IETC Chemical Marketing Assoc Inc 20040501

8/8/2019 IETC Chemical Marketing Assoc Inc 20040501

1/27

Houston London Singapore Dubai

The Industrial Energy Technology Conference

Vikki MedleyChemical Market Associates, Inc.

Director, Olefins Economics and Feedstocks(281) [email protected]

Shifting Influences on North

America Olefins Production:Is Energy the Entire Answer?


2/27



Strategic Issues Facing

North America Olefins Producers

Strategic Issues FacingNorth America Olefins Producers

Economic Recovery

Energy Market Impact Natural gas to crude oil ratio

Net Trade Position On Major Derivatives

Increasing Non-Durable Goods Imports\Exports

Middle East & Asia Ethylene Capacity Build-Up* While an issue for ethylene markets..it could be an opportunity for

propylene markets

Economic Recovery

Energy Market Impact Natural gas to crude oil ratio

Net Trade Position On Major Derivatives

Increasing Non-Durable Goods Imports\Exports

Middle East & Asia Ethylene Capacity Build-Up* While an issue for ethylene markets..it could be an opportunity for

propylene markets


3/27



7.7%

6.3%

6.8% 7.1%

-9.0%-10.0%

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08

Annual Change

GDP Growth Ethylene Demand Growth

Forecast

U.S. Ethylene & Economic Growth ComparisonU.S. Ethylene & Economic Growth Comparison

Annual average growth rate from 1990through 1999 is equal to 4.3%. Aboveaverage growth seen in 90', 94', 96' and99' may be hard to repeat under currentmarket conditions.


4/27



U.S. Ethylene & Economic Growth ComparisonU.S. Ethylene & Economic Growth Comparison

7.7%

6.3%

6.8% 7.1%

-9.0%-10.0%

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08

Annual Change

GDP Growth Ethylene Demand Growth

Forecast

U.S. ethylene demand hascontracted or was flat during

three of the last four yearsindicating a fundamental shift

in market dynamics


5/27



U.S. Ethylene Demand Has New Trendline.Likely A Permanent Change

U.S. Ethylene Demand Has New Trendline.Likely A Permanent Change

Total Demand Nameplate Operating Rate, %

8

9

10

11

12

13

14

15

16

17

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05

Billion Pounds

55

60

65

70

75

80

85

90

95

100

% Operating Rate

Forecast


6/27



From the Wellhead to WalmartThe Supply Chain is Changing

From the Wellhead to WalmartThe Supply Chain is Changing

Base EnergyBase Energy

ConsumersConsumers

Ethylene CrackerEthylene Cracker

PE

Pellets

PE

Pellets

Non-Durables

Non-Durables


7/27



What About Global Competition?What About Global Competition?

It is not all about who has the

biggest plant It is not all about who has the

best technology

It is not all about who tradedthere first

It is all about costand

competitive cost positions havedeveloped into a battle betweennatural gas versus crude oil

It is not all about who has the

biggest plant It is not all about who has the

best technology

It is not all about who tradedthere first

It is all about costand

competitive cost positions havedeveloped into a battle betweennatural gas versus crude oil

To play the game successfully in commodity

petrochemicals and plastics

To play the game successfully in commodity

petrochemicals and plastics

as 60% of integrated PE production costs is hydrocarbon related!as 60% of integrated PE production costs is hydrocarbon related!


8/27



North America Energy Price TrendsNorth America Energy Price Trends

The playing field has been leveled between North America and otherglobal producers.

