1. PRICING & PURCHASING SUMMIT
WASHINGTON DC | NOVEMBER
PRICING & PURCHASING SUMMIT

2. Ethylene: A North American Renaissance
Track: Chemicals and Plastics
Ethylene: A North American Renaissance
12, November 2014
Howard Rappaport
Senior Director - Chemicals

3. Agenda Industry Drivers Supply / Demand Price Outlook
Pricing & Purchasing Summit / November 2014
Agenda
Industry Drivers
Feedstocks
Oil, Natural Gas, Coal
Regional Differences
Cash Costs
Supply / Demand
New Capacity
Demand Growth
Supply Situation
Price Outlook
Buyers Bottom Line

4. Industry drivers Feedstocks play a very important role
Pricing & Purchasing Summit / November 2014
Industry drivers
Feedstocks play a very important role
Natural gas is king in North America and the Middle East, while other regions rely on crude oil (and coal in China)
Waves of new capacity are coming in the U.S. based on ethane, however it will be at least more years before we see a significant impact on prices
Europe will continue to consolidate capacity while the U.S. , Asia and Middle East keep building
Chemical industry margins have been at record levels in the U.S. and are expected to erode SLOWLY over the next 18 – 24 months
The U.S. will have to become a larger exporter of polyethylene and other ethylene derivatives as new capacity comes on line

5. The importance of ethylene in the chemical business
Pricing & Purchasing Summit / November 2014
The importance of ethylene in the chemical business
World’s largest volume petrochemical product
Key building block in several widely used materials:
Polyethylene, PVC, Polyester & PET, Styrene & PS, Ethylene Glycol
“Cracking” process can yield several important co-products and by- products:
Benzene, propylene, butadiene
Can be produced using crude oil, natural gas, coal or biomass
Millions of tons of new capacity have been announced for the North American market

6. 11/13/ :59 AM
Pricing & Purchasing Summit / November 2014
North American NGL production ramping up with shale gas and tight oil production
MMBPD
US NGL Supply
Ample New Feedstocks for Olefins
other is historical supply, conventional crude/gas recovery, refinery coproducts
yellow shaded area is “NEW” supply (unconventional)
Horizontal drilling
Fracking
Split
Mostly ethane – limited only by outlets (to discuss in next slide)
Others grow but not as big as step change for ethane

7. The U.S. is becoming the world’s largest LPG exporter
Pricing & Purchasing Summit / November 2014
The U.S. is becoming the world’s largest LPG exporter

8. Shale gas geology is not unique to the U.S.
Pricing & Purchasing Summit / November 2014
Shale gas geology is not unique to the U.S.

9. China leads in coal chemical development
Pricing & Purchasing Summit / November 2014
Gasification
Crude Methanol
Merchant Methanol
MTO/MTP
Oxalate Ester
Acetyl
MTA
Ethylene
Propylene
MEG
Ethanol PX
In Commercial Production
In Pilot Test

10. Several coal chemical projects are on the horizon in China
11/13/ :59 AM
Pricing & Purchasing Summit / November 2014
Multiple plants are in operation
Many more are under construction
CTO and CTMEG projects are built in coal-rich west
MTO projects are built along east coast
Some planned projects may not be built
CTO
CTMEG
MTO

11. Coal geology is also not unique to China
11/13/ :59 AM
Pricing & Purchasing Summit / November 2014
Coal geology is also not unique to China
Lignite, or brown coal, is the lowest rank of coal and used almost exclusively as fuel for electric power generation. Jet, a compact form of lignite, is sometimes polished and has been used as an ornamental stone since the Upper Palaeolithic.
Sub-bituminous coal, whose properties range from those of lignite to those of bituminous coal, is used primarily as fuel for steam-electric power generation and is an important source of light aromatic hydrocarbons for the chemical synthesis industry.
Bituminous coal is a dense sedimentary rock, usually black, but sometimes dark brown, often with well-defined bands of bright and dull material; it is used primarily as fuel in steam-electric power generation, with substantial quantities used for heat and power applications in manufacturing and to make coke.
"Steam coal" is a grade between bituminous coal and anthracite, once widely used as a fuel for steam locomotives. In this specialized use, it is sometimes known as "sea-coal" in the US.[11] Small steam coal (dry small steam nuts or DSSN) was used as a fuel for domestic water heating.
Anthracite, the highest rank of coal, is a harder, glossy black coal used primarily for residential and commercial space heating. It may be divided further into metamorphically altered bituminous coal and "petrified oil", as from the deposits in Pennsylvania

