1. Chem Systems
Instituto Petroquimico Argentino (IPA)
November 14, 2002
Presented by
Mr. Robert J. Bauman
Vice President, Plastics Business Practice
Nexant, Inc./Chem Systems
Instituto Petroquimico Argentino (IPA)
November 14, 2002
Presented by
Mr. Robert J. Bauman
Vice President, Plastics Business Practice
Nexant, Inc./Chem Systems
Global Plastics Industry
Outlook
Global Plastics Industry
Outlook
4. All of the important issues begin with
the letter “C”
• Cycles
• ‘Conomy
• C=C (ethylene)
• C=C=C (propylene)
• Chlorine/Caustic
• Chem Systems/Nexant forecast
• China and the Middle East
• Consolidation
• Caveat (emptor)
5. U.S. PETROCHEMCIAL INDUSTRY
PROFITABILITY
(cash cost margins - constant dollars - cycle case)
-50
50
150
250
350
450
1975 1980 1985 1990 1995 2000 2005 2010
INDEX,1982=100
10 YEARS
PEAK-
TO-PEAK
7 YEARS
PEAK-
TO-PEAK
9 YEARS
PEAK-
TO-PEAK
Cycles in commodities are about 8 years long
peak-to-peak – but this one will be 10 Years long
6. U. S. polymer industry profitability was at a 20
year low in 2001
0
20
40
60
80
100
120
140
1988 1990 1992 1994 1996 1998 2000
INDEX-Q11984=100
PROFITABILITY INDEX - POLYMERS
(weighted average cash margin - constant dollars)
PVC had the worst performance with PS not too far behind
For many companies, 2001
was the worst in their history
3Q01 recovery stopped by 9/11
7. 300
600
900
1,200
1,500
1986 1988 1990 1992 1994 1996 1998 2000
PRICES,CIFHONGKONG
USD/MT
LDPE LLDPE HDPE
Asian polyethylene prices appear to be in
random disorder… … …
8. 300
600
900
1,200
1,500
1986 1987 1988 1989 1991 1992 1993 1994 1996 1997 1998 1999 2001
LDPE LLDPE HDPE
DEMAND AND
INVENTORY
BUILDUP
(SHORTAGE)
CHINA STOPS
BUYING
FLY-UP
RECESSION
PHILLIPS HDPE
EXPLOSION
GULF WAR
MULTIPLE SUPPLY
PROBLEMS¹
END OF SUPPLY
PROBLEMS CHINA SITUATION
CHINA REDUCES
PURCHASES
ASIAN
CRISES
ASIAN RECOVERY
SURGE
RECESSION
SURGE
CHINA
RESUMES
PURCHASES
¹ 15 CRACKERS/30 POLYOLEFIN PLANTS DOWN
Until global events and China are taken into
consideration
PRICES,CIFHONGKONGUSD/MT
SEPTEMBER 11
BOTTOM
OF CYCLE
9. ¹ 15 CRACKERS/30 POLYOLEFINS PLANTS
Global events and China also impact polypropylene prices
300
600
900
1,200
1,500
1986 1987 1988 1990 1991 1992 1994 1995 1996 1998 1999 2000 2002
USD/MT
CFR HONG KONG
CHINA
STOPS
BUYING
FLY-UP
(TIGHT SUPPLY)
MULTIPLE
SUPPLY
PROBLEMS¹
CHINA REDUCES PURCHASES
(RECESSION)
SURGE
(GULF WAR)
CHINA
RESUMES
PURCHASES
SURGE
END OF SUPPLY
PROBLEMS
ASIAN
CRISIS
RECOVERY
SE
PT
11
10. PVC prices follow the same event-driven pattern
PVC PRICE TRENDS
0
200
400
600
800
1,000
1,200
1,400
1986 1988 1990 1992 1994 1996 1998 2000 2002
USDollars/Ton
CFR Hong Kong US Market Price
11. Polystyrene prices also follow the same event-
driven pattern
POLYSTYRENE PRICE TRENDS
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
1986 1988 1990 1992 1994 1996 1998 2000 2002
USDollars/Ton
CFR Hong Kong US Market Price
12. ‘Conomy: U.S. GDP growth in 4Q/01 and 1Q/02 is
misleading due to government spending
-2
0
2
4
6
8
10
1Q00 3Q00 1Q01 3Q01 Q102 Q302 1Q03 3Q03
HISTORY FORECAST
GDP, % CHANGE, REAL
2002 economic recovery is slower than many expected
13. C=C: There are a limited number of new
ethylene expansions
• Most of the new crackers will be built in the Middle
East and China
• Essentially no new crackers planned for Japan,
Korea, the United States or Western Europe
• Most new crackers are based on ethane
• Most of the new crackers will be built by oil
companies in joint ventures with government entities
