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Light Olefins Outlook

Presentation to APIC General Matters & Raw Materials


Committee
Sapporo, May 19 2017

Tony Potter – Vice President, APAC, IHS Chemical

Tony.Potter@ihsmarkit.com

Confidential. © 2017 IHS MarkitTM. All Rights Reserved.


Agenda

Economy & Energy Drivers


Ethylene
Propylene
What does this mean for Asia?

© 2017 IHS Markit


Confidential. © 2017 IHS MarkitTM. All Rights Reserved.
Global real GDP growth will strengthen in 2017–18 led by the United
States and commodity exporting regions
Real GDP
10 15

8
10

Percent change
Percent change

6
5
4

2 0
0
-5
-2

-4 -10
2000 2005 2010 2015 2020 2000 2005 2010 2015 2020

World Advanced countries Emerging markets China India Brazil Russia


Source: IHS Markit © 2017 IHS Markit
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Confidential. © 2017 IHS MarkitTM. All Rights Reserved.
Crude oil prices will gradually recover beyond 2018 as the world needs
oil “yet to be found”
Price of Dated Brent crude oil
150

125
Dollars/barrel

100

75

50

25

0
2000 2005 2010 2015 2020 2025
Source: IHS Markit Current US dollars © 2017 IHS Markit

4
Confidential. © 2017 IHS MarkitTM. All Rights Reserved.
Agenda

Economy & Energy Drivers


Ethylene
Propylene
What does this mean for Asia?

© 2017 IHS Markit


Confidential. © 2017 IHS MarkitTM. All Rights Reserved.
Regional Competitiveness Induced By NGL Oversupply To Remain In the
Longer Term
Crude Oil vs. Natural Gas Based Energy & Feedstocks
Crude Oil - VS - Natural Gas & NGLs

20

15
Dollars Per MMBtu

10

0
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24
Brent Crude Henry Hub Gas USGC Ethane
Source: IHS Markit USGC Propane China Coal NEA Naphtha © 2017 IHS Markit

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Confidential. © 2017 IHS MarkitTM. All Rights Reserved.
Non-conventional Technology Providing Options For Future
Investments In Olefins Production
Conventional Light Olefins Cash Cost Non-Conventional Light Olefins Cash Cost
US$ / Metric Ton
1400
2011 2013 2015
1200

1000

800

600

400

200

0
US US PDH NEA PDH NEA WEP US GTP US GTO NEA CTO NEA MTO
Ethane Naphtha Naphtha
Source: IHS Markit © 2017 IHS Markit

PDH = Propane Dehydro; GTP = Gas to Propylene; GTO = Gas to Olefins; CTO = Coal to Olefins; MTO = Methanol to Olefins
Confidential. © 2017 IHS MarkitTM. All Rights Reserved.
North America ethylene capacity growth*

Starting Company Location Total Growth**


Q1-17 Dow Plaquemine, LA 250
Equistar Corpus Christi, TX 401
Q1/2-17
Oxy/Mexichem Ingleside, TX 550
ChevronPhillips Cedar Bayou, TX 1,500
Q3/4-17
Dow Freeport, TX 1,500
Q1-18 ExxonMobil Baytown, TX 1,500
Q2/3-18 Indorama Lake Charles,LA 420
Q4-18 Formosa Point Comfort, TX 1,150
Shin-Etsu Plaquemine, LA 500
Q1-19
Sasol Lake Charles, LA 1,550
Q1-20 LACC Lake Charles, LA 1,000
Q2-22 Shell*** Monaca, PA 1,500

Total additions 11,821

Confidential. © 2017 IHS MarkitTM. All Rights Reserved.


*Firm 2017 through 2021/22 **000 metric tons *** Shell Monaca, PA was last to FID
Low Cost Coal and Ethane Driving Investments
Incremental Ethylene Capacity 2016-2021

Rest of Asia

China

MDE/Afr

Europe

Americas

0 2 4 6 8 10 12
Million Metric Tons
Naphtha & Heavier LPG Ethane Coal/ Methanol Others
Source: IHS Markit © 2017 IHS Markit

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Confidential. © 2017 IHS MarkitTM. All Rights Reserved.
Unconventional Feedstocks for China Crackers?

