PETROLEUM INSTITUTE OF THAILAND · 2015-03-19 · Part 1- 5 Dee;/Briefing/2006_07_06/SET_Thai PC Ind, Where do we stand -Part 1-World PC.ppt The long-term drivers of the world economy

Dee;/Briefing/2006_07_06/SET_Thai PC Ind, Where do we stand -Part 1-World PC.pptPart 1- 1

PETROLEUM INSTITUTE OF THAILANDPETROLEUM INSTITUTE OF THAILAND

“

Thai Thai PetrochemicalPetrochemical Industry: Industry: Where Do We Stand?Where Do We Stand?

6 July 2006

Petroleum Institute of Thailand, 18th Floor, PTT Building,

555 Vibhavadi Rangsit Rd., Chatuchak, Bangkok 10900

Tel. (622) 537-3592-8 Fax (662) 537-3591 Website: http:// www.ptit.orgE-mail: [email protected]

Briefing onBriefing on

ForFor

Securities Analysts AssociationSecurities Analysts Association


Content Content World Petrochemical Industry: The Gods are still on our side…but for how long? • The world’s health in the next five years looks O.K.• Global Petrochemical Industry

- What sustains the up-market?- How long will the Gods be on our side?- The Gods will be with different players for different periods

Thailand: Where Do We Stand? • Competitiveness: Thailand is competitive• Petrochemical 3rd Wave: What is critical?

- Integration at last: PTT Group and SCC Group- New Dimensions: SCALE, TECHNOLOGY, NEW PRODUCTS

• Scale: 1 Million tons Ethane Cracker ~ Definitely World Scale

• Technology: Metathesis for Propylene

• Products: MEG, Phenol, ACN, Ethoxylates & Fatty Alcohols


WORLD PETROCHEMICAL INDUSTRY: The Gods are still on our side...but for how long?


• The world’s health in the next five years looks O.K.


The long-term drivers of the world economy have reemerged, are well established and will be in full command through 2010 and beyond. These are:

1. Population factors, especially the transition of millions of individuals from subsistence existence to join the one third of humankind that constitutes the modern industrial commercial world.

2. World economic integration. Most countries and corporations will concentrate yet more on goods and services they can most efficiently produce. Thereafter they will rely on world trade, which is expected to expand at 6 to 8% per year.

3. The technological revolution, e.g. the rapid progress of computing, communications and biotechnology. These industries will continue their own very rapid expansion, and by saturating all human activities, will greatly contribute to the growth of productivity.

Source: 2006 CMAI World Petrochemical Conference , 22-23 March 2006, Houston, Texas, U.S.A,


CONCERNS

1. The geopolitical scene is unsettled and creates major uncertainties.

2. Stubbornly high energy prices could cause additional damage, although much of this impact was already absorbed and is likely to be reversed eventually.

3. The migration of manufacturing and of some services from developed countries to the developing world continues and calls for difficult adjustments. (Concern for the West, but goodfor us.)

4. Indebtedness by individuals, corporations and countries is high and represents a potential danger. Trade imbalances, especially of the U.S., persist. The relative value of major currencies is in flux.



FORECAST: WORLD GDP GROWTH:

The long-term economic outlook is quite favorable compared with past long-term GDP growth of 2.8 percent per year.

• 2006 to 2007: 3.1 to 3.6 percent per year, directionally up slightly

• 2008 to 2010: 3.6 to 3.0 percent per year, directionally down slightly



Singapore Spot Product Prices Singapore Spot Product Prices January 1995 January 1995 -- May 2006 : MonthlyMay 2006 : Monthly

Source: Platts

81216202428323640444852566064687276808488

Jan-

95

May

-95

Sep-9

5

Jan-

96

May

-96

Sep-9

6

Jan-

97

May

-97

Sep-9

7

Jan-

98

May

-98

Sep-9

8

Jan-

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May

-99

Sep-9

9

Jan-

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May

-00

Sep-0

0

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-01

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-04

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-05

Sep-0

5

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-06

Unit:US$/bbl

95 UNL NAPHTHA KERO GO 0.5%S FO180(2%) Dubai Crude


Development of Crude Prices Development of Crude Prices 1995 1995 -- May 2006: MonthlyMay 2006: Monthly