12. 2014 ethylene regional cost curve: a feedstock story
Pricing & Purchasing Summit / November 2014
2014 ethylene regional cost curve: a feedstock story
Higher cost regions
Lower cost regions
This is an ethylene cash cost curve.
It shows how the world key regions lined up in 2008 relative to their respective annual cost of production of one ton of ethylene
You will note that the MDE was all alone on the left hand side of the chart with a great advantage over every other region including NAM which was very much in the middle of the pack… with NEA and WEP on the high side.
Then along came the shale gas phenomenon and changed every thing.
Note that while the naptha based producers in Asia Europe and SAM remain high --- the NAM producer have moved way down the curve and are now on par with MDE.

13. 2014 global ethylene capacity = 153 million metric tons
Pricing & Purchasing Summit / November 2014
2014 global ethylene capacity = 153 million metric tons
So lets look at where the ethylene capacity is currently located.
153 mmtons capactiy this year.
One third in asia
One quarter in NAM
Followed by MDE and Europe
Equally important to the location of the capacity is the predominant feedstock used in each region
This pie shows that nearly one half of the worlds ethylene production is based on naptha derived from crude oil
A bit more than one third of the capacity is based on ethane – mostly in MDE and NAM.
These feedstocks have a big impact on costs as you will see in this next chart.
Ethylene Nameplate Capacity
By Major Region
Ethylene Production
By Feedstock

14. Pricing & Purchasing Summit / November 2014
Global capacity additions in sync with demand growth forecast, through 2016
So if you remember our first slide that said capacity changes were based primarily on relative cost advantages or proximity to demand you can see that played out here.
This chart shows ethylene capacity additions from 2009 – 2013
Most capacity added in Asia and MDE. – NAM and Europe shutting down capacity.
(reveal)
A look at the next few years shows NAM back in the equation – courtesy of shale gas. MDE still adding but at a slower pace. Asia, primarily china – adding significant capacity due to proximity of demand and exploiting cheap coal. Much of the China capacity linked to coal.
= +25M MT
= +31M MT

15. Ethylene Capacity Additions
11/13/ :59 AM
Pricing & Purchasing Summit / November 2014
Unprecedented capacity additions in North America due to ample ethane supply
Ethylene Capacity Additions
2014
2015
2016
2017
2018
2019
2020
Total Additions
Projected North American Ethylene ( ) (Thousand Metric Tons per Year)
through 2020
Company
Location
BASF/Total
Port Arthur. TX
170
ChevronPhillips
Cedar Bayou, TX
150
1350
1500
Dow
Freeport, and Plaquemine
220
600
900
1720
Eastman
Longview, TX 17
Equistar
All Locations
385
477
250
1112
ExxonMobil
Baytown, TX
750
FHR
PT Arthur
100
Formosa
Point Comfort, TX
1150
Oxy/Mexichem
Ingleside, TX
137
413
550
Sasol
Lake Charles, LA
387
1163
1550
Westlake 94
122
216
Williams
Geismar, LA
258
Braskem Idesa
Mexico
1000
Nova
Sarnia
168
Firm:
666
1177
1168
4674
2326
11,011

16. Ethylene demand still growing by 5-6% long term
Pricing & Purchasing Summit / November 2014
Ethylene demand still growing by 5-6% long term
134 Million Metric Tons
196 Million Metric Tons
2013
2023

17. Low cost regions will push excess ethylene supply to other regions
Pricing & Purchasing Summit / November 2014
Low cost regions will push excess ethylene supply to other regions
Ethylene equivalent net trade is equal to the differential of total imports and exports of all ethylene based derivatives on a contained ethylene basis plus the net trade of any ethylene monomer that is being traded. Ethylene derivative trade is dominated by polyethylene, vinyls (EDC, VCM, PVC), ethylene glycol and styrene.
Given competitive ethane cracking economics in North America, ethylene net equivalent exports from the U.S. and Canada are forecast to increase significantly as new ethylene capacity is added to the region. The new capacity will have an emphasis on derivative exports given a modest forecast for growth in domestic demand. The combined net exports from all regions from 2014 to 2020 are forecast to increase by 10 million metric tons. Logistics systems around the world will be pushed to handle higher and higher volumes of derivative trade adding to the needs for more capital investment in the value chain. Despite significant investment in new ethylene capacity, China net imports of ethylene equivalents will exceed 20 million tons by 2020.

