ALTINTEL TERMINAL (ARKEM GROUP) - ISTANBUL

GLOBAL OUTLOOK

2014 E M R E A Y H A N

D I R E C T O R

F I N A N C E A N D A D M I N I S T R A T I O N

1 5 M A Y 2 0 1 4

HEADLINES

• ECONOMIC OUTLOOK: IS CRISIS OVER?

• CURRENT TRENDS ON CHEMICAL INDUSTRY AND INTERNATIONAL TRADE OF CHEMICALS

• STRATEGIES & TOOLS FOR PRODUCERS AND DISTRIBUTORS TO COPE WITH THE NEW ECONOMIC ENVIRONMENT

2

3

2008

An era of bank failures, a credit

crunch, private defaults and massive

layoffs

The worst the world has seen since the Great

Depression of the 1930s

The regulatory framework did not

keep pace with financial innovation,

such as the increasing importance of

the shadow banking system,

derivatives and off-balance sheet

financing.

Prior to the crisis, financial

institutions became highly

leveraged, increasing their appetite

for risky investments and reducing

their resilience in case of losses.

IMF estimated that large U.S. and

European banks lost more than

$1 trillion on toxic assets and from

bad loans from January 2007 to

September 2009.

4

Three stages of the crisis

- GDP

- Budget deficits and public debts vs. GDPs

- Current account imbalances

- Inflation

- Consumer confidence

- Commodities and international trade

5

Main Indicators

6

GDP Growth

7

Budget deficits seem to be on the path to remedy...

Source: The Telegraph

8

But, burden on the shoulders of taxpayers to grow

9

Risk of Deflation

Source: www.economistsview.com

10

Customer confidence Q2-2012 Q2-2013

11

Current account balances continue to trend down

12

Commodities

0

100

200

300

400

500

600

0

100

200

300

400

500

600

1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

Energy

Metals

Food

Agri

Source: Thompson Reuters DataStream & HSBC

Index, 1990s average = 100

IMF All commodity price index; Real base = June 2012, deflated by US CPI

13

2014 seems like...

- Global recovery will be

supported mostly by advanced

economies

- Consumer confidence returning

to pre-financial crisis levels, at

its highest since the first quarter

of 2007(Nielsen)

- Emerging market economies are

now much larger and more

integrated into global trade and

financial markets

- Still fragile climate due to still

high indebtedness and low

inflation

- The exposure of advanced

economies to emerging market

economies has increased;

therefore policymakers of

advance economies should

closely monitor growth in

emerging markets and be

prepared to mitigate any adverse

movement

GLOBALLY

14

2014 seems like...

The euro area has finally emerged from

recession and Advanced European

economies are expected to resume

growth in 2014.

However, Deflation, high unemployment

(Over 23 million EU workers have

become unemployed), weak private and

public balance sheets, contracting credit,

and a large debt burden are still on the

agenda of the decision makers.

New austerity principles relying not on

tax base but also financial stimulus: New

opportunuties for business and an

improving economy in the Eurozone

Fiscal rules that treated mostly symptoms

(budget deficits) not causes (a deficient

structure and crippled banks). This has

led many to call for additional regulation

of the banking sector across not only

Europe, but the entire world.

Stringer measures in the banking system Eligibility criteria for the banks and their

clientele will become much higher:

Harder to finance

15

2014 seems like...

Improving economic indicators including

the strengthening of the U.S.' property

market Quantitative Easing ?

A reduction in the U.S.-China current

account balance

Latin American economies are expected

to experience a modest growth, motivated

by the recovery in the advanced

economies but hindered by fiscal and

financial bottlenecks and impact of lower

commodity prices.

U.S. consumer sentiment indicates

optimism about the economic outlook

TTIP : Transatlantic Trade and

Investment Partnership between USA and

EU

- CIS Economies are vulnerable due to the political tension between Russia and

Ukraine. Growth is expected at a slower pace due to the low commodity prices and

anticipated sanctions against Russia, which could be partly offset by still strong

domestic demands of these economies.

- MENA: A stronger recovery in advanced economies could keep oil and gas prices

high, benefiting both the oil and gas exporters, however continued political

transitions and conflict, weak confidence, high unemployment, low competitiveness,

and large public deficits will continue to pull the pace of growth back. For the oil-

importing MENA countries, recovery seems to be even less visible.

- Asia: Steady Recovery thanks to the solid domestic demand and growth in exports to

US and Euro-area.

- The wave of reforms in China

- Downgrade of growth rates in some of the large emerging market economies (Brazil,

Russia, Turkey, S. Africa) due to domestic policy weaknesses, tighter domestic and

external financial conditions.

16

2014 seems like...

17

Yuan’s influence grows in international trade

JPY (1.94%)

EUR (7.87%)

CNY (1.89%)

USD (84.96%)

Other (3.34%)

JPY (1.36%)

EUR (6.64%)

CNY (8.66%)

USD (81.08%)

Other (2.26%)

Source: SWIFT Watch & HSBC

Jan 2012 Oct 2013

- Capacity rationalizations and industry consolidations/spinoffs have significantly

changed market dynamics. (e.g. CPC, Dow, BP, Ineos, BASF)

- The outlooks for olefins and aromatics show that regional concerns will shape

petrochemical markets in 2014.

