The first wave of US crackers : End of a super cycle?

The first wave of US crackers : End of a super cycle? Tokyo Anu Agarwal 4 October 2017 London Houston Singapore Moscow Dubai New York Calgary Santiago Rio de Janeiro Beijing Shanghai Tokyo Sydney Astana Kiev Cape Town Riga San Francisco Washington Market Reporting Consulting Events

Agenda An update on US cracker start-ups US ethylene exports, when will they materialize Feedstock will US ethane stay competitive than Asian naphtha An outlook for ethane prices Chinese investment in petchem capacity US polyethylene exports can Asia absorb the volumes Impact on Asian producers A brief look at US and global propylene markets Copyright 2017 Argus Media group. All rights reserved.

The Argus view One of the world s leading PRAs, Argus is a team of more than 800 staff members in 20 global offices Publishing more than 11,000 daily spot and forward price assessments, plus market intelligence for world commodities markets Coverage includes: Energy Fertilizers Petrochemicals Metals Services Price reporting and indexation Consulting Conferences Indexation examples US crude oil US and European refined products US and European natural gas NGLs US and European environmental markets Copyright 2017 Argus Media group. All rights reserved.

Developments in the US ethylene market Cracker start-up schedule What happens to excess US ethylene Will US remain competitive US ethane price outlook Market Reporting Consulting Events

US steam cracker capacity increases in the next 4 years Expected profile of ethylene capacity additions as estimated by Argus Includes cracker debottlenecks Copyright 2017 Argus Media Ltd. All rights reserved.

New US crackers are long ethylene, derivative capacities lagging Dow : 1.2mn t PE 750kt MEG in mid-2019 CP Chem: 1mn t PE, 250kt LAO Exxon Mobil : 1.3mn t PE, another 650kt later Sasol : 870kt PE, 320 EO/EG Copyright 2017 Argus Media group. All rights reserved.

US operating rates to drop as it becomes net long on ethylene US ethylene capacity will become long compared with derivative consumption capacity by mid-2018. Derivatives announcements still lag behind ethylene capacity additions. US likely to build a second ethylene export terminal. US ethylene exports may breach 1mn t/yr by US operating rates to be 2021 from 214,000t in 2016 lower than expected Copyright 2017 Argus Media Ltd. All rights reserved.

So where will US ethylene go? US will remain long ethylene until 2020/21 A new USGC ethylene terminal likely 0.5 to 1mnt capacity Expect a decision by close of 2017, likely start 18-24 months from go-ahead date Producers/ buyers not fully committed but ethylene shipper may be part of the project Copyright 2017 Argus Media group. All rights reserved.

And therefore, US competitiveness gap can become narrow New low-cost NA capacity will not have the cost advantage previously expected. It could prove challenging (expensive) to displace local naphtha/lpg based Asian or European production. Copyright 2017 Argus Media group. All rights reserved.

Meanwhile, ethylene China s self-sufficiency growing. Company Location Feedstock 2017 2018 2019 2020 2021 Shenhua Ningmei Ningdong, Ningxia Naphtha from coal refinery 450 CNOOC Shell Petrochemicals Huizhou, Guangdong Naphtha+LPG 1000 Sinopec Hainan Petrochemical Danzhou, Hainan Naphtha+LPG 1000 Zhejiang Petrochemical Zhoushan, Zhejiang Naphtha+LPG 1000 Sinopec KPC Zhanjiang, Guangdong Naphtha+LPG 1000 SP Chemical Taixing, Jiangsu Ethane+LPG 650 Gulei Refinery Gulei, Fujian Naphtha+LPG 800 Wanhua Chemical Yantai, Shandong LPG 1,000 Sinochem Quanzhou Petrochemical Quanzhou, Fujian Naphtha+LPG 1,000 Driven by lucrative cracker margins in 2016-2017, Chinese companies have speeded up or are trying to expand cracker projects. Three projects have kicked off construction, including SP Chemical s gas-feed cracker, Zhejiang Petrochemical s refinery-cracker project, and Sinopec Zhanjiang s project. Besides naphtha feed, Chinese are exploring LPG and ethane as alternative cracker feed Copyright 2017 Argus Media Ltd. All rights reserved.

