Factors Affecting Polyolefin Price in 2012

Chunyu Gao

Senior ExpertSinopec Economics & Development Research Institute

Polyolefin Price Trends

Factor 1: Economic Development

Factor 2: Crude Oil Price

Factor 3: Supply & Demand

Other Factors

Contents

Polyolefin Price Trends

Southeast Asia Polyolefin Market

Polyolefin price rebounded in Northeast Asia market in Q1 2012. As of end of March, the average price reached $1,400/t, which was $150/t higher than the beginning of 2012. And then in May, polyolefin price fell back as the crude oil price dropped.

700

900

1100

1300

1500

1700

1900

Jan-09

Apr-09

Jul-09

Oct-09

Jan-10

Apr-10

Jul-10

Oct-10

Jan-11

Apr-11

Jul-11

Oct-11

Jan-12

Apr-12

LDPE LLDPE HDPE PP PP Copolymer $/t

Polyolefin price in domestic market rebounded in Q1 2012 as well, by 500-800 Yuan/t as of end of March. Among polyolefin products LLDPE had the highest rate of price markup. Again, in May, polyolefin price fell back as the crude oil price dropped.

Domestic Polyolefin Market

8000

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Mar-12

LDPE LLDPE HDPE PP PP Copolymer Yuan/t

Factor 1: Economic Development

World economy: recovery started in Q2 2012If Europe’s debt crisis continues evolving slowly, world economy growth will rise from 2.6% in Q1 to around 3.4% in Q2.

In developed world, economy growth will rise from 0.6% to 1.0%. In emerging and developing world, economy growth will rise from 5.0% to 6.0%.

World

Developed economies

Developing/emerging economies

Annualized QoQ GDP Growth

World economy: recovery goes stronger, and US recovery offsets the cumbrance from the Euro area

According to leading indicator of JP Morgan Chase, the PMI for all global sectors in February 2012 was 55.5 - the highest level since 2012 (54.5 in January) , also above the critical point of 50.

Baltic Dry Index has been climbing since early February 2012 to 30% as of March 12, which was still a low level.

All sectors

Services

Manufacturing

Baltic Dry Index

Mar 2011 May 2011 Jul 2011 Sep 2011 Nov 2011 Jan 2012 Mar 2012

Feb 3, 2012

US: growth continues in Q2 2012

Favorable factors Federal Reserve does not change

its extremely loose monetary policy Unemployment preferential policy

continues Natural gas price kept low

Unfavorable factors Europe's debt crisis gets worse Higher crude oil price Two-party politics

Driven by investment and export, US GDP growth rose from 0.4% in Q1 to 3.0% to Q4 2011.

JP Morgan Chase estimates that US GDP growth will rise from 1.5% in Q1 to 2.5% in Q2 2012.

Annualized QoQ Growth

Consumption Investment Export Import

Integrated leading indicator – US GDP

The Euro Area: recovery starts in Q2 2012, but at low speed

Favorable factors IMF will provide more relief funds

to Greece ECB will keep its loose monetary

policy Governments and banks will

provide more support to recovery

GEP growth dropped from 2.4% in Q1 to 0.7% in Q4 2011. Negative growth was observed in consumption, and import growth went down to a low level.

Unfavorable factors Financial pressure leads to fiscal

austerity, which will restrain consumption

Leading banks lack credit strength Possibility of Sovereign debt crisis

going worse

The European Commission estimated on Feb 23 that GDP in the Euro area will shrink by 0.3% in Q1 2012.

Germany: 4.6% in Q1 to 2.0% in Q4; France: 2.2% to 1.4%; growth was still positive in Spain but negative in Italy; recession continued in Greece, Ireland and Portugal.

QoQ Growth

Consumption

Investment

Export

Import

France

ItalyGermany

Portugal

Greece

Spain

Ireland

QoQ Growth

BRICS: growth slowdown continues in 2012

Unfavorable factors Central banks hesitate in raising or

even cut interest rate, stimulating capital investment

Governments will keep expanding fiscal expenditures

Favorable factors Currency appreciation pressure and

weakened demand from main economies keep slowing down export growth

Inflation pressure Extremely loose monetary policies of

developed economies cause instability to BRICS’ financial markets

India: GDP growth dropped from 7.3% in Q1 to 6.5% in Q4 2011; Brazil: 4.1% to 1.4%; Russia: rose from 3.8% in Q1 to 4.9% in Q3.

