Polyethylene Price Drivers: What To Expect And Why.. PE: Market snapshot

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1 Polyethylene Price Drivers: What To Expect And Why.. Nick Vafiadis, Director Polyethylene Flexible Packaging Association February 212 PE: Market snapshot Demand has been relatively weak domestic and export Production costs have collapsed since November Ethylene spot price has steadily increased Integrated margins have been soaring since November Non-integrated margins have been struggling More PE price increases scheduled for February and March Capacity constraints for ethylene and PE influencing prices 2 Copyright 25 IHS Inc. All Rights Reserved. 1

2 Price Drivers Changes in cost - energy prices - feedstock prices Supply / Demand balance - operating rates outages (planned and unplanned) - capacity changes - inventory levels - domestic vs. export opportunities 3 Future Development Then Translates to Lower Gas Prices $ / MM Btu Gas as a % of Crude 3 12% Crude (WTI) Natural Gas Gas as % of Crude 1% 8% 6% 4% 2% % Copyright 25 IHS Inc. All Rights Reserved. 2

3 U.S. Natural Gas Liquids Price Gas Liquids, Cents Per Gallon Natural Gas, $/MMbtu Q3 7 Q3 8 Q3 9 Q3 1 Q3 11 Q3 12 Q3 13 Q3 Natural Gas Ethane Propane N-Butane Ethane Price Drivers Ethane no longer follows natural gas, but is instead more closely linked to competing feedstock prices (propane, butane, naphtha etc ) Ethane is therefore priced as high as it can be without loosing its competitive edge Ethane price spikes that we have seen are usually associated with supply constraints linked to pipeline capacity and fractionation capacity limitations both issues being addressed Ethane price also reflects fluctuating demand at the cracker 6 Copyright 25 IHS Inc. All Rights Reserved. 3

4 Purity Ethane Price: A Supply/Demand story Supply constrained Demand reduced Demand increase Supply increases 5. Jan-211 Jul-211 Jan-212 Jul-212 Jan-213 Jul-213 Purity Ethane North America Pipeline Expansions Company/Pipeline Capacity Date Enterprise/Yoakum-Mt. 7 Mb/d 1Q 212 Belvieu Oneok/Arbuckle 6 Mb/d 2Q 212 Oneok/Bakken 6 Mb/d 1Q 213 Vantage/Bakken-Joffre 4/6 Mb/d Late 213 DCP/Southern Hills 15 Mb/d Mid 213 Enterprise/Texas Express 2 Mb/d 2Q 213 Oneok/Sterling III 35 Mb/d Late 213 Crosstex/Cajun-Sibon 7Mb/d 1H 213 Enterprise/ATEX Express 19 Mb/d 1Q Copyright 25 IHS Inc. All Rights Reserved. 4

5 NGL Fractionation Expansion In MBD USGC Capacity Additions Targa Resources / CBF (Mt Belvieu, TX) 78 1 Copano Energy (Houston, TX) 22 Formosa Plastics (Point Comfort, TX) 75 Enterprise Products (Mt Belvieu, TX) Gulf Coast Fractionators (Mt Belvieu, TX) 43 Lone Star NGL (Mt Belvieu, TX) 1 Crosstex Energy (Eunice, LA) 4 All Other Capacity Additions OneOK (Bushton, KS) 6 Caiman Energy (Fort Beeler, WV) MarkWest Liberty (Houston, PA) 6 Dominion Resources (Natrium, WV) Total Cumulative Total Ethylene: North America Current Situation Significant amount of capacity to be off-line 1H 12 Huge inventory build at end of 211 Unplanned production outages impacting market now Supply demand balance supporting a sellers market High spot prices relative to contract Unplanned production issues may provide additional lift to prices Some additional supply will begin to enter the market Debottlenecks at Williams, Ineos, and Westlake However, cumulative amount not sufficient to change market balance Copyright 25 IHS Inc. All Rights Reserved. 5

6 Ethane/Ethylene North America Jan-8 Jan-9 Jan-1 Jan-11 Jan-12 Jan-13 NAM Avg Acquisition Price Ethylene cash costs (Ethane) NAM Ethylene Spot Weekly Ethylene Cash Costs & Spot Price /3/211 1/28/211 11/23/211 12/22/211 1/2/212 2/17/212 Price/Cost Spread Weighted Avg Cash Cost Weekly Spot Price 12 Copyright 25 IHS Inc. All Rights Reserved. 6