0

1

2

3

4

5

6

7

81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10

$ / MM Btu

0

1

2

3

4

5

6

7Crude/Gas Ratio

Natural Gas Crude (WTI) Crude / Gas Ratio


9/27



2003 Ethylene Production By Feedstock2003 Ethylene Production By Feedstock

Gas Oil

28.7 Million Metric Tons

North America

Propane13%

Ethane55%

Others

1%

4%

Naphtha23%

Butane4%

96.8 Million Metric Tons

World

Propane8%Ethane

28%

Others1%

Gas Oil

6%

Naphtha54%

Butane

3%


10/27



A decade of olefins andderivative investmentswere driven by an

assumption ofreadilyavailable low cost naturalgas

Ethylene capacity grewat a rate of 1.0 MM tonsper year

North America was aprimary supplier ofethylene derivatives tothe global market

Natural Gas Is KeyNatural Gas Is Key

United StatesUnited States CanadaCanada MexicoMexico

1010

1515

2020

2525

3030

3535

4040

4545

9090 9191 9292 9393 9494 9595 9696 9797 9898 9999 0000 0101 0202

Ethylene Capacity by Country (Million Tons)Ethylene Capacity by Country (Million Tons)


11/27



World Ethylene Cash Costs - Regional AveragesWorld Ethylene Cash Costs - Regional Averages2003 Energy Prices2003 Energy Prices

Dollars per Ton

50

150

250

350

450

550

650

0 20 40 60 80 100 120

Cumulative Capacity (Million Tons)

USGC Natural Gas = $5.00/MM BtuUSGC Natural Gas = $5.00/MM BtuBrent Crude = $28/BBLBrent Crude = $28/BBL

2003 total demandforecast to reach about

98.5 MM tons

North AmericaNorth America

Wt'd Avg = $420/tonWt'd Avg = $420/ton

West EuropeWest EuropeWt'd Avg = $315/tonWt'd Avg = $315/ton

Northeast AsiaNortheast AsiaWt'd Avg = $310/tonWt'd Avg = $310/ton

Southeast AsiaSoutheast AsiaWt'd Avg = $270/tonWt'd Avg = $270/ton

Middle EastMiddle EastWt'd Avg = $140/tonWt'd Avg = $140/ton

South AmericaSouth AmericaWt'd Avg = $380/tonWt'd Avg = $380/ton


12/27



U.S. Daily Ethylene Cash CostsU.S. Daily Ethylene Cash Costs20032003

0

5

10

15

20

25

30

35

Jan 2 Feb 7 Mar 17 Apr 22 May 28 Jul 2 Aug 7 Sep 12 Oct 17 Nov 21

Cents Per Pound

0

110

220

330

440

550

Purity Ethane

Light Naphtha

Dollars Per Metric Ton

New era in Natural Gas

But ethane was still favored

for 2.5 quarters of the year!

Ethane Favored Ethane FavoredNaphtha Favored Parity


13/27



High natural gas pricesrelative to crude impacts

regional competitiveposition

International trade is no

longer a major source ofdemand growth for NorthAmerica

Growing imports of non-durable goods threatenfuture demand growth

Natural Gas Is KeyNatural Gas Is Key


14/27



Million Tons

-1.0

0

1.0

2.0

3.0

4.0

5.0

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10

Net Exports

Net Imports

Ethylene Vinyls Styrenics Polyethylene

Glycol Others Net Trade

North America Share of Global EthyleneDerivative Trade all but Disappears



15/27



Million Tons

-1.0

0

1.0

2.0

3.0

4.0

5.0

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10

Net Exports

Net Imports

Ethylene Vinyls Styrenics Polyethylene

Glycol Others Net Trade



Historically 50% of world

net equivalent ethylene

trade and 15% of NorthAmerica capacity


16/27



Surely the U.S. isnt vulnerable wont

logistics protect the market?

How much Polyethylene did the

United States Import in 2003?

How much Polyethylene did the

United States Import in 2003?


