 23.5 2.9 12.7 U.S. Japan China Germany Others

15 Growth of Chinese Economy GDP Growth Rate, Percent 10 5 0-5 00 01 02 03 04 05 06 07 08 09 10 11 12 13 China

Chinese Economy Chinese economy benefits greatly from integration with the global economy But, is also very vulnerable to global downturn Exports have been declining Economic crisis has impacted China Economic and social pressures are mounting

2008 China Finished Goods Exports Units in Billion 8 7 6 Chinese New Year 5 4 3 2 1 0 Jan Feb Mar April May June July Aug Sept Oct Nov Dec Appliance Electronic Toy Textile 2007 Sum

China Also Gets Hurt Government policy change and global recession impact China Export-oriented industries suffered most Factory closure happens from South to East China Migrant workers lost jobs A wave of workers migrate back to rural areas

Chinese Main Industrialized Regions Heilongjiang Jilin Xinjiang Liaoning Tibet Qinghai Sichuan Ningxia Hebei Shanxi Henan Hubei Anhui Jiangsu Major export industries Zhejiang Jiangxi Hunan Guizhou Fujian Yunnan Guangxi Major provinces with excess labor

In Million 1,400 2008 China Industrial Output 1,200 Chinese New Year 1,000 800 600 400 200 0 06 Avg. 07 Jan Feb Mar April May June July Aug Sep Oct Nov Dec Avg. Mining (Tons) Construction Materials (Tons) Refining&Chemical (Tons) Food (Tons) Textile (Tons) Appliances (Units) Industrial Equipment (Units) Electronics (Units) Electricity (MW.Hr)

Summary Of The Chinese Economy Global economic slowdown impacts China Manufacturing industry slows down significantly in the 2 nd half 2008 Reducing unemployment and maintaining social stability are the challenges ahead

Can China Save the Market? Status of the country s economy Economic stimulus package

Economic Stimulus Package US$585 billion will be spent in 2009 and 2010. Half of the package will be spent on infrastructure Direct investment in Refining & Petrochemical Industry is around US$15 billion. Rural Area Development, 54 Earthquake Reconstruction, 146 Unit: billion ($) Environment Protection, 51 Infrastructure, 263 Basic Housing, 41 Chemical Investment, 15 Others, 15

Policy Changes Increase export tax rebate Implement flexible labor pay Reduce social contribution Speed project approval process Relax bank loan control

Can China Save the Market? Status of the country s economy Economic stimulus package Status the country s petrochemical industry

China Plastics Supply and Demand Million Ton Operating Rate, Percent 50 100 40 80 30 60 20 40 10 20 0 03 04 05 06 07 08 09 10 11 12 13 PE production PP Production PVC Production Total Net Import Total Capacity Total Demand Operating Rate 0

What About The Aromatics Industry? Million ton Operating Rate, Percent 30 100 25 20 15 10 5 0 03 04 05 06 07 08 09 10 11 12 13 PX production Bz Production Net Bz/PX Import PX Equivalent PTA Import Total Demand 80 60 40 20 0

New Petrochemical Complexes, 09-10 Company Location Startup Timing New Capacity in -000- Metric Tons Bz PX C2 C3 Remarks Fujia PC Dalian 1Q 09 217 700 Standalone PX complex CNOOC Guangdong 2Q 09 400 800 Integrated refining / PX complex Fujian PC Fujian 2Q 09 465 700 800 400 Integrated refining/ethylene/px complex Shanghai PC Shanghai 2Q 09 125 585 PX complex Panjin Ethylene Liaoning 3Q 09 125 450 225 Ethylene complex Dushanzi PC Xinjiang 3Q 09 250 1,000 500 Integrated refining / ethylene complex Tianjin PC Tianjin 1Q 10 250 1,000 500 Ethylene complex Zhenhai PC Zhejiang 2Q 10 300 1,000 500 Ethylene complex Fushun PC Liaoning 1Q 10 200 800 400 Ethylene complex Urumuqi PC Xinjiang 4Q 10 300 1,000 PX complex

Locations Sinopec s projects are located next to the market PetroChina s projects are located next to resources Private enterprises start emerging Panjin Ethylene Fujia PC Tenglong PC

Other Complex Start-Ups, 2011-12 Company Location Startup Timing New Capacity in -000- Metric Tons Bz PX C2 C3 Remarks Maoming PC Guangdong Mid 11 230 590 PX complex Daqing PC Helongjiang Mid 11 190 600 300 New ethylene complex Liaoyang PC Liaoning 1Q 12 200 600 PX complex Sichuan PC Sichuan 1Q 12 400 600 800 400 Integrated refining/cracker/px complex Tenglong PC Fujian 1Q 12 400 1,400 PX complex Wuhan PC Hubei 1Q 12 200 800 400 Integrated refining/ethylene complex Total 4,252 6,375 7,250 3,625 New capacities developed during 09-12

Coal to Olefins Projects Over 1.5 MTA coal-to-olefins capacity will be built by mid 2010 Current weak energy market makes CTC projects less attractive Chinese government tightens control coal-to-chemical projects Shenhua Baotou Ethylene: 260 KTA Propylene: 260 KTA Shenhua Ningmei Propylene: 500 KTA Shenhua/Dow JV Datang Int l Propylene: 500 KTA

Petrochemical Capacity Growth Million tons 12.0 10.0 8.0 6.0 4.0 2.0-03 04 05 06 07 08 09 10 11 12 13 Benzene PX Ethylene Propylene 2008 Estimate

Can China Save the Market? Status of the country s economy Economic stimulus package Status the country s Petrochemical industry Industry Outlook

15 Growth of Chinese Economy GDP Growth Rate 10 5 0-5 00 01 02 03 04 05 06 07 08 09 10 11 12 13 China

More Domestic Demand Exports continue to be vital for the Chinese economy But, raising domestic demand becomes more and more pressing

China Plastics Supply and Demand Million Ton Operating Rate, Percent 50 100 40 80 30 60 20 40 10 20 0 03 04 05 06 07 08 09 10 11 12 13 PE production PP Production PVC Production Total Net Import Total Capacity Total Demand Operating Rate 0

What About The Aromatics Industry? Million ton Operating Rate, Percent 30 100 25 20 15 10 5 0 03 04 05 06 07 08 09 10 11 12 13 PX production Bz Production Net Bz/PX Import PX Equivalent PTA Import Total Capacity Total Demand Operating Rate 80 60 40 20 0

Opportunities for International Exporters China will continue to be the major export destination Competition will become more intense Focus on cost reduction to make import material competitive Increase product differentiation in unique applications Focus on services and longterm customer relationship Diversify target market outside China

Conclusions Chinese economy has been severely impacted by the global crisis Large economic stimulus package will help chemical industry recover Domestic production will continue to grow despite difficulties Opportunities remain for international producers