Polyolefins - A Volatile or Cyclical Future?
APIC 200612 May 2006
Sukanya Jira-arnontConsultant, Nexant (Thailand) Ltd.
- 1 -
Some definitions
Cyclicality: A structural situation that occurs when global operating rates exceed 90% indicating that the market is really tight. Prices increase rapidly and customers hedge further price increases and potential supply constraints by building inventory
Volatility: Sudden price changes caused by global events, competitive action or China’s purchasing behavior. Speculative inventory changes also fuel volatility
Fly up: Sharp increase in prices and inventory building driven by a tight supply/demand balance (global operating rates reach 92%)
Surge: Sharp increase in prices and inventory building driven by a short-term event (Gulf War, hurricanes, etc.): Temporary
- 2 -
What a year!
About the only thing we did not have was a plague!
Katrina
Rita
War
Inventory Building
Record Energy Prices
China
Plant explosions
Volatility: 2005…
YET!
- 3 -
Causes of Volatility
• China• Unplanned supply outages
– Weather related (e.g., US Gulf Coast hurricanes)– Plant operating problems (fires, equipment failure, etc.)– Problems in restarting after a planned shutdown
• Global events – volatile crude oil price, political instability in the Middle East, etc.
• Changes in inventory– Building when it is tight– Depleting when prices start to drop
Volatility can be monitored but not forecast
- 4 -
0200400600800
1,0001,2001,4001,600
1986 1988 1990 1992 1994 1996 1998 2000 2002 2004LDPE LLDPE HDPE
Price
s, CI
F Ho
ng K
ong,
USD
/MT
Asian polyethylene prices appear to be in random disorder until we analyze the causes
Asian PE PricesCIF Hong Kong, USD/MT
Asian PE PricesCIF Hong Kong, USD/MT
- 5 -
Asian polyethylene prices show the impact of cyclicality (fly up) and volatility (surge/events)
¹ 15 CRACKERS/30 POLYOLEFIN PLANTS DOWN
Asian PE PricesCIF Hong Kong, USD/MT
Asian PE PricesCIF Hong Kong, USD/MT
During fly ups and surges, customers build inventory to hedge future price increases which worsens the problem
0200400600800
1,0001,2001,4001,600
1986 1988 1990 1992 1994 1996 1998 2000 2002 2004
Price
s, CI
F Ho
ng K
ong,
USD
/MT LDPE LLDPE HDPE
Demand and Inventory Buildup(shortage)
Recession
Fly-up
Phillips HDPEExplosion
Surge
China Stops Buying
Gulf War Multiple Supply
Problems
Recession
End of Supply Problems
China Resumes Purchases
China Closes Ports
Asian Crises
AsiaRecovery
September 11
SARS
- 6 -
Cyclicality and volatility are also evident in profitability which generally follows the price curve
Chemical Industry Return, Japan, Korea and U.S.(percent on replacement capital)
-20-10
0102030405060
1990 1993 1996 1999 2002 2005
Perc
ent
Japan South Korea U.S.
- 7 -
China’s behavior is one main driver of volatility – China is the world’s largest polyolefin importer
• Current polymer demand is about 45 percent of total Asian demand. This is projected to exceed 50 percent by 2010
• Polyethylene demand in 2004 accounted for 15 percent of total global demand; polypropylene for 18 percent
• About 50 percent of demand is produced domestically and 50 percent imported. The percentage of imports will increase
• Essentially all polyolefins used for process exports is imported to take advantage of the duty drawback and no VAT
• On a net trade basis, China imports about 42 percent of globallyexported polyethylene and 44 percent of globally traded polypropylene
Sudden changes in China’s purchasing pattern causes volatility
- 8 -
Understanding the China market is difficult. Predicting it is impossible
• Purchasing patterns have always been erratic causing volatility– Government actions (e.g., closing ports)– Inventory building (speculative)– Price sensitivity (lowering purchases when prices are high)– Interpolymer/intermaterial substitution– Other factors (e.g., SARS epidemic, power shortages)
• Polyolefins imports in 2004 and 2005 were below expectations leading to the belief that demand had weakened
• However, in retrospect, this was not the case
A structural change occurred in the China market in 2004
- 9 -
Intermediates import growth was much higher than polymers (as were imports of essentially every other raw material)
0
2000
4000
6000
8000
10000
12000
14000
16000
1990 1995 2000 2003 2004
Kt
MEG SM PTAAN BD VCMEDC
At first glance, polymer demand growth, as seen from imports, was much lower in 2004
0
2000
4000
6000
8000
10000
12000
14000
16000
18000
1990 1995 2000 2003 2004
Kt
PE PPPVC ABSPS/EPS
Only 4% PE growth
- 10 -
A structural change occurred in the China import market in 2004 that continued in 2005
