Polypropylene Industry Briefing

HMC s Customer Seminar 2016 Polypropylene Industry Briefing Chommanad Thammanayakatip May 2016

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Agenda Petrochemicals recent performance Investment Landscape South East Developments Chommanad Thammanayakatip Managing Consultant Energy & Chemicals Advisory T: +66 2 793 4606 M. +66 81 829 6450 E chommanadt@nexant.com 22nd Floor, Rasa Tower I 555 Phahonyothin Road Kwaeng Chatuchak, Khet Chatuchak Bangkok 10900 Thailand May 2016 4

What a difference a year makes Brent Crude Oil Price Decline, mth average 150 125 US$ per barrel 100 75 50 25 0 Jan-2008 Jan-2010 Jan-2012 Jan-2014 Jan-2016 Source: Nexant 5

What does low oil mean for the petrochemicals sector? 140 120 100 80 60 40 20 Brent Crude Oil Prices US$/bbl Issues for Global Chemicals: Investment slowdown in Middle East and in other geographies. Partly associated with Middle East sponsors. Shifts in industry competitiveness. Naphtha cracking has become more competitive. Feedstock alternatives have become less attractive e.g. coal, bio etc. Pricing correction across the value chain due to falling cost base. However margins have improved for some products Demand upside for some geographies increased disposable income? May 2016 6

Shale gas advantage has been eroded as naphtha cracking competitiveness improves with lower oil prices Petrochemicals Return on Capital Employed Index 45 140 Sharp decline in crude oil 120 Index (1984 Q1= 100) 30 15 0 Shale gas advantage Chemicals up-cycle 100 80 60 40 Brent oil price ($/bbl) -15 Economic crisis 2007 2008 2009 2010 2011 2012 2013 2014 2015 ROCE - Naphtha ROCE - US Shale Brent oil price 20 0 May 2016 7

Demand growth for polyolefins has varied over time yet the trend remains link to economic growth percent Global Polyolefins Demand Growth and Economic Growth 15 10 5 0-5 2000 2005 2010 2015 2020 Average Global GDP LDPE LLDPE HDPE Polypropylene Polymer consumption growth is driven by economic growth, or in more developed countries, by industrial production indices and consumer trends Estimated global PP demand CAGRs for 2000-2015 / 2015-2020 are 4.6% and 4.4% percent respectively Estimated global GDP growth for 2000-2015 / 2015-2020 is 2.9% / 3.2% Short-term global GDP forecasts (through 2020) have recently been reduced by almost 0.5% due to ongoing low oil prices, uncertainty about China, and other economic factors May 2016 8

China is by far the largest polyolefins market and the gap is continuing to widen Polyolefins per Capita Consumption, 2000-2020 Market Size (million tons) 80 70 60 50 40 30 20 10 0 2000 2010 2020 2000 2010 2020 2010 2000 Note: Bubble size reflects size of population 2020 2010 2020 2000 0 10 20 30 40 50 60 70 Consumption per capita United States Consumption Western Europe per Capita (kg) China Asia (ex China) Polymer demand is driven by industrial production and consumer trends, varying by country maturity May 2016 9 9

Investment Landscape 10

A number of new petrochemical projects are expected to be delayed due to the impact of low oil prices Regional Petrochemical Feedstock Sources and Trends US Shale Reserves Increased oil & gas production, resulting in lower energy prices. Increased production of co-produced ethane and other NGLs. Improved competitive position, resulting in reinvestment in commodity products. Middle East Oil and Gas Reserves Further utilisation of ethane and other available NGLs. Investment in new refinery with a focus on refinery/petchem integration. Declining competitive position off-set by mixed feeds, integration/scale and higher value products. China Coal Reserves Increase focus on coal to chemicals and PDH (via propane imports). Investment in new refinery capacity with a focus on refinery/petchem integration. Variable competitive position depending on feedstock. Access to markets is key. May 2016 11

New propylene supply trending towards on-purpose technology Steam Cracker Products: Naphtha vs. Ethane 4 Global Propylene Capacity Profile 100% Ton per ton ethylene 3 2 1 Percent of total capacity 50% 0 Naphtha Feedstock Ethane Feedstock Ethylene Propylene Others 0% 2005 2010 2015 Steam Cracker Refinery PDH CTO/MTO Others CTO/MTO and PDH processes are increasingly becoming important sources of incremental global propylene supply. This trend has been due to higher growth in propylene demand than refinery and cracker investments, and also prompted by trends towards using a lighter feedstock slate for global ethylene production. Globally, incremental propylene capacity from cracker and refinery developments is forecast to remain insufficient to balance propylene demand growth Firm CTO projects are limited to China and supported by the local availability of low-cost mine-mouth coal PDH investments are taking place in North America, Middle East and Asia. Propane exports from the US and the Middle East are also supporting PDH projects in Asia. May 2016 12

