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September 2014 Raw Materials Report

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We use our expertise to navigate raw material challenges to help our customers succeed. Our sourcing team is comprised of regional groups representing the Americas, Europe, India, Middle East, Africa and Asia. These groups work together to develop and implement strategic sourcing plans. By regularly evaluating both regional feed-stocks, and global events, we leverage our global supply chain to balance materials across our markets. This ensures stable supply at the best value to support our customers for their regularly planned requirements.

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September 2014 Raw Materials Report

  1. 1. GLOBAL, SEPTEMBER 2014 Global Economic Activity Stabilizes in 2014 The global economy appears to have stabilized in 2014 to a greater degree than at any time since the onset of “the great recession” in 2007. Economic demand and economic growth are slower than was expected—the World Bank recently reduced its forecast for U.S. economic growth in 2014 from 2.8 percent to just 2.1 percent, for example. The global forecast was similarly reduced from 3.2 percent to 2.8 percent. Still, the world’s advanced economies are expected to grow 1.9 percent in 2014, as compared to 1.3 percent in 2013. The world’s developing economies are now forecast to experience their third straight year of disappointing growth of less than 5 percent. Nevertheless, “high income country-based risks to the global economy have been largely eliminated… (while) among developing countries, short-term risks have also become less pressing.” In fact, “downside risks have diminished overall.” As a result, fears of a return to global recession have for the most part been forgotten. For the first time in five years or more, macroeconomic factors have substantially given way to matters of supply and demand as key drivers in many industries and markets—including those for petrochemical by-products and feedstocks, and adhesive raw materials. ENERGY REMAINS SOMEWHAT VOLATILE Crude oil prices, including WTI (in the U.S.) and Brent (worldwide), were at or near recent highs in late June and early July due to political tensions in the Middle East, Libya and Ukraine. It is true that prices have fallen over the past month, but oil-price.net forecasts another uptick in the coming months as political tensions seem to be unlikely to end any time soon. Prices could vary from region to region, of course. Crude prices impact all of the crude oil derivatives. Meanwhile, natural gas spot prices have returned nearer to historical pricing in the $3 to $4 per million BTU range after peaking at twice that much early this year. A bitter cold North American winter caused an explosion in demand for natural gas-based heating oils and a historical low in natural gas inventories. A cool summer has dampened demand for energy for cooling. This has helped bring prices down, but has not substantially increased inventories. So natural gas remains at risk for another spike in prices this coming winter. Historically, this was only a matter of concern in North America. But as more U.S. natural gas liquids are available for export, and it is feasible for Europe and Asia to transform ethylene crackers to lighter feeds, natural gas prices become a matter of concern on a global scale. 1000 900 800 700 600 500 400 300 200 100 0 USD/MT Mar 2013 June 2013 Sept 2013 Dec 2013 Mar 2014 June 2014 Sept 2014 Dec 2012 KEY FACTORS IN ENERGY AND PETROCHEMICAL MARKETS At the present time in mid-2014, there are several key factors that are driving the energy and downstream petrochemical markets. Several of these are presented in greater detail in our petrochemical roundup on page 2. 1. Natural gas is still the favorite feed for ethylene crackers, but crude oil sets the energy price floor. Crude oil remains sensitive to global geopolitical influences. 2. Ethylene and propylene are linked to crude oil cost movement. Demand for ethylene and propylene tends to track GDP growth. 3. The supply and pricing of all by-products of ethylene crackers—including aromatics, styrene, butadiene, resins oils—are challenging due to the impact of light cracking. The volatility of crude oil pricing is also a factor. 4. Acetic acid is a key feedstock for vinyl acetate monomer (VAM), and both have been hit hard by a number of production outages across the globe. 5. Supplies of natural feedstocks such as gun rosin and terpenes are relatively balanced to demand, but most are higher priced than a year ago due to higher labor and other costs. Raw Materials Report • Energy markets somewhat volatile due to geopolitics and the weather • Global economic activity stabilizes in 2014; fears of a return to recession are largely eased • Acetic acid and VAM remain challenging due to global production outages ENERGY PRICING TRENDS WTI Brent U.S. Natural Gas While global economic activity has stabilized in 2014, energy prices have done the opposite due to geopolitical tensions in the Middle East, Ukraine and elsewhere, as well as the cold North American winter of 2013-2014.
