1. business and industrial
2. energy
3. natural gas

What is the future of Polyolefins in Asia when
facing the dual low-cost players – Middle East and
North America?
APIC 2014 – Polyolefins Committee
1
16 May 2014
Contents:
2

Context (or, the causes)

Challenges

Conclusions
APIC 2014
Shale revolution shifted some old concepts
But we had a revolution because oil & natural gas prices hit the roof
Non-OPEC taking the
lead on production
growth (Russia,
Caspian countries,
Mexico, North Sea,
North Slope of Alaska)
160
US$/bbls – nominal prices
140
120
Higher prices lead to a
resurgence in
exploration and
technological
revolution (deepwater
and shale)
100
80
60
40
20
WTI Spot Price FOB (US$/b)
APIC 2014
Jul-2013
Jan-2014
Jul-2012
Jan-2013
Jul-2011
Jan-2012
Jul-2010
Jan-2011
Jul-2009
Brent Spot Price FOB (US$/b)
Today, OPEC production marginally higher than 1980’s
3
Jan-2010
Jul-2008
Jan-2009
Jan-2008
Jul-2007
Jul-2006
Jan-2007
Jul-2005
Jan-2006
Jul-2004
Jan-2005
Jul-2003
Jan-2004
Jul-2002
Jan-2003
Jul-2001
Jan-2002
Jul-2000
Jan-2001
Jul-1999
Jan-2000
Jul-1998
Jan-1999
Jul-1997
Jan-1998
Jul-1996
Jan-1997
Jul-1995
Jan-1996
Jul-1994
Jan-1995
Jul-1993
Jan-1994
Jul-1992
Jan-1993
Jul-1991
Jan-1992
Jul-1990
Source: Townsend Solutions
Jan-1991
0
14.00
12.00
-
4
Jul-1990
Jan-1991
Jul-1991
Jan-1992
Jul-1992
Jan-1993
Jul-1993
Jan-1994
Jul-1994
Jan-1995
Jul-1995
Jan-1996
Jul-1996
Jan-1997
Jul-1997
Jan-1998
Jul-1998
Jan-1999
Jul-1999
Jan-2000
Jul-2000
Jan-2001
Jul-2001
Jan-2002
Jul-2002
Jan-2003
Jul-2003
Jan-2004
Jul-2004
Jan-2005
Jul-2005
Jan-2006
Jul-2006
Jan-2007
Jul-2007
Jan-2008
Jul-2008
Jan-2009
Jul-2009
Jan-2010
Jul-2010
Jan-2011
Jul-2011
Jan-2012
Jul-2012
Jan-2013
Jul-2013
Jan-2014
US$/MMBTU – Nominal Prices
Shale revolution shifted some old concepts
Same movement on natural gas prices but different…
16.00
Katrina and Rita
effect
Shale Gas comes
in to play
10.00
8.00
6.00
4.00
2.00
Source: Townsend Solutions
Henry Hub Natural Gas Spot Price ($/MMBTU)
APIC 2014
Shale revolution shifted some old concepts
But, what really matters for petrochemicals is NGL
25.00
US$/MMBTU – Nominal Prices
20.00
U.S. Natural Gas Liquid Composite Price ($/MMBTU)
Henry Hub Natural Gas Spot Price ($/MMBTU)
WTI Spot Price FOB ($/MMBTU)
15.00
10.00
5.00
Source: Townsend Solutions
-
NGL prices have traditionally been linked to crude oil. Not anymore…
5
APIC 2014
Oil and NGL tilts economics of energy plays
Source: Bentek Energy
6
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This scenario brings some questions
As more oil and NGL is
produced higher the return
Pushing for more and more
production of oil and NGL
Source: EIA; Townsend Solutions Analysis
7
APIC 2014
Natural Gas is long and will remain long
2012-2015 Fundamentals (Henry Hub Avg. - $ 4.00)
0.8
0.2
Industrial Demand
Exports to Mexico
Pipe Loss
Total Demand
Industrial Demand
ResComm Demand
Demand from Power
LNG Imports
Net Long
0.8 Bcf/d
Total Demand
ResComm Demand
Demand from Power
LNG Imports
Imports from Canada
Production
Total Supply
8
0.8
(1.7)
(1.7)
(0.3)
6.6
6.5
(3.3)
Imports from Canada
12.5
7.4
-
(1.8)
2007-2012 Fundamentals (Henry Hub Avg. - $ 5.14)
14.0
12.0
10.0
8.0
6.0
4.0
2.0
(2.0)
(4.0)
(6.0)
0.4
Pipe Loss
(0.6)
2.5
1.9
Exports to Mexico
2.0
Total Supply
Net Long
0.6 Bcf/d
3.9
3.1
Production
5.0
4.0
3.0
2.0
1.0
