January Are polymer prices about to bottom-out?

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1 January 2019 Are polymer prices about to bottom-out? The occasions on which polymer feedstock costs fall in three consecutive months is quite a rarity, and although for the last two months there have been corresponding falls in the cost of crude oil to offset these losses, the question has to be, are such trends likely to continue? A possible answer to this question is to look to Asia, where China tends to have a significant influence

2 Welcome to price know-how A monthly publication looking at key factors that affects UK polymer markets. The concept of a user friendly market report came from feedback about an article published in PRW (Plastics & Rubber Weekly) about the 2011 market outlook to which Plastribution made a significant contribution. The objective of the report is to form the basis of discussion about issues such as pricing and availability and so be a basis on which to consider purchasing strategies. Whilst some price surveys currently exist they are often difficult to interpret, use foreign currencies, and differing units of measure. Price know-how aims to be relevant by providing an overview, material group specific reports and more general economic information including exchange rates and GDP growth. To keep things relevant the report is in Sterling with tonnes as the common unit of measure. It is also believed that the report will support customers in explaining polymer price trends to their own customers, employees and shareholders. As always we would welcome your feedback, and as ever your sales team is available to discuss your specific requirements. The Plastribution Team Price know-how Glossary Monomers C2 Ethylene C3 Propylene SM Styrene Monomer Naphtha Derivative from the crude oil refining process, which is then typically passed through a (Steam) Cracker to produce various feedstocks including C2 and C3. Force Majeure (non-legal definition) Since accepting an order circumstances outside of the supplier s control, and which could not have been foreseen, now prevent the supplier from fulfilling the contract either in part or in full. By declaring Force Majeure the contract is to supply is cancelled. 2

3 From Hydrocarbons to Polymer A simple diagram explaining the production routes from the major hydrocarbon sources through feedstock to the most common polymer groups. Coal Methanol Formaldehyde Acetal Natural Gas MTO Methane Dehydrogenation Ethane Propane Butane Condensate Steam Cracking Olefins Ethylene (C2) Propylene (C3) Butadiene (C4) Butene Phenol Polyethylene LDPE, HDPE, LLDPE Polypropylene Cumene Ethylbenzene Acetone Styrene Polystyrene ABS PMMA SBR Benzene Crude Oil Naptha Aromatics Toluene Xylenes Cylclohexene Adipic Acid Nylon 66 Caprolactam Nylon 6 3

4 Main drivers of polymer prices Feedstock Oil Gas Shale Naptha Polymer Producers Monomer Pricing Polymerisation Styrene Margins Propylene Inventory Ethylene Planned & Benzene un-planned C4 outages Market Currency Short term demand Short term reductions in capacity Arbitrage of Polymer China & SE Asia supply/demand Trader Activity External Factors Political War Natural Disaster Changes in consumer markets Geographical shifts in supply/demand 4

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6 Are polymer prices about to bottom-out? January 2019 Feedstock Change (Contract) The occasions on which polymer feedstock costs fall in three consecutive months is quite a rarity, and although for the last two months there have been corresponding falls in the cost of crude oil to offset these losses, the question has to be, are such trends likely to continue? A possible answer to this question is to look to Asia, where China tends to have a significant influence. In this region there are three matters of significance: 1. Most polymer prices have bottomed-out and are currently flat-lining, or in some cases showing very modest increases. 2. In the period leading up to the Chinese New Year, purchasing activity tends to be very subdued. However, after the New Year on February 5th activity will flourish as buyers and sellers are eager to follow their tradition of placing their first orders in what will be the year of the pig. 3. Many Asian polymer producers are refusing to sell at the lowest prices in the market, instead preferring to either wait and see how demand and pricing is after February 5th and/or to curb output to match the perceived demand. Furthermore, there has been a recovery in Brent Crude Oil prices since the beginning of the New Year. As has been witnessed on previous occasions, a modest increase in demand can significantly impact the supply/ demand balance and go on to create a virtuous circle in which demand fuels pricing and pricing fuels demand. After what is inevitably a slow start after the seasonal holiday period, January is likely to be an important month if buyers take the view that prices are at, or near the bottom and that the next price moves could be upwards /3/18 12/5/18 12/7/18 12/9/18 12/11/18 12/13/18 12/15/18 12/17/18 12/19/18 12/21/18 12/23/18 12/25/18 12/27/18 12/29/18 12/31/18 1/2/19 1/4/19 1/6/19 1/8/19 1/10/19 Brent Crude $ per Barrel Euro USD C2 (Ethylene) C3 (Propylene) Styrene Benzene Brent Crude December 2018 Feedstock Change (Contract) C2 (Ethylene) C3 (Propylene) Styrene Benzene Brent Crude November 2018 Feedstock Change (Contract) C2 (Ethylene) C3 (Propylene) Styrene Benzene Brent Crude