  2. 2. A CLOSER LOOK GLOBAL RAW MATERIAL REPORT: SEPTEMBER 2014 GEOPOLITICS, LIGHT FEEDSTOCKS, PRODUCTION OUTAGES AGITATE PETROCHEMICAL MARKETS While each of the petrochemical derivatives has its own story to tell, the most often repeated stories at this time are those of tight supplies due to light cracking, geopolitical issues and production outages. ETHYLENE TRENDS Ethylene is produced using various feeds, including naphtha, ethane, propane and butane. Naphtha is the primary feed, however, and sets the global cost floor for ethylene. Producers with the capability of using cheaper feedstocks, such as ethane and/or propane, are able to achieve a higher profit margin. But, overall, high energy and feedstock costs have pushed ethylene costs upward in 2014. During 2014, the industry also has seen a number of planned and unplanned production outages, resulting in reductions in ethylene supplies. These also have contributed to an increase in the price of ethylene in recent months. Looking forward, there is room for improvement in the price of ethylene, but this will depend in all regions, worldwide, on a recovery of production capacity, and price improvement in crude oil and naphtha. PROPYLENE TRENDS Like ethylene, propylene pricing is driven by crude oil and other feedstocks. In 2014, both supply and demand have remained stable and balanced, and so pricing has been less volatile than in the recent past. New on-purpose capacity is expected by 2015, which will help to offset the reduction of propylene availability due to the trend to lighter feeds. PYGAS TRENDS Pygas supply is tight and getting tighter, due to the use of lighter feeds and also due to competition from the gasoline pool. Pygas can be used to produce gasoline, and much of it is diverted to the gasoline pool during periods of high demand. Long-term supply challenges are anticipated. STYRENE TRENDS Styrene is produced using aromatic feedstocks. The increasing use of light feeds has reduced the availability and increased the cost of those feeds. Supplies are particularly tight today and the cost has increased since late 2013 till Mid-Q3, 2014” The market is now stable with slight improvement. BUTADIENE TRENDS Butadiene has been by far the most volatile of petrochemicals in recent years, and 2014 has been no exception. We have seen the shift of a flexible cracker in Korea to light feeds, we have had planned and unplanned production outages, and an Asia start-up has been delayed. Meanwhile, demand is relatively weak, but with some recent increase in Asia. The price is likely to continue to trend upward through the remainder of 2014. The question is whether it will move up slowly, or whether there will be a sharp increase. This will be determined by the pace of demand recovery. METHANOL TRENDS Methanol supply and pricing has been relatively stable due to weak demand and high inventories. Pricing may soften further in the remainder of 2014. ACETIC ACID TRENDS Finally, acetic acid has overtaken even butadiene as the most volatile of chemicals in 2014 due to a series of production outages worldwide. Among the world’s 33 largest producers of acetic acid, no fewer than 14 have had unplanned outages this year. Another 16 have had planned outages. One declared force majeure and two have been on allocation. A total of 28 plants have operated at reduced capacity. Only one plant out of the 33 has not had an outage or supply reduction. As a result, prices have a skyrocketed as much as 30 to 33 percent, which impacts VAM, PVOH and EVA. There is more discussion of this under “Water Base Adhesives” on the following page. Global Response to the Supply Chain H.B. Fuller navigates raw material management and their associated challenges to help our customers succeed. Our Sourcing teams collaborate globally to develop and implement strategic sourcing plans. By working with our suppliers and regularly evaluating both regional feedstocks and global events, we leverage our global supply chain to balance materials across our markets—in accordance with regulatory requirements. This ensures stable supply at the best value to support customers for their regularly planned requirements. H.B. Fuller Sourcing also works closely with our technology group to evaluate both new sources of existing materials and new materials that guide technology development to support innovation and enable sustainability objectives. Find more information by region: hbfuller.com/north-america hbfuller.com/latin-america hbfuller.com/eimea (Europe, India, Middle-East and Africa) hbfuller.com/asia-pacific
