North America Light Olefins Market Review

1
North AmericaLight Olefins Market Review
Presented To Petrochemical Feedstock Association
of the Americas November 8-10, 2006 Austin, Texas

• Mark Eramo
  Vice
  President Olefins
  CMAI Houston
  meramo_at_cmaiglobal.c
  om

2
LegalStuff

• The petrochemical forecasts of prices, costs,
  margins and supply/demand are based on CMAI
  analysis.
• Energy price forecast data are provided by Purvin
  Gertz.
• Please use at your own risk!

3
Light Olefins Market Outlook

• View At 50,000 Feet
• Economy Light Olefins Growth
• Energy Impact On Cost
• Market Overviews
• Supply / Demand / Trade
• Utilization
• Price Margin Forecast
• Strategic Issues

4
Olefins Supply-Chain Dynamics

5
Global Assembly Line
Commodities to Converted Products to Retail
Goods
Growth in Chemicals Demand Will Continue to
Outpace That of The World Economies Extremely
Efficient Supply Chains Have Been Developed
Global Companies and WTO Very Supportive
Hydrocarbon Value
Labor Cost
Improving Standard of Living in China India
Have Significantly Increased Internal
Consumption Implies That Current Pace of
Additions Could be Absorbed Fairly Quickly
Consumer Demand
6
2005 U.S. Film Bag Imports
(PE Resin Volume Equivalent)
Canada
Others
25
31
Mexico
France
4
1
Israel
1
China
South Korea
Germany
28
2
1
Japan
1
Indonesia
Malaysia
2
4
Approx. 2.7 Billion Pounds of PE Resin
7
The Petrochemical Cycle Will Continue
Light Olefins
Polyethylene (HDPE)
Polypropylene
8
The Economy Light Olefins Growth
9
Regional Economic Growth Comparison Most Likely
Case
Percent Change
8.0
7.0
6.0
5.0
4.0
3.0
2.0
1.0
0.0
-1.0
-2.0
-3.0
90
92
94
96
98
00
02
04
06
08
10
10
World Ethylene GDP Elasticity
Elasticity
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
12
11
Comparison of U.S. Non-Durable Goods Production
Index in the 1990/92 2000/03 Recessions
Index
Source Federal Reserve Board
125
120
1990/91 Recession
2000/03 Recession
115
Peaks
110
September 1990
December 1999
105
Sept. 06
100
95
90
-6
0
6
12
18
24
30
36
42
48
54
60
66
72
78
Months Prior
Months After Peak
to Peak
12
World Propylene GDP Elasticity
Elasticity
6.0
5.0
4.0
3.0
2.0
1.0
0.0
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
13
Energy Impact on Regional Ethylene Economics
14
North America Energy Price Trends
/ MM Btu
Crude/Gas Ratio
14.00
10.00
While the absolute value of energy is higher, the
price of natural gas relative to crude oil is
what counts from a North America light olefins
producer perspective
9.00
12.00
8.00
10.00
7.00
6.00
8.00
5.00
6.00
4.00
3.00
4.00
2.00
2.00
1.00
0.00
0.00
81
83
85
87
89
91
93
95
97
99
01
03
05
07
09
Natural Gas
Crude (WTI)
Crude / Gas Ratio
15
Global Ethylene Cash Costs
Unit-by-Unit Cost Curve
Dollars per Ton
1250
High energy prices increase advantage for Middle
East Units
Crude Oil Prices 1998 15/bbl 2006
65/bbl 2010 48/bbl
1050
850
2006
650
450
1998
250
50
0
20
40
60
80
100
120
140
160
Cumulative Ethylene Capacity (Million Tons)
Total Cash Cost
Middle East
U.S.
Southeast Asia
West Europe
Western Canada
16
"The Alberta Advantage"
Ethylene Cash Costs Comparison
Alberta Ethane Vs U.S.G.C. Ethane
Cents Per Pound
Dollars Per Ton
45
992
Periods of strong advantage for
Forecast
40
882
Western Canada ethane cracking
35
772
30
661
25
551
20
441
15
331
10
220
5
110
0
0
-5
-110
00
A
J
O
01
A
J
O
02
A
J
O
03
A
J
O
04
A
J
O
05
A
J
O
06
A
J
O
07
A
J
O
Delta
USGC Ethane
Alberta Ethane
17
Light Olefins Market Outlook Trends in
Supply, Demand, Trade, Utilization, Price
Margins
18
North America
2006 Ethylene Supply/Demand
Production by Feedstock
Demand by End-Use
PE
Ethane
58
49
Propane
Others
15
5
Others
Gas Oil
Butane
Ethylene Oxide
11
5
Naphtha
4
EDC
EBZ
22
13
13
5
Domestic Demand 31 Million Metric Tons
19
North America
2006 PG/CG Propylene Supply/Demand
Production by Source
Demand by End-Use
PP
Stm. Crackers
59
49
Cumene
1
Others
Acrylo-nitrile
6
Others
FCC/Splitters
Oxo Alc.
Propylene
Acrylic Acid
10
3
48
6
Oxide
12
6
Domestic Demand 16 Million Metric Tons
20
Supply Growth Outlook

