Polyolefins: Globalization and Beyond

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Polyolefins Globalization and Beyond

• Robert J. Bauman
• Vice President

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Globalization Now More Than Ever
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The Polyolefins World is Changing

• The need to globalize is becoming increasingly
  important
• No new crackers in North America
• High feedstock cost
• Low demand growth
• Advantaged feedstock (ethane) is still available
  in many countries (risk is an issue)
• Trade patterns will change
• Protectionism is declining (WTO, GATT, etc.)
• Mergers and acquisitions are increasing and money
  is no object
• There are more than 150 polyethylene and
  polypropylene producers but very few are global
  players

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Top twenty polyethylene producers, (thousand tons
per year), 2006
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There Are Only a Few Global Polyethylene
Producers (3 or More Regions)
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Top ten polypropylene producers, 2006
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There Is Only One Global Polypropylene Producer
But More Are Coming
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It Is Not Too Late To Globalize

• The outlook for the next two years is very
  positive for the industry. Companies will have
  cash to invest
• Many new and countries are emerging opportunities
  and many new projects are being developed in
  countries that already have capacity. Political
  issues exist for some of these countries
• Some companies that have only invested in their
  own county have recently announced international
  investments
• Westlake Trinidad
• Braskem (Brazil) Venezuela

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Opportunities Exist in Many Countries (Partial
List)
Future opportunity
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Nexant Foresees a Period of Strong Industry
Profitability (Fly Up)

• Olefins and polyolefins will lead the fly up
  projected to begin in early 2007 and possibly
  peak by year end
• Globally, most companies are already operating
  close to, or at, full effective capacity
• Any unplanned outage will exacerbate the
  situation (e.g., Gulf Coast hurricanes)
• Lack of new capacity in 2008 will keep operating
  rates high
• Construction delays in China and the Middles East
  
• Downturn is projected to begin in 2009 as too
  much new capacity will be starting up
• Demand growth will be higher than supply growth

Strong profitability will drive investments. The
key question is where to invest
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No New PE Plants are Being Built in the U.S.
(Shift is to the Middle East and China)
Global PE Capacity Growth, Announced Start up
Dates (thousand tons per year)
Most plants in the Middle East and China will be
delayed by one to two years
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PE Operating Rates will Stay High Based on Known
Expansion Plans, but the Downturn Could be Severe
Global Polyethylene Operating Rates

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Capacity Growth Mainly in China and the Middle
East With 1 to 2 Year Delays
Announced Capacity Additions by Region
Most of the 2008 plants will not start up until
2009-2010
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PP Operating Rates will be High Through 2008,
but the Downturn Could be Worse Than 2001
Global Polypropylene Operating Rates

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The Profitability Decline in the Post-fly Up
Period Could be Severe

• Most new crackers in low cost feedstock countries
  and most of the production will be exported
  (lower export cost)
• China will be building a large amount of new
  capacity (lower import growth post 2010)
• The amount of new capacity in the 2009-2011
  period will determine the depth of the downturn.
  Profitability could decline to the levels of the
  2000-2003 period

Key Conclusion Companies and people have a
window of strong profits in which to position
themselves for the downturn
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Middle East
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About 23 MM Tons/Year of New Capacity is Planned,
but Most Plants are Delayed by 1-2 Years
Ethylene Capacity Growth In The Middle East
Total Installed Capacity(million tons per year)
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ME will Become the Worlds Supplier of Commodity
Polyethylene (and Some Specialties)
Global Polyethylene Net Exports (thousand tons
per year)
Actual
Forecast
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The Middle East will Become the Major Supplier
of Polypropylene
Global Polypropylene Net Exports (thousand tons
per year)
Actual
Forecast
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China
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China is the Worlds Largest Polyolefins Importer

• Polyethylene demand in 2005 was about 45 of
  total Asian demand and 15 of total global
  demand. Polypropylene demand was 48 of Asian
  demand and 18 of global demand
• About 50 percent is produced in China and 50
  percent imported
• On a net trade basis, China imports about 42 of
  globally exported polyethylene and 44 of
  polypropylene
• China has become the worlds largest exporter of
  fabricated products (e.g., bags, woven sacks,
  toys) and finished products (e.g., TVs,
  microwaves, appliances) and will begin exporting
  cars in 2007

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Understanding the China Market is Difficult.
Predicting it is Impossible

• Purchasing patterns have always been erratic
• Government actions (e.g., closing ports)
• Inventory building (speculative)
• Price sensitivity (reducing purchases when prices
  are high)
• Interpolymer/intermaterial substitution
• Other factors (e.g., SARS epidemic, power
  shortages)
• Polymer imports in 2004 and 2005 were below
  expectations leading to the belief that demand
  had weakened. However, in retrospect, this was
  not the case

A structural change occurred in the China market
in 2004
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Imports of Recycled Polymers Increased 25 percent
in 2005 Reaching 5 Million Tons, but may Have
Peaked
Nexant estimates based on adjusted import data
and market research 2006 1st qtr data
extrapolated
This is the main reason for lower virgin resin
imports
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Outlook for China