  3. 3. A CLOSER LOOK GLOBAL RAW MATERIAL REPORT: SEPTEMBER 2014 SUPPLIES TIGHTER IN SEVERAL KEY RAW MATERIALS MARKETS Supplies of several key petrochemical feedstocks have tightened during 2014. As a result, supplies of several key derivatives used in the adhesives industry have tightened as well. 1. The supply of vinyl acetate monomer (VAM) continues to be very tight in the second half of 2014, as the industry, worldwide, continues to be plagued by a remarkable series of operational problems. Initially, the European market was most affected. Recently, the focus has shifted to North America. 2. Hydrocarbon resins are facing a series of planned maintenance shutdowns, so availability will be reduced just as demand has begun to increase. 3. Ethylene vinyl acetate (EVA) and styrene butadiene styrene (SBS) polymers are experiencing upward pricing pressure due to increases in the cost of various feedstocks. 4. I socyanate (MDI) is in tight supply due to various production outages and resulting sales allocations. 5. Polyether polyols also are in tight supply due to production outages affecting the availability of propylene oxide. Several of these highlights are discussed further below in our Supply Issues Snapshot. Supply Issues Snapshot Adhesives are compounded products, typically containing more than one raw material. Overall adhesive cost trends do not follow any one individual raw material. WATERBASE ADHESIVES Eight of the world’s 31 VAM plants experienced an unplanned outage in 2014. This includes four China plants with outages of a month or more. Two of those plants have been down for more than six months, and remain so at this time. Then, a Russian plant went down in February and will not reopen in 2014, and a Japanese plant closed (on a planned basis) in May, never to reopen again. These events, plus a number of planned maintenance at major global VAM manufacturers in the second half of 2014, will keep VAM supplies tight. HOT MELT ADHESIVES Tackifier resins, including both hydrogenated and non-hydrogenated resins, also are experiencing tight supply as 2014 unfolds. The growth in demand for H2 resins has exceeded GDP at an estimated 6 to 7 percent, and has exceeded the available capacity in the industry. Scheduled maintenance will reduce supply in the second half of the year, and planned new capacity has been delayed. As a result, several key producers are on sales allocation of as much as a 40 percent volume reduction. We anticipate a higher price during the second half of the year in order to secure the product. Non-hydrogenated resins also face challenges in the form of a short supply of C5 feeds, especially in North America. Meanwhile, demand has increased as some users have shifted over from rosin ester to non-hydro H2. C5 feeds are also under pressure due to seasonal high demand for road paving. Maintenance outages also are contributing to sales allocation on the part of some suppliers. A market price increase is anticipated, reflecting the supply/ demand imbalance. Finally (among the tackifiers), high gasoline prices are pulling resin oils into the gasoline pool, reducing their availability for other uses. SBS and EVA Polymers have been impacted by increasing cost of their feedstock. As a result, a price uptrend is expected in SBS and has already occurred in EVA. Globally EVA price is about 30% higher than a year ago. REACTIVES Reactive (two-part) adhesives generally are expected to remain under pressure due to tight supplies of aromatic petrochemicals. Isocyanates (MDI) are most impacted—MDI is on allocation from several suppliers, and there have been several rounds of price increases by key suppliers in the third quarter. Polyether polyols are in tight supply with announced price increases. Key suppliers in North America are sold out, while explosions at a Shell/BASF site in the Netherlands has put propylene oxide feestocks in short supply. The site is expected to be offline for nine months or more. PETROCHEMICAL SUPPLY CHAIN FOR VAM AND DERIVATIVES FUEL CARBON MONOXIDE METHANOL ACETIC ACID VINYL ACETATE (VAM) OXYGEN NATURAL GAS NGLs CRUDE OIL SYNGAS – H2, CO, CO2 ETHYLENE CRACKER NAPHTHA & GAS OIL FUEL PVOH VAE EMULSION LPG REFINERY ETHYLENE Key supply issues in 2014 Vinyl acetate monomer (VAM) is the leading driver of waterbase adhesives, and VAM will remain at high price levels through the remainder of 2014, particularly in North America. This is due to a series of plant shutdowns both in acetic acid production and in VAM production. www.hbfuller.com @hb-fuller @HBFullerGlueTalk @GlueTalk @gluetalk H.B. Fuller Company This report is published by H.B. Fuller based on industry knowledge and opinions, in-house research and publicly available news sources. While we believe it to be accurate when published, no guarantee of accuracy is made. © H.B. Fuller Company, 2014 S RMR 09/2014

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