• High virgin resin prices in the Asian export market in the second half of 2004 resulted in an exceptionally strong increase China purchasing post consumer and post-industrial recycled polymer and scrap
• Imported scrap/recycled polymer increased 35 percent in 2004 reducing prime resin imports of which about 300,000 tons was polyethylene and 60,000 tons was polypropylene
• Domestic recycling accelerated as well due to the high prices increasing polyethylene recycling by about 150,000 tons and polypropylene recycling by about 85,000 tons
• This has continued through 2005 as scrap and recycled polymer imports increased to 5 million tons (25% increase from 2004)
• Based on industry sources, this may be peaking by mid-2006 requiring imports of virgin resin to increase again later this year
- 11 -
Imports of recycled polymers, including scrap increased 35% in 2004 and 25% in 2005 reaching 5 million tons
0
2
4
6
1995 2000 2003 2004 2005
Mill
ion
Tons
Polyolefins StyrenicsVinyls All Other
Nexant estimates based on adjusted import data and market research
This is the main reason for lower virgin resin imports
- 12 -
Sources of recycled plastics and scrap imports, 2004
Taiwan12%
USA11%
Japan5%
Australia5%
S. Korea5%
Germany4%
Hong Kong¹39%
All Other 19%
¹ Same approximate supply profile as the rest of China
About 25 countries
comprise All Other
About 25 countries
comprise All Other
- 13 -
Accounting for scrap and new recycling increases polymer growth to normal levels (10-12%)
02,0004,0006,0008,000
10,00012,00014,00016,00018,000
1990 1995 2000 2003 2004
Kt
PE PP PVC ABS PS/EPS
02,0004,0006,0008,000
10,00012,00014,00016,00018,00020,000
1990 1995 2000 2003 2004 2005K
t
PE PP PVC ABS PS/EPS
Polymer demand has not declined – the sourcing has changed!
Virgin Resin ImportsVirgin Resin Imports Virgin Resin + Scrap and RecyclingVirgin Resin + Scrap and Recycling
- 14 -
Two major hurricanes adversely impacted the petrochemical industry in late 2005
• There were two hurricanes (Katrina and Rita) that landed in the U.S. gulf coast
• Katrina had severe damage to New Orleans and surrounding areas• Rita, while less severe, caused damage in the Beaumont, Texas area.
However, due to the extent of damage of Katrina, the entire U. S. gulf coast petrochemical industry shut down
• This caused severe supply shortages with U. S. prices reaching $1800 per ton – a record
• As a result, polyolefins exports out of the U. S. gulf coast stopped and exports from Asia replaced them. In fact, more than 50 thousand tons of polyolefins were imported into the U. S. from Asia during the crisis
- 15 -
Hurricane Katrina hit the New Orleans Area
- 16 -
Hurricane Rita was less intense than Katrina but the impact was more severe (everything shut down)
- 17 -
Ethylene plants in Louisiana and Texas
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BBaattoonn RRoouuggee BBaayyttoowwnn
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HHoouussttoonn
PPooiinntt CCoommffoorrtt
GGeeiissmmaarr
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PPoorrtt NNeecchheess DDeeeerr PPaarrkk
NNoorrccoo
More than 75% of U. S. polyolefins capacity was shut
down
- 18 -
This had quite large impact on US polymer prices, but not Asia
LDPE, HDPE and PP moved in the same directionPrices are moving back to the pre hurricane level
Asia prices were not impacted by this event
-200400
600800
1,0001,2001,400
1,6001,8002,000
Jan
Feb
Mar
Apr
May Ju
nJu
lA
ugS
ep Oct
Nov
Dec Ja
nFe
bM
arA
prM
ay Jun
Jul
Aug
Sep Oct
Nov
Dec Ja
nFe
bM
ar
2004 2005 2006
US
$/to
n
0
20
40
60
80
100
120
140
US
$/bb
l
LLDPE, US LLDPE, Asia Brent crude
- 19 -
Polyolefins margin has been impacted by the recent high crude oil price situation
Polyethylene margin over ethylene has been dropped significantly in the recent past as ethylene producers can pass on their cost quicker
than polyolefin producers can pass on to their customers
-400
-200
-
200
400
600
800
1,000
1,200
1,400
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
Ethylene HDPE PE Margin
-400
-200
-
200
400
600
800
1,000
1,200
1,400
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
PE Margin Brent Crude
CIF SE Asia PriceCurrent US dollar per ton Current US dollar per ton
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Cyclicality - investment opportunity arises
• History will repeat and that petrochemical/polyolefin industry will continue its cyclicality pattern
• Industry cycle is 8 years period – Optimistic investment decisions drive a surge in new capacity, creating a glut of overcapacity, then growing demand absorbs excess capacity, restoring a balance to petrochemical markets.