• Ethylene is not readily traded
There will not be enough crackers to meet projected demand
14. C=C=C: propylene will be very tight post-2005
• Most new crackers being built are ethane based
• Most refineries have already maximized readily
available propylene (capital investment
necessary for additional propylene)
• Propane dehydro only viable with low-cost
propane from a government joint venture (e.g.,
Malaysia, Saudi Arabia)
• New technologies (e.g., MTO) still not
economically viable
15. Chlorine/Caustic outlook
• Chlorine is tight with caustic starting to improve
due to numerous plant shutdowns
• Environmental concerns will limit new capacity
• EDC and VCM will become very tight first
• PVC will follow but with even higher margins
• Economic growth will be the driver
16. China will be an important factor in the recovery in
2003
• Purchasing restarts in fourth quarter
– Inventory depleted (estimated six month
impact ends in October)
– 2008 Olympics spending began last month
17. Spending for the 2008 Olympics began last month
– $13+ billion revamping of water distribution systems
in major cities: 100-150 KT annual increase in PVC
(main), HDPE and PP pipe through 2008
– Reforestation of areas to the north of Beijing to
Mongolia (red sand sandstorms) will require
irrigation systems (PVC and HDPE)
– Major construction of the Olympic site in Beijing
– Promotional items and souvenirs (mainly plastic)
18. China will be an important factor in the recovery in
2003 (cont’d)
• Double digit plastics demand growth expected in
2003
– Economic growth at 7-8 percent
– Low per capita consumption
– Impact of WTO already occurring (e.g., automotive
sales)
– Capacity growth will not meet demand growth
(four new crackers plus expansions)
Polymer imports are projected to double by 2010
19. Government action impacts plastics demand in
China
• Government action affects plastic demand – quickly!
– Ban on corrugated packaging of carbonated
beverages: 50 KT increase in LDPE shrink film in
2001
– Ban on soft wood pallets: 20 KT increase in HDPE
tote bins (could be much more) in 2002
– Ban on the use of wood in window and door
frames: 35 KT increase in PVC in 2002
– Changes in residential and commercial heating
piping design: greater use of plastic pipe (HDPE,
PP and PVC)
20. Petrochemical investment in the Middle East is
driven by low cost feedstock (ethane/propane)
ETHYLENE CAPACITY GROWTH IN THE MIDDLE EAST
(thousand tons per year)
+1,100
+640
+1 258
+1 600
8 800
Borouge 600kt
Q-Chem 500kt
6thOlefins 520kt
Petkim (exp) 120kt
Jubail United1000kt
Qapco(exp) 195kt
Arak (exp) 63kt
7 thOlefins 1,100kt
Yanpet(exp) 500kt
Under Construction/
Firm Plans
Speculative
+2 970
10 th Olefins 1320kt
Equate II 850kt
Yanbu Cracker 800kt
1100kt
Q-Chem II 1000kt
Borouge II 800kt
+2 900
8 th Olefins 1000kt
CV Cracker 1000kt
EGPC Cracker 1000kt
+3 000
5,000
10,000
15,000
20,000
25,000
1998 2000 2002 2004 2006 2008 2010 2012
23 620
CV Cracker 21200kt
Equate II (exp) 150kt
+1 350
+640
+1 258
+1 600
8 800
Borouge 600kt
Q-Chem 500kt
6thOlefins 520kt
Petkim (exp) 120kt
Jubail United1000kt
Qapco(exp) 195kt
Arak (exp) 63kt
thOlefins 1,100kt
Yanpet(exp) 500kt
Under Construction/
Firm Plans
Speculative
1320kt
Equate II 850kt
Yanbu Cracker 800kt
9 th Olefins 1100kt
Q-Chem II 1000kt
Borouge II 800kt
8 1000kt
CV Cracker 1000kt
1000kt
23 620
CV Cracker 21200kt
150kt
Twelve crackers are currently planned (11+ MM tons C=C)
21. The largest use for polyethylene in the Middle
East will be… … … … … … ..
