Price dynamics of plastic resins in global markets what can a converter do?

Chua Sok Peng, Managing Editor, Platts Asia Petrochemicals & Soft Commodities

AGENDA

Rising crude & naphtha prices Ethylene Propylene Polyethylene Polypropylene Looking forward

CRUDE & NAPHTHA RELATIONS

ASIAN ETHYLENE PRICES DIVERGE

NEA ETHYLENE CRACKING MARGIN AT 3-YEAR-LOW

SEA Ethylene crack margin worsens

ASIAN ETHYLENE Short term: Supply tightness in Q1

Arbitrage opportunities, creating outflow of C2 Mid-East tightness (Saudi and Qatar)

Mid-to-long term: Iran issue Mid-to-long term: Limited expansions

Little spot availability/expansions in the next 2-3 years

AGENDA

Rising crude & naphtha prices Ethylene Propylene Polyethylene Polypropylene Looking forward

PROPYLENE: Caught between high naphtha, poor PP

Propylene market was on an uptrend since end-Dec to Feb

Initially pushed by PP demand/prices Then supply/demand issue
Some market participants expected market to be better post Lunar New Year Stock up for T/A season in South Korea

Took a downturn mid-Feb

Demand did not take off as expected for C3 and PP

PROPYLENE MARGIN CRUNCH

SEA PROPYLENE PRICE

SEA propylene price relatively stable

Supplies are heavy in SEA and demand is weak in Indonesia

Traders are reluctant to move SEA cargoes to NEA due to high freight rates

CFR SEA PROPYLENE VS CFR TAIWAN

AGENDA

Rising crude & naphtha prices Ethylene Propylene Polyethylene Polypropylene Looking forward

12

PE: China & India, the Asian drivers

Asia PE demand share 2010 (by country)
Indonesia Taiwan 2% Thailand 3% 4%

China 58%

Others 7%

S Korea 7%

Japan 9%

India 10%

ASEAN grows: China LLDPE 2010 imports

China's LLDPE imports FY 2010

Canada 5%
Brazil 1% Taiwan 4% UAE 2%

US 14%

Indonesia Iran 3% 1%

Japan 4%

Kuwait 4% Saudi Arabia 27%

Thailand 10%

South Korea 12%

Singapore 13%

ASEAN grows: China LLDPE 2011 imports

China's LLDPE imports FY2011 Taiwan prov. 2% Saudi Arabia 28%

Japan Kuwait 3% 3%

Canada Iran 4% 4% U.A.E. 4% Qatar 4% United States 10%

Thailand 15%

Singapore 13%

Korea Rep 10%

ASIAN PE SPOT PRICES

POLYETHYLENE ON RECENT UPTREND

High feedstock cost
ICE Brent crude crosses $120/barrel Naphtha crosses $1,000/mt CFR Japan

Last time when both were at this levels (end-Apr 2011):

HDPE: $1,400/mt LLDPE: $1,370/mt LDPE: $1,675/mt

Feedstock cost push

Even gas-based Mid-East producers pushing prices up Lack of lower-cost cargoes now

CHANGING DYNAMICS OF PE MARKET

HDPE highest priced now

LLDPE fell below HDPE since mid-Apr 2011 LDPE fell below HDPE since mid-Dec 2011

Occasional HDPE supply tightness supporting prices LLDPE supply high, demand seen as weak
Less use = less blending Affects LDPE demand

CURIOUS CASE OF LDPE

LDPE traditionally higher than other PE but dynamics changed since end-Dec Supply set to increase by H2 2012
H1 2012 Qapco to start up LDPE3 plant H2 2012 Saudi Kayan to start up 300 kta plant

Abundant supply from Iran

China is largest buyer of Iran LDPE China 2011 imports, 297 kt or 20%

Other alternatives: i.e. C6 LLDPE

NEGATIVE MARGINS FOR ASIAN PE

PP: China and India, the Asian drivers too

Vietnam Malaysia 1% 2% Taiwan 2% Indonesia 3% Thailand 5%

Asian PP demand 2010

Others 2% China 59%

S Korea 6% India 10%

Japan 10%

Source: METI

Saudi grows in China PP market

China's PP imports 2010

Korea Rep 25%

Thailand 4%

United States Singapore 5% 6% India 6% Japan 6%

Saudi Arabia 18%

Taiwan prov. 14% Others 16%

Chinas PP imports in 2011

China's PP imports 2011 Korea Rep 24% Thailand 4% United States 5%

Japan 5% Singapore 5% U.A.E. 6% India 7%

Saudi Arabia 19% Others 13%

Taiwan prov. 12%

Asian PP on uptrend due to high cost

ASIAN PP MARGINS IN THE RED

Polyolefins producers under pressure

Date Naphtha 2/27/12 1072.75

Cost Ethylene Propylene HDPE LLDPE LDPE MEG PP Slate HDPE / LLDPE HDPE / LDPE Margins 1422.75 1322.75 1572.75 1572.75 1622.75 1003.65 1472.75