(Europe) (Middle East) (Asia) (N.America)

Source: Platts

812162024283236404448525660646872

Jan-

95

May

-95

Sep-9

5

Jan-

96

May

-96

Sep-9

6

Jan-

97

May

-97

Sep-9

7

Jan-

98

May

-98

Sep-9

8

Jan-

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May

-99

Sep-9

9

Jan-

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May

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Sep-0

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-01

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US$/bbl

BRENT DUBAI TAPIS WTI

Brent

WTI

Tapis

Dubai

Dee;/Briefing/2006_07_06/SET_Thai PC Ind, Where do we stand -Part 1-World PC.pptPart 1- 10Source: 2006 CMAI World Petrochemical Conference , 22-23 March 2006, Houston, Texas, U.S.A,






2006-2007


World Economy on a long bull run

Real GDP Growth

Latest quarters %

5.4

4.8

2.4

10.2

7.6

6.2

Japan*

US

Euro area

China

India*

Saudi Arabia**

Economist poll of GDP forecasts (%)

2006

3.0

3.4

2.1

2007

2.4

2.8

1.7

Quarterly rates are for Q1 2006 except *Q4 2005 and **FY2005

Source: Economist May 13, 2006 platts


US economy shrugging off high prices

2.7 2.2 2.4

0.2

1.7

3.7 3.24.3

3.5 43.3 3.8 3.3

4.3

1.7

4.8

7.2

012345678

Q102

Q202

Q302

Q402

Q103

Q203

Q303

Q403

Q104

Q204

Q304

Q404

Q105

Q205

Q305

Q405

Q106

US Quarterly GDP GrowthYear-on-year change to %

platts


Analysis: world recession unlikely for now

Would take two or more “big shocks” at once• Oil price over $100 per barrel• Inflation rate 3% higher than today’s levels• 10% drop in value of homes in US, Europe, Australia“Probability of such a scenario is less than 20%-Global Insight”

platts



• Global Petrochemical Industry

- What sustains the up-market?- How long will the Gods be on our side?


- What Sustains the Up-Market?




EFFECT OF OIL PRICE ON BASIC CHEMICALS & PLASTICS SECTOR EARNINGS

• Over the years people have tried to link energy value with basic chemicals and plastics sector earnings. But there has been no decent correlation between the two.

• The theory was that low energy prices was very beneficial and that high energy prices were equally damaging. This has not been found to be true.

• In fact the all important operating rate or demand/supplyfactors far outweigh cost-factors in chemical sector earnings.

• Remember the profits the petrochemical companies made in ’04-’05 when oil price was in the 50’s $/b?


However, petrochemicals profitability drivers continue to be driven by operating rates rather than oil price

Source: Nexant, “Feedstock Developments” APIC 2006Part 1-25


WHAT SUSTAINS THESE UP-CYCLE MARKET CONDITIONS

Certainly the factors that sustain a chemicals sector recovery have been evident in the market for some time, namely:

1. Prior extended period of unattractive earnings forcing capital discipline

2. Consolidation of producers in developed markets

3. Widespread economic recovery, especially in emerging countries

4. Concentration of New Capacity Addition

5. Application gains in fast-expanding non-durable (consumer) product markets


• Prior Extended Period of Unattractive Earnings

– This extended period of industry EBIT remaining close to negative for six painful years spelled the end for many weak participants.

– The industry had to undergo consolidation, divestiture and financial restructure, and new investments only possible among the strongest participants.

– This resulted in a strained supply by 2004 against the spurt in demand led by China.


Prior Extended Period of Unattractive Earnings



• Consolidation of Producers in Developed Market

The consolidation has resulted in a market structure that is more disciplined.


Consolidation of Producers in Developed Markets



• Widespread Economic Recovery in Emerging CountriesCareful analysis of chemicals value chains shows that a majority of end uses contributing to ~ 75% of demand for petrochemicals are in retail-based consumption. Consequently, a sustaining strength for the current up-cycle is the continuing growth in real sales not just in developed economies such as the US but especially in emerging economies like China, Russia and India.


