Oulook for North America’s Polyolefin Industry:

Opportunities & Threats

Plastic News Executive ForumMarch 5-7, 2018Naples, Florida

Esteban Sagel, Principal ChemPMCEsteban.sagel@chempm.com

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• More than 20 years of experience throughout the petrochemical industry value chain, spanning chemical producers, polymer converters and consumer product companies

• Three areas of expertise: Market Research; Supply, Demand and Price Forecasting and Modeling; Training

• Additional information: www.chempmc.com

Why are we here today?

• First, will briefly review the North American polyolefins industry’s last five years, with a special focus on polyethylene

• This will lead to an overview of what’s changing in the industry, particularly from a supply standpoint

• Will attempt to put in perspective those changes, as a way to introduce what opportunities and risks they may represent

• Will briefly review the polypropylene case, to finalize with a short list of what I would be following/checking/keeping up to date with, if I were a polyolefin converter…

That said… Let’s start at the end

• What you should be following/checking/keeping up to date with?

• North American projects timing, delays & cancellations –showcase producers’ expectations

• Asian projects delays & cancellations – can improve imports into Asia, delaying impact of new capacity in prices

• China demand or China imports – how much is that market coming to the rescue?

• China prices, North American spot prices & your prices –question your contracts… are you getting the best deal possible? Invest in pricing information, particularly overseas data.

• Who’s moving materials for producers? Become their best friends

• Check the weather; in active hurricane seasons, inventories will be your best friend. Cover your basic needs, and don’t follow the panic.

Polyethylene: Steady as she goes…

-2,000

-1,500

-1,000

-500

0

500

1,000

1,500

2,000

-2,000

-1,500

-1,000

-500

0

500

1,000

1,500

2,000

2006 2008 2010 2012 2014 2016

North American Poyethylene Excess Capacity Growth

Change in Demand Change in Capacity

Cumulative Excess Capacity Growth

KT KT

Sources: ACC, ITC, ChemPMC Estimates

Result: Happy Producers!

0

10

20

30

40

50

60

70

80

90

Jan-13 Jan-14 Jan-15 Jan-16 Jan-17

North America HDPE Prices and Costs

Integrated Cash Costs (ethane)

Non-Integrated Cash Cost (Spot Ethylene)

HDPE Discounted Contract North America

CPP

Sources: ChemOrbis (olefins), TradingView & EIA (Natural Gas & NGL), ChemPMC Estimates

Everybody Joins the

Party

Sources: ChemPMC

Expected Start Up Company Type of Project State/Province HDPE LDPE LLDPE UHMW

HDPE

2016 Nova Chemicals New Plant AB 450

2017 Braskem New Plant TX 50

ChevronPhillips New Plant TX 500 500

Dow Chemical New Plant TX 400

Exxon Mobil New Plant TX 1300

2018 Dow Chemical New Plant TX 350

Formosa New Plant TX 626

Sasol & Ineos JV New Plant TX 470

2019 Dow Chemical New Plant TX 320

LyondellBasell New Plant TX 500

Sasol New Plant LA 420 450

2020 Exxon Mobil New Plant TX 650

2021 ExxonMobil & Sabic JV New Plant TX 1300

Shell New Plant PA 1050 550

2022 Dow Chemical New Plant Unidisclosed 600

Formosa New Plant LA 600 400

Nova Chemicals New Plant ON 450

Nova, Borealis & Total JV New Plant TX 625

Polyethylene: Big Bang Theory

-6,000

-4,000

-2,000

0

2,000

4,000

6,000

8,000

10,000

12,000

-2,000

-1,500

-1,000

-500

0

500

1,000

1,500

2,000

2,500

3,000

3,500

2006 2008 2010 2012 2014 2016 2018 2020 2022

North American Excess Capacity Growth

Change in Capacity Change in Demand Cumulative Excess Capacity Growth

KT KT

Sources: ACC, ITC, ChemPMC Estimates

Export, We Must!

0

10

20

30

40

50

0

5,000

10,000

15,000

20,000

25,000

30,000

2005 2008 2011 2014 2017 2020

Exports Share of Production

Exports Production Exports Share of Production

KT %

Sources: ACC, ITC, ChemPMC Estimates

Domestic Market: Not Coming To The Rescue

0

500

1,000

1,500

2,000

2018 2019 2020 2021 2022

Growth in Exports Vs. Growth in Domestic Demand

Growth in Exports Growth in Domestic Demand

KT

Sources: ACC, ITC, ChemPMC Estimates

How Are we Going to Move this Material?