Assessed 1280 1335 1381 1281 1349 1076 1415

Cracks -142.75 12.25 -191.75 -291.75 -273.75 72.35

-57.75

-483.5 -465.5

AGENDA

Rising crude & naphtha prices Ethylene Propylene Polyethylene Polypropylene Looking forward

27

Ethylene a by-product?
With the negative margins of ethylene, producers have to rely on other olefins to even out margins

Butadiene and propylene are still in the blacks

Crackers optimized based on the prices of these other products

Ethylene: The Iran Issue

Iran will have 15-20 kt/month of cargoes available as EU countries enforce its sanctions mid-year Cargoes will move to Asia, especially China where trade can still go on This can lead to heavy supply in the region But will be challenging Only Japanese, Taiwanese flagged tankers available Insurance will be tough to find Banking issues

Few world-scale projects in near future

Slow down of new large capacity additions After large projects came on stream 2010-2011 Few large capacities over the next 3-5 years globally Awaiting the start-up of Saudi Polymers in Q1 Sadara Chemical Company is the next big project on the horizon JV between Saudi Aramco and Dow Chemical 1.5 million mt/year of ethylene, 400,000 mt/year of propylene complete construction in September 2014

Few world-scale projects coming up

New Chinese capacities
Wuhan Petrochemicals: 300 kta LLDPE, 300 kta HDPE (DOC 2012) Fushun Petrochemical: 450 kta LLDPE, 350 kta HDPE (2012 Q3 startup) Sichuan Petrochemical: 300 kta HDPE, 300 kta LLDPE (2012 Q4 2013 Q1 start)

New Indian capacities

MRPL 440 kta PP plant (Oct start-up) OPaL's 1.1 million mt/year PE & 340 kta PP (Oct 2013) HMEL 440 kta PP plant (Mar-Apr) Gail PE expansion to 900 kta (end 2013) BPCL 220 kta HDPE/LLDPE swing plant & 60 kta PP (Q1 2014)

ASEAN growth worth watching

Southeast Asia polymer supply to grow JG Summit starts cracker construction 300 kt LL/HDPE swing Burel Industries in Malaysia 500 kt PE, 250 kt PP Gulf Asian Petroleum in Malaysia 525 kt PP Thailand PTT and SCG ramping up production ExxonMobil yet to start 650 kta LLDPE plant in Singapore SEA producers taking advantage FTAs ASEAN-China Intra-ASEAN

ASEAN Free Trade Agreements

ASEAN-China FTA Currently at 0%: LLDPE, PP-copol, PVC 2012: PP-homo import tax = 0% With the exception of HDPE, LDPE

Impact of ASEAN-China FTA

Import growth (2010 vs 2007)
200.0%

ASEAN ORIGIN
150.0%

TOTAL IMPORTS

% increase

100.0% 50.0% 0.0% LLDPE -50.0% PP-BC LDPE HDPE PP-homo PVC

Product

Chinas GDP growth moderating

China GDP Growth 2011-2013 IMF Estimates

15 14 13 12 11 10 9 8 2006 2007 2008 2009 2010 2011* 2012* 2013* 2006 2007 2008 2009 2010 2011* 2012* 2013*

Source: IMF

India economy growing, but moderating too

India GDP Growth 2011-2013 IMF Estimates

10.5 10 9.5 9 8.5 8 7.5 7 6.5 6 2006 2007 2008 2009 2010 2011* 2012* 2013* 2006 2007 2008 2009 2010 2011* 2012* 2013*

Source: IMF

Focus moving to internal consumption

Indias growing economy will support demand for polymers India population expected to outgrow China by 2050 Younger population; entering workforce But fairly balanced domestic demand-supply Current per capita consumption 5-6kg China is a big market, but long-term growth appears to be moderating Per capita consumptions increasing 46kg per capita in 2010, doubled over 5 years Aging population Financial controls But new 5-year plan may help boost immediate demand (10 mil public housing by 2011, 36 mil by 2015

Conclusion
Current market trends High feedstock costs a concern Moderating demand no supporting prices Weak margins for olefins and polyolefins Looking ahead Mid-east feedstock change SEA growth / AFTA China/India still driving forces

Thank you!
Chua Sok Peng Managing Editor Asia Petrochemicals & Soft Commodities