Name Startup Status Feedslates

CNOOC-SHELL II 2017 Constructing Naphtha/LPG

Shenhua Ningmei 2017 Constructing Naphtha/LPG

SP Chemicals 2019 Constructing Ethane/Propane

Zhejiang PC I & II 2020/2022+ Constructing Naphtha

Sinopec/KPC 2021 Constructing Naphtha

Shenghong PC 2021+ Planning Naphtha

Sinopec Gulei 2021+ Planning Naphtha

Sinochem QZ 2021+ Planning Naphtha

Sinopec Hainan 2021+ Planning Naphtha

Hengli PC 2021+ Planning Naphtha

Tongyi PC 2021+ Planning Ethane/Propane

Wanhua Chemical 2021+ Planning Ethane/Propane

Donghua NA Planning Ethane/Propane

Confidential. © 2017 IHS MarkitTM. All Rights Reserved.


Reasonable Unconventional Feedstocks?

Coal-to-Liquids-Cracker
X Huge capital cost. Over 60 Billion RMB for 4 Million CTL and 600 KTA
cracker.
X Environmental challenges—water consumption and carbon tax.
X Low crude oil price impact.
 National energy security strategy support. Consumption tax (30%-50%)
could be exempted.

Ethane/Propane Cracker
X Highly rely on imported feedstocks from NAM. Ethane/Propane prices
will rise with demand increase and crude oil price rise.
X E/P supply is fine in the US. But infrastructure and logistics are key
restrictions.
 Lower capital cost per ton and highly environmentally friendly.
 Highest C2 yields meet C2 and C3 fundamental difference.

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New Cracker Projects in the rest of Asia

S. Korea
KPIC Expansion +330KTA (2017)
Lotte Chem Expansion +200KTA (2018/2019)
LG Chem Expansion +230KTA (2019)
Thailand
PTTGC 500KTA (2021)
Philippines
JG Summit Expansion +160KTA (2021)

Vietnam
Long Son 1000KTA (2022+)

India
Reliance 1,500KTA (2017)

Indonesia
At least one potential cracker Malaysia
1,000KTA(2023+ ?) LC Titan Expansion +92KTA (2017/2018)
Petronas 1,200KTA (2020)

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Capacity addition outpaces demand in 2017/18 but does not
guarantee supply
Global Ethylene capacity additions vs. demand
9
Million Metric Tons

-1
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
North America West Europe Middle East
Asia Others Annual Demand Increase
Source: World Analysis - Ethylene
Source: IHS Markit © 2017 IHS Markit

Confidential. © 2017 IHS MarkitTM. All Rights Reserved.


Global ethylene ‘Operating Rate ex US & Iran’ is how the
market will feel, but with a US delay…
Global Ethylene Operating Rate Scenarios
200 92%
Demand, Million Metric Tons

160 90%

Op. Rate, Percent


120 88%

80 86%

40 84%

0 82%
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

Global Demand Op. Rate Op. Rate US delay Op. Rate ex US & Iran
Source: IHS Markit © 2017 IHS Markit

Confidential. © 2017 IHS MarkitTM. All Rights Reserved.


The slowdown in project approvals will sustain healthy margins for Asia
naphtha crackers
NEA Cracker
Dollars Production Cost and Margins
Per Metric
2,000
Dollars Per Metric Ton

1,500

1,000

500

0
11 12 13 14 15 16 17 18 19 20 21
-500

Integrated Production Cost Margins (Integrated with BTX/BDE) Price CFR


Source: IHS Markit © 2017 IHS Markit

Confidential. © 2017 IHS MarkitTM. All Rights Reserved.


Asian cracker margins supported by recent surge in Butadiene prices

Integration Analysis
1,000 500

Delta, Dollars Per Metric Ton


Dollars Per Metric Ton

800 400

600 300

400 200

200 100

0 0
Jan 15 Jul 15 Jan 16 Jul 16 Jan 17 Jul 17
BDE Component BTX Component Non-integrated Margins Integrated Margins
Source: IHS Markit © 2017 IHS Markit

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China’s Ethylene Self-Sufficiency Rises
China’s Ethylene
Million Metric Self-Sufficiency
Tons Percent, %
60 70
Million Metric Tons

50 60

Percent
40 50

30 40

20 30

10 20

0 10
11 12 13 14 15 16 17 18 19 20 21
Domestic Production Net Equivalent Import Self-sufficiency
Source: IHS Markit © 2017 IHS Markit

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Confidential. © 2017 IHS MarkitTM. All Rights Reserved.
Asian equivalent ethylene shortfall continues to grow despite substantial
China investments
West Europe Northeast Asia
13,281 307

-384 -1,305 19,606


5,228 6,220 17,952
13,953 -8,321
-10,575
North America -14,522

Southeast Asia
Middle East -412 -953
-1,931
South America
Others*
2011
-2,858 -2,583 -3,803
2016
-7,382
-10,455 2021
-11,446

© 2017 IHS Markit *Others: Africa, Indian Sub., CIS & Baltic, Central Europe
Agenda

Economy & Energy Drivers


Ethylene
Propylene
What does this mean for Asia?