7 1, Polyolefins per tonne 1, Brent Crude Naphtha Spot Ethylene (C2) Spot Ethylene (C2) Contract Propylene (C3) Spot Propylene (C3) Contract Polyolefin Basket Data provided by PIE Jan-17 Mar-17 May-17 Jul-17 Sep-17 Nov-17 Jan-18 Mar-18 May-18 Jul-18 Sep-18 Nov-18 C2-110, C3-100 Dec C2-40, C3-35 Jan Supply Supply Supply Supply Demand Demand Demand Demand LDPE Reductions in crude oil and naphtha pricing saw Ethylene feedstock prices fall dramatically going into December. Producers were reluctant to pass this reduction on in its entirety, with many applying reductions in the region of 70-80/T. This reduction was well received by the market and demand remained strong despite what was expected to be a seasonally quieter month. Moving into the New Year, Ethylene feedstock prices continued to fall as an ongoing reflection of crude oil and naphtha prices throughout December. This again was generally not passed on in full by producers, and due to the weakening of the / exchange rate, pricing was generally rolled over in Pound Sterling terms. Demand remains sluggish. LLDPE A tightening supply situation in December meant that the reduction in price was limited and did not reflect the full Ethylene cost reduction. That said, the reductions that were passed on were still significant and several producers looked to do large volume deals. Moving into the New Year, the supply situation appears to have tightened somewhat and reductions in pricing were limited as a result. The availability of injection moulding grades remains stable and the market is balanced. HDPE The picture on HDPE was similar to that of LDPE in December, in that producers generally withheld on passing on the full feedstock reduction. Deals continued to be available for those looking to place large volume orders (specifically on blow moulding grades), though generally the supply and demand situation was stable. Producers again passed only part of the Ethylene reduction on in their HDPE pricing for January. In comparison with other Polyethylene products, supply of HDPE seems tighter and therefore producers are likely to withstand pressure to apply further reductions. PP Propylene feedstock costs also fell significantly in December as a result of falling crude oil and naphtha prices. Producers resisted passing on the full extent of the decrease, with ongoing supply restrictions from some producers justifying this approach. Demand eased somewhat due to the seasonally quieter month. January saw a further reduction in propylene feedstock pricing, which again was only partly passed on by producers. The supply situation remains stable/ tight, however, this has generally been matched by demand. UK prices continue to be negatively impacted by the weakness of Sterling and largely resulted in a rollover of prices for the month. Other Polyolefins EVA pricing continues to track the Ethylene feedstock price movement in Euro terms. Availability appears to be sufficient to meet demand. 7

8 Styrenics Data provided by PIE per tonne 2, , , , , , Brent Crude Benzene Spot Benzene Contract Styrene (SM) Spot Styrene (SM) Contract Styrene Basket Jan-17 Mar-17 May-17 Jul-17 Sep-17 Nov-17 Jan-18 Mar-18 May-18 Jul-18 Sep-18 Nov-18 Supply Supply Supply Demand Demand Demand PS December saw a drop in SM of 150/T, and GPPS and HIPS fell by at least 125/T. The SM fall was due to overstock at the main European producers, due to Rhine river levels, coupled with poor demand in China. Demand was low, as the holiday period approached. ABS The decreasing trend was also mirrored in December ABS, as SM fell by 170/T and ACN by 25/T. Supply was strong as imports from Asia became readily available. January has seen slight reductions, but it seems likely that prices have bottomed-out. Supply should remain strong, but lead times of Asian imports could be stretching out. Increases in February are likely. PC/ABS As usual, PC/ABS price is following the trend of ABS, although demand is not as strong. Other Styrenics SAN and specialities such as ASA and SMMA continue to follow the price trend of ABS. SM dropped by 15/T in January, which seems to be the bottom of the market. PS has followed suit, and demand has increased as converters restock for the New Year. Supply could be an issue and increases seem very likely in February. 8

