Steve-Lewandowski-Big-Changes-Ahead-for-Ethylene-Implications-for-Asia-IHS.pdf

ihsmarkit.com
Asia Chemical Conference
© 2016 IHS Markit
Steve Lewandowski, Vice President, +1281 752 3230,
Steve.Lewandowski@ihsmarkit.com
Ethylene - Global
November 2016

© 2016 IHS Markit
Ethylene Market: Key Issues
• Ethylene capacity additions globally outpace
demand growth in updated forecast (2016/18);
but, a demand surge or supply constraint (project
start up delays) could leave markets short.
• “Unconventional” sources (CTO, MTO) will add
more capacity; steam crackers fed by: ethane,
LPG, and naphtha, will continue to drive
competitive economics.
• Naphtha crackers required to balance demand
swings; weak propylene markets (increasing cash
cost) will support higher ethylene prices to keep
these assets in the black.
• North America ethylene integrated margins are
lower (still profitable) despite new capacity coming
on stream.
Asia Chemical Conference / November 2016
2

© 2016 IHS Markit
Capacity, Demand, and Operating Rates
3

© 2016 IHS Markit
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
0
50
100
150
200
250
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
%
Non
Steam
Cracker
N. America S. America CIS & Baltics
W. Europe C. Europe SE Asia
NE Asia Indian Subc. Middle East
Africa Total Capacity Percent from Non Steam Cracker
16-pt - IHS clustered column - 2016
© 2016 IHS
Source: IHS
World: Ethylene Production by Region
4
Million
Metric
Tons
Global Ethylene Supply
Four Main production regions. Non-Traditional Sources on the rise

© 2016 IHS Markit
Ethylene Capacity Additions Delayed and Reduced
Capacity Does Not Equal Supply, inferring margins via these trends is risky.
5
-1.0
1.0
3.0
5.0
7.0
9.0
11.0
13.0
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
North America West Europe
Middle East Asia
Others Annual Demand Increase
Global Ethylene Capacity Additions vs. Demand
© 2016 IHS
Million
Metric
Tons
Source: IHS

© 2016 IHS Markit
Ethylene Supply by Feed Type
Volumes by type Up Across the Board driven by ethane and other (CTO/MTO)
6
Ethane
36.3%
LPG
14.8%
Other
6.4%
Naphtha
42.6%
2016
© 2016 IHS
Notes: Production = 146,093 Thousand Metric Tons
Source: IHS
Ethane
40.1%
LPG
13.3%
Other
8.6%
Naphtha
38.0%
2021
© 2016 IHS
Notes: Production = 174,663 Thousand Metric Tons
Source: IHS
KTA, ethylene 2016 2021 %AAGR
Naphtha 62,182 66,289 1.3%
Ethane 52,977 69,959 5.7%
LPG 21,610 23,311 1.5%
Other 9,325 15,104 10.1%

© 2016 IHS Markit
Global Ethylene NAMEPLATE Capacity Operating Rates
2015 Peak Not Seen Since Early 2000’s, Outlook Stronger, effective operating rates are high – are they
sustainable at this level? No spare capacity as seen pre 2013 to absorb project delays.
7
77
79
81
83
85
87
89
91
93
95
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Global Op Rate Global Op Rate (Steam Cracker)
NEA Op Rate WEP Op Rate
NAM Op Rate
Global Ethylene Operating Rates
© 2016 IHS
Percent
Source: IHS

© 2016 IHS Markit
Increasing Complexity In The Ethylene Value Chain
Emerging changes in ethylene supply drivers and demand drivers make modeling the ethylene
supply/demand balance more complex
8
Ethylene
Coal to MEG
(skipping EO)
Coal to VCM (skipping
EDC)
Demand Shocks (GDP related) or
Demand Shifts (product
substitution related)
Polyolefins Recycle,
PE/PVC/PET
Co-product impact: On purpose
propylene via PDH, metathesis, coal,
methanol
Coal to
olefins
Gas to
methanol
Supply/Demand from
traditional feeds (NGL’s and
Naphtha): feed switches and
capacity / production impact
Catalytic from Methane:
add-on versus new world
scale
Methanol to
olefins

© 2016 IHS Markit
Yields and Recycles
So why can’t I just switch from Heavy Naphtha to lighter feeds?
9
0%
50%
100%
150%
200%
250%
300%
Propane
Yields and Recycles(Compared to Full Range Naphtha Feed @ 100%)
Percent
© 2016 IHS
Source: IHS

© 2016 IHS Markit
China Cracker Feed Slate
19 MMTA of total ethylene production from crackers ~90% naphtha plus
10
0%
20%
40%
60%
80%
100%
2016 2017 2018
Ethane Propane Butane Naphtha Gas Oil
China Cracker Feed Slate
© 2016 IHS
Percent
Source: IHS
• 15% swap to propane like WEP, with a C3 recovery limit
• Could be a loss of up to 1.5 MMTA of ethylene production capability
• Or about 1% of global nameplate capacity reduction.

