Chemical Outlook - Country & Industry Forecasting: IHS Global Insight

IHS Mexican Outlook Conference
October 3rd, 2012
Mexico City, Mexico
Chemical Outlook:
Mexican Industry Challenges
Esteban Sagel
Director Polypropylene Americas
IHS Chemical
Esteban.sagel@ihs.com

IHS Chemical
CMAI + SRIC + HARRIMAN + CHEMICAL WEEK
© 2012, IHS Inc. No portion of this presentation may be reproduced, reused, or otherwise distributed in any form without prior written consent.

Energy
Oil & Gas
Healthcare
Power &
Utilities
Military &
Security
Transportation
IHS IHS Chemical
Aerospace
& Defense
Government
Electronics
& Telecom
Construction
Consumer
& Retail
Financial
Automotive
Metals &
Mining
Agriculture
Shipping
© 2012, IHS Inc. No portion of this presentation may be reproduced, reused, or otherwise distributed in any form without prior written consent.

Petrochemical Value-Chain
Consumers
Retail
Converters
Energy
Petrochemicals
Derivatives
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Changes In Energy Market Create Threats
& Opportunities For Chemical Producers
FCC
Propylene
REFORMER
BTX Extraction
Raffinate
Benzene
Toluene
Xylene
Refinery
Crude Oil
Natural Gas
Naphtha
Gas Oil
Propane
Ethane
Butane
Condensate
Gas
Processing
Unit
Pygas
Benzene
Toluene/Xylene
Heavy Aromatics
C 5 /C 6 Non Aromatics
Ethylene
Unit
Ethylene
Fuel Oil
Methane/Hydrogen
Crude C4
Butadiene
Mixed Butylenes
Propylene
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Megatrends Center around Broad
Fundamental Value-Creation Drivers
Demographic
Rapid population in the
developing world with
increased ageing in the
developed world shift
demand profile
Economic
Standard of Living rises
rapidly, merging developing
country standards with that of
the developed world and
leading to rapid technology
take-up
Sustainability
Growing populations and
economies create needs for
innovative solutions; market
drivers will be likely
supplemented by policy
Sustainability
Economic
Demographic
Create opportunities Rapid Growing
Standard
and population populations threats
of Living
growth for
rises
and chemical in producers
economies
rapidly, merging developing
the developing create world needs with for
innovative
country standards with that
increased solutions; ageing in market the
• New geographic & end-use drivers
of the developed world and
developed will markets be supplemented
world
(products,
shift
logistics & channels)
leading
by
to rapid technology
• Minimum operational footprint demand policy initiatives profile
take-up
maximum resource efficiency
(energy & environment)
• Linkages to fast growth markets (BRICS), coupled with an expanded
focus on the frontiers (e.g. Africa)
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6

Chemical Outlook
• Global Demand – Pattern
Changing? Impact on Trade
• Mexican Chemical Industry –
Can Trends be Changed?
• Earnings – Cyclic Path?
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7

Chemicals - Critical & Growing
• Chemicals remain ingredients
used to manufacture everything
in our lives
• Chemical demand expands at
rates about two-times GDP
• Most growth is centered in Asia,
but other “fast growth economies”
are also expanding
• Chemicals Trade continues to
accelerate
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Chemicals – More of the Story
• Production expansion mostly in the
Middle East or China, but Shale Oil
and Gas is putting North America
back in play.
‣ Longer term potential to spread
• Economics of petro-based raw
materials represent 60% or more of
total Petrochemical production cost –
and drive capital investment decisions
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Vision 2020….
Global demand for Basic Chemicals and Plastics
reaches 1.0 Billion metric tons, requiring
200 Million metric tons of internationally traded
product and raising the importance of a deep and
broad end-to-end understanding of supply
sustainability and drivers-of-consumption as
international sourcing options expand.
Trade continues to expand faster than demand
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Basic Chemicals & Plastics Demand
Distribution is Shifting
Economic Expansion:
Basic demand to fast
growth emerging
economies is evident
Investment Decisions:
Two Options: Produce in
demand centers or
leverage a clear cost
advantage
Tomorrow’s Market:
Sustainability includes a
systematic addition of
performance products
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Distribution of Global Demand
Basic Chemicals and Plastics
All Others
W. Europe
N. America
Middle East
Other Asia
China
1990 1995 2000 2005 2010 2015 2020
Center of Industry has shifted to Asia
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Asia Remains the Driver for Global
Demand of Petrochemicals
Million Metric Tons, Ethylene
80
70
60
50
40
30
20
10
Asia Pacific regional equivalent
ethylene consumption to reach
75 million metric tons by 2016.
0
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16
North America West Europe Asia Middle East South America
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Competitive Resources Also
Attract Capacity
• Production growth is a
combination of demand
pull and cost position
• Growth feeds on local
labor; supports
diversified investment
• International Markets
expand as offsets for
less-developed or lowgrowth
economy
- if you can compete
Cumulative Production Growth
800
700
Million Metric Tons
Middle East (Hydrocarbon)
600 Developing Countries
China
500
Developed Countries
400
N. America
300
200
100
0
90 95 00 05 10 15 20
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Regional Ethylene Capacity Trends…
200 Million Metric Tons by 2020
Regional Capacity
Million Metric Tons
70
60
50
40
30
20
10
World Capacity
Million Metric Tons
250
200
150
100
50
0
00 02 04 06 08 10 12 14 16 18 20
World NAM MDE WEP Asia Other
0
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Regional Ethylene Capacity Trends…
200 Million Metric Tons by 2020
Regional Capacity
Million Metric Tons
70
60
50
40
30
20
10
World Capacity
Million Metric Tons
250
200
150
100
50
0
00 02 04 06 08 10 12 14 16 18 20
World NAM MDE WEP Asia Other
0
© 2012, IHS Inc. No portion of this presentation may be reproduced, reused, or otherwise distributed in any form without prior written consent.