© 2017 IHS Markit


Confidential. © 2017 IHS MarkitTM. All Rights Reserved.
Steam cracker shift to lighter feeds leaves propylene supply far behind
ethylene
Global Olefins Production from Steam Crackers
200 0.5

Propylene to Ethylene Ratio


160 0.4
Million Metric Tons

120 0.3

80 0.2

40 0.1

0 0
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020
Ethylene Propylene Production PE ratio
Source: IHS Markit © 2017 IHS Markit

Confidential. © 2017 IHS MarkitTM. All Rights Reserved.


Non-traditional propylene supplies meet demand growth

World: PG/CG Propylene Production by Process


125

100
Million Metric Tons

75

50

25

0
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

Stm. Crackers FCC Splitters On-Purpose Demand


Source: World Analysis - Propylene
Source: IHS Markit © 2017 IHS Markit

Confidential. © 2017 IHS MarkitTM. All Rights Reserved.


Global Propylene Capacity Additions
Global Propylene Capacity Additions 2016 - 2021

Rest of Asia

China

MDE/Afr

Europe

Americas

0 2 4 6 8 10 12 14 16
Million Metric Tons
Steam Cracker Refineries PDH Coal/ Methanol Others
Source: IHS Markit © 2017 IHS Markit

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PDH remains flavor of the day due to ample propane supply

World: PG/CG Propylene Capacity by Alternate Routes

12% 4%
5% PDH
16%
2016 (inner)
41% Metathesis Capacity = 27.9 MM MT/y
40%
11% MTO/MTP 23% of global capacity
18%
9% CTO/CTP 2021 (outer)
19%
HS FCC Capacity = 45.1 MM MT/y
31% of global capacity
Other
10%

15%
Source:World
Source: WorldAnalysis
Analysis- Propylene
- Propylene
Source: IHS Markit © 2017 IHS Markit

Confidential. © 2017 IHS MarkitTM. All Rights Reserved.


More than 13 million tons of propylene from PDH

5,168 KT 1,400 KT
1,480 KT 11 Producers 3 Producers
4 Producers (S. Korea)

4,280 KT
7 Producers

600 KT
410 KT 1 Producer
Operating 2 Producers (Vietnam)
(Thailand)
Under Constructing
380 KT
Planning 2 Producers
(Malaysia)
Confidential. © 2017 IHS MarkitTM. All Rights Reserved.
PDH-A Seasonal Player and Struggling Technical Glitch

PDH Margins & Operating Rates


• Better margins in summer than
400 120% in winter given the relative lower
Dollars Per Metric Ton

300 100%
LPG prices.
200 80% • Operating rates remain
100 60%
relatively low as producers
experience numerous
0 40%
unplanned outages
-100 20%

-200 0%

PDH/C3 Margins Operating Rates


Source: IHS Markit © 2017 IHS Markit

Confidential. © 2017 IHS MarkitTM. All Rights Reserved.


Methanol based investments slowing down

4 CTO/ 1 CTP 8 MTO/ 7 MTP


8 CTO/ 2 CTP
1,250KT/1,450KT 1,674KT/2,707KT
2,215KT/3,060KT

CTO/MTO projects in China


10 2 MTO
9 412KT/450KT
8

11 CTO/ 1 CTP 7
6 3 MTO
3,378KT/3,597KT
5 770KT/920KT
4
3
CTO/CTP operating
2
CTO/CTP under constructing
CTO/CTP planning 1

MTO/MTP operating 0
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
MTO/MTP under constructing
MTO/MTP planning Source: IHS Markit
MTO MTP CTO CTP

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Did capacity additions overwhelm demand growth?

Annual Propylene Capacity Additions


8 5 MM MT
Million Metric Tons

Overbuild
6

-2
06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21
North America Middle East China Other Asia West Europe Others Annual Demand
Source: World Analysis- Propylene
Source: IHS Markit © 2017 IHS Markit

Confidential. © 2017 IHS MarkitTM. All Rights Reserved.


Using effective operating rates – market is hungry for more capacity by
2019
Cumulative Effective Capacity Growth less Cumulative Demand Growth

5
Million Metric Tons

4
1 MMT short
3
2
1
0
-1
-2
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Cumulative Demand Growth less Cumulative Capacity (Nameplate) Growth
Cumulative Demand Growth less Cumulative Effective Capacity Growth
Source: IHS Markit Assumed 85% operating rates on-purpose units. © 2017 IHS Markit

Confidential. © 2017 IHS MarkitTM. All Rights Reserved.