New refinery investments heavily concentrated in China and India Global Refinery Capacity Changes 2014-2017 Bubble size scale of total capacity additions 13

More than 20 CTO/MTO projects are under various stages of development in China CTO/CTP Operating Plants in China CTO/CTP Capacity CTO MTO 10 Heilongjiang Xinjiang Tibet Qinghai Beijing Jilin Liaoyang Inner Mongolia Hebei Tianjin Ningxia Shanxi Shandong Gansu Shaanxi Henan Jiangsu Anhui Sichuan Hubei Jiangxi Zhejiang Guizhou Hunan Fujian Yunnan Guangxi Guangdong Million tons 0 2012 2013 2014 2015 2016 Ethylene Propylene Hainan First phase CTO project concentrated in the western regions exploiting lower cost coal reserves. East coast developments are focused on methanol imports for new MTO projects. Higher cost projects may not succeed. 14

PP additions highly concentrated in China, strong emphasis around new refinery and on-purpose propylene Regional Polypropylene Incremental Capacity Additions (million tons) Incremental Changes 15-20 Other NA SA EU ME/AF China Over the next five years, polypropylene capacity will increase by almost 20 million tons May 2016 15

Global polypropylene demand was estimated at 60 million tons in 2015, following growth of 4.4% from 2014 Global Polypropylene Demand by End Use, 2015-e (Global demand 60 million tons) Other Extrusion 8% Others 5% Film 19% Regional Polypropylene Demand, 2015-e (Global demand 60 million tons) Asia (ex China) 23% North America 12% South America 5% Western Europe 12% Injection Moulding 39% Fibre 29% China 33% Africa 3% CEE 5% Middle East 7% Film applications are expected to have the highest growth rate, but almost all applications are forecast to have good growth HMC's Source: Customer Nexant Seminar Analysis May 2016 16

Polypropylene volume growth set to remain highly dependent on China Incremental PP Consumption Growth, million tons 5.0 Global Polypropylene Demand and capacity, million tons 100 Million tons per year 2.5 Million tons per year 75 50 25 0.0 0 China ROW Demand Capacity May 2016 17

The Middle East will continue to be the dominant export region, while China will remain the largest importer Global Polypropylene Net Trade Million tons 6 2010 2015 2020 With its low-cost production base, the Middle East is the dominant net export region, and this is not expected to change Million tons 0-6 North America, Western Europe, and Asia (ex China) are also net exporters - Despite its low-cost propane position and large additions of PDH capacity, very little polypropylene capacity has been announced in North America Despite large capacity additions, China continues to be the largest net importer, although this position will decline slightly May 2016 18

South (East) Asia Developments <Insert job number using 'Insert - Header & Footer'> <Insert date using Insert Header & Footer > 20

Economically, South East Asian is a major market with half a billion people registering U$2.4 trillion GDP in 2014 GDP of six major countries, 2014 (Total GDP 2.4 trillion dollars) Population of six major countries, 2014 (Total Population 560 million people) Vietnam 20% Indonesia 27% Vietnam 17% Thailand 13% Indonesia 46% Thailand 29% Singapore 1% Philippines 7% Malaysia 16% Singapore 1% Philippines 18% Malaysia 5% HMC's Source: Customer Nexant Seminar Analysis May 2016 21

Although in relative term, not as big as China the GDP is 5 times smaller, half slower growth and half GDP per capita consumption GDP per Capita (estimated US$ thousand, 2014) 60 56 50 40 30 26 20 10 11 8 5 4 4 3 2 0 Vietnam Philippines Indonesia SEA 6 combined Thailand China Malaysia Korea & Taiwan Singapore The region s fragmented market is illustrated by the highly varied GDP per capita Singapore is 5 times per capita larger than Malaysia (second largest per capita market) and Malaysia is 5 times larger than Vietnam (the smallest market in the analysis). May 2016 22

For the past decade, SEA PP markets have grown about as fast as GDP SEA Polypropylene Demand and Economic Growth 12% Polypropylene growth ~ 1.1 1.2 times GDP growth on average Year on year change 8% 4% 0% -4% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Actual GDP Actual polymer May 2016 23

High growth opportunities still exist in specific markets Asia Polypropylene Demand Growth Demand CAGR in 2015-2025 (%) 8% China India Vietnam Malaysia 4% Indonesia Thailand High growth potential Korea Polypropylene consumption by major countries (total demand 4.4 million tons) Vietnam 21% Indonesia 32% 0% 0 20 40 Consumption per Capita in 2015 (kg) Thailand 29% Malaysia 10% Philippines Singapore 7% 1% Consumption growth in polymers is associated with the substitution of traditional materials, infrastructure development and population demographics (income, urbanisation etc.) May 2016 24