Regional Ethylene Capacity Trends…
200 Million Metric Tons by 2020
Regional Capacity
Million Metric Tons
70
60
50
40
30
20
10
World Capacity
Million Metric Tons
250
200
150
100
50
0
00 02 04 06 08 10 12 14 16 18 20
World NAM MDE WEP Asia Other
0
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North America Exports Come Back
Into Focus
• Demand growth in
developing regions
outpace capacity
• Asia requires increasing
derivative imports
• Assume Middle East
will grow market share
• North America returns
as competitive supplier
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20
18
16
14
12
10
N. America Energy Market Shift Felt
around the Petrochemical World
$US per Million Btu
8
6
4
2
0
Gas as % of Crude
120%
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16
Crude (WTI) Natural Gas Gas as % of Crude
100%
80%
60%
40%
20%
0%
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20
18
16
14
12
10
N. America Energy Market Shift Felt
around the Petrochemical World
$US per Million Btu
8
6
4
2
0
The shift from crude oil parity to a
significant advantage for natural gas has
sparked renewed interest in North
American based chemical and derivative
investments
Gas as % of Crude
120%
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16
Crude (WTI) Natural Gas Gas as % of Crude
100%
80%
60%
40%
20%
0%
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Ethane Cracking Providing
A Sustainable Advantage
$US per Metric Ton, Ethylene
1,400
Regional Ethylene Cash Cost
1,200
1,000
800
600
400
200
0
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16
U.S. Ethane WEP Naphtha SEA Naphtha
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Regional Trade Competition…
Light vs Heavy Feedstock
21
12.1
Ethylene Net
Equivalent Exports
(million metric tons)
2010 2015 2020
Middle East
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Regional Trade Competition…
Light vs Heavy Feedstock
6.4
10
21
7.7
6.6
12.1
2010 2015 2020
U.S.
Canada
2010 2015 2020
S. Korea Taiwan Japan
2.8
3.7
Ethylene Net
Equivalent Exports
(million metric tons)
2010 2015 2020
Middle East
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2010 2015 2020
Singapore
Thailand

North America
Ethylene Net Equivalent Trade
Million Metric Tons, Ethylene
9.0
Ethylene
8.0
Glycol
7.0
Polyethylene
6.0
5.0
4.0
3.0
2.0
1.0
Others
Styrenics
Vinyls
MBPD, Ethane
567
504
441
378
315
252
189
126
63
0.0
90 95 00 05 10 15 20
0
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North America
Ethylene Net Equivalent Trade
Million Metric Tons, Ethylene
9.0
Ethylene
8.0
Glycol
7.0
Polyethylene
6.0
5.0
4.0
3.0
2.0
1.0
Others
Styrenics
Vinyls
MBPD, Ethane
567
504
441
378
315
252
189
126
63
0.0
90 95 00 05 10 15 20
0
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Chemical Outlook
• Global Demand – Pattern
Changing?
• Mexican Chemical Industry –
Can Trends be Changed?
• Earnings – Cyclic Path?
© 2012, IHS Inc. No portion of this presentation may be reproduced, reused, or otherwise distributed in any form without prior written consent.
25

