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Strategic Advisors in Global Energy
Strategic Advisors in Global Energy
Strategic Advisors in Global Energy
Change Creates Opportunities:Petrochemicals
PFC Energy Abu Dhabi Seminar
by Carlo Barrasa, Downstream & Petrochemicals Group
12 November 2009
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Within Context Of Global Energy Demand
Petrochemical and chemical energy demand represents approximately 10% of totalenergy demand
This represents a significant portion of total energy demand & is the single largestconsumer of energy in the industrial sector
228 MMb/d (2008 oil equivalent)
33%Industrial
71% OtherIndustrial
29% Chemical &Petrochemical
67%Transport,Residential,Agricultural
& Other
75 MMb/d (2008 oil equivalent)
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The History of Plastics
Only two consumption declines have ever occurred in the history ofpetrochemicals, but the most recent decline is demand driven
Data excludes polyester fibers
Impact of1973 Oil
Embargo
Impact of
GreatRecession
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The Future of Plastics
The Great Recession will cause the plastics industry to lose fiveyears of growth
Data excludes polyester fibers
Demand pullbackconcentrated inOECD markets
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Global Polyolefins Penetration
In order to its maintain penetration rate, polyolefins producers willcontinue building products that promote displacement
Increasedadoption ofpolyolefins
Gradual inter-material substitutionof other plastics
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Polyolefins Demand Outlook
All developing markets will exhibit robust growth in polyolefinsconsumption as light manufacturing continues moving out of OECD
08 15 1.8% 4.8% 1.7% 4.3% 4.8% 4.8% 4.3%CAGR
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Regional Polyolefins OutlookPer capita consumption
Asia Pacific alone will comprise nearly 55% of the global consumptiongrowth with over 15 million tons in additional demand
Figures in kg per person
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Rationale For Demand Growth
Significant upside potential in developing countries for additionalconsumption on a per capita basis
Expanding economies will gradually move towards moreconsumer-oriented markets
Product innovation will promote continued displacement oftraditional materials
OECD countries will still be significant markets as they will drivematerial innovations
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Capacity AdditionsRegional breakdown of steam cracker announcements
Over 44 million tons of ethylene capacity has been announced with nocapacity additions being added in OECD markets
4 projects,3.8 milliontons
17 projects,19.5 milliontons
10 projects,11.1 milliontons
13 projects,10.0 milliontons
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How Much Cracking Capacity Will Be Needed?
With only 23 million tons of incremental demand, approximately 12
million tons of announced is unlikely to be added
Capacity rationalization is likely to occur within the next five years
Installed base of nearly 130 million tons
Utilization at less than 80% for 2009
Likely additions are announced projects that have been probability-adjusted
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Will Capacity Shutdown?
Weak consumer demand in OECD
markets
High oil prices increasing the input
cost of liquids-based cracking
Prevailing refining economics
dictating shutdowns of refinery-
integrated complexes
Climate change policy initiativesthat add incremental costs
Signs of increasing demand in
developing markets
Favorable co-product economics
to promote continued operation
Increased rate of rationalization of
refineries that produce
petrochemicals
Protectionist measures by worldgovernments
Environment that wouldfavor rationalization
Environment that wouldfavor over-capacity
In a high priced, higher capacity environment, smaller operators willtremendous pressure to maintain necessary utilization
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What Will Future Capacity Look Like?
1999Average Cracker Size
344 KTA Ethylene
2009Average Cracker Size
538 KTA Ethylene
AnnouncedAverage Cracker Size
1,010 KTA Ethylene
Increasing economies of scale
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Economies of ScaleEthylene production cost, USGC example
On a non-integrated basis, average sized crackers from ten years agoare ill-equipped to compete in the present environment
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Economies of ScalePolyethylene production cost, USGC example
On an integrated basis, oil-based producers without economies ofscale are the most at risk of rationalization
PE conversion costs include cash cost of HDPE production ex ethylene costs
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How Much Capacity Is At Risk?
Given the proximity to low cost Middle East production & the regionsoil-based feedslate, European capacity is most at risk to shutdown
Cracking capacity excludes China & India
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Strategy In A Volatile Environment
With the looming additions, existing capacity will be underpressure with rationalization occurring within the next few years
However, it will be difficult to shutdown enough capacity to
achieve historical utilization due to stickiness of existing sites This environment will produce a more volatile environment with
petrochemical cycles lasting months rather than years
Given such an environment, producers will need to be steadfast in
their operating strategy to weather the storm Option 1: Focus on being the lowest cost producer
Option 2: Focus on being a niche producer
Option 3: Focus on being a customer-centric producer
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Strategic Options For ProducersOption 1: Focus on being the lowest cost producer
Maximize economies of scale
Lower transition cost by minimizing the number of grades produced
Focus production on high volume fungible grades of product
Work with feedstock suppliers in order to secure necessary feedstock to maximize uptime
Continuously seek out cost reductions
Focus marketing group to target high volume customers to minimize transaction costs (e.g.physical product traders)
Invest in feedstock flexibility to ensure the lowest feed costs
Seek opportunities to increase scale by buying other high volume sites
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Strategic Options For ProducersOption 3: Focus on being a customer-centric producer
Maximize customer touch points to promote intimacy
Increase customer service staff to address administrative issues
Increase tech service staff to help customers solve processing problems Develop marketing programs designed to maintain customer loyalty (e.g. rebates, joint advertising)
Offer product logistics & terminal inventory to offer product on just-in-time basis
Consider investing in companies that have considerable exposure to productdistribution
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Conclusions
The industry has grown aggressively with only two demanddeclines over the past forty years
Despite the recent demand loss, the industry will resume itsgrowth trends in 2010
By 2015, over 55% of the growth in polyolefins consumption will occur inAsia Pacific
OECD markets will still be significant accounting for over 20% of the growthpolyolefins consumption
Given the forecasted level of consumption and capacity additions,existing capacity will need to be rationalized
Smaller, oil-based producers are most at risk of shutting down
This will produce an environment that will be more volatile thanprevious downturns
Thus, necessitating a focused operating strategy to weather the
storm
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