- 21 -
Historically, the petrochemical industry cycle has averaged 8 years peak to peak but the current one is running 10 years
U.S. Petrochemical Industry Profitabilitycash cost margins - constant dollars - cycle case
050
100150200250300350400450
1975 1980 1985 1990 1995 2000 2005 2010
INDE
X, 1
982
= 10
0
10 YEARSPEAK-
TO-PEAK
7 YEARSPEAK-
TO-PEAK
9 YEARSPEAK-
TO-PEAK
Based on projected industry dynamics, a plateau rather than a peak could occur creating an extended period of good margins
- 22 -
New capacity additions in Asia as well as the Middle East contribute to the next petrochemical cycle – Operating rate drops significantly
LLDPE – Global Supply/Demand Balance
-
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2000 2002 2004 2006 2008 2010 2012 2014
thou
sand
ton
per y
ear
Capacity additions per year
-
200
400
600
800
1,000
1,200
1,400
1,600
2000 2002 2004 2006 2008 2010 2012 2014
thou
sand
ton
per y
ear
Asia
Middle East
Large additional capacities are expected in Asia and the Middle East during 2008-2010
-
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
2000 2002 2004 2006 2008 2010 2012 2014
Thou
sand
ton
per
year
75%
80%
85%
90%
95%
100%
Consumption Capacity Operating rate
- 23 -
So does PP – Operating rate drops sharply after 2008
PP – Global Supply/Demand BalanceCapacity additions per year
Asia shows much larger cumulative capacities added than the Middle East during 2006-2015
0
10000
20000
30000
40000
50000
60000
70000
80000
90000
2000 2002 2004 2006 2008 2010 2012 2014
Thou
sand
ton
per y
ear
75%
80%
85%
90%
95%
100%
Consumption Capacity Operating rate
-
500
1,000
1,500
2,000
2,500
3,000
2000 2002 2004 2006 2008 2010 2012 2014
thou
sand
ton
per y
ear Asia
-
500
1,000
1,500
2,000
2,500
2000 2002 2004 2006 2008 2010 2012 2014
thou
sand
ton
per y
ear Middle East
- 24 -
Based on the supply/demand balances, operating rates are projected to be high for the next couple of years
• The long-awaited cyclical fly up is projected to occur by year end based on the following:– No major global event affecting oil supply or economic stability– Energy prices remain at current levels– Global demand growth will be about 5 percent, essentially in line with
Global GDP growth – China returns to buying virgin resin in the second half of the year– Delays occur with new plant construction in the Middle East
• There is more upside potential than downside potential due to volatility– Unplanned outages could occur especially weather-related
An extended period of profitability could occur
- 25 -
Industry profitability could be sustained based on the lack of new capacity
• The fly up is forecast to start in the last half of 2006 as global polyolefins operating rates reach 92 percent. Prices increase rapidly and customers build inventory as a hedge against future price increases and supply constraints
• Very little new capacity coming on stream in 2007; producer profitability will be extended. Some debottlenecking occurs by year end
• Even in 2008 there still may not be enough capacity to meet projected demand growth (delays in the Middle East will be the main reason). As such 2008 could also be a good year for producers but debottlenecking will reduce operating rates and margins and start the downturn
• Downturn really begins in 2009 accelerates in 2010 with 2011 being the most likely bottom of the cycle. Depth depends upon the amount of new polymer capacity that is built
Companies need to use the period of extended profitability to plan for the downturn
Polyolefins- A Volatile or Cyclical Future?
APIC 200612 May 2006
Sukanya Jira-arnontConsultant, Nexant (Thailand) Ltd.