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SABIC EuroPetrochemicals Trends and Challenges in the European Polyolefin Industry Mark Vester 18 February 2003.

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Presentation on theme: "SABIC EuroPetrochemicals Trends and Challenges in the European Polyolefin Industry Mark Vester 18 February 2003."— Presentation transcript:

1 SABIC EuroPetrochemicals Trends and Challenges in the European Polyolefin Industry Mark Vester 18 February 2003

2 SABIC EuroPetrochemicals Short introduction to SABIC EuroPetrochemicals Typical project investment WE and ME Global and European S/D balance for Polyethylene The European Case Managing the cycle: The Past and The Future Contents

3 SABIC EuroPetrochemicals The Power to Provide … Resources to guarantee long term supply Modern technology for efficiency and quality Global marketing and distribution network to serve our customers … for the long term

4 SABIC EuroPetrochemicals SABIC … … is 70% owned by Saudi government and 30% by private sector … started from scratch in 1976 … produced first tons in 1983 … now produces 40 million tons of products per year … has a turn-over of 11,4 bln in 2002 SABICs vision: to be a leading global manufacturer and marketer of hydrocarbon and metal products. Think about it: 2 mln tons of new capacity added annually!

5 SABIC EuroPetrochemicals SABIC … … is number 3 global PE player … markets almost 5 million tons of PE/PP … is now established in Europe … has technical centres in KSA, USA, India and The Netherlands … accelerates its expansion SABIC EPC: the Powerhouse comes to Europe … SABICs Geleen site SABICs headquarters in Riyadh

6 SABIC EuroPetrochemicals … with the Power to Provide … 4 highly integrated sitesdirect access to low cost feedstock world-scale facilitiesdirect market access multiple lines per technology … anywhere !!! Houston Vadodara Riyadh Al Jubail Yanbu Geleen Gelsenkirchen Kerteh

7 SABIC EuroPetrochemicals Global Polyolefins position SABIC KTON SABIC, after acquisition DSM Petrochemicals: number 4 global Polyolefins player number 3 global PE-player number 4 global PP-player

8 SABIC EuroPetrochemicals.. and anything !! Application Automotive Corrugated board Dustbins Foam Furniture Houseware and appliances Geomembranes Masterbatches Multi purpose injection moulding Packaging Photo and imaging Pipe Sheet Textiles Wire and cable … Process Bi-axially oriented film Blow moulding Blown film Cast film Extrusion coating Extrusion compression moulding Foam extrusion Fibre, filament and tape extrusion Injection moulding Injection compression moulding Masterbatch compounding Pipe extrusion Sheet extrusion Thermo forming … Material HDPE High cristallinity polyolefin LDPE LLDPE Long glass fibre reinforced PP Modified PP PP block copolymer MF PP homopolymer PP homopolymer MF PP random copolymer PP reactor elastomer modified PP reactor elastomer modified MF

9 SABIC EuroPetrochemicals Low cost feedstock !! Investment scale Investment cost Utilities cost are lower No co-products credit Middle East PE has significant cost advantage Naphtha cracker 650 kta Ethane cracker 1050 kta Middle East Europe Take into consideration: License cost Infrastructure Marketing and Sales cost Research and Development Cost of overhead Working capital HDPE slurry 300 kta LLDPE gasphase 350 kta PP gasphase 2*200 kta LLDPE gasphase 2*350 kta HDPE gasphase 350 kta Co-products revamp cracker 650 kta

10 SABIC EuroPetrochemicals Structure of typical projects vary revamp naphtha cracker 650 kta Ethane cracker 1050 kta Middle East Europe HDPE slurry 300 kta LLDPE gasphase 350 kta PP gasphase 2*200 kta LLDPE gasphase 2*350 kta HDPE gasphase 350 kta Co-products

11 SABIC EuroPetrochemicals Distribution Customer Warehouse Plant Warehouse Hub Middle East Europe Document cost Outbound cost Inbound cost and storage Sea port to hub Terminal cost Sea freight Terminal cost Warehouse to sea port Warehouse to customer Import Duties Warehouse to customer

12 SABIC EuroPetrochemicals Using ethane for ethylene leads to propylene deficits … 54 mio 71,5 mio Steam cracker 68 % Steam cracker 65 % FCC 30 % FCC 32 % other … which leads to improved co-product contribution