QoQ GDP Growth

Brazil

India

South Africa

China

Russia

OECD Leading Indicator - BRICS

Brazil

India

South Africa

China

Russia

50.551

35

40

45

50

55

60

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

2007 20082009 20102011 2012

%PMI

China: economic growth slows down in a steady manner in 2012

GDP growth in Q1 was 8.1% - the lowest in recent three years GDP growth slowed down quarter by quarter since 2011

Manufacturing PMI bounced recovered in March 2012 PMI climbed to 53.1% from 51.0% in the last month - the growth has lasted for four

months. Meanwhile, HSBC PMI was 48.3% in March - higher than February but still

depressive

PMI in Feb was the lowest since 2006 (except 2009)

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07Q2

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10Q2

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11Q1

11Q2

11Q3

11Q4

12Q1

12Q2

%

23.821.5

22.5

23.2

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40

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-02

固定资产投资同比增速（左）新开工项目投资同比增速（右）

% %

Investment growth will slow down slightly

Favorable factors Implementation of New 36 will facilitate private investment in

railway, civil, finance, energy, social undertakings and other sectors

Q2 is a busy season, and investment in newly-commenced projects will show steady growth

Investment in affordable housing and agricultural infrastructures

Investment in industrial projects in middle and western regions

Unfavorable factors China failed to meet the goals set for energy consumption,

carbon dioxide emission and nitrogen oxide emission in 2011, so the development of industries with high energy consumption will be further restricted in 2012

Many of the loans made through local financing platforms will mature in 2012, and local governments will face huge financial pressure

Growth of investment in manufacturing and infrastructure will slow down

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制造业交通运输、仓储和邮政业水利、环境和公共设施管理业房地产业

%

投资累计同比（分行业）

Newly-commenced projects grew by 23.2% in January and February, and growth was 0.7% higher than last year

Investment growth in Q1 2012 was 20.9%, which was 2.9% lower than that of 2011

YoY Growth: Investment (left)YoY Growth: Newly-commenced projects (right)

ManufacturingTransport, warehousing and post servicesWater conservancy, environment and utilitiesReal estate

YoY Growth of Investment in various sectors

17.1

14.7

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社会消费品零售总额:累计值社会消费品零售总额:累计同比

亿元

%

Favorable factors Consumption stimulating policies

－ Paid vacations, consumer credits and preferential policy for first-time home buyers

－ E-commerce realized a total turnover of 780 billion Yuan in 2011, and new consumption modes including online shopping will be further promoted in 2012

－ Production and supply of energy saving products will be enhanced to benefit more people

Improvement of consumption environment and consumption capacity

－ Household registration reform will be quickened to attract more eligible rural population to settle down in middle- and small-size cities

－ SMB facilitating policies will help improve employment and then increase consumption

Unfavorable factors Potential price increase

－ According to the government's work report, the CPI goal is set at 4%, which was higher than the CPI goals (average 3.7%) and actual inflations (average 3.1%) of previous years since 2005

－ Other factors driving inflation such as increasing labor cost and climbing oil price

Automobile and housing consumption cooled down

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%

CPI同比

YoY growth of total retail sales of consumer goods in Q1 was 14.8% - the lowest level since 2007

Consumption will grow at a lower speed

Total retail sales of consumer goods: cumulative valueTotal retail sales of consumer goods: YoY growth

100

mill

ion

Yua

n

CPI: YoY Growth

156.7

24.5

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汽车销量：当月值（左） 汽车销量：当月同比（右）

万辆

%

Regulation and control on real estate continues－ Total real estate sales dropped by 14.0% in January

and February, and this was the first time negative growth showed since 2010

－ Normalized interest rate for first-time home buyers will stimulate rigid demand Car sales will grow but slowly

－ Car sales dropped by 6.0% in January and February－ Rigid demand still exists, and purchase of school bus

will increase Sales of household appliances will fall

－ Sales of household appliances decreased by 2.9% in January and February, and it was the first time the growth turned negative since March 2009

－ Appliance trade in and appliances going to the countryside ended in late 2011, but new stimulating policies are not in place

Sales volume in February grew fast because of the different number of effective working days due to Chinese New Year

4.9

-14.0

16.2

5.1

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商品房当月销售面积（左）商品房销售面积累计增速（右）房屋新开工面积累计增长率(右)

万平方米

%

-2.90

12.80

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家用电器和音像器材类:累计同比服装鞋帽针纺织品类:累计同比

零售额%

Consumption will grow at a lower speedReal estate sales per month (left)Growth of real estate sales (right)Growth of newly-commenced housing projects (right)