© 2016 IHS Markit
0
100
200
300
400
500
600
700
800
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Int CTO Margins CTO Margins
Integrated & Non-Integrated Margins
© 2016 IHS
Dollars
Per
Metric
Ton
Source: IHS
Coal to Olefins / Poly-olefins Outlook on Margins
Positive margins for all of the coal to olefins units
11

© 2016 IHS Markit
Merchant Methanol to olefins and derivatives outlook on Margins
Will these assets run with negative margins? Product slate for ethylene less PE driven more MEG/vinyls driven.
Propylene slate better aligned with global average
12
-200
-100
0
100
200
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Int MTO Margins MTO Margins
Integrated & Non-Integrated Margins
© 2016 IHS
Dollars
Per
Metric
Ton
Source: IHS

© 2016 IHS Markit
MTO/CTO Ethylene Derivatives
CTO is PE based, MTO more non-PE builds (merchant linked to EO/EB/PE)
13
Merchant
20%
EDC
10%
Ethylene
Oxide
27%
HDPE
43%
MTO-Ethylene Derivative
© 2016 IHS
Source: IHS
EDC
4%
HDPE
96%
CTO- Ethylene Derivatives
© 2016 IHS
Source: IHS

© 2016 IHS Markit
Back to Ethylene
14

© 2016 IHS Markit
Propylene Market View
Propylene to Ethylene Price Ratios, big impact on cash costs – Asia and West Europe below recent history,
North America may have bottomed out? But NAM an ethylene story.
15
0.5
0.7
0.9
1.1
1.3
1.5
0.5
0.7
0.9
1.1
1.3
1.5
00 03 06 09 12 15 18 21
Ratio
Southeast Asia North America West Europe
Propylene to Ethylene Price Ratio
Source: IHS © 2016 IHS
Ratio
Ratio

© 2016 IHS Markit
China PE Recycled Demand
Continual growth over last 15 years with higher virgin PE prices
16
-200
200
600
1,000
1,400
1,800
0.0
1.0
2.0
3.0
4.0
5.0
2000 2002 2004 2006 2008 2010 2012 2014
PE Recycled NEA HDPE Spot, BM
Recycled Polyethylene
Million
Metric
Tons
US
Dollar
Per
Metric

© 2016 IHS Markit
VCM swing for EDC/Ethylene versus Acetylene/Coal
China, can swing ethylene demand and pressure ethylene operating rates
17
0
10,000
20,000
30,000
40,000
2010 2015 2020
EDC Production EDC Surplus Capacity
© 2016 IHS
Source: IHS
VCM From EDC (Global)
Thousand
Metric
Tons
0
10,000
20,000
30,000
40,000
2010 2015 2020
Coal-based Surplus Capacity Coal-based Production
VCM From Coal (China)
© 2016 IHS
Thousand
Metric
Tons
Source: IHS
MMTA 2010 2015 2020 2010 2015 2020
CAPS Cont. C2= 16.8 17.1 17.5 11.4 10.3 10.7
Ethylene
demand swing
+3.2 + 2.9 + 1.9 (7.3) (4.0) (2.6)

© 2016 IHS Markit
Feedstocks Pricing
Ethylene: Costs, Pricing, Margins
18

© 2016 IHS Markit
World Cash Costs
US loses some cost advantage but maintains about $400/ton
19
0
200
400
600
800
1000
1200
1400
U.S. Ethane US GTO Western
Canada
China CTO China MTO West
Europe
Naptha
Northeast
Asia Naptha
2011 2016 2021 SAR @1.75/Mmbtu
World Ethylene Cast Cost Comparison
US
Dollar
Per
Metric

© 2016 IHS Markit
Regional Ethylene Cash Costs
Energy drives the longer term cost structure as does ethane demand growth
20
0
220
441
661
882
1,102
1,323
0
10
20
30
40
50
60
2000 2003 2006 2009 2012 2015 2018 2021
Global Monthly Feedstock Cash Margins
U.S. Ethane WEP Naphtha SEA Naphtha
Annual Cash Costs
Cents
Per
Pound
Dollars
Per
Metric
Ton

© 2016 IHS Markit
Regional Ethylene Prices
Average Acquisition in US moves up with higher cash cost on ethane feed
21
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
00 03 06 09 12 15 18 21
US Average Acquisition Price WEP Contract Price SEA CFR Spot Price
Global Annual Ethylene Prices
Dollars
Per
Metric
Ton