13 SABIC EuroPetrochemicals Surplus: + 3,7 mln t (= 6,4 % of CTP) (= 6,4 % of CTP) Surplus: + 0,2 mln t (= 0,3 % of CTP) (= 0,3 % of CTP) ME suppliers will export most PE to Asia, however … Net export position (CTP > demand) Net import position (CTP < demand) Global overcapacity will be reduced from 3700 kton in 2002 to potentially 200 kton in 2007 Note: Balance is calculated as Local CTP -/- local demand (trade is excluded) Asia is growth market ME export net backs will make European pricing follow Asian balance

14 SABIC EuroPetrochemicals West European demand will outpace capacity growth in coming years … West Europe leaves opportunity window … Realisation Forecast kton

15 SABIC EuroPetrochemicals Middle East imports will make up for WE production deficit. … for ME to further increase its market share. Realisation Forecast Room for 100 kt extra imports per year

16 SABIC EuroPetrochemicals Despite ME producers cash cost advantage over WE … Gas price ($/mmBTU) Naphtha (EUR/t) Structural delta in cash cost Typical ranges for gas and naphtha ME producer NWE producer Delta depends on oil price and co-product values Low High

17 SABIC EuroPetrochemicals … WE capacity has outpaced demand, kton Margin as C4 LL -/- C2 (EUR/t) contributing to deterioration of margins … … and resulting in poor profitability; even for WE leaders!

18 SABIC EuroPetrochemicals ME re-investment level is lower than average WE level Gas price ($/mmBTU) Naphtha (EUR/t) Delta in re-investment level ME producer Within WE players differ in site scale and integration, portfolio, … Only strong WE super sites (cost leaders) remain Re-investment level required for IRR of 20% Delta in cash cost NWE producer Low High

19 SABIC EuroPetrochemicals Pricing in Europe will be affected WE ME Re-investment level Middle East attracts investment at lower levels than Europe

20 SABIC EuroPetrochemicals ddp NWE cif FE Revenue Platts low Discount-/-25- Import duties (4%)-/-35 Inland logistics-/-50- Transport overseas-/-45-/-20 Contribution745 EUR/t730 EUR/t Future PE flow over the globe Asia is growth market Export to Europe is EUR/t more expensive European price will follow Asian balance and average at EUR/t above Asia

21 SABIC EuroPetrochemicals Cyclicality in Petrochemicals is a fact of life The cycle ……is due to Long lead time of investments No reliable forecast global economic gowth Globalisation ……affects mainly margins but also volumes and …… leads to strong fluctuations in cash flow

22 SABIC EuroPetrochemicals Essentials of the Petrochemical Business Global Utilisation Rate drives the margins Position on the global cost curve indicates the chance to survive the dip in the cycle Position on the learning curving quantifies the yearly needed cost improvement

23 SABIC EuroPetrochemicals Cracker margins correlate with the global utilisation rate Global Utilisation rates > 92 % are needed for a healthy cracker margin CTP = Capacity to Produce

24 SABIC EuroPetrochemicals Position on the global cash cost curve A low cost position is essential to survive the dip in the cycle and is determined by: Scale Integration Technology Cracker feedstock position / flexibility Upgrading cracker co-products Logistics Employees

25 SABIC EuroPetrochemicals Global cash cost curve crackers Low cost ethane Naphtha/ethane/LPG in Europe/USA Small scaled Laggards Cash costs/ton C2 Cumulative ethylene capacity

26 SABIC EuroPetrochemicals Learning curve of ethylene production Cash costs/ton C2 Cumulative ethylene production

27 SABIC EuroPetrochemicals Managing through the cycle Cash costs/ton C2 Cumulative ethylene capacity First Quartile Hors category (Potential) Super sites Sitting ducks Losers

28 SABIC EuroPetrochemicals No rationale for investment in additional integrated ethylene and PE capacity in Europe Potential for scrap and build Little further improvement of cost position All cost laggards in Europe will disappear Central and Eastern Europe have the same future as WE European cost leaders will be able to compete Future PE source for West Europe WE super sites Growth will come from Middle East Conclusions

29 SABIC EuroPetrochemicals Drivers for European industry: We enter a new era Period 95 – 02 Scale and cost Site integration and M&A Technology and Catalyst Development Period 02 – 09 Cost & Rationalisation Bottomline cashflow Invest and grow Re-establishment of sustainable profit levels scale cash flow

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