Impacts of lower oil prices on the chemicals industry. Hugo Heath Head of Corporate Sector Group HSBC

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1 Impacts of lower oil prices on the chemicals industry Hugo Heath Head of Corporate Sector Group HSBC

2 Oil outlook Oil prices have declined considerably since June 14, to reach ~$36/barrel as of mid- February 16 Research analysts (including HSBC) and industry consultants IHS are expecting oil prices to remain relatively low in 16 before recovering in 17 Recent oil prices ($/bbl) Price ($/bbl) 1 Oil price declines of ~57% between June 14 and January 15 Oil price forecasts ($/bbl) Price ($/bbl) 1 99 Oil price declines of ~% in 2H Jan-14 Jun-14 Nov-14 Apr-15 Sep-15 Feb-16 Brent WTI Source: FactSet, Broker research (as available), IHS Brent price (ave.) HSBC IHS Research analysts range

3 Performance of global stocks Share Price / Index 1 1 Brent price ($/bbl) % Jun-14 Aug-14 Oct-14 Dec-14 Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 Feb-16 WTI MSCI World Brent oil price ($/bbl) Source: FactSet, IHS

4 Performance of global commodity chemicals stocks Source: FactSet, IHS Note: 1. US Commodity includes Ashland, Axiall, Celanese, Dow, Eastman, Huntsman, LyondellBasell and Westlake 2. EU Commodity/Diversified includes AkzoNobel, Arkema, BASF, Evonik, Lanxess, Solvay and Wacker 3. Asia Commodity includes Formosa Chemicals & Fibre Corp., Formosa Plastics, Hanwha Corp, Indorama, LG Chem, NanYa, Petronas and PTTGC 4. KSA Commodity includes APC, PetroRabigh, SABIC, Sahara Petrochem, Sipchem and Tasnee Share Price / Index 1 Brent price ($/bbl) % -3% -16% -29% -53% Jun-14 Aug-14 Oct-14 Dec-14 Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 Feb-16 US Commodity EU Commodity/Diversified Asia Commodity KSA Commodity MSCI WTI World Brent oil price ($/bbl)

5 Earnings momentum Developed Markets US Commodity EU Commodity/Diversified ave. oil price ($/bbl) ave. oil price ($/bbl) EBITDA ($bn) EBITDA ($bn) % +1.1% % % a 13a 14a 15e 16e 17e Strong earnings growth as oil prices decoupled from gas prices Resilience of earnings despite low oil price environment in the recent past North America remains a low cost producer and continues to be an attractive investment destination 0 12a 13a 14a 15e 16e 17e EU producers regain relative competitiveness with lower oil prices (and FX tailwinds) and flattened cost curves Margins have opened up significantly European assets regain attractiveness Source: FactSet, Company information Note: 1. US Commodity includes Ashland, Axiall, Celanese, Dow, Eastman, Huntsman, LyondellBasell, and Westlake 2. EU Commodity/Diversified includes AkzoNobel, Arkema, BASF (ex. Oil & Gas), Evonik, Lanxess, Solvay and Wacker 3. Based on HSBC estimates

6 Earnings momentum Emerging Markets Asia Commodity GCC Commodity ave. oil price ($/bbl) 3 3 ave. oil price ($/bbl) EBITDA ($bn) EBITDA ($bn) % -.8% % % a 13a 14a 15e 16e 17e Significant growth in Asia after a significant earnings slowdown in previous years Improved naphtha cracking but slower demand in China Outlook seems optimistic compared to history Source: FactSet, Company information Note: 1. Asia Commodity includes Formosa Chemicals & Fibre Corp., Formosa Plastics, Hanwha Corp, Indorama, LG Chem, NanYa, Petronas and PTTGC 2. GCC Commodity includes APC, PetroRabigh, SABIC, Sahara Petrochem, Sipchem and Tasnee 3. Based on HSBC estimates 0 12a 13a 14a 15e 16e 17e Saudi petrochemicals industry has reached a plateau in 12 given lack of growth opportunities Lower oil prices and higher feedstock had a direct impact on earnings

7 Key drivers of corporate activity in chemicals 1 2 Falling oil price environment Europe has regained competitiveness: Improving margins and positive earnings momentum encourage owners to consider options for their business. Improved attractiveness for international investors Chemicals assets from oil & gas majors expected to come to the market Opportunities in North America continue to arise as investors are now looking to partner-up for their greenfield projects Developed markets players are continuing to experience low organic growth: 15- GDP growth forecast for North America and EU of 2.6% and 1.9%, respectively Low growth environment Emerging Markets are experiencing lower growth: With the exception of India, growth in the BRIC economies has been slowing. 15- GDP growth for China and Brazil of 6.4% and 1.2%, respectively M&A on corporate agendas to drive growth and earnings momentum 3 Financial environment Strong balance sheet positions and pressure to use cash (or to return to shareholders) No 08 LyondellBasell / Ineos situations (so far) Continued low interest rate environment Capital markets less favourable so far this year (vs. 15)

