Prospects for the Basic Petrochemical Value Chains Steve Zinger Managing Director, Asia SZinger@cmaiglobal.com May 14, 29 Seoul, South Korea Singapore Shanghai Houston New York London Düsseldorf Dubai
What Is This Light? The light at the end of the tunnel? An on-coming train? Short-term price outlook All around Asia for olefins & aromatics Long term price outlook Trends for each key olefin and aromatic products
Prices & Margins Have Collapsed Dollar Per Metric Ton (Olefins Products) 2,2 2, 1,8 1,6 1,4 1,2 1, 8 6 4 2 J F M A M J J A S O N D J F M A 8 9 Naphtha Ethylene Propylene PE PP Crude Oil Dollar Per Barrel (Crude Oil) 275 25 225 2 175 15 125 1 75 5 25
The Drop in Aromatics Prices U.S Dollar Per Metric Ton (Products) 1,8 1,6 1,4 1,2 1, 8 6 4 2 J8 F M A M J J A S O N D J9 F M A Crude Oil, WTI Benzene, FOB Korea Naphtha, C&F Japan PX, CFR Taiwan US Dollar Per Barrel (Crude Oil) 25 2 15 1 5 Toluene, FOB Korea Styrene, CFR China
China Supportive Of Chemical Demand & Supply Massive new integrated investments in 28-211 o 6.3 MMT ethylene; +63% o 5.3 MMT propylene; +57% o 4.6 MMT benzene; +8% o 4.4 MMT paraxylene; +19% Still not self-sufficient for most chemicals, but import needs are not growing as fast or reducing Economic stimulus package will support chemical investment and local consumer demand Coal chemistry is a viable option
India Still Will Grow, But Projects under construction will start o Reliance (Early 29) refinery o Indian Oil (Early 21) olefins & aromatics o ONGC aromatics complex (mid 211) India will be large exporter until local economy grows Others major projects being considered: o Reliance o ONGC o IOC o ESSAR Non-financed projects struggle until economy improves Demographics support long-term petrochemical demand growth
Southeast Asia Will Continue to Invest Projects under construction, only slightly delayed: o Shell & Exxon in Singapore o PTT & Siam/Dow in Thailand New projects either integrated or have advantaged feedstock Others still being considered: Singapore, Vietnam, Brunei, Philippines, Indonesia, Malaysia Non-financed projects struggle until economy improves
Japan, Korea and Taiwan Focus On Competitiveness Reducing operating rates in short-term to meet demand Little expansion of olefins, some small aromatics projects associated with refineries in Japan and Korea Integrating with upstream & downstream facilities Adding feedstock flexibility Producing specialty products Consolidation and closures likely and necessary
Massive Investments In The Middle East Will Compete in Asia & The World Massive feedstock advantaged investments in 28-211 o 11.4 MMT ethylene; +6% o 5. MMT propylene; +8% o.9 MMT benzene; +3% o 1.6 MMT paraxylene; +79% Refinery based aromatics complexes starting up in Kuwait and Oman Feedstock advantage is greatest in gas chemistry but liquid feeds being used to diversify chemical base Exporting large volumes of derivatives (PE, PP, MEG) With new capacity in China, China s thirst for imports no longer large enough to consume Middle East excesses This will impact the rest of the world!