7 U.S. Ethylene Daily Cash Costs Spot Cash Cost Drivers Dollars Per Metric Ton 3 Ethylene Cash Costs as of Feb 13 2 Purity Ethane = 17 cpp Light Naphtha = 51 cpp Weighted Average = 24 cpp Coprod. Int. Lt. Naphtha = 47 cpp 1 Propane = 27 cpp Butane = 39cpp Gas Oil = 52 cpp Dec 2 Dec 28 Jan 5 Jan 12 Jan 2 Jan 27 Feb 3 Feb 1 Light Naphtha Weighted Average Propane Purity Ethane Coprod. Int. Lt. Naphtha Butane World Ethylene Cash Cost Comparison U.S. Dollars Per Metric Ton 1,6 Ethylene Cash Costs From 1,4 Ethane in Saudi Arabia 1,2 1, Western Canada U.S. Ethane U.S. Northeast Southeast U.S. Weighted Average Asia Naphtha Asia Naphtha Coprod. Int. Light January 212 Naphtha December 211 U.S. 73 West Europe Naphtha U.S. Light Naphtha Copyright 25 IHS Inc. All Rights Reserved. 7

8 212 North America Ethylene Operating Schedule Thousand Pounds Jan BASF/FINA ExxonMobil Feb Shell Chemical Mar Apr May Chevron Phillips Flint Hill West Lake Jun Jul Aug Eastman Huntsman Sep Unplanned Outage Oct Nov Equistar Dec Ineos Forecast Unplanned Outage U.S. Ethylene Production Loss Forecast Monthly, Million Pounds 1, Cumulative, Million Pounds 5, Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Planned Unplanned** Unconfirmed '12 Cumulative Production Loss '11 Cumulative Production Loss ** Forecast period assumes a forecast of unplanned outages 4, 3, 2, 1, Copyright 25 IHS Inc. All Rights Reserved. 8

9 Ethylene Inventory levels Inventory, Billion Pounds Historical Inventory Source: NPRA 1 Q3 2 Q3 3 Q3 4 Q3 5 Q3 6 Q3 7 Q3 8 Q3 9 Q3 1 Q3 11 Q3 12 Q3 Inventory 17 U.S. Ethylene Supply/Demand Outlook Billion Pounds Operating Rate 95% 9% 85% 8% 75% 7% 9 1 Q4 Q3 Q2 4 Q4 Q3 Q2 7 Q4 Q3 Q2 1 Q4 Q3 Q2 13 Q4 Total Demand Effective Operating Rate 65% Nameplate Operating Rate Copyright 25 IHS Inc. All Rights Reserved. 9

10 Global Monthly Ethylene Prices Dollars Per Metric Ton 2,1 1,8 1,5 1, A J O 12 A J O 13 A J O U.S. Large Buyer Contract Price WEP Contract Price SEA CFR Spot Price U.S. Ethylene Market Quarterly Economics Large Buyer Contract Cash Margins 8 7 Dollars Per Metric Ton 1,764 1, Q3 6 Q3 7 Q3 8 Q3 9 Q3 1 Q3 11 Q3 12 Q3 13 Q3 Wtd. Average Cash Cost Average Spot Price Wtd. Average Cash Margin Large Buyer Contract Price 1,323 1, Copyright 25 IHS Inc. All Rights Reserved. 1

11 U.S. Ethylene Margins Dollars Per Metric Ton U.S. Wtd. Avg Contract Cash Margin NA Ethylene Expansion Talk In The Press ~ 9.36 Million Tons Company Future Announced (-- MT) Chevron Phillips (TBD) 15 Dow (Taft/TBD) * Equistar (All locations) Formosa (Point Comfort) 8 Ineos (Chocolate Bayou) Oxy (Ingleside, TX) 55* Sasol (Lake Charles) 14 Shell (Northeast) 1* Westlake (Lake Charles) Williams (Geismar) Nova (Sarnia) 25* Braskem/Idesa (Mexico) 1 Total Cumulative Total Dow, Shell, NOVA, and Oxy capacity additions shown are CMAI estimates Copyright 25 IHS Inc. All Rights Reserved. 11

12 Polyethylene Snapshots: U.S. & Canada 211 domestic demand ahead of 21 levels 4.8% Export volumes trailed 21 by 6.2% PE prices bottomed out in November, upward movement in Q1 December five cent increase held 6 cents for Jan rolled to Feb and another 7 cents announced for March Production costs (integrated) declining spot ethylene remains high Year end inventories tightened (33.6 days in Dec vs 38.6 ytd avg) LDPE supply tight with Nova outage HDPE HMW supply tight with ExxonMobil outage Integrated margins were well off high water mark in Nov (5.6 cpp) vs near 2 cpp Jan Aug avg Nov. lowest since Jan of 21) strong margins returning Jan 17 cpp and Feb 25 3 cpp Non integrated margins are near zero for some resins: spot ethylene prices have recently been higher than PE prices for some resins. North America PE Demand: Negative To Positive Rotomolding Wire & Cable AAGR Domestic Demand = 2.3 % Blow Molding Extrusion Coating Pipe & Profile Injection Molding Film & Sheet Growth Rate Percent AAGR 6-11 Demand Change AAGR Copyright 25 IHS Inc. All Rights Reserved. 12