To make polyethylene bags
To put polyethylene in
To ship polyethylene out
23. 2002 is a year of transition that will last about 15
months
• The worst is over
– Bottom of the petrochemical cycle 4Q01
– Economic recovery occurring 2002/2003
• Asian economies and demand already recovering
– China to start buying more in the 4th quarter
• Next six months ends transition in North America
– Weaker fourth quarter sales
– New capacity starts up (HDPE, polypropylene)
– Weakness could extend into the 2nd quarter
24. Latin America has had a particularly poor year in
2002
• Argentina crisis has reduced demand and
eliminated credit
• Weak demand in Brazil coupled with political
uncertainty and the Argentine situation has
resulted in extremely low prices and margins
• Colombia and Venezuela in same situation
(export price pressure)
• Chile and selected other countries better
25. The global plastics business is expected to steadily
improve in 2003
• Demand will continue to be strong in Asia
• Business performance will be more positive in
North America beginning in the second half of
the year
• Europe will follow this trend as well
• Latin American demand will mostly be positive
led by Brazil and Mexico in the second half 2003
26. The global plastics business is expected to steadily
improve in 2003
• Capacity utilization will improve but there will still be
overcapacity
• Lower oil prices resulting in lower feedstock prices
• Margins will improve but will not reach reinvestment
economics
27. The business in 2004 will be particularly strong
• Continued demand growth; little new capacity
• Global operating rates could approach 90
percent by year end for PVC and possibly PS
• Reinvestment economics achieved by year-end
• Debottlenecking activity begins (12 month
period)
• Companies also consider/plan major new
expansions – but location will be an issue
With inventory building possibly beginning in the fourth
quarter, prices will start their accelerated cyclical climb
28. The fly up starts/continues in 2005
• The fly up will likely last through most of 2005
– Inventory building continues through most of the
year
– Debottlenecking of olefins and polyolefins comes
first (about 12 months from inception)
– Prices could rise above the 1994/1995 peak of $1200
per ton
– By year-end some of the debottlenecked capacity
comes on stream, inventory building stops and
prices could start their decline
If the fly up starts in 2005, prices will not decline until 2006
29. Global polyethylene demand is projected to
increase from 54 to 87 tons (2002-2010)
10,000
30,000
50,000
70,000
90,000
1990 1995 2000 2005 2010
THOUSANDMETRICTONS
LDPE LLDPE HDPE
Demand growth is relatively steady: inventory is the price driver!
30. Global polypropylene demand is projected to
increase from 29 70 55 MM tons (2002-2010)
GLOBAL TOTAL POLYPROPYLENE DEMAND GROWTH
0
20,000
40,000
60,000
1990 1995 2000 2005 2010
THOUSAND
METRICTONS
N. AMERICA EUROPE ASIA PACIFIC L. AMERICA MEA
31. Global PVC growth is projected to increase
from 24 to 36 MM tons (2002-2010)
DEMAND BY REGION, 2001
(percent)
NORTH
AMERICA
26%
LATIN
AMERICA
6%
W.
EUROPE
22%
ASIA
31%
JAPAN
7%
E. EUROPE
3% TOTAL DEMAND = 26.2 MILLION METRIC TONS
GROWTH RATE BY REGION, 2000 TO 2005,
(percent)
0
1
2
3
4
5
6
7
8
NO
RTH
AM
ERICA
LATIN
AM
ERICAW
.EUROPEE.EUROPE
M
IDDLE
EAST/AFRICA
JAPAN
O
THER
ASIAG
LO
BAL
AVERAG
E
PERCENTGROWTH
GLOBAL AVERAGE
4.1%
MIDDLE
EAST/AFRICA
5%
PET will have the highest growth rate with PS a little lower than PVC
32. Supply side dynamics
• Some polyethylene and polypropylene
expansions proceeding short term but will not
be enough to meet projected demand growth
• Essentially no new capacity for polystyrene
• Very limited new capacity for PVC
• PET resin capacity still available from fiber
operations and debottlenecking
These differences will affect the timing of tight supply
33. Tightness will vary by polymer
3Q05PET
1Q05Polystyrene
4Q04PVC
4Q05Polypropylene
1Q05Polyethylene
Tight supply
(90% operating rate)
Polymer
The key question is how much capacity will be built
34. The next polystyrene and PVC fly up is forecast for
late 2004
50
55
60
65
70
75
80
85
90
95
100
2000
2002
2004
2006
2008
2010
Operating
rates, %
PVC
35. The next global fly up in polyolefins is forecast for
early 2005
78
82
86
90
94
1992 1996 2000 2004 2008
OPERATINGRATE,%
POLYETHYLENE POLYPROPYLENE
2012
?