Major Projects are progressing in India, however elsewhere project delays are occurring Reliance Refinery & Cracker Jamnagar, Gujarat Reliance Industries C2/C3: 1400/200 kta, no new PP only expansion Status: Under Construction, Start-up 2016 ONGC Petro Additions Limited (OPaL) Dahej, Gujarat ONGC, Gail, GSPC C2/C3: 1100/400 kta, PP 340 kta Status: Under Construction, Start-up 2016 South Korea Hyosung 200 kta, 2017 S-Oil 400 kta, 2018 PETRONAS RAPID Refinery & Cracker Pengerang, Malaysia Petronas/Partners C2/C3: 1300/1300 kta, PP 900 kta (Spheripol) Status: Planning: Start-up >2021 IRPC, Thailand 140 + 160 kta (late 2017) Indonesia integrated Refinery/petchem Projects Balongan Pertamina/ Partners C3: 500-2000 kta, derivatives not announced yet Status: Under Evaluation May 2016 25

Overview of major refinery/petrochemical investments in Vietnam Nghi Son Refining & Petrochemical Located at Thanh Hoa Province PetroVietnam/Idemitsu/Mitsui/Kuwait Petroleum C3/PP: 370/370 kta Status: Start-up 2017/Q4 Binh Son Refining & Petrochemical Located at Dung Quat economic zone PetroVietnam C3/PP: 150/150 kta Status: Operational since 2010 Long Son Petrochemical Located at Ba Ria - Vung Tau PetroVietnam/SCG (QP exit 2015) C2/C3: 1000/500 kta Status: Start-up 2020-21 Vung Ro Refining & Petrochemical Located at Phu Yen Province PetroVietnam/Technostar/Telloil C3/PP: 900/900 kta Status: Not Firm May 2016 26

Despite regional expansions many markets are expected to rely on imports Polypropylene Potential Market Deficits (million tons) 2.5 40 2.7 mta 2.0 1.5 1.0 0.5 1.2 mta 0.6 mta 1.3 mta 30 20 10 1 mta 0.0 Indonesia Vietnam Other Asia Philippines Oceania Demand in 2025 Capacity in 2020 0 China India Demand in 2025 Capacity in 2020 May 2016 27

Olefin pricing dynamics show a reversal of previous trends Incremental Supply & Demand Changes, million tons 50 25 0 50 Propylene 15 19 23 10-15 15-20 Demand Capacity Ethylene 29 1.6 1.4 1.2 1.0 0.8 0.6 0.4 Ethylene and Propylene Pricing Ratio Dynamics First PDH (NPC Thailand) 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 Parity First Asian Metathesis (Mitsui Chems) SEA Propylene/Ethylene First MTP (Shenhua Ningxia) 25 41 30 20 17 0 10-15 15-20 Demand Capacity Initial price premiums on propylene reversed due to market oversupply Increase in merchant propylene sales reflected in quoted pricing more liquidity versus ethylene market Future pricing corrections expected longer-term due a combination of C3 cost structure, value chain integration and polymer substitution. May 2016 28

Olefin price trends are reflected in downstream polymer markets US$ per ton HDPE & PP Pricing Trends (US$/ton, CFR SEA) 1800 1600 1400 1200 1000 800 Ratio HDPE/PP 600 2010Q4 2011Q4 2012Q4 2013Q4 2014Q4 2015Q4 HDPE PP HDPE/PP 1.3 1.2 1.1 1 0.9 0.8 0.7 0.6 HDPE & PP Price Spreads (US$/ton, CFR SEA) 300 200 US$ per ton 100 0-100 -200-300 2010Q4 2011Q4 2012Q4 2013Q4 2014Q4 2015Q4 HDPE - PP spread May 2016 29

Summary of Polypropylene Market Developments Demand Outlook: Demand fundamentals are expected to remain strong in the outlook Global polypropylene demand was estimated at 60 million tons in 2015, an increase of 4.4% compared with 2014 Global growth driver is Asia China is forecast to account for 65% of Asia s incremental demand over the next five years On-going low oil prices, uncertainty about China, and other economic factors have reduced short-term global GDP forecasts and polymer demand growth forecasts Supply Developments and Net Trade: New capacity additions slowed in recent years, but will reach unprecedented levels in the next few years Total polypropylene production increased from 44 million tons to 73 million tons per year from 2005 to 2015 Developments in the Middle East and Asia will contribute to capacity expansions up to 2020 Global capacity additions planned for 2016 and 2017 will exceed the amount of demand growth Low oil prices have caused some longer term projects to be delayed or cancelled May 2016 30

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