13 HDPE Film Resin Demand 21 vs. 211 HDPE Percent Change Film 12 Mils and Below Packaging Film -1.4 Food Packaging Film 7.9 Non-Food Packaging Film -9.3 Non-Packaging Film -2.2 Retail Bags -2.3 Trash and Can Liners -6.3 Other Non-Packaging Film 11.4 Source: ACC, Plastics Division; Gov t Trade Data LLPE Film Resin Demand 21 vs. 211 LLDPE Film (12 Mils and Below) Packaging Film Food Packaging Film Non-Food Packaging Film Non-Packaging Film Percent Change Source: ACC, Plastics Division; Gov t Trade Data Copyright 25 IHS Inc. All Rights Reserved. 13

14 LPE Film Resin Demand 21 vs. 211 LDPE Percent Change Film (12 Mils and Below) -5.2 Packaging Film -5.2 Food Packaging Film -6.1 Non-Food Packaging Film -5.9 Non-Packaging Film -5.2 Source: ACC, Plastics Division; Gov t Trade Data U.S. & Canada PE Film Resin Quarterly Demand Billion Pounds Q1-6 Q4-6 Q3-7 Q2-8 Q1-9 Q4-9 Q3-1 Q2-11 Q Q4-12 Q3-13 PE Film Resin Demand Copyright 25 IHS Inc. All Rights Reserved. 14

15 PE Inventories: Monthly Change Million Pounds Jan-1 May-1 Sep-1 Jan-11 May-11 Sep-11 Jan-12 Inventory Change HDPE Inventory Change LLDPE Inventory Change LDPE LLDPE Cost Vs. Price Jan-7 Jan-8 Jan-9 Jan-1 Jan-11 Jan-12 Jan-13 NAM Cash Cost, Integrated WEP LLDPE NAM LLDPE CHINA LLDPE (Spot) Copyright 25 IHS Inc. All Rights Reserved. 15

16 Spot Ethylene Margin vs. LLDPE Jan-27 Jan-28 Jan-29 Jan-21 Jan-211 Jan-212 Jan-213 Differential: Spot Ethylene/Cash Cost LLDPE Discounted 31 North America PE Prices Dollars Per Metric Ton 2,25 1,984 1,764 1,543 1,323 1, Jan-8 Oct-8 Jul-9 Apr-1 Jan-11 Oct-11 Jul-12 Apr-13 LDPE GP HDPE BM LLDPE C4 661 Copyright 25 IHS Inc. All Rights Reserved. 16

17 Margins On The Rise! / Jan-7 Oct-7 Jul-8 Apr-9 Jan-1 Oct-1 Jul-11 Apr-12 Jan-13 Oct-13 LLDPE Integrated Cash Costs LLDPE Discounted Price 33 Total PE Chain Margins Margin, 4 Jan-8 Jan-9 Jan-1 Jan-11 Jan-12 Jan-13 Ethylene Cash Margin NAM PE Discounted Price Total PE Non-Integrated Margin Copyright 25 IHS Inc. All Rights Reserved. 17

18 Global PE Capacity Additions Capacity, Million Metric Tons Global Capacity AAGR = 4.% Global Demand AAGR = 5.% Asia/Pacific Africa/ Middle East North America Central Europe/ CIS South America West Europe Global Demand Change PE Capacity Expansions Thousand Metric Tons HDPE LDPE LLDPE Startup Type 214 Dow Canada Prentiss, Alta Canada 2 (2) 2Q 214 Westlake Lake Charles, LA United States 3Q Braskem Idesa Coatzacoalcos Mexico Q 215 Nova Sarnia Canada 1* 1Q 215 hypo Formosa Point Comfort, TX United States 4Q 215 hypo 216 Nova Sarnia Canada 4* 4Q 216 hypo 217 Chevron Phillips US Gulf Coast United States 5* 5* 3Q 217 hypo Dow US Gulf Coast United States 3* 3* 3Q 217 hypo Nova Prentiss, Alta Canada 35* 3Q 217 hypo 218 Shell Northeast US United States 5* 5* 2Q 218 hypo * No firm announcements, CMAI speculation ** Sasol announced a new cracker in Lake Charles, LA (1.4 million tons per year). The startup year was not released. eased Copyright 25 IHS Inc. All Rights Reserved. 18

19 Global Operating Rates Accelerate Polyethylene, Operating Rate, % North America West Europe Middle East Northeast Asia World U.S. Trade Trends Million Metric Tons Production as a % of Exports Imports Exports Production as a % of Exports Copyright 25 IHS Inc. All Rights Reserved. 19

20 U.S. Bag Imports Billion Units Percent Q3 5 Q3 6 Q3 7 Q3 8 Q3 9 Q3 1 Q3 211 Q3 China Share of Total World China What to Expect 212 shaping up much like previous two years from a US resin price perspective - Sellers market persist through 2Q 212 Price pressure begins to ease 2H 212 Producer shift more volume to export market as supplies improve keeping some pressure on operating rates and inventories Resin demand for US packaging and film markets remains positive, approximating gdp levels for the next two years. Copyright 25 IHS Inc. All Rights Reserved. 2