18. US supply/demand balance remains “tight” next year
Pricing & Purchasing Summit / November 2014
US supply/demand balance remains “tight” next year
This is our view of supply demand for ethylene in the US through the end of next year.
Blue bar = dmenad
Orange line nameplate capacity
Blue line = effective capacity
Near 95% through 15
Selling every pound that can be made.

19. 2015 US ethylene production loss “forecast”
Pricing & Purchasing Summit / November 2014
2015 US ethylene production loss “forecast”
Monthly, Million Pounds
Cumulative
So what do we expect for 2015.
Some relief but not much. Still expect more than 3 mmtons lost with heavy T/A’s expected during q2.
Not a lot of opportunity to rebuild low inventories.

20. Ethylene margins soar in North America
Pricing & Purchasing Summit / November 2014
Ethylene margins soar in North America

21. Global ethylene prices relatively calm next year
Pricing & Purchasing Summit / November 2014
Global ethylene prices relatively calm next year

22. Pricing & Purchasing Summit / November 2014
Buyers bottom line
A smoother price profile with slight downward potential is possible next year if we continue to see softening in energy prices
No need to build inventories if the chemical and refining industry complex is running smoothly, but there is not much “excess” in the system
Producers will attempt to pass along any cost increases, no matter how small
New capacity will not be here in time to have a major impact on 2015 / prices
Producers will try and capitalize on any supply disruption event
We are definitely coming down from peak pricing… some MODEST relief is in sight (some of it will be in the form of reduced volatility)
Increases in Chinese PE consumption could temporarily tighten up supply

23. Propylene: Too much, too soon?
Track: Chemicals and Plastics
Propylene: Too much, too soon?
12, November 2014
Daniel De Castro
Senior Economist

24. Agenda Industry Drivers Feedstocks Supply / Demand New Capacity
Pricing & Purchasing Summit / November 2014
Agenda
Industry Drivers
Feedstocks
Supply / Demand
New Capacity
Price Outlook
Buyers Bottom Line

25. Propylene Key Takeaways
Pricing & Purchasing Summit / November 2014
Propylene Key Takeaways
Propylene is poised to be oversupplied on a global basis, driven by massive investments in on-purpose technology to fill the supply-gap created by “lightening” of global steam cracker feedslates.
Propylene prices will drop relative to ethylene due to the rapidly expanding on- purpose production.
Eventually economics drive capacity additions at a more measured rate. Continuous on-purpose additions required long term to meet demand growth.
P/E price ratios could drop (to PDH cash costs), impacting cracker Cash Costs (operating rates on heavy feeds) and offer more incentives to refineries to invest in Alkylation. This also could give demand a boost at the expense of other plastics.

26. Energy advantage benefiting US chemical producers
11/13/ :59 AM
Pricing & Purchasing Summit / November 2014
Energy advantage benefiting US chemical producers

27. NGL’s having different effects on propylene supply
11/13/2018
Pricing & Purchasing Summit / November 2014
NGL’s having different effects on propylene supply

28. Key Routes to Produce Propylene
Pricing & Purchasing Summit / November 2014
Key Routes to Produce Propylene
Motor Gasoline
Motor Gasoline
Alkylation Unit
High Octane Motor Gasoline
Crude Unit
FCC Unit
Crude Oil
Other Fuel Uses
Refining Industry
Chemical Industry
Direct Refinery Grade chemical consumption
Purification Splitter Unit
Injection Molding, Fibers, Films
Naphtha
Polypropylene
Steam Cracker (Olefins Plant)
Ethane Propane
Nat.
Gas
Other Propylene consumers
Ethylene & Olefins
On-Purpose

29. Propane abundance in NAM supports PDH additions
Pricing & Purchasing Summit / November 2014
Propane abundance in NAM supports PDH additions