• Capacity additions slowed in 2003/2004 supporting
  current recovery
• Peak-cycle conditions accelerating investments in
  Middle East and Asia
• Modest additions in other regions
• Supply growth by end of decade too much too fast
• Acceleration in On-Purpose propylene

Yanpet Ethylene Plant, Saudi Arabia
21
Regional Ethylene Capacity Growth
Regional
World
Million Tons
Million Tons
50
200
40
160
30
120
20
80
10
40
0
0
00
01
02
03
04
05
06
07
08
09
10
11
12
22
Global Ethylene Capacity Growth
( -000- Tons )






























23
Ethylene Investments In The Americas
24
Global Propylene Supply Trends
Propylene Supply Million Tons
90
80
70
60
50
40
30
20
Refineries
Steam Crackers
10
0
00
01
02
03
04
05
06
07
08
09
10
25
Middle East Propylene Capacity
Million Metric Tons
10
8
6
4
2
0
00
01
02
03
04
05
06
07
08
09
10
26
Olefins Derivative Trade Dominated By The Middle
East

• By 2009, ethylene net trade is dominated by the
  Middle East Region
• All other major regions are net importers,
  including North America
• Asia imports, mainly China, remain the largest
• Middle East emerges in propylene trade

27
Ethylene Equivalent Trade Surplus From Middle East
Million Metric Tons
30
25
20
15
10
5
0
00
01
02
03
04
05
06
07
08
09
10
11
12
28
North America
Ethylene Net Equivalent Trade
Million Metric Tons
5.0
Net Exports
4.0
3.0
2.0
1.0
0
-1.0
-2.0
Net Imports
-3.0
01
02
03
04
05
06
07
08
09
10
11
Ethylene
Vinyls
Styrenics
Polyethylene
Glycol
Others
29
North America Propylene Net Equivalent Trade
Million Tons
3.0
Net Exports
2.5
2.0
1.5
1.0
0.5
0
Net Imports
-0.5
01
02
03
04
05
06
07
08
09
10
11
Propylene
Acrylonitrile
Polypropylene
Others
30
Olefins Demand Growth Remains Steady With The
Economy

• A strong and resilient global economy continues
  to drive demand growth for light olefins
• Ethylene demand growth forecast at 4 per year
• Strongest Growth In PE and EO/EG
• Propylene demand growth forecast at 5 per year
• Strongest growth in PP and Cumene

31
North America
Ethylene Demand Forecast
Total Demand Growth -0.7 AAGR 2006-11
Million Metric Tons
40.0
35.0
30.0
25.0
20.0
15.0
10.0
5.0
0.0
01
02
03
04
05
06
07
08
09
10
11
PE
Ethylene Oxide
EDC
EBZ
Others
Capacity
32
North America
Ethylene Production By Feedstock
Million Metric Tons - Ethylene Capacity
Thousand Barrels per Day
2500
40
2000
35
1500
30
1000
25
500
20
0
15
01
02
03
04
05
06
07
08
09
10
11
33
North America
PG/CG Propylene Demand Forecast
Total Demand Growth 1.7 AAGR 2006-11
Million Metric Tons
Polypropylene
Cumene
Acrylic Acid
Propylene Oxide
Acrylonitrile
Oxo Alc.
Others
34
Peak-Cycle Conditions Sustained In
2006What Lies Ahead ?