Middle East Has The Lowest Cost Ethylene Ethylene Production Cost, Dollars Per Metric Ton 2,5 1,65 28 1,25 85 Southeast Asia Avg. Europe Avg. Northeast Asia Avg. North America Avg. 45 Middle East Avg. WTI Crude Oil: 28 = $13/bbl 5 2 4 6 8 1 12 14 16 Cumulative Ethylene Capacity (Million Metric Tons)
Benzene Curve is More Flat Except for On-Purpose Supplies Benzene Production Cost, Dollars Per Metric Ton 1,7 1,5 1,3 1,1 9 7 5 North America Avg. Middle East Avg. Europe Avg. Southeast Asia Avg. Northeast Asia Avg. 3 1 WTI Crude Oil: 28 = $13/bbl 1 2 3 4 5 6 Cumulative Capacity (Million Metric Tons)
The Profit Cycle Is Still Alive Olefins Profitability, Dollars Per Metric Ton 1,6 1,4 1,2 1, 8 6 4 2 1 2 3 4 5 6 7 8 9 1 11 12 13 14 15 Cash Margin Ethylene, CFR SE Asia Propylene, CFR SE Asia
The Profit Cycle Is Still Alive (Mostly) Aromatics Profitability, Dollars Per Metric Ton 1,6 1,4 1,2 1, 8 6 4 2 1 2 3 4 5 6 7 8 9 1 11 12 13 14 15 BZ to Naphtha Spread PX to Naphtha Spread Benzene,FOB Korea Naphtha, C&F Japan PX, C&F Taiwan
Olefins & Derivatives Ethylene Propylene Butadiene Polyethylene Ethylene Glycol PVC
Ethylene Market Summary New Ethylene Capacity & Demand, MMT 1 8 6 4 2-2 -4-6 Americas Europes/CIS/Baltics Middle East/Africa Asia Global Ethylene Supply/Demand, MMT 18 15 12 9 6 3 Demand Capacity Utilization Rate 9 92 94 96 98 2 4 6 8 1 12 14 Global Demand Growth Operating Rates, % 96 94 9 92 94 96 98 2 4 6 8 1 12 14 92 9 88 86 84 82 Demand loss in Q4 was painful to the industry; some recovery in Asia in late Q1 and early Q2 Middle East and China continues to build large capacity volumes in 29-211 Some shutdowns of high cost crackers in NAM, WEP, and NEA will likely occur Gas prices (ethane) in US will likely stay disconnected with crude oil (naphtha), giving US exporters an advantage Economic and market crisis will likely cancel or delay projects beyond 212 Low utilization rates and profit margins expected to persist until 212/213.
Propylene Market Summary New Propylene Capacity & Demand, MMT 6 5 4 3 2 1-1 -2-3 9 92 94 96 98 2 4 6 8 1 12 14 Americas Europes/CIS/Baltics Middle East/Africa Asia Global Propylene Supply/Demand, MMT 12 1 8 6 4 2 Global Demand Growth Operating Rates, % 9 9 92 94 96 98 2 4 6 8 1 12 14 Demand Capacity Utilization Rate 87 84 81 78 75 72 Demand loss due to economic meltdown a concern, but some improvement in Asia recently Middle East investing heavily in LPG cracking and on-purpose capacity o PDH, DCC, OCT in Saudi Arabia o OCT in Abu Dhabi Heavy crackers being added in China, Singapore, & Thailand Some on-purpose propylene being added in Asia: PDH and metathesis Lower cracker operating rates not significantly impacting supply availability
.8.6.4.2. -.2 -.4 -.6 Butadiene Market Summary New Butadiene Capacity & Demand, MMT 1. 9 92 94 96 98 2 4 6 8 1 12 14 Americas Europes/CIS/Baltics Middle East/Africa Asia Global Demand Growth Global Butadiene Supply/Demand, MMT Operating Rates, % 16 1 14 95 12 9 85 1 8 8 75 6 7 4 65 6 2 55 9 92 94 96 98 2 4 6 8 1 12 14 5 Demand Capacity Utilization Rate Record high prices in early 28 have collapsed with the economic downturn. Producers and consumers started looking at onpurpose sources. Most butadiene goes into the synthetic rubber / automotive industry. Suffering auto industry causing massive demand loss and limited upward price movement in near term Plenty of new butadiene extraction capacity additions planned for 29-21. Crude C4 availability will become short again as demand recovers (in 21) faster than cracker utilization rates rise to high rates (212-213).