8 Lower oil prices: different impacts on different regions Americas Continued strong profitability in North America: diversified and international portfolios help to offset reduction in the gas advantage North America still represents an attractive investment destination ~10.6mt of ethylene capacity to come on-stream in North America in the next 5 years ~% of global M&A volumes in 15 1 Shareholder activism remains a key theme Pressure to use cash Challenging situations in Brazil Stable Europe Regain competitiveness and attractiveness to international investors Technology position remains attractive Consolidation to accelerate More corporate activity to come Positive Strong balance sheet positions reinforced by recent performance Earnings momentum: Flat Corporate activity: Earnings momentum: Corporate activity: Note: 1. Excluding Dow-DuPont merger

9 Lower oil prices: different impacts on different regions Southeast Asia Positive Developing domestic capacities to serve regional markets where supply gaps exist (India, Indonesia) Northeast Asia Positive Improved economics of naphtha cracking to drive earnings of Korean and Taiwan producers Creation of national champions (PTTGC, Petronas) Improved feedstock position Gas-based producers continue to perform Producers with heavier feedstock slate benefit from lower oil prices (India) Consolidation of national / regional markets (in Korea notably) to anticipate the reduction of Chinese imports Continue to look for strong technology platforms (including in Europe) Earnings momentum: Corporate activity: Earnings momentum: Corporate activity: Note: 1. Excluding Dow-DuPont merger

10 Lower oil prices: different impacts on different regions GCC stock markets have been affected since June 14 as key indices lost between ~- % Chemicals stocks in the Middle East have been particularly affected GCC key stock exchanges Middle East chemicals stocks Index (re-based to ) Price ($/bbl) Share price (re-based to ) Price ($/bbl) 1-12% 85-16% 85-27% -% -39% -38% -39% -45% -62% -74% Jun-14 Oct-14 Feb-15 Jun-15 Oct-15 Feb-16 Jun-14 Oct-14 Feb-15 Jun-15 Oct-15 Feb-16 TASI Abu Dhabi Exchange Qatar WTI Kuwait Stock Exchange Dubai Brent oil price (US$/bbl) APC SABIC Industries Qatar WTI Tasnee Sipchem Brent oil price (US$/bbl) Source: FactSet

11 Lower oil prices: different impacts on different regions GCC stock markets have been affected since June 14 as key indices lost between ~- % Chemicals stocks in the Middle East have been particularly affected GCC key stock exchanges Middle East chemicals stocks Index (re-based to ) Price ($/bbl) Share price (re-based to ) Price ($/bbl) 1-12% % -% -39% -39% -38% -39% -45% -47% Jun-14 Oct-14 Feb-15 Jun-15 Oct-15 Feb-16 TASI Abu Dhabi Exchange Qatar WTI Source: FactSet Note 1. Saudi Chemicals includes APC, Tasnee, SABIC, Sipchem and Industries Qatar Kuwait Stock Exchange Dubai Brent oil price (US$/bbl) Jun-14 Oct-14 Feb-15 Jun-15 Oct-15 Feb-16 TASI WTI SABIC Brent oil price (US$/bbl) Saudi Chemicals Industries Qatar 1

12 Lower oil prices: different impacts on different regions Middle East Lower earnings for Middle Eastern producers Negative KSA Commodity EBITDA 16e (US$bn) 1 EBITDA 16 expected as of Lower oil prices drive lower revenues Increased feedstock prices in Saudi Arabia -29% accelerate the need to re-define business models and growth strategies going forward % Lack of domestic growth opportunities Need to internationalise businesses Focus on cost / capital discipline Earnings momentum: Corporate activity: Business models to be re-defined Dec-14 Jun-15 Feb-16 Source: FactSet, Company information Note: 1. KSA Commodity includes APC, PetroRabigh, SABIC, Sahara Petrochem, Sipchem and Tasnee 2. Based on HSBC figures

13 Concluding comments Lower oil prices (and flattened cost curve) is positive news so far for the industry European and Asian producers enjoy a recovery in profitability North American earnings fairly resilient despite a reduction in their gas-based cost advantage but also confirms some key long-term trends: Attractiveness of North America as key investment destination Challenges for Middle Eastern producers to maintain growth and profitability profiles Global chemicals businesses can deal with low or high oil prices: Mature, diversified and international businesses also better able to withstand volatility

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