• 2006 developing into peak year in the current
  cycle
• We remain optimistic for 2007 and early 2008
• Massive expansions in 2009 expected to influence
  2H-2008
• Trough returns by 2009 and it could be another
  long one
• PE price ratios remain higher for all regions

35
Regional Ethylene Capacity Additions
Million Tons
12.0
Two-year rolling average
10.0
8.0
6.0
4.0
2.0
0.0
01
02
03
04
05
06
07
08
09
10
11
North America
Middle East
Southeast Asia
West Europe
Northeast Asia
Others
Annual Demand Change
36
Global Ethylene Market Outlook
Million Tons
180
160
140
120
100
80
60
40
20
0
1995
1997
1999
2001
2003
2005
2007
2009
2011
37
Regional World
Ethylene Capacity Utilization
Percent
110
105
100
95
90
85
80
75
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
World
NAM
WEP
NEA
SEA
MDE
38
North America
Ethylene Demand, Capacity Operating Rate
Operating Rate
Million Metric Tons
40.0
110
35.0
105
30.0
100
25.0
95
20.0
90
15.0
85
10.0
80
5.0
75
0.0
70
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
Demand 2.2 / -0.7
Capacity 0.9 / 0.1
Operating Rate
AAGR 01-06 / AAGR 06-11
39
North America
Ethylene Demand, Capacity Operating Rate
Operating Rate
Million Metric Tons
40.0
110
35.0
105
30.0
100
25.0
95
20.0
90
15.0
85
10.0
80
5.0
75
0.0
70
01
02
03
04
05
06
07
08
09
10
11
Demand 2.1 / -0.7
Capacity 0.6 / -0.1
Operating Rate
AAGR 01-06 / AAGR 06-11
40
U.S. Cash Margins By Feedstock Type
Operating Rate
Dollars Per Ton
800
95
700
90
600
500
85

400
80
300
200
75
100
0
70
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
12
13
14
15
41
Global Annual Ethylene Prices
(Constant 2006 Dollars)
Dollars Per Ton
1,300
1,200
1,100
1,000
900
800
700
600
500
400
300
200
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
12
13
14
15
U.S. Contract Price
WEP Contract Price
SEA CFR Spot Price
42
Propylene to Ethylene Price Ratios
Ratio
Ratio
1.5
1.5
Forecast
1.4
1.4
1.3
1.3
1.2
1.2
1.1
1.1
1.0
1.0
0.9
0.9
0.8
0.8
0.7
0.7
0.6
0.6
0.5
0.5
90
92
94
96
98
00
02
04
06
08
10
12
14
Southeast Asia
West Europe
North America
43
Market Outlook Conclusions

• Strong global demand growth supported by steady
  economic growth
• Peak-cycle conditions well into 2007 and maybe
  2008
• Middle East and Asia capacity additions will
  outpace demand growth by a sizeable amount
• Cycle-trough margin conditions seem unavoidable
  by 2009/2010 from over-supply
• Downturn will be sooner if economy slows

44
Strategy Implications For North America
Olefins Producers
45
Looking Ahead for North AmericaKey Issues for
Olefins Producers

• Increase imports of finished goods derivatives
  impact domestic growth for monomer
• North America remains high growth (end-use)
  market Product mix becomes essential
• Price/Margin peak during 2005/07 bottom out in
  2009/11
• Margin low-point similar to 2001 price low point
  is higher due to energy base
• Additional mergers/closures likely and will lend
  support to supply discipline in trough
• Crude-To-Gas ratio critical to regional
  competitiveness