- Due to competitive advantages from shale gas, a stronger growth is expected in North

America, together with the newly established investments in chemicals production

amounting up to nearly USD 100 bn. Total shipments are expected to exceed $1

trillion in 2018, up from $789 billion in 2013, (ACC )

- The increased competition from Asia as well as the low-cost production environment

in the United States will continue to impact the growth prospects for many European

chemical companies.

- Asia will continue to be the driver for demand growth. China’s growth is expected on

a slower pace, but it will still play a considerable role in the capitalization of new

product lines, technologies.

18

Chemicals outlook

19

Asia is driving the growth in the global chemical

output

Source: ACC

0

1.000

2.000

3.000

4.000

5.000

6.000

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Asia-Pacific

Western Europe

North America

Latin America

C&E Europe

Africa and ME

Total

Global trade

20

Europe is still the largest chemicals trade

partner for the rest of the world

Source: WTO

0

10

20

30

40

50

60

2000 2012 2000 2012 2000 2012 2000 2012 2000 2012 2000 2012 2000 2012

EU Extra EU USA China Switzerland Japan Korea

Imports

Exports

- EU is the largest importer and exporter of chemicals. However, the EU chemicals industry

has been under pressure since the start of the financial crisis in 2008, and then in European

sovereign debt crisis in 2012. Now it is less competitive overall compared to 2003 because

of the hits from both demand and supply sides.

- Excess capacity emerges as a problem as other countries/regions such as CIS, West Africa,

Middle East concentrate their efforts to build up their own chemicals industry, with the help

of their own crude/natural gas supplies.

- Europe is squeezed between feedstock-advantaged regions, including the Middle East and,

now, the U.S.

- Europe-based players also face substantial cost challenges that are not feedstock related.

- Energy costs

- Maintenance

- Logistics / International transport

21

But...

22

Chemical distribution vs. consumption

Source: BCG

23

IMPACT OF GLOBAL FINANCIAL CRISIS

Source: BCG

24

Returns on capital

Source: BCG

- More emphasis on reach to feedstocks / coping with resource contraints / efficient

use of resources

- Emerging markets and the agrochemical and fertilizer subsector (along with other

food-production-related subsectors) will likely remain key growth drivers, given

macroeconomic trends and customer-industry dynamics.

- The sources of demand will shift even further, with nearly 50 percent of worldwide

demand coming from asia by 2020.

- Favorable credit and financing, but stricter regulations for lending

- Private equity firms are able to submit big bids for promising assets

- A positive sentiment for chemicals M&A activities

- But also spinoffs due to efficiency, competency and cost concerns

25

Trends that will shape the market

Source: BCG

26

Factors effecting decisions of producers

Cost reduction Complexity Competition Market volatility

Decision to

outsource the

distribution

Decision to limit the number of distributors

Global partnerships with selected third party distributors

Value-added services

Expertise

Specialization

Access to emerging markets

Cri

teri

a

Strong local+global

capabilities

Financial capability to

invest in market

development, technical

expertise and IT

27

Factors effecting decisions of customers

Cost reduction Market volatility Scale Access to suppliers

Outsourcing the procurement process to third party distributors

Partnerships with international or mid-size regional distributors

Wider product portfolios

Price

Flexibility (log./fin.)

Technical support Cri

teri

a

Inventory outsourcing

Global network for sourcing

- Scale

- Local / global networks

- Preferred partnerships

- Regulations such as REACH

- Increasingly challenging conditions for small distributors, more favorable for mid-

size regionals and large international players.

- M&A: Some larger companies have used mergers and acquisitions to develop

capabilities needed to meet producers’ and customers’ needs. Also small-to-mid-size

enterprises have formed networks such as Omni Chem Alliance and Chemical

Distribution Network.

28

Key drivers of optimization and consolidation in

distribution market

29

Building successful distribution models

International

Increase coverage and expertise in key sectors

Preferred partnerships

M&A activities

Value added services

Regional

Ensure financial stability

Increase specific expertise

Establish and expand local networks

Preferred partnerships

Small

Grow into a regional one

Comply with local regulations

Ensure financial stability

Specialize in a niche

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• Established in 1992

• Global sales: USD 370mn

• Strong global presence

• Integrated distribution group with cutting-edge terminal and logistics

infrastructure

• Ranks 38th in the ‘ICIS TOP 100 Chemical Distributors List’

• Exclusive and regular supply arrangements with prominent producers

solvents aromatics

solvents, aromatics,

monomers, acetates,

acrylates, glycols,

alcohols, surfactants,

amines, titanium dioxide,

ketones, acids, blends,

plastics

monomers

acrylates

glycols

alcohols

surfactants

acids

blends plastics

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