17/27



0

20

40

60

80

100

120

140

96 97 98 99 00 01 02

Billions of Bags

Disguised asPolyethylene

Bags

160

(Using 10# per 1000)03

1.67 Billion pounds of PE Resin

Imported Polyethylene


18/27



0

20

40

60

80

100

120

140

96 97 98 99 00 01 02

Billions of Bags

Disguised asPolyethylene

Bags

160

(Using 10# per 1000)03

1.67 Billion pounds of PE Resin

Continued Growth in Non-durable GoodsImports Will Have a Negative Impact on

U.S. Ethylene Demand Growth

Imported Polyethylene


19/27



Its More than Just A Natural Gas IssueIts More than Just A Natural Gas Issue

Significant build-upof ethylene capacityin the Middle East

Increased ethyleneintegration in Asia

A Thi d W f Middl E t Eth l C it


20/27



A Third Wave of Middle East Ethylene CapacityWill Impact Market Starting in 2006/07

A Third Wave of Middle East Ethylene CapacityWill Impact Market Starting in 2006/07

Middle East ethylene capacity is hitting the globalmarket in waves. By the end of the 3rd wave,Middle East regional capacity will likely rankamong the top four regions globally.

1st Wave; Mid-to-late 90s

0

5

10

15

20

25

30

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15

Saudi Arabia Iran Qatar Kuwait United Arab Emirates Turkey Israel Iraq

(Million Metric Tons)

3rd Wave; 2006+ Therefore,timing may not impact theforecast for the next peak inglobal plastics and basechemicals

2nd Wave; 2000 2005


21/27



Million Tons

Southeast Asia Has Become Less Dependent onEthylene Derivative Imports

Southeast Asia Has Become Less Dependent onEthylene Derivative Imports

-2.5

-2.0

-1.5

-1.0

-0.5

0

0.5

1.0

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08

Net Exports

Net Imports

Ethylene Vinyls Styrenics PolyethyleneGlycol Others Net Trade

Ethylene Net Equivalent Trade


22/27



World Ethylene & Derivatives TradeWorld Ethylene & Derivatives Trade

-20

-15

-10

-5

0

5

10

15

20

94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10

Million Tons

North America South America West Europe Middle East

Indian Sub. Northeast Asia Southeast Asia Others

Net Exports

Net Imports

It N t All B d N F


23/27



Primary supplier to the largestconsuming region of olefins

derivatives. Restraint on new investments

(or additional closures) will

lead to higher utilization. Feedstock flexibility will secure

regional competitive position.

Dominant position in globaltrade of propylene will bemaintained.

Its Not All Bad News ForNorth America Olefins Producers !

Its Not All Bad News ForNorth America Olefins Producers !

Middl E / A i I D d


24/27



Middle East / Asia Inter-DependenceMiddle East / Asia Inter-Dependence

New Asia C2 Demand New Asia C3 Demand

New M.E. C2 Capacity New M.E. C3 Capacity

3.0

2.0

1.0

0.0

1.0

2.0

3.0

4.0

1990 1995 2000 2005 2010

Million Metric Tons

New Asia C2 Demand (Area)


New M.E. C2 Capacity (Bars)


Middl E t / A i I t D d


25/27



Middle East / Asia Inter-DependenceMiddle East / Asia Inter-Dependence

New Asia C2 Demand New Asia C3 Demand

New M.E. C2 Capacity New M.E. C3 Capacity

3.0

2.0

1.0

0.0

1.0

2.0

3.0

4.0

1990 1995 2000 2005 2010

Million Metric Tons





Middle East is Big Ethylene,Little Propylene

W ld P l & D i ti T dW ld P l & D i ti T d


26/27



World Propylene & Derivatives TradeWorld Propylene & Derivatives Trade

North America West Europe Middle East

Northeast Asia Southeast Asia Others

-6000

-5000

-4000

-3000-2000

-1000

0

1000

2000

3000

4000

5000

6000

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10

Thousand Tons

Net Exports

Net Imports

O f COl fi M k t C l i


27/27



Olefins Market ConclusionsOlefins Market Conclusions

Recovery continues; supported by renewed economic andmanufacturing sector growth

U.S. remains key supplier of propylene to the rest of theworld, Asia remains critically short of propylene

Regional competitive positions will shift with crude andnatural gas price volatility

Restraint on new investments and focus on closures andfeedstock flexibility in high cost regions, investments

continue in low cost regions

Global shift in supply chain has changed regional growthscenarios

Documents

IETC Chemical Marketing Assoc Inc 20040501