• Substantial amount of new capacity planned, but
  there will be delays
• Polyolefin imports will peak in 2009 declining as
  domestic capacity starts up
• The Middle East will have the largest share of
  the import market. Prices could decline
  significantly as South Korean and other Asian
  producers compete for the remaining share
• No significant action expected from other
  countries against China that would adversely
  affect economic growth, exports, etc. (e.g.,
  China is the biggest supporter of the U.S. debt
  and strength of the dollar)

China will remain the largest and most
competitive export market
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North America
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Polyolefins in North America will be Capacity
Limited, Due to the Lack of Investment

• No new polyethylene or polypropylene plants under
  construction or even announced in the United
  States due to the high ethane costs and low
  market growth
• In Mexico, one polypropylene expansion will occur
  in 2007/2008 (Indelpro) but a new polyethylene
  expansion (New Phoenix) not likely until after
  2010
• The new cracker project in Nova Scotia still has
  feedstock and financing issues which will delay
  the project until after 2010

With the lack of new investment any supply
problem, such as hurricanes in the Gulf Coast
will intensify the shortage
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In The U.S. Imports of Fabricated Products have
Been Increasing, in Spite of Anti-dumping Action

• Nexant estimated that more than 500 thousand tons
  of polyethylene products were imported in the U.
  S. in 2003
• FTC action resulted in anti-dumping tariffs
  against China, Malaysia and Thailand (50 percent
  of 2003 imports)
• In spite of high export prices in 2004 imports
  increased substantially
• One of the categories specifically targeted in
  the anti-dumping action was carrier bags. Nexant
  has analyzed this segment to measure the impact
  of the anti-dumping action

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Imports of Bags Continued to Increase in 2005
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Large LLDPE and HDPE Deficits are Projected
Without Substantial New Capacity
United States Polyethylene Net Exports (thousand
tons per year)
The U.S. will continue to be a net exporter of
LDPE
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North America Could Become a Large Net Importer
of Polypropylene by 2009
North American Polypropylene Net
Exports ((thousand tons per year)
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Logistics will be the Key for Success in
Supplying North America

• The Americas has remained relatively isolated
  from the rest of the world
• Logistics (bulk delivery) has acted as a
  non-tariff trade barrier to large volume
  polyolefin imports
• Based on supply shortages, it is very likely that
  this barrier will end by 2009. Bulk delivery is
  being implemented in other regions and could
  easily be implemented in the United States
• Any country with an advantaged feedstock position
  could supply the United States
• Exporting from Asia and South America to the
  West Coast could also occur as the Middle East
  will likely use Houston and the East Coast as its
  ports of entry

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Challenges Ahead
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Some Important Short-term Changes are Emerging
(2006-2010)

• Significant shift in investing with no investment
  in developed countries
• Future investments driven by low cost feedstock
  and the China market
• Trade patterns will change
• North America moving to a net import position
• Increased trade in fabricated and finished
  products will reduce demand in target countries
• Heavy investment in new technology development

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Whats Next For The Polyolefins Industry?

• Trade patterns will change
• Globalization will increase
• Technology development will accelerate
  particularly for alternative feedstocks and
  energy (coal, biomass, etc.)
• Merger and acquisition opportunities will also
  occur. A fly up is a good time to divest
  non-core assets
• Cyclicality will continue learn to live with
  it!

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Polyethylene Trade is Highly Regionalized
The Americas
Rest of World
From Canada/U.S.
From Asia (spot sales mainly from Korea)
The Middle East and Europe have never exported to
the Americas
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The Export World Will Change With the Middle East
Becoming a Large Supplier to the Americas
From Canada/U.S.
?
(specialties)
From Asia (spot, mainly from Korea)
New plants in Latin America could also export to
the U.S. (post 2010)
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Whats Next For Your Company?

• Enhancing domestic sales
• Increase market share of higher value-added
  products
• Identifying new export opportunities
• Which countries?
• Can you establish a competitive advantage?
• Cost to serve
• Product mix
• Sales channels
• Strategic alliance
• Greater use of existing and new technology to
  upgrade product mix
• Future investments (how much and where to invest?)

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Whats Next For You?

• The successful employee of the future will have
  to adapt to new ideas, new rules and a changing
  environment
• If you want to produce polyolefins learn Arabic
• If you want to sell polyolefins learn Chinese
• If you want to get noticed volunteer to work in
  Kazakhstan (or any of the other stans or
  similar places in the news)

But, above all Do not be a beaver
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• You've carefully thought out all the angles.
• You've done it a thousand times.
• It comes naturally to you.
• You know what you're doing, its what you've been
  trained to do your whole life.
• Nothing could possibly go wrong, right ?

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Think Again.
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Polyolefins Globalization and Beyond

• Robert J. Bauman
• Vice President