Where Are We in the Chemical Cycle? The US shale boom, macro factors and outlook Joseph Chang, Global Editor March 16, 2012 EBDQUIM 6 th Annual Meeting Salvador de Bahia, Brasil
Agenda Near-term profit outlook Chemical cycle Shale gas boom US ethylene expansions The coming bust Global dynamics
Near-term outlook Q4 not pretty marred by inventory destocking. Volumes flat to down Companies cautious on Q1 outlook Earnings will be back-end loaded (H2 2012), managements hope! Wall Street expects modest EPS gains for major chemical companies Big theme: INVENTORY RESTOCKING
US polyethylene margins expanding
Chemical cycle: boom and bust Peak: Markets tighten, companies ramp up spending Mid-cycle: Spending picks up, capacity added Trough: Capital investment slows and stops Capacity buildup takes its toll
Shale gas boom
Crude oil vs. US natural gas
US IPEX tracks WTI crude not natural gas 40 Henry Hub (daily) WTI (daily) US IPEX (monthly) US IPEX v WTI v Henry Hub IPEX and oil R2 =.881 IPEX and gas R2 =.594 80 Day-ahead price ($/MMBTU) 30 20 10 60 40 20 IPEX Index (1993 = 100) 0 0 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Source: ICIS, EIA Crude oil price divided by EIA s factor 5.8 to give equivalent energy value
US ethane advantage vs. naphtha 30 US Ethylene Variable Margins 25.0 25 Ethane Advantage US Ethane Contract variable margin US Naphtha Contract variable margin 20.0 Ethylene Variable Margin cents/lb 20 15 10 15.0 10.0 5.0 Ethane margin advantage, cents/lb 5 0.0 0 2006 2007 2008 2009 2010 2011 2012-5.0 Source: ICIS; 2012 average margins as of end January
US ethylene expansion plans US ETHYLENE EXPANSIONS BASED ON SHALE GAS Company Project Capacity Location Cost Start-up Chevron Phillips Chemical New cracker 1.5m tonnes Cedar Bayou, Texas NA Q1 2017 Dow Chemical New cracker World-scale US Gulf Coast NA 2016-2017 Shell New cracker World-scale US Northeast NA 2016-2017 Formosa Plastics New cracker 800,000 tonnes Point Comfort, Texas $1.7bn 2016 Dow Chemical Restart 390,000 tonnes St. Charles, Louisiana NA end 2012 Westlake Chemical Expansion 108,863 tonnes Lake Charles, Louisiana NA H2 2012 Williams Expansion 272,158 tonnes Geismar, Louisiana $350m- Q3 2013 $400m INEOS Debottleneck 115,000 tonnes Chocolate Bayou, Texas NA end 2013 Westlake Chemical Expansion 113,399 tonnes Lake Charles, Louisiana NA 2014 LyondellBasell Expansion 386,000 tonnes Laporte, Texas NA 2014 Considered expansions Project Capacity Location Cost Start-up Indorama Ventures New cracker** 1.3m tonnes NA NA 2018 Sasol New cracker* 1.0m-1.4m tonnes Lake Charles, Louisiana $3.5bn- NA $4.5bn LyondellBasell Expansion NA Channelview, Texas NA NA SABIC New cracker World-scale US NA NA Braskem New cracker NA US NA NA Occidental Chemical New cracker*** NA Ingleside, Texas NA NA Aither Chemicals, Renewable Manufacturing Gateway New cracker NA US Northeast $750m 2016 *Feasibility study to be complete by H2 2013 **Feasibility study to be complete by H1 2013 ***Company to "explore various options for future supply of ethylene" Source: Companies, ICIS
New US ethylene capacity to 2017 New crackers: 6.0m tonnes* (5) Restarts: 390,000 tonnes (1) Expansions/debottlenecks: 995,000 tonnes (5) 7.4m tonnes = 28% of US capacity *Assumption of world-scale cracker at 1.25m tonnes/year
Mulling crackers, expansions Considered expansions Project Capacity Location Cost Start-up Indorama Ventures New cracker** 1.3m tonnes NA NA 2018 Sasol New cracker* 1.0m-1.4m tonnes Lake Charles, Louisiana $3.5bn- $4.5bn LyondellBasell Expansion NA Channelview, Texas NA NA SABIC New cracker World-scale US NA NA Braskem New cracker NA US NA NA Occidental Chemical New cracker*** NA Ingleside, Texas NA NA Aither Chemicals, Renewable Manufacturing Gateway New cracker NA US Northeast $750m 2016 NA *Feasibility study to be complete by H2 2013 **Feasibility study to be complete by H1 2013 ***Company to "explore various options for future supply of ethylene" Source: Companies, ICIS
Oxy wanna cracker? OxyChem s Ingleside plant is a large consumer of ethylene and the fractionator development will also allow Oxy to explore various options for future supply of ethylene for the Ingleside plant. - Occidental Petroleum press release, June 9, 2011 NGL fractionator + X = ethylene supply What is X? Cracker tie-up with Mexichem?