Ethylene China s self-sufficiency growing 3mn of MTO based, 5mnt of CTO based capacity and 8mnt of cracker based C2 coming up by 2020 China capacity to absorb higher ethylene supply limited as the country expands its own capacity rapidly towards the end of the decade. Capacity CAGR at 8.3pc in 2016-21, against demand 6.1pc Copyright 2017 Argus Media Ltd. All rights reserved.

Developments in the polyethylene market US PE supply growth Can Asia/China absorb more PE from the US What the global PE trade may look like Impact on Asian operating rates Market Reporting Consulting Events

Major PE growth still expected despite delays The US & China will experience the largest rise in capacity Chinese capacity growth will increase. Russia & India will also see rapid growth Copyright 2017 Argus Media group. All rights reserved. 17

Problem- far more PE capacity in the world than we need From 2008-2012, new Middle-East supply coincided with a global recession resulting in lower operating rates Supply growth now driven by low cost production in US and by CTO & MTO in China Supply growth exceeds demand growth by 50% 2016-2021 Copyright 2017 Argus Media group. All rights reserved. 18

Polyethylene- China s self-sufficiency also growing, import growth tapering China PE capacity reached 17mn t vs. demand at 25mn t/yr in 2016. China s PE import volumes reached 9.9mn t/yr in 2016 and may go up further to the 11mn t/yr level in 2017-2019. New PE capacities will boost China self-sufficient to 64-65pc in 2019-20 from current 60-61pc. Copyright 2017 Argus Media Ltd. All rights reserved.

PE trade patterns US exports will grow by 5.5 mn t 2016-2021 China imports growth will flatten from 2017-2019 at 10-12mn t Middle East to remain largest exporter by a large margin Copyright 2017 Argus Media group. All rights reserved.

Therefore PE op rates will fall, though ethylene op rates may not fall as much Supply driven trough PE to suffer more than ethylene Margin compression Greater volatility Cracker operating rates will not be under too much pressure But margins will fall as PE sales get aggressive Copyright 2017 Argus Media Ltd. All rights reserved.

A word on propylene US propylene supply growth US propylene export outlook Chinese propylene and polypropylene growth outlook Impact on Asian operating rates Market Reporting Consulting Events

Propylene production by region 2016 and 2021 mnt China favors onpurpose production as demand grows faster than coproduct routes US continues to rely on refineries, with growing PDH On-purpose includes: Propane dehydrogenation (PDH), Coal-to-Olefins (CTO), Methanol-to-Olefins (MTO), and metathesis Source: Argus 2017 Propylene Annual Copyright 2017 Argus Media Ltd. All rights reserved.

PDH and new ethane-crackers will bring up US propylene supply US is adding on new PDH unit, to utilise abundant LPG supplies. Refinery-propylene continues to be an important source 55-60pc of US propylene is sourced from refineries. Steam cracker production has been dropping in recent years as operators move to lighter feedstocks. New ethane-crackers only make up a small portion. Copyright 2017 Argus Media Ltd. All rights reserved.

PDH units: North American projects Company Location Capacity ( 000 t/y) Technology Notes Flint Hills Resources Houston, TX 650 Lummus Operating since 2010 Dow Freeport, TX 750 UOP Oleflex Operating Dec 15 Enterprise Mont Belvieu, TX 750 Lummus start-up Aug 17 Inter Pipeline Alberta, Canada 2 x 500 est. UOP Oleflex 2021; + 500 PP Pembina/PIC Alberta, Canada 800 est. UOP Oleflex 2021; + 550 PP C3 Petrochemicals Chocolate Bayou, TX 2 x 500 UOP Oleflex suspended Formosa Plastics Point Comfort, TX 550 Uhde STAR Unlikely before 2022 Rextac Odessa, TX NA TBA cancelled Sunoco Logistics Pennsylvania NA TBA Under evaluation Dow TBA NA TBA Under evaluation Lyondell USGC 1mn t TBA Under evaluation Copyright 2017 Argus Media group. All rights reserved.