Retail Sales of Select EconomiesRetail Sales of Select Economies

Widespread Economic Recovery in Emerging Countries



• Appropriate Geographic Concentration of New Capacity Additions

–In 2005 the cap. added outside “New Gulf” or China is only 23% and ME. accounts for only 21%. So Much more of the cap. additions has been in the “high growth” China than in the “low cost” ME. This exemplifies the proximity to marketconcept. This provides market access opportunity for international suppliers to the huge China market.

–This keen understanding or the degree of advantage and disadvantage associated with investments in different countries is preventing most of the mistakes made in the past cycles, creating more sustaining up-market environment.


Geographic Concentration of New Capacity Addition

Capacity Addition in 2005

23% 24%

56%

0%

10%

20%

30%

40%

50%

60%

Outside New Gulf& China

New Gulf China (mostly)




• Appropriate Gains in Fast-expending Non-durable (consumes) products markets.

–Petrochemical are the basic ingredients for many consumption segments; and since the world is still expanding the demand for consumer goods expands too.

–This growth in petrochemicals demand will outpace that of the world economies due to the extremely efficient supply chains, facilitated by the emergence of global companies; and the support of WTO agreements.

–The open trade agreements have increased the ease of moving finished goods all over the globe.


Gains in Fast-Expanding Markets


Increased


- How Long Will the Gods Be on Our Side?


PETROCHEMICAL INDUSTRY FOR THE REST OF THE DECADE

First, update the basic fundamentals for the remainder of this decade.

• Demand Growth ~ Relentless with exceptions- e.g. US, WEU and Japan whose demand for first-level chemicals and plastics

have plateaued. But consumption of finished goods grows with economic health.

- Most of the finished goods into the US are from China while the basic raw materials are from the “New Gulf” (ME) supplying conversion plants in China.

- e.g. Local PE production in developed markets like the US continues to be displaced by imports of bags and films. Therefore, while US’s petrochemical sector may be suffering from declining sales, its consumption growth in imported consumers goods is sustaining production in China and elsewhere supporting global economic activities.

- The US will attract more and more imports of bags and film. Is this an opportunity for some of us here in Thailand?

- One cannot escape the “hydrocarbon cost” in the business. It pervades all economics and converts very low real demand countries into production heaven e.g. ME. The future is glim for the high cost producers e.g. US and WE producers.






• Capacity Addition ~ Accelerating at moderate pace.

PETROCHEMICAL INDUSTRY FOR THE REST OF THE DECADE (cont’d)

- Note the transition of the dominating China in the build up in 2004/2005 to the “New Gulf” in 2009/2010.

- The market is now in a moderate over-supply but will not be overly impacted by excess capacity until 2009; and unless more capacities come on stream in 2010, the impact will be fairly short lived. In fact the over build in 2008 is only 0.78% of demand.




• Continuing Delays ~ Iran factor


- Iran capacity can be delayed, and if it is delayed by 2 years (worse case) the market moves into a slightly long to balance position relative to current projection (~25% probability) But it is still worth careful attention.

- Availability of feedstock is being questioned in Saudi Arabia aswell. The development of new fields may not be in time to satisfy enough feedstock for all the petrochemical growth.





• Global Trade Pattern ~ Major shifts evident

- North America producers have recognized that their and their customers’ cost structures are not competitive and concluded that imports of finished and semi-finished goods will capture the majority of market growth for the foreseeable future ~ resulting in conservative investment.

- The geographic shift in the pace of demand growth from West to East has created corresponding shift in trade – away from the high cost Western exporters.

- N.America & WE will have to focus on differentiated segmentsof the market as a defensive move against low cost ME products.


• “New Gulf” Capacity will be absorbed.


- China can absorb its own capacities and will still need to import large quantities of products.

- Generally, new capacity shocks have to be close to 5% of total supply occurring in a very concentrated period of time before they severely impact market conditions.

- With the new low-cost capacity coming on to the market, the high cost material that has so far been the last increment of supply will be totally priced out of the market. This implies that future prices will be lower. How much lower depends on the integrated production economics of the remaining players.

- Price pressure will be relatively severe near the end of the decade as market barriers are being lifted through WTO initiative.




- The Gods will be with Different Players for Different Periods.








Documents

PETROLEUM INSTITUTE OF THAILAND · 2015-03-19 · Part 1- 5 Dee;/Briefing/2006_07_06/SET_Thai PC Ind, Where do we stand -Part 1-World PC.ppt The long-term drivers of the world economy