0 20,000 40,000 60,000 80,000 100,000 120,000 140,000

Others

Oakland, CA

Freeport, TX

Norfolk Harbor, VA

New Orleans, LA

Savannah, GA

Charleston, SC

Los Angeles, CA

Long Beach, CA

New York, NY and NJ

Houston, TX

Top 10 US Ports by Plastic Volume, 2015 (TEU)

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

0

20,000

40,000

60,000

80,000

100,000

2017 2018 2019 2020 2021 2022

Increase in Seaborne Exports, Polyethylene

Annual Increase, LHA Cumulative, RHA

TEU TEU

Sources: U.S. Army Corps of Engineering Navigation Data Center, ChemPMC estimates

Largest polymer-exporting ports

Additional Logistical Issues

• Freight Rates

• Packaging Facilities

• Road conditions/last mile congestion

• Trucker availability

• Availability of empty containers

• Vessel capacity/Vessel availability for destination ports

Opportunities & Risks -Pricing

• Inability to export all the material/product backing up into North American Market

• Negative pressure on producer margins and prices

• North American contract premium decreasing?

• Current contract prices at a premium over global prices

• Can this premium survive?

• Spot Prices to align with global prices; time to move into Spot?

• Weather: Concentration of capacity in USGC

• Short-term distortions related to logistics

45

50

55

60

65

70

75

80

85

Jan-13 Jan-14 Jan-15 Jan-16 Jan-17

HDPE Global Prices

US Domestic DiscountedUS Domestic SpotChina CFR

CPP

Sources: ChemOrbis (China Prices), ITC & ChemPMC Estimates

Opportunities & Risks -Feedstocks

0

5

10

15

20

25

Feedstocks

Brent WTI

Natural Gas Henry Hub Propane Mont Belvieu

Ethane Mt. Belvieu

$/MM BTU

0

5

10

15

20

25

30

35

Crude to Gas Ratio

Crude to Gas

Crude to Ethane

MMBTU Content Per Barrel

Sources: ChemOrbis (Brent), TradingView & EIA (WTII, Natural Gas & NGLS), ChemPMC Estimates

Other Risk Factor: China

0

2000

4000

6000

8000

10000

2001 2004 2007 2010 2013 2016

China Scrap Imports

Scrap Imports All Plastics

Polyethylene Scrap Imports

KT

0

5000

10000

15000

20000

2001 2004 2007 2010 2013 2016

China PE Imports

Virgin Scrap

KT

Sources: ITC, ChemPMC Estimates

Polypropylene: A Different Story…

Limited Investment

Propylene Volatility

High P/E Ratio

0

20

40

60

80

100

Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17

Global PP and North American Propylene Prices

US Domestic Discounted US Domestic Spot China CFR PGP Spot Domestic

CPP

0

0.5

1

1.5

2

2.5

Jan

-13

Mar

-13

May

-13

Jul-

13

Sep

-13

No

v-1

3

Jan

-14

Mar

-14

May

-14

Jul-

14

Sep

-14

No

v-1

4

Jan

-15

Mar

-15

May

-15

Jul-

15

Sep

-15

No

v-1

5

Jan

-16

Mar

-16

May

-16

Jul-

16

Sep

-16

No

v-1

6

Jan

-17

Mar

-17

May

-17

Jul-

17

Sep

-17

No

v-1

7

Jan

-18

P/E Ratios

USA ASIA

Sources: ChemOrbis (China Prices, Olefins), ITC & ChemPMC Estimates

Self-Sufficient China

0

1000

2000

3000

4000

5000

6000

2001 2004 2007 2010 2013 2016

China PP ImportsKT

Sources: ITC, ChemPMC Estimates

And now: Lets Finish Where We Started!

• What you should be following/checking/keeping up to date with?

• North American projects timing, delays & cancellations – showcase producers’ expectations

• Asian projects delays & cancellations – can improve imports into Asia, delaying impact of new capacity in prices

• China demand or China imports – how much is that market coming to the rescue

• China prices, North American spot prices & your prices – question your contracts… are you getting the best deal possible? Invest in pricing information, particularly overseas data.

• Who’s moving materials for producers? Become their best friends

• Check the weather; in active hurricane seasons, inventories will be your best friend. Cover your basic needs, and don’t follow the panic.

See you at the International Petrochemical Conference in San AntonioQuestions? Comments? Esteban.sagel@chempmc.com

Detailed white paper available at www.chempmc.com

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