9 4, , , Engineering Polymers per tonne 2, , , , Brent Crude Benzene Spot (EUR/t) Benzene Contract(EUR/t) Naphtha Spot (EUR/t) Engineering Basket Data provided by PIE Jan-17 Mar-17 May-17 Jul-17 Sep-17 Nov-17 Jan-18 Mar-18 May-18 Jul-18 Sep-18 Nov-18 Supply Supply Supply Supply Supply Supply Demand Demand Demand Demand Demand Demand PA6 December saw lower benzene prices in all regions and a considerable drop in caprolactum prices in Asia. We have started to see price reductions on nylon 6 and this is likely to continue into January and possibly into quarter one. There is expected to be little change in supply and demand until the auto industry gets off the ground. PA66 The situation for nylon 66 remains unchanged. We continue to see increasing prices and material is still in very short supply. Whilst BASF lifted their force majeure, offering some hope, Ascend announced force majeure on hexamethylene diamine (HMD). The company cites manufacturing delays as the reason. POM There is unlikely to be any significant change to supply and pricing in the short to medium term. There is still a shortage of material and customers remain on allocation. PC After the significant fall in demand from the automotive sector in the last few weeks of 2018, which resulted in rapid price reductions, it is expected that many producers will hope that cutting of output and reducing high inventory levels in the run up to Christmas will have been enough to stay further decreases. Little change is expected until we see some rejuvenation in the automotive sector, which is likely to be middle of January/early February. PMMA For the first time in two years, we are starting to see reductions in pricing and greater availability of material. Although there are still reports of MMA shortages, these are more regional and the issues with low water levels in the Rhine are expected to improve as we move into the winter months and levels become more normal. PBT/PET Pricing has started to increase on the back of rising base polymers. Other Engineering Polymers The situation for most other engineering polymers is one of continued high market prices and fairly tight supply, but possibly improving into next year. 9

10 Fundamentals Brent Crude Oil Price per tonne Jan - 18 Feb - 18 Mar - 18 Apr - 18 May - 18 Jun - 18 Jul - 18 Aug -18 USD per tonne Sep - 18 Oct - 18 Nov - 18 Dec - 18 GBP per tonne UK Economic Data Topic Item Date % Trend GDP Real GDP (Q on Q) Q % UK Output Manufacturing (Index) November Sales New Car Registrations (Y on Y) December -5.5 Sales Retail Sales (M on M) October 0.1 Labour Unemployment Rate August - October 4.1 Prices CPI (Y on Y) November 2.3 Prices RPI (Y on Y) November 3.2 Interest Rate Bank of England Base Rate December 0.75 Exchange Rates 1. Oil Price 2. Exchange Rates Oil prices appear to have stabilised in the $75 to $85 range following the announcement by OPEC to increase output. The Sterling/Euro exchange rate is a key factor in determining polymer prices, since most materials are Euro denominated. At current price levels, each Euro Cent change in price represents a 10 per tonne impact on our polyolefins materials basket. The Sterling/USD exchange rate tends to be more influential on the price of ABS, PC and POM Euro USD The UK election result coupled with BREXIT has created significant economic uncertainty. Since the end of May 2017, the Pound has weakened against the Euro and the USD; volatility is expected to increase in the coming months as the March 2019 BREXIT deadline approaches. Feb - 18 Mar - 18 Apr - 18 May - 18 Jun - 18 Jul - 18 Aug - 18 Sep - 18 Oct - 18 Nov - 18 Dec - 18 UK Economic Data (Apart from Interest rate not updated since December 2017 due no update of Pocket Databank by HM Treasury 10

11 Methodology This report is produced based upon the following fundamentals: - EURO based pricing for feedstock and polymer pricing Conversion of Euro and USD based prices at prevailing exchange rates Product baskets weighted according to UK consumption Acknowledgements We would like to thank the following organisations for their support in producing this report: - PIE (Plastics Information Europe) HM Treasury Disclaimers The information provided in this report are based upon data available from both external an internal sources, and whilst care is exercised in producing this report we give no guarantee of accuracy. Furthermore we accept no liability for purchasing decisions based upon the information provided as the petrochemical market is complex and volatile. Plastribution Limited. All rights reserved. Plastribution Limited Clinitron House, Excelsior Road, Ashby Business Park, Ashby-de-la-Zouch, Leicestershire LE65 1JG Tel: +44 (0) Fax: +44 (0) sales@plastribution.co.uk