PLUS one more cracker New crackers: 6.0m tonnes* (4) Restarts: 390,000 tonnes (1) Expansions/debottlenecks: 995,000 tonnes (5) Total: 7.4m tonnes = 28% of US capacity PLUS one more world-scale cracker of 1.25m tonnes 8.6m tonnes = 32% of US capacity *Assumption of world-scale cracker at 1.25m tonnes/year
7 6 5 4 3 2 1 0 Projected US ethylene capacity additions through 2017 US ethylene additions 2013 2014 2015 2016 2017 Additional ethylene capacity, million tonne/year 2012 Source: ICIS Analysis
Where will the ethylene go? Polymers and intermediates PE, PVC, MEG, EO A slowly growing US market can absorb some capacity But mostly for EXPORT Asia, Latin America
Many things need to go right Low level of US natural gas prices versus crude oil US infrastructure build NGL fractionators, pipelines to carry ethane Moderate growth in global economy Lack of huge new capacity additions in the Middle East, Asia, Latin America Lack of other countries building out shale gas production and infrastructure
North America ethane conversions Company Conversion Capacity Location Start-up BASF FINA Petrochemicals Increase flexibility 934,000 tonnes Port Arthur, Texas Jun 2012 LyondellBasell Increase flexibility 873,000 tonnes (increase ethane by 227,000 tonnes) Channelview, Texas 2012 NOVA Chemicals 100% NGLs 839,000 tonnes Corunna, Ontario, Canada Westlake Chemicals Propane to ethane 195,000 tonnes Calvert City, Kentucky Dow Chemical Increase flexibility NA Plaquemine, Louisiana End 2013 NA 2014 Dow Chemical Increase flexibility NA Texas 2016 Source: Companies, ICIS
Structural shortages of C3, C4 Ethane Propane Butane Naphtha/Gas oil Ethylene 1,000 1,000 1,000 1,000 Propylene 36 400 432 462 C4s (BD feed) 35 101 255 261 Source: ICIS
Sep 2011 Mar 2011 Sep 2010 Mar 2010 120 100 80 60 40 20 0 US olefins prices Ethylene Propylene (P-grade) Sep 2007 Mar 2008 Sep 2008 Mar 2009 Sep 2009 C en ts/lb Mar 2007 Source: ICIS
Global petrochemical dynamics POLITICS The West operates here China, the Middle East etc. SHARED VALUE OPERATES HERE ECONOMICS SOCIAL
Expansionary pushes through history Japan (1960s and 1970s) Security of raw materials for auto industry and other downstream industries South Korea and Thailand (late 1970s-early 1990s) Similar model China (2000s and 2010s) Security of supply to manufacturing industry Middle East (2010s) Building naphtha-based petrochemical capacity for more diversified product slate to spur downstream and employment Malaysia (2010s) $20bn refinery and petchem complex (RAPID) end of 2016 Latin America (2010s) Mexico s Ethylene XXI project Brazil s Comperj project
China s explosive growth
Europe has held its own Annual Regional HDPE Variable Margins (2008-2011) 40 US contract HDPE variable margin (ethane) European contract HDPE variable margin (naphtha) Asian spot HDPE variable margin (naphtha) 30 HDPE variable margin, cents/lb 20 10 0 2008 2009 2010 2011 2012 Source: ICIS Weekly Margin Reports, 2012 average margin as of end January 2012
Conclusions Near-term profit outlook is positive, but hinges on inventory restocking Widening US ethylene and PE margins will also drive profit growth in 2012 Mid-term outlook: Good window of extended ethylene and derivatives profitability from 2012-2015, especially for US Long-term outlook: Flood of US ethylene capacity to lead to a downturn in 2017 US shale gas changes the dynamics in global petrochemicals, but it does not change the cycle
Thank You! Joseph Chang Global Editor Email: joseph.chang@icis.com Office: 212 791 4224