Question : Will the industry revert to its historical
practice of overbuilding?
37. Consolidation in polyethylene and PET has
been significant
EASTMAN
29%
KoSa
18%
M & G
13%
NAN YA
15%
WELLMAN
15%
ALL
OTHER (2)
10%
PET BOTTLE GRADE
2002
6.4 BILLION POUNDS/YR – 7 PRODUCERS
5 PRODUCERS HAVE 90% OF CAPACITY
POLYETHYLENE
2002
42.7 BILLION POUNDS/YR - 14 PRODUCERS
5 PRODUCERS HAVE 72% OF CAPACITY
DOW
24%
EQUISTAR
15%
EXXON MOBIL 21%
CHEVRON
PHILLIPS 12%
ALL OTHER (8) 15%
SOLVAY 5%
NOVA 8%
38. Consolidation has also occurred in PVC and
polystyrene
ATOFINA
17%
DOW
19%
CHEVRON
PHILLIPS
12%
BASF
11%
ALL
OTHER (5)
13%
NOVA
28%
POLYSTYRENE
2002
5 PRODUCERS HAVE 87% OF CAPACITY
PVC
2002
5 PRODUCERS HAVE 88% OF CAPACITY
SHINTECH
22%
ALL
OTHER (6)
12%
BORDEN
9%
FORMOSA
PLASTICS
16%
GEORGIA
GULF
14%
OXYVINYLS
27%
Even with this dramatic consolidation, companies are not profitable
39. Consolidation has also been significant for these
products on a global basis (e.g., polyethylene)
• Basell (Elenac and Targor: BASF and Hoechst and
Montell and Shell)
• Borealis (Borealis and PCD)
• BP (Amoco and ARCO and BP and Solvay)
• Chevron Phillips (Chevron and Phillips)
• Dow (Dow and Union Carbide)
• Equistar (Lyondell and Millennium and Occidental)
• ExxonMobil (Exxon and Mobil)
Nineteen companies have been “condensed” to seven!
40. In the last fly up all of the 19
individual companies built one or
two crackers and/or polyolefins
plants. The 7 consolidated
companies will not build as many in
the next fly up
41. The next cycle should outperform history
• Consolidation will reduce the number of
expansions by the major producers
• Many other chemical companies have had to
refinance debt in 2001 that will limit new
capital for an expansion (debt reduction will
prevail)
• The economic downturn that has followed the
last three fly-ups has already occurred. The
post-fly up period will see positive demand
growth
42. The next cycle should outperform history (cont’d)
• No new crackers planned in many countries
(Japan, South Korea, United Sates, Western
Europe): 3 – 4 year lead time
• New Middle East capacity will not be enough to
meet forecast demand growth and many
projects are delayed
• Energy prices are projected remain low in the
post-2005 period (~$20/bbl post-2004 base case)
43. As a result, profitability in
the next cycle should be
much stronger than history
making petrochemicals an
attractive business
FINALLY!
44. The post-2005 period could be more balanced
Historic oversupply
Projected post-2005 supply
Projected post-2005
demand
Historic demand (recession)
The degree of
oversupply
could be much
smaller than
history
Historic
supply/demand delta
ILLUSTRATIVE
45. We will all be smiling in 2005
But hopefully will not reinvest all of the profits in new capacity
Profits!
47. A short term spike in prices is likely in the war
scenario
• Oil prices will surely increase
• Feedstock prices are likely to follow
• Inventory building begins simultaneously
• In the Gulf War, Asian polyolefins prices increased
from $650 to $1,100 per ton (1988 peak was $1,400)
for a three month period – even though no
polyolefins facility was damaged or even stopped
production
48. A short term spike in prices is likely in the war
scenario (continued)
• Prices then dropped back to exactly where they
were before the war
• The same situation is likely even though it is a
slightly different situation (outward versus
inward military focus)
• Oil supplies are not expected to be adversely
affected
The degree of global inventory building will determine the
price peak
49.
50. But We Can Always Hope for a
Peaceful Solution!