Mexican Petrochemical
Demand and Production
Million Metric Tons
30
25
20
15
10
5
0
1990 1995 2000 2005 2010 2015 2020
Production Domestic Demand
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Mexican Petrochemical
Exports, Imports and Net Trade
Million Metric Tons
12
10
8
6
4
2
0
-2
-4
-6
1990 1995 2000 2005 2010 2015 2020
Imports Exports Net Trade
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Competitive Feedstock Pricing Key
• First major grassroot
petrochemical project in
Mexico
• Ethane cracker + HDPE +
LDPE plant
• Competitive ethane price
key
− Phoenix project experience
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28

Shale Gas Opportunity
• Natural gas deficit in Mexico to reach
45% of demand by 2018
• Same formations present in Mexico,
concentrated in Eastern Coast
• National Energy Strategy envisions
shale gas production by 2016
− Priority in Mexico appears to be oil
rather than shale gas
− Private resources expected to be
required, given lower raking of natural
gas E&P versus oil on Pemex budget
allocation
• Some gas processing infrastructure
overlaps shale plays, but more would
likely be required
• New regulatory and legal provisions
needed for private participation in
E&P beyond current service contracts
• This could lead to constitutional
amendments or legal reforms – a big
challenge
© 2012, IHS Inc. No portion of this presentation may be reproduced, reused, or otherwise distributed in any form without prior written consent.
29

Chemical Outlook
• Global Demand – Pattern
Changing?
• Mexican Chemical Industry –
Can Trends be Changed?
• Earnings – Cyclic Path?
© 2012, IHS Inc. No portion of this presentation may be reproduced, reused, or otherwise distributed in any form without prior written consent.
30

Profit Cycle Dynamics Vary By
Products & Region
09
Full recovery
by 2014
10
11 12 13 14 15
• Recovery based on slower
capacity vs demand growth
• Light feedstock producers
maximize cash margins
• Ethane based producers
see no margin “downturn”
• Ethylene market
fundamentals recover by
2014
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Capacity Absorption Inconsistent
• Pace of growth has
been erratic – just
like the economy…
• Sharp decline was
followed by a sharp
recovery in the fast
growing economies
(BRICs)
• Pace of recovery not
sustainable; more
moderate growth
prevails
75
60
45
30
15
0
- 15 -
- 30 -
Basic Chemicals and Plastics
Millions of Metric Tons
Demand Change
Capacity Additions
00 05 10 15 20
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32

Global Base Chemicals & Plastics
Weighted Average Earnings Before Interest & Taxes
Dollars per Metric Ton
$225
$200
$175
$150
$125
$100
$75
$50
$25
$0
-$25
-$50
85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15 17
Olefins Aromatics Chloralkali Methanol Plastics
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Profit Levels Vary By Region
Global Earnings Before Interest and Taxes
U.S. $ per Metric Ton – Volume Weighted Basis
$300
$300
North America
$250
Global Average
West Europe
$250
$200
Asia
$200
$150
$100
$50
$0
- $50
- $100
85 88 91 94 97 00 03 06 09 12 15 18
Significant Regional Differences
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34
$150
$100
$50
$0
- $50
- $100

Conclusions – The Path to 2020
• Geopolitical events become an even larger factor by
underpinning oil prices and slowing economic growth
- more volatility and slower pace of surplus absorption
• Global demand expands at a pace equal to about 4.4%
per year driven by emerging consumers
• Middle East remains the largest source of global tradeflows
and its future investments continue to diversify the
region’s production portfolio, attracting more participants
and creating more jobs
• New oil based (naphtha, etc.) facilities are still built where
refinery integration and/or labor can be leveraged
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Conclusions – The Path to 2020
• North America becomes a much larger participant in
ethane-to-ethylene derivative trade (PE, MEG and PVC)
- local demand growth remains modest (~2.0%)
• Mexico could be a part of this process
• Etileno XXI a step on the right direction
• Further natural gas developments key
• Regulatory environment that enables international investments
biggest hurdle
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Mexico related conclusions
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IHS Mexican Outlook Conference
October 3rd, 2012
Mexico City, Mexico
Chemical Outlook:
Mexican Industry Challenges
Esteban Sagel
Director Polypropylene Americas
IHS Chemical
Esteban.sagel@ihs.com