(1.0)
(2.0)
(3.0)
Source: Townsend Solutions
APIC 2014
This scenario brings some questions
- Is this revolution in US reproducible in
other countries?
- What about exports of NGL and LNG?
Could trade rebalance the supply/demand
and push prices up?
Issues:
- Experienced field personnel
- Regulations
- Operating companies
- Water and land rights
- Market large and liquid
- Usage of natural resources (water)
- Dry gas vs. NGL
- Growth in demand for liquefied natural gas
(LNG) exports, results in upward pressure on
prices, particularly in the 2015-18 period
- Even so, Henry Hub spot prices for natural gas
increase by an average of 3.7%/year from
$2.75/million Btu (MMBtu) in 2012 to
$7.65/MMBtu (2012 dollars) in 2040!
Source: Townsend Solutions
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APIC 2014
And one problem with a known solution
Estimated Product Yield by Feedstock
Ethane
Propane
Butane
Light Naphtha
Ethylene
80%
46%
37%
29%
Propylene
2%
15%
18%
17%
Fuel Gas
14%
28%
24%
20%
C4
2%
3%
8%
9%
Pygas
2%
8%
13%
25%
NGL Composition USA
13%
Ethane
9%
42%
Propane
Butane
8%
Isobutane
28%
Huge availability of propane
in the market
Natural Gasoline
Source: Townsend Solutions
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APIC 2014
On Purpose Propylene
Composition of Middle East’s propylene capacity shifted from a by-product to
on-purpose status
16000
14000
12000
10000
OP Metathesis
8000
On-purpose PDH
6000
Refinery
4000
Steam Cracker
2000
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
kta
2004
0
• The 2014-2015 shares will
be 55% from ethylene
crackers, 6% from refineries,
28% from PDH plants, and
11% from metathesis units.
• Metathesis units are higher
cost and ‘new’ for ME with
large units in Qatar and the
UAE (Abu Dhabi)
– Ethylene is converted to
intermediate butylenes
& finally propylene
Source: Townsend Solutions
11
APIC 2014
0.00
12
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Dec-2012
Jun-2012
Dec-2011
Jun-2011
Dec-2010
Jun-2010
Dec-2009
Jun-2009
Dec-2008
Jun-2008
Dec-2007
Jun-2007
Dec-2006
Jun-2006
Dec-2005
Jun-2005
Dec-2004
Jun-2004
Dec-2003
Jun-2003
Dec-2002
Jun-2002
Dec-2001
Jun-2001
Dec-2000
Jun-2000
Dec-1999
Jun-1999
Dec-1998
Jun-1998
Dec-1997
Jun-1997
Dec-1996
Jun-1996
Dec-1995
Jun-1995
Dec-1994
Jun-1994
Dec-1993
Jun-1993
Dec-1992
Jun-1992
US$/gallon
Economics are good for PDH
2.00
1.80
1.60
1.40
1.20
1.00
0.80
0.60
0.40
0.20
Mont Belvieu Propane Spot Price FOB (Dollars per Gallon)
With actual propane and propylene prices, IRR in a PDH unit could reach ~20%
Source: Townsend Solutions
Other points to consider
- Low cost of money – interest rates are still
low but tend to go up in the short term
- Domestic demand growing
- Cost of production in Mexico is less
expensive than China and China's
manufacturing-cost advantage over the
U.S. has shrunk to less than 5%
- Delays on the new projects due to scarcity
of resources (hard to find engineers,
construction workers and equipments to
build all the new petrochemical –
crackers, PDH, PO plants)
- High constructions costs
- Many crackers in US still running on about
5%-20% naphtha/gasoil/condensate (long
term contracts or in-house needs to
supply cracker by-products)
- It creates a plateau for ethylene prices
13
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Contents:
14