6 4 2-2 -4 Polyethylene Market Summary New PE Capacity & Demand, MMT 8 9 92 94 96 98 2 4 6 8 1 12 14 Americas Europes/CIS/Baltics Middle East/Africa Asia Global PE Supply/Demand, MMT Operating Rates, % 12 95 93 1 91 8 89 87 6 85 83 4 81 2 79 77 9 92 94 96 98 2 4 6 8 1 12 14 75 Demand Capacity Utilization Rate Global Demand Growth Most new ethylene plants tied to PE downstream operations; Very similar supply/demand situation as ethylene: o Demand loss in Q4, some recovery in Asia o Too much Middle East and Asia capacity coming on-line from 29-211 o Low utilization rates and profit margins until 212/213 Large Middle East export volumes will go to China, new domestic Chinese capacity will limit growth in imports o Middle East resin will flow to other parts of Asia, Europe, and even the Americas
Ethylene Glycol Market Summary New MEG Capacity & Demand, MMT 3.5 3. 2.5 2. 1.5 1..5. -.5-1. 9 92 94 96 98 2 4 6 8 1 12 14 Americas Europes/CIS/Baltics Middle East/Africa Asia Global MEG Supply/Demand, MMT 3 25 2 15 1 5 Operating Rates, % 1 9 92 94 96 98 2 4 6 8 1 12 14 Demand Capacity Utilization Rate Global Demand Growth 95 9 85 8 75 7 65 Many large MEG facilities coming on-line in Middle East and Asia Middle East producers will dominate trade flow of MEG globally Low operating rates and margins for the next 3 to 5 years. Higher cost producers in the US, Europe, and part of NE Asia will struggle rationalizations likely The temptation to invest in ethoxylates, ethanolamines, and other EOD s will be strong, but these are small markets.
New PVC Capacity & Demand, MMT 4 3 2 1-1 -2-3 PVC Market Summary 9 92 94 96 98 2 4 6 8 1 12 14 Americas Europes/CIS/Baltics Middle East/Africa Asia Global PVC Supply/Demand, MMT 6 5 4 3 2 1 9 92 94 96 98 2 4 6 8 1 12 14 Demand Capacity Utilization Rate Global Demand Growth Operating Rates, % 95 9 85 8 75 7 Recent global demand loss unprecedented even in previous economic downturns PVC greatly impacted by economic outlook with many durable end-uses (housing and construction). When economic stimulus packages develop, this should be very positive for PVC demand recovery Significant Chinese coalbased PVC capacity added in 25-29, causing excess supply and changing market structure
Aromatics & Derivatives Benzene Toluene Paraxylene Styrene Phenol
3 2 1-1 -2-3 Benzene Market Summary New Benzene Capacity & Demand, MMT 4 9 92 94 96 98 2 4 6 8 1 12 14 Americas Europes/CIS/Baltics Middle East/Africa Asia Global Benzene Supply/Demand, MMT Operating Rates, % 7 1 95 6 9 5 85 4 8 75 3 7 2 65 1 6 55 9 92 94 96 98 2 4 6 8 1 12 14 5 Demand Capacity Utilization Rate Global Demand Growth Benzene Supply Storm o New capacity justified based on strong market in 24-27. o Continued by-product capacity additions due to growth in ethylene and PX o More benzene being removed from motor gasoline pools Combined with demand loss at end-28: train wreck benzene trades below naphtha Benzene surplus to stay for many years By-product problem: source (from ethylene and PX) growing faster than main demand (styrene)
Toluene Market Summary New Toluene Capacity & Demand, MMT 4. 3.5 3. 2.5 2. 1.5 1..5. -.5-1. -1.5 9 92 94 96 98 2 4 6 8 1 12 14 Americas Europes/CIS/Baltics Middle East/Africa Asia Global Toluene Supply/Demand, MMT Operating Rates, % 45 1 4 95 35 9 3 85 8 25 75 2 7 15 65 1 6 5 55 9 92 94 96 98 2 4 6 8 1 12 14 5 Demand Capacity Utilization Rate Global Demand Growth Similar to benzene, by-product supply continues to grow. Chemical demand is mainly for making on-purpose Benzene or PX o HDA units (on-purpose benzene) rarely needed to meet benzene demand o STDP/TDP units run opportunistically based on economics o TA units still growing to support PX growth. Toluene will trade closer to its floor value of motor gasoline blending for the foreseeable future