30. Ethylene impacting propylene production
11/13/2018
Pricing & Purchasing Summit / November 2014
Ethylene impacting propylene production
Minimal Propylene Production

31. Propylene PDH margins attracting new investment
Pricing & Purchasing Summit / November 2014
Propylene PDH margins attracting new investment

32. Propylene demand growth remains strong
Pricing & Purchasing Summit / November 2014
Propylene demand growth remains strong
89 Million Metric Tons
134 Million Metric Tons
2014
2024

33. Propylene is poised to be oversupplied globally
Pricing & Purchasing Summit / November 2014
Propylene is poised to be oversupplied globally
Capacity Overwhelms Anticipated Demand Growth

34. China pursuing on-purpose propylene using coal
Pricing & Purchasing Summit / November 2014
China pursuing on-purpose propylene using coal
Million Metric Tons
% of Capacity
08-13: + 8 MMT
14-18: + 13 MMT

35. Non-traditional sources supporting propylene additions
Pricing & Purchasing Summit / November 2014
Non-traditional sources supporting propylene additions 35

36. PDH Production by Region
Pricing & Purchasing Summit / November 2014
PDH production goes big around the world
Propane available from shale gas/natural gas
Changing the economic profile of propylene production
Will result in investment in PP capacity in North America, a change from recent trends
PDH Production by Region

37. Total World Propylene 2020+
11/13/ :59 AM
Pricing & Purchasing Summit / November 2014
Total World Propylene 2020+
Refinery FCC/Coker
Steam Crackers
On-Purpose
30% – 35%
40% - 45%
25% - 30%

38. Alkylation alternative remains favored
Pricing & Purchasing Summit / November 2014
Alkylation alternative remains favored

39. 11/13/ :59 AM
Pricing & Purchasing Summit / November 2014
Global propylene net equivalent trade reduces due to the rapid investment in China
This chart shows the net propylene import and export position for each major region. It is calculated on both propylene and contained propylene in derivatives.
Historically, North America and West Europe served as the main exporters of propylene derivatives to other regions, especially Asia. However, with investments towards the end of last decade, the Middle East is now the largest net exporter of propylene derivatives while Asia remains the largest net importer.
China is the largest importer of propylene and propylene derivatives, but with its massive wave of new on purpose capacity additions slows the continual growth of net imports into Asia. Eventually the Middle East continues to grow it’s export position and North America moves back closer to historical levels. West Europe moves to a more balanced position.

40. Polypropylene: Americas Trade Balance
Pricing & Purchasing Summit / November 2014
Polypropylene: Americas Trade Balance

41. Propylene prices will begin to trend lower next year
Pricing & Purchasing Summit / November 2014
Propylene prices will begin to trend lower next year

42. Propylene short-term market outlook
Pricing & Purchasing Summit / November 2014
Propylene short-term market outlook
US propylene prices will decline slightly in the fourth quarter before a projected increase in 2015 on the back of refinery supply shortages.
European ethylene crackers are utilizing more propane, further reducing propylene output in the region. This will result in continued tightness of supply over the next 12–18 months.
Asian propylene markets will remain long next year as derivative demand is soft and domestic producers have shut down excess capacity until consumption growth returns.
Reduced pricing volatility is expected next year; however, we will continue to see up-and-down price movement based on demand seasonality and projected refinery turnarounds.

43. Propylene prices increasing in the long-term
11/13/ :59 AM
Pricing & Purchasing Summit / November 2014
Propylene prices increasing in the long-term

44. Propylene to Ethylene Price Ratios
Pricing & Purchasing Summit / November 2014
Propylene to Ethylene Price Ratios
A Return to the 1990’s?
More than 2X GDP Growth in 1990’s

45. Pricing & Purchasing Summit / November 2014
Buyers bottom line
Improved demand for polypropylene, combined with unplanned steam cracker production issues and poor metathesis economics, has allowed prices to recover moderately
A smoother price profile with slight downward potential is possible next year if we continue to see softening in energy prices
Improved pre-planning of all consumers throughout each derivative chain has helped reduce some volatility.
Rapid expansion of China non-PP derivative capacity (especially AN) limits export opportunities.
No need to build inventories if the chemical and refining industry complex is running smoothly, but there is not much “excess” in the system

46. Thank You!
Questions?