© 2016 IHS Markit
Ethylene Market View
US Ethylene Spot Affordability (using spot/export derivative pricing)
…….Room to be a bit more Bullish for ethylene pricing.
22
58.1
79.4
56.4
48.7 48.4
58.6 59.1
46.2
52.1
79.5
54.5
42.4 43.7 42.7
76.9
62.5
0
10
20
30
40
50
60
70
80
MEG EDC Styrene LLDPE HDPE LDPE PVC VCM
2010 2020
U.S. Spot Ethylene January 2010 U.S. Spot Ethylene January 2020
US Net Trans Ethylene January 2010 US Trans Ethylene January 2020
US Ethylene Spot Affordability
© 2016 IHS
Cents
per
Pound
Source: IHS

© 2016 IHS Markit
Regional Ethylene Cash Margins
Asia margins driving capacity additions
-220
0
220
441
661
882
1,102
1,323
-10
0
10
20
30
40
50
60
2000 2003 2006 2009 2012 2015 2018 2021
Global Monthly Feedstock Cash Margins
U.S. Ethane WEP Naphtha SEA Naphtha
Annual Margins
Cents
Per
Pound
Dollars
Per
Metric
Ton
23
Another Wave in
the works?
Strong Margins
Encouraged Builds
Weak Margins
stalled builds

© 2016 IHS Markit
HDPE Integrated Margins -similar story
Integrated Margins to PE off peaks. Asia still strong versus recent history.
-400
-200
0
200
400
600
800
1,000
1,200
1,400
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
US Ethane - HDPE WEP Naphtha - HDPE SEA Naphtha - HDPE
Integrated HDPE Margins
© 2016 IHS
Dollars
Per
Metric
Ton
Source: IHS
24

© 2016 IHS Markit
Ethylene Equivalent Trade Flow
25
2011
2016
2021
*Others: Africa, Indian Sub., CIS & Baltic, Central Europe
North America
South America
West Europe
Middle East
Northeast Asia
Southeast Asia
Others*
5,228
6,220
13,281
-2,858 -2,583
-3,803
-384
307
-1,305
13,953
17,952
19,606 -8,321
-10,575
-14,522
-412 -953
-1,931
-7,382
-10,455
-11,446

© 2016 IHS Markit
North America Ethylene Capacity Growth – (-000- Metric Tons)
Firm through 2021/22, Shell Monaca, PA was last to FID
27
Company Location Total Growth
ChevronPhillips Cedar Bayou, TX 1,500
Dow Freeport, TX 1,500
Dow Plaquemine, LA 250
Equistar Various sites 401
ExxonMobil Baytown, TX 1,500
Flint Hills Port Arthur, TX 50
Formosa Point Comfort, TX 1,150
Indorama Lake Charles,LA 363
Lotte/Axiall Lake Charles, LA 1,000
Oxy/Mexichem Ingleside, TX 550
Shell Monaca, PA 1,500
Shin-Etsu Plaquemine, LA 500
Sasol Lake Charles, LA 1,550
Westlake KY and LA sites 154
Williams Geismar, LA 129
Braskem Idesa Mexico 1,000
Total Additions 13,097

© 2016 IHS Markit
Ramp up Timing
Lower nameplate operating rates are skewed by potential ramp up issues on new
assets to come on line. Effective operating rates will be high.
Max Rates
Min Rates
What is the Duration of Ramp up?
At time = 0, Capacity
is in our tables at 100%.
28

© 2016 IHS Markit
US – Capacity Integration
Do we have an imbalance?
-4,000
-2,000
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Original US Net Feed Modified US Net Feed
US Derivative Cumulative Capacity Change US Ethylene Cumulative Capacity Change
Change in Ethylene Capacity Vs. Capacity to Consume
© 2016 IHS
Million
Metric
Tons
Source: IHS
29
Notes: Post 2015 includes 1600kta demand creep for PE and 300kta of
export monomer

© 2016 IHS Markit
Ethylene Market
Key Take Aways • Ethylene capacity globally we come up
short on additions in 2019-21.
• Ethylene capacity US wave will have its
challenge from the production side.
Derivatives projects should be available
first and ready to consume ethylene once
it becomes available.
• Stress on global Ethylene as supply
could be challenged via feed switching and
MTO negative economics. Demand up with
more virgin resin demand and coal
chemistry challenges. Nameplate capacity
operating rates remain at elevated levels.
• Global Margins remain strong ethylene
integrated margins remain high with a
question on what does it take to encourage
the next Asian capacity wave?
30

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