Context (or, the causes)

Challenges

Conclusions
APIC 2014
Leading us to different solutions for each region
15
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According to their competitive advantages
North America
• Massive investment in
new ethane/ethylene
capacity
• Investment in onpurpose C3 technology
16
APIC 2014
According to their competitive advantages
North America
• Massive investment in
new ethane/ethylene
capacity
• Investment in onpurpose C3 technology
Middle East
• Hurdles in the way –
possible shortage of gas
• Pursuing downstream
expansion
17
APIC 2014
According to their competitive advantages
North America
China
• Massive investment in
new ethane/ethylene
capacity
• Investment in onpurpose C3 technology
• Proven reserves of 1.94
trillion tons of coal
• Growing domestic
wealth leading
consumption
Middle East
• Hurdles in the way –
possible shortage of gas
• Pursuing downstream
expansion
18
APIC 2014
Or disadvantages
North America
China
• Massive investment in
new ethane/ethylene
capacity
• Investment in onpurpose C3 technology
• Proven reserves of 1.94
trillion tons of coal
• Growing domestic
wealth leading
consumption
Middle East
• Hurdles in the way –
possible shortage of gas
• Pursuing downstream
expansion
Central/South America
• No relevant
investments
• Political and economical
problems in some
countries
• Becoming an importing
region
19
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Or disadvantages
North America
Europe
• Massive investment in
new ethane/ethylene
capacity
• Investment in onpurpose C3 technology
• Sub-scale plants leading
to closures
• Clusterization
• Partnerships/Off-takers
China
• Proven reserves of 1.94
trillion tons of coal
• Growing domestic
wealth leading
consumption
Middle East
• Hurdles in the way –
possible shortage of gas
• Pursuing downstream
expansion
Central/South America
• No relevant
investments
• Political and economical
problems in some
countries
• Becoming an importing
region
20
APIC 2014
Or disadvantages
North America
Europe
• Massive investment in
new ethane/ethylene
capacity
• Investment in onpurpose C3 technology
• Sub-scale plants leading
to closures
• Clusterization
• Partnerships/Off-takers
China
• Proven reserves of 1.94
trillion tons of coal
• Growing domestic
wealth leading
consumption
Middle East
21
Central/South America
Africa
• No relevant
investments
• Political and economical
problems in some
countries
• Becoming an importing
region
• Despite political
problems, consumption
is growing
• Investments in Oil &
Gas chain (not
petrochemicals yet)
APIC 2014
• Hurdles in the way –
possible shortage of gas
• Pursuing downstream
expansion
Challenges in the Middle East
- Chemical and petrochemical chain
support an estimated 840,000 jobs in GCC
- Companies became leading global players
(internationalization to assure outlets for
GCC production)
- Downstream plastic processing
investments lagged behind expectations
so far
- Downstream activities account for 3% of
capacity compared to 15% on average,
worldwide
- Not enough gas available for further
expansions (new gas availability most
likely to be supplied at a higher price)
- Initiatives to develop non-associated gas
production under way but face long lead
times
- Some of the new projects under
construction have to use different
feedstock slate (Saudi Kayan/butane,
Sadara/naphtha)
- JV’s account for 60% of petrochemical
capacity – unlikely international partners
interested in investing without the
feedstock advantage
22
- Gap in management and technical
capabilities
APIC 2014
Challenges in the Middle East
Shifting production to naphtha may represent a major challenge to the cost position and
competitiveness of the Middle East petrochemical industry:
(1) Transportation cost of shipping GCC petrochemicals to market
(2) By-product streams at GCC petrochemical plants that are used for fuel have low value, given the low price
of gas, increasing plants’ costs
Cash Cost ($/t)
Global ethylene cost curve (plant gate): 2020 capacities, 2012 prices, and cash costs
Effective Capacity (kt/y)
Source: McKinsey
23
APIC 2014
Chinese coal chemicals
• Chinese Northwest regions host 76% of country’s total reserve
• Coal-consuming market is mainly located In the economically developed East and South regions
• Coal from NW is almost entirely transported by railways to ports in North China and then transported by
ships to the East and South. A significant amount is also transported by rail directly to the Central and East
• China has 400 kt and 1,400 kt of Ethylene and Propylene Capacities currently in operation, respectively
• Beyond those plants already in operation, 54 new CTO or MTO projects have been announced
16,000
Total capacity of CTO and MTO in China (MM t)
24% of total light olefin cap
14,000
12,000
10,000
8,000
6,000
4,000
2,000
0
2012
2013
2014
2015
2016
2017
Main risks:
• Chinese government tight control on project
approval
• Water supply constraints
• High capital costs
• Logistics and lack of infrastructure in the
underdeveloped NW part of the country
• Currently, the rail capacity is severely limited
and the cost to bringing coal from the NW to the
East and South is very high. As a result, the coal
price in the NW is significantly below the market
prices in the East and South
• Coal gasification produces 7x more greenhouse
gases than natural gas and is water-intensive
Source: Townsend Solutions
24
APIC 2014
But, what about Asia?
- Competition from North American product?
- How much product can China absorb with all the investment being made in
polyolefins?
- How can Asia be competitive with Middle East knocking on its door?
25
APIC 2014
North America vs. Middle East
Several similarities between those two regions but three major differences
26
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North America vs. Middle East
I. Companies (*some examples)
Most of
the
companies
are JV’s
27
APIC 2014
North America vs. Middle East
I. Companies (*some examples)
Footprint
in different
regions
28
APIC 2014
North America vs. Middle East
I. Companies (*some examples)
Footprint
in different
regions
Ability to control prices and markets
29
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North America vs. Middle East
II. Grade slates (*some examples)
Polyethylene
129
8
205
8
189
11
Different strategies on the market therefore, different focus on sales (direct sales vs
traders/off-takers; specialties + commodities vs pure commodities)
North American companies will push more for Western Europe sales, reshaping
Middle Eastern sales to China and Africa
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North America vs. Middle East
III. Plant sizes
North America average PE line 200kt
Middle Eastern average PE line 450kt
Today, GCC plants run smoothly, low
number of grades, world scale and quick
and efficient transitions
3 years from now, American companies will be able to:
(1) Maximize operations – commodity grades in the new word scale plants
(2) Maximize specialties – small units to produce high value added products
(3) Shut down or mothball units, controlling supply/demand
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APIC 2014
New trends on trade PE 2018
Change in PE capacity based on expected shutdowns & delays
Charts based on expected production, operating rates by region and forecasted consumption
-0.1 MM t
-1.9 MM t
-8 MM t
-0.9 MM t
1.4 MM t
11 MM t
-1.0 MM t
3.5 MM t
-2.0 MM t
-2.2 MM t
PE trade
flow
Average operating
rate = 85.1%
Source: Townsend Solutions
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APIC 2014
New trends on trade PP 2018
Change in PP capacity based on expected shutdowns & delays
Charts based on expected production, operating rates by region and forecasted consumption
-0 MM t
-0.6 MM t
-2.2 MM t
-0.7 MM t
0.2 MM t
2.8 MM t
0 MM t
2.7 MM t
-0.9 MM t
-1.0 MM t
PP trade
flow
Average operating
rate = 81.3%
Source: Townsend Solutions
34
APIC 2014
Contents:
35