PDH setting prices. Coal-based economics still attractive long-term

Northeast Asia on-purpose propylene production cost


1,500
Dollars Per Metric Ton

1,000

500

0
11 12 13 14 15 16 17 18 19 20 21
Integrated Naphtha Cracker* PDH MTO* (Basis: Shanghai, E China) CTO* (Basis: Inner Mongolia, NW China)
Source: IHS Markit Notes: *Per Metric Ton Light
Olefins
© 2017 IHS Markit

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China’s Move Towards Self-Sufficiency in Propylene
Million Metric
China’s TonsSelf-Sufficiency
Propylene Percent, %
60 120
Million Metric Tons

50 100

Percent
40 80

30 60

20 40

10 20

0 0
11 12 13 14 15 16 17 18 19 20 21
Domestic Derivative Equivalent Demand Net Equivalent Import Self-sufficiency
Source: IHS Markit © 2017 IHS Markit

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Confidential. © 2017 IHS MarkitTM. All Rights Reserved.
Propylene net equivalent imports shift away from Asia to India, Africa, W.
Europe
307
Northeast Asia
158
1,726 -384
1,308
694
West Europe
-1,305 3,546 3,839
-1,828
2,311
North America -3,023

Southeast Asia

2011 Middle East -313


2016
South America Others* -862 -479

2021 -357 -165


-562 -1,393
-2,475
All values are Net Equivalent Trade of Propylene based
products in Thousand Metric Tons -3,739
© 2017 IHS Markit *Others: Africa, Indian Sub., CIS & Baltic, Central Europe
Agenda

Economy & Energy Drivers


Ethylene
Propylene
What does this mean for Asia?

© 2017 IHS Markit


Confidential. © 2017 IHS MarkitTM. All Rights Reserved.
China industry is going through a transformation

• China demand growth will slow but remain substantial driven by the growth of the
middle classes
• Consolidate and rationalize. Centralizing production bases into chemical industry parks
• Financing is becoming more transparent
• Environmental legislation is becoming more stringent. Introduction of carbon tax dents
competitive position of coal
• China is approaching self-sufficiency for some products forcing exporters to find new
markets. In other value chains, import dependency is growing
• SOEs vs private companies. Private companies now allowed to import crude.
Mega-aromatics complexes back integrating into refining and planning to add olefins
capacity

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India’s petchem and polymer investment is not keeping up with domestic
demand growth
Indian Subcontinent Ethylene Net Equivalent Trade Indian Subcontinent Propylene Net Equivalent Trade
1.0 0.5
0.0 0.0

Million Metric Tons


Million Metric Tons

-1.0 -0.5
-2.0 -1.0
-3.0 -1.5
-4.0 -2.0
-5.0 -2.5
-6.0 -3.0
-7.0 -3.5
11 12 13 14 15 16 17 18 19 20 21 11 12 13 14 15 16 17 18 19 20 21
Ethylene Vinyls Styrenics Propylene Acrylonitrile Polypropylene
Polyethylene Glycol Others
Net Trade Others Net Trade
Source: IHS Markit © 2017 IHS Markit Source: IHS Markit © 2017 IHS Markit

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Growing deficits of base chemicals and polymers are investment
opportunities in Indonesia, Vietnam and The Philippines

Net Trade 2016 • Indonesia and Vietnam studying joint venture


cracker opportunities.
0
-200 • NOC involvement: decision making process is
Thousand Metric Tons

-400 slow
-600 • Transportation fuel deficits driving refinery
-800 investments
-1000
-1200 • Logistics: some parts of eg Indonesia are easier
-1400 to supply from other SE Asia countries
-1600
-1800
-2000
Indonesia Vietnam Philippines
Ethylene Equiv Propylene Equiv
Source: IHS Markit © 2017 IHS Markit

Confidential. © 2017 IHS MarkitTM. All Rights Reserved.


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Asia Pacific Summary
• Asia Pacific is not a homogenous market. China will remain a huge opportunity but
India, Indonesia, Vietnam and others have large populations and substantial and
growing petchem deficits
• Not a feedstock cost advantaged region. “Cheap” feedstocks elsewhere have oil parity
once they reach APAC
• Growing fuel needs are driving refinery investments across SE Asia and India, on the
back of which there will be opportunities for petchem investments
• As coal based investments slow down, there will be greater dependence on naphtha
cracking to close the ethylene balance
• On purpose propylene units are essential to the supply-demand balance and set the
pricing in the market. Slowdown in investment and technical glitches could leave the
market short by 2020

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