10,0

00 m

2

Car sales per month (left) YoY growth (right)

Retail Sales

Household appliances and A/V equipment:

YoY growthKnitwear and textile: YoY growth

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贸易顺差:当月值出口金额:累计同比进口金额:累计同比

亿美元 %

Trade surplus in Q1 was only $670 million

Export growth in Q1 was 7.6%, import growth 6.9%, both were the lowest in recent years (except 2009)

Export environment is extremely harsh － Europe's debt crisis will continue to impact

external demand－ Emerging economies cool down － Trade friction between China and US may

intensify during in the election year－ Increasing labor cost, RMB appreciation, unstable

international environment, etc. will increase export cost

－ No sign of improvement is seen in general operation of SMB, making stabilization of export more difficult

48.8

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汇丰中国PMI

%景气临界线

-30.0

-20.0

-10.0

0.0

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20.0

30.0

40.0

50.0

60.0

2008

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日本欧盟美国东盟

%

出口（分经济体）累计同比

China’s export to US, EU, Japan and ASEAN recovered in February

Trade surplus per month Export value: YoY growthImport value: YoY growth

$100

mill

ion

JapanEUUSASEAN

YoY export growth of various economies

HSBC China PMI

Prosperity Threshold

Export growth slows down, but may recover in the 2nd half

Factor 2: Crude Oil Price

18

Process flow of petrochemical productsIntermediate

productsMonomers &

polymersSynthetic

resinSynthetic

fiberSynthetic

rubber

Naphtha

Light diesel oil

Others

Pyrolysis gasoline

Naphtha

Mixed xylene

Others

Eth

ylen

e cr

acke

rA

rom

atic

s un

it

Coal

Residue oil

Natural gas

Deoiled asphalt

Ethylene

Propylene

Butadiene

Acetic acid

Vinyl acetate

Phenol/Acetone

Butanol/octanol

Styrene

Benzene

Toluene

P-xylene

Glycol

Polyvinyl alcohol

Acrylonitrile

Caprolactam

Polyester

HP polyethylene

LP polyethylene

Linear LD polyethylene

PVC

PVA

Acrylic

PPPolypropylene

PolystyreneStyrene-butadiene rubber

Butadiene rubber

Butyl rubber

Nylon

Terylene

Synthetic ammonia

Urea

Crude oil price in international market was volatile and reached new high level in Q1

Crude Oil Price 2011-2012

$/bbl Q1 2012

　 Average YoY Chain Rate Brent Spread 　WTI 102.93 9.4% 9.4%

-15.4Brent 118.35 12.5% 8.6%

Dubai 115.86 15.6% 10.5% -2.5

1. US launched financial sanction against Iran;

2. S&P lowered credit rating of 9 countries in

Euro area;

3. Cold weather in Europe drove the demand for

heating oil;

4. Greece almost reach at a salvage agreement;

5. Iran refused inspection by IAEA;

6. High crude oil challenged world economy;

7. Natural gas leak in North Sea;

8. US and EU discussed about releasing

strategic reserve.

$/bbl

Brent-WTI spread

WTI Brent Dubai

World Crude Oil S&D million bbl/day

Source: Adapted from IEA data, April 2012.

Shortage of global oil supply will reach 400,000bbl/day in Q3 2012 due to uncertainties in S&D and limited production increase by OPEC.

2010 2011 2012

Annual Annual Q1 Q2 Q3 Annual

OECD 46.0 45.4 45.3 44.2 45.4 45.1

Non-OECD 41.9 43.3 43.6 44.4 45.1 44.4

Total demand 87.9 88.7 88.9 88.6 90.1 89.5

Non-OPEC 52.0 52.1 52.6 52.3 52.8 52.8

OPEC 34.7 35.7 37.3 37.0 36.9 37.0

Crude oil 29.4 29.9 31.2 30.8 30.4 30.7

Condensate 5.3 5.8 6.1 6.2 6.5 6.3

Total supply 86.7 87.8 89.9 89.3 89.7 89.8

Gap -1.2 -0.9 1.0 0.7 -0.4 0.3

Forecast on Crude Oil Price in Q2/Q3 2012

Q2 2012 Q3 2012

Forecaster Brent WTI Brent WTI

Barclays 118 104 121 107

Credit Suisse 124 110 128 118

FirstEnergy 121 105 119 107

Citibank 117 104 113 103

Merrill Lynch 122 106 117 106

BNP Paribas 119 105 117 105

JP Morgan Chase

112 103 120 114

Goldman Sachs 120 114 120 115

Societe Generale

128 116 135 127

BPI 122 103 126 105

Average* 119 105 117 107

Cambridge Energy

122 105 120 107

2009-2012 年分季度国际原油价格及价差

Latest trends in crude oil market: Elections in France and Greece affect

the Europe’s debt crisis; Recession in the Euro area leads to

low oil demand; OPEC increases its production to a

record high level; USD appreciates quickly; Oil price fall back quickly due to

concentration of previously covered risks.