Paraxylene Market Summary New Paraxylene Capacity & Demand, MMT 5 4 3 2 1-1 -2 9 92 94 96 98 2 4 6 8 1 12 14 Americas Europes/CIS/Baltics Middle East/Africa Asia Global Paraxylene Supply/Demand, MMT 5 45 4 35 3 25 2 15 1 5 Operating Rates, % 1 95 9 85 8 75 7 65 6 55 5 9 92 94 96 98 2 4 6 8 1 12 14 Demand Capacity Utilization Rate Global Demand Growth Continues to rapidly grow 6-7% o o Polyester preferred fiber PET rapid growth into bottles Short-term recovery in PX market is not sustainable Cyclical downturn expected due to capacity build-up in 29-11 Demand hurt in many ways o o o o Economic downturn at year-end 27/8 inventory build of fiber 27/8 PET light-weighting Increased recycle of PET bottles to staple fiber (more economic at high oil, but being green long-term) Capacity additions will slow, and long-term recovery expected in 214-215
2. 1.5 1..5. -.5-1. -1.5-2. Styrene Market Summary New Styrene Capacity & Demand, MMT 2.5 9 92 94 96 98 2 4 6 8 1 12 14 Americas Europes/CIS/Baltics Middle East/Africa Asia Global Styrene Supply/Demand, MMT 4 35 3 25 2 15 1 5 Operating Rates, % 1 9 92 94 96 98 2 4 6 8 1 12 14 Demand Capacity Utilization Rate Global Demand Growth 95 9 85 8 75 7 Demand has suffered in the shortterm due to economic downturn Longer-term demand prospects are weak because of mature polystyrene industry: o Loss of demand to nonplastics or to PP/PET in packaging applications o Changing consumer product trends (CRT to flat TV, video/audio cassette to CD to MP3) New styrene capacity in Middle East and Asia in 29-21 Capacity rationalizations in US, Europe, and Japan already occurring More industry consolidation and restructuring needed to sustain a long-term recovery
.8.6.4.2. -.2 -.4 -.6 Phenol Market Summary New Phenol Capacity & Demand, MMT 1. 9 92 94 96 98 2 4 6 8 1 12 14 Americas Europes/CIS/Baltics Middle East/Africa Asia Global Phenol Supply/Demand, MMT 14 12 1 8 6 4 2 Operating Rates, % 1 95 9 85 8 75 9 92 94 96 98 2 4 6 8 1 12 14 Demand Capacity Utilization Rate Global Demand Growth 7 65 6 55 5 Like other commodities, phenol demand hurt in economic downturn. o Particularly influenced by weakness in the construction and automobile sectors o Optical media (polycarbonate) is also showing long-term demand maturity trends Middle East and Asia adding significant capacity Additional rationalization needed to recover operating rates to strong level Acetone by-product continues to be a disposal problem o Solvent applications grow slowly o Trading near propylene recently
What Is This Light?
Train Wreck or New Light? Make The Right Choices To Survive the Downturn
CMAI s Key Visions: Significant Change Is Underway You can leverage the resulting opportunities Demand loss is largest concern of current market; demand will recover with economy by 21, returning to trend-line patterns Over-capacity still looms despite demand recovery, causing margins to underperform expectations until next up cycle. Industry restructuring likely & necessary Low margins expose marginal performers with high debt loads Capacity closures of old/inefficient facilities will occur Financing difficulties for marginal projects will delay start-ups for 212+ Cost reduction becomes critical for competitiveness Innovation needed: technical, application development, operational efficiency, etc Asia investments chasing local demand recovery Middle East investments mitigating margin risk with low-cost feedstocks Petrochemical cycle is alive and well: good times will return again; survival is key!