Context (or, the causes)

Challenges

Conclusions
APIC 2014
Reshaping the market
- PE will be more and more a global game,
however PP will be a regional play
- North America won’t be able to export
PP across the world, due to capacity
limitations and added costs (PDH)
- In the short term, supply/demand in US
is tight, keeping prices up
- Major players will avoid “war prices” –
they will need to pay for the financing
- They will tend to keep domestic prices
up (North America) and use exports as a
cushion (Asia is not the best netback for
them)
- With the new PDH capacity in North
America, propylene prices tend to go
down and be less volatile (but still higher
than ethylene)
36
- Asian companies are and will be feeling
the pressure of North American and
Middle Eastern resin on PE
- New capacity in North America by the
major players, with footprint in all regions
of the world
- China is the major risk for other Asian
companies
- Re-shoring (migration back to NA)
- New players in the former Soviet Union
- The ability of Iran to put up new capacity
- Chinese market growing less than 5% p.y.
- New projects in Middle East subsidized by
governments (feedstock)
APIC 2014
Different strategies
“Sleeping with the enemy”
Invest or execute joint projects in North America
Partnerships to sustain your global position
Integration is key
“Bigger and Stronger”, promote mergers & acquisitions in different
regions, setting footprints in several parts of the world maximizing
logistics and production across plants
In the short term, importing feedstock can be an option for some
companies
“Lean and fit”, when the market reshapes, it’s time to reshape your
organization, focus migrates from sales to marketing & R&D
37
APIC 2014
Every cent is important
Functional excellence can significantly improve ROIC performance
Source: McKinsey
38
APIC 2014
Reshape the organization
Strategy
• Plan goals and
targets (what)
Strategic Planning
Value Targets
Tactics
• Pathway to accomplish
the targets (how)
• How control the assets
to meet the customer
standards and reach
the market
Operations
• Plan the usage of
the assets
(action plan)
Planning the
Capacity
Planning the
Demand
Plans and procedures
Inventories, Product Line,
Markets and Customer Bases
Primary and
Secondary
Distribution
Technical
Assistance
39
Objectives and policies
Objectives
Exports and Trade
Sales &
Marketing
APIC 2014
Domestic Sales
Channels
Infrastructure
Check and monitoring
Identify strengths and weakness – execution is key
Knowing the needs of your customer and the customer of your customer comparing your performance to your
competitors, identifying your strengths and weakness in the marketplace
40
APIC 2014
Thank you
Roberto Ribeiro
Phone: +1 281 873 8733 Extension 117
Email: [email protected]
509 N. Sam Houston Parkway East, Suite 500
Houston, Texas 77060 USA
www.TownsendSolutions.com
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APIC 2014