Brent crude oil price in Q2 is estimated at $115/bbl.

World economic recovery continues, oil demand grows in terms of both YoY and

chain rate; Uncertainties in oil supply increase due to hurricane season and maintenance of

refineries; Gap in supply still exists, as OPEC reduces its production to the level of 2007; USD turns weak, low interest rate and high debt ratio increase cash flow. Generally

the YoY growth will remain unchanged, and chain rate growth will rise..

Average price of Brent crude oil in Q3 2012 is estimated between $115 and

$119/bbl.

Notable trends in Q3:

$/bblBrent-WTI spread $/bbl

Brent

Factor 3: Supply & Demand

China's PE production declined in Q1, while PP production increased slightly, but demand growth kept falling; LLDPE price rose and other polyolefin products lowered, gross margin was relatively stable.

In Q1 2012, domestic PE production was 2.63 million tons, PP 2.84 million tons, YoY growth - 3.2% and 6.5% respectively.

PE import grew while PP import fell. Apparent consumption: PE 4.5 million tons

and PP 3.76 million tons, YoY growth 0.5% and 3.5%. Consumption growth dropped 0.3% and 4% respectively.

In Q1 2012, polyolefin price rebounded in domestic market, especially LLDPE and PP. But the quarterly average prices generally fell except LLDPE.

Gross margin was relatively stable, but still below break-even point.

2010-2012 年聚烯烃逐季表观消费量

聚烯烃价格走势图

-5%

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2010Q1 2010Q2 2010Q3 2010Q4 2011Q1 2011Q2 2011Q3 2011Q4 2012Q1

聚乙烯 聚丙烯 聚乙烯同比 聚丙烯同比

8000

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-12

LDPE LLDPE HDPE PP万元PE PP PE growth PP growth 10,000 Yuan

Polyolefin market demand will drop in Q2. However, limited domestic production and maintenance of ethylene units in Southeast Asia may drive the price to climb and the gross margin to cover.

Polyolefin demand in domestic market is estimated to drop in Q2: PE falls by 2.3%, PP 4.3%. Capital supply is still right, and more units

in neighboring countries/regions will be shut down for maintenance in Q2, leading to lower stock.

Domestic petrochemical companies will continue limiting production.

Apparent Quarterly Polyolefin Consumption 2010-2012

Polyolefin price may rebound in Q2;

Gross margin will be better, but still around break-even point.

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元/吨

LDPE-石脑油 LLDPE－石脑油

HDPE-石脑油 PP-石脑油

Gross Margin of Polyolefin

0

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2010 Q1 2010Q2 2010 Q3 2010Q4 2011 Q1 2011 Q2 2011Q3 2011 Q4 2012Q1 2012Q2

PE PP10,000t

Yuan/tNaphtha

Naphtha

Naphtha

Naphtha

Number of Futures warehouse receipts registered with DCE declines since April

End of March is the time for re-registration of futures warehouse receipts specified by DCE.

Beginning in April, fewer new warehouse receipts were registered, and total number as of May 10 was only 4,276 contracts.

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4-Jan4-Feb4-Mar 4-Apr 4-May4-Jun 4-Jul 4-Aug4-Sep4-Oct 4-Nov4-Dec 4-Jan4-Feb4-Mar 4-Apr4-May

Warehouse Receipts

Closing priceContracts Yuan/t

Other Factors

Olefin price

Changes in stock level

Export factor

Monetary policies

US and EU’s sanctions against Iran may force Iran to increase its export to China, resulting in smaller spread between LLDPE and LDPE

US and EU’s sanctions against Iran and Iranian central bank have changed China’s PE import by the end of 2011;

Substantial price cuts by Iran and domestic barter trade will increase PE import volume from Iran;

More cheap PE from Iran will be imported, and may cause disorder in domestic market.PE Import from Iran 2011-2012

Iranian PE makes up about 10% of China’s total PE import, including LDPE (20%) and HDPE (10%). The price difference between LDPE and LLDPE will be narrower in Q2.

0

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Feb-12

LDPE HDPE LLDPE万吨10,000t

Thank You!