Concerns in propylene and derivative investments US Propylene demand 14mn t/yr in 2016 Derivative capacity expansion has been slower as the US cost advantage is not as significant as that for ethylene. Braskem has now confirmed a 1Q 2020 start-up for its new PP unit. Formosa has not yet provided a recent update. LyondellBasell plans to build a new 450,000 t/yr PO/TBA unit for start up in 2021 Copyright 2017 Argus Media Ltd. All rights reserved.

Slow demand growth will boost North America s propylene exports North American propylene capacity has reached 21mn t/yr, second largest in the world, but consumption was 15mn t/yr. Export volumes to double in 2020 from 250,000t in 2016. Enterprise operates two propylene export terminals on the US Gulf coast and can now export up to 5,000 t/d of PGP. Copyright 2016 Argus Media Ltd. All rights reserved.

Ethylene/PE Conclusions We are moving into a supply driven global margin downturn bottoming in 2019/20 due to new capacity expansions in the US and in China. New cracker operating rates will be lower than expected due to the sheer complexity of crackers and quantum of capacity increase A new US ethylene terminal will be built, and higher exports from the US expected from 2019 New PE capacity will exceed demand, putting pressure on prices More cost competition in the PE market- as US ethane prices rise in a low crude environment Trough less severe than previous demand driven ones. Severity will depend significantly on how aggressive US is in filling plant capacities Copyright 2017 Argus Media Ltd. All rights reserved.

Propylene /PP conclusions Over-supply in ethylene will weigh on derivatives. PP prices and market share to be pressured by weak PE Production shifts-on-purpose processes to meet downstream demand Regional Trends-Cost advantages seem to emerge Propylene continues shift to on-purpose, PDH is now favoured but CTO can be competitive Global propylene better balanced than Ethylene Copyright 2017 Argus Media group. All rights reserved.

Argus Ethylene Publications Argus Ethylene and Derivatives Argus Polymers Twice monthly global report on ethylene supply and demand issues, pricing, and trade flow Argus Olefins Outlook Key price assessments as well as insightful market commentaries Argus Ethylene Annual 10 year forecast and 5 year history for capacity, trade, and supply/demand balances Copyright 2017 Argus Media group. All rights reserved.

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Anu Agarwal Head Editorial, Asia and Middle East Anu.agarwal@argusmedia.com Singapore www.argusmedia.com Stay Connected @ArgusMedia +Argusmediaplus Argus-media argusmediavideo Copyright notice Copyright 2017 Argus Media group. All rights reserved. All intellectual property rights in this presentation and the information herein are the exclusive property of Argus and and/or its licensors and may only be used under licence from Argus. Without limiting the foregoing, by reading this presentation you agree that you will not copy or reproduce any part of its contents (including, but not limited to, single prices or any other individual items of data) in any form or for any purpose whatsoever without the prior written consent of Argus. Trademark notice ARGUS, the ARGUS logo, ARGUS MEDIA, ARGUS DIRECT, ARGUS OPEN MARKETS, AOM, FMB, DEWITT, JIM JORDAN & ASSOCIATES, JJ&A, FUNDALYTICS, METAL-PAGES, METALPRICES.COM, Argus publication titles and Argus index names are trademarks of Argus Media group. Disclaimer All data and other information presented (the Data ) are provided on an as is basis. Argus makes no warranties, express or implied, as to the accuracy, adequacy, timeliness, or completeness of the Data or fitness for any particular purpose. Argus shall not be liable for any loss or damage arising from any party s reliance on the Data and disclaims any and all liability related to or arising out of use of the Data to the full extent permissible by law.