Global Petrochemical Outlook Ben Morse Senior Editor
AGENDA Crude oil overview Crude, natural gas & light vs heavy feedstocks Feedstock impact on polymers How to follow benzene China & Middle East developments Conclusions
Brent Crude & Platts Global Petrochemical Index
Petrochemical prices follow crude Platts Global Petrochemical Index follows crude oil --weighted index of ethylene, propylene, polymers, aromatics Crude oil s been on an upward swing, so have petchem prices Crude oil has not been the only commodity on the rise Have oil & commodity prices hit their peak? --Sure looks that way Will anyone begin short selling?
Platts PGPI, gold high prices here to stay? Central banks dilemma rein in inflation by raising interest rates or risk stunting growth? Global commodity prices gold, oil, petchems pushing record highs
High inflation push food prices higher 450.0 400.0 350.0 300.0 Food Price Index Meat Price Index Cereals Price Index Oils Price Index Sugar Price Index 250.0 200.0 150.0 100.0 50.0 0.0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 World food price index hit new record in February, up 8th consecutive month, surpassed 2008 food crisis peaks - UN's Food and Agriculture Organization Source: UN s FAO
Weak dollar trends toward higher crude 1.70 1.65 1.60 Euro/Dollar ICE Brent 150.00 130.00 1.55 1.50 110.00 1.45 90.00 1.40 1.35 70.00 1.30 1.25 50.00 1.20 30.00 Jan- 08 Mar- 08 Jun- 08 Sep- 08 Dec- 08 Feb- 09 May- 09 Aug- 09 Nov- 09 Jan- 10 Apr- 10 Jul-10 Oct- 10 Dec- 10 Mar- 11
Financial Factors in Commodities Global Economy screeches to a halt in 2008 US Federal reserve begins bailouts & QE1, 2 Over $1 trillion pumped into the market --Does not include global pumping ($5 trillion?) CME volume up YTD: Commodities-44%, Energy-14%, Metals-24% CME, Zhengzhou exchanges report record volumes
Financials continued China raises interest rates, requires more banking reserves (tightens money supply) Asia prices stall--china exporting!! CME raised margins on silver, price drops from $49 to under $40 in a day Commodity Prices not only supply/demand driven!!!!! Need to track the fundamentals of money
Crude steady increase, natural gas flat
Crude oil & US Natural Gas US natural gas prices show weak industrial demand Not tradable like oil-no exports limit natural gas to US supply/demand Shale gas increases supply US ethylene margins have benefited
US vs Europe cracker margins Light versus heavy feedstocks
Heavy feedstocks track oil; light feedstocks natural gas Heavy feedstock for steam crackers = mainly naphtha Naphtha comes from oil refining Natural gas stream made up of ethane, propane, butane, etc Ethane (C2), propane (C3), butane (C4)=Liquid Petroleum Gas=LPG Ethane, propane, butane extracted from natural gas stream for other uses. Lighter=more ethane than propane or butane Crackers often use an ethane/propane mix (E/P mix) Different feeds in=different products out
Reason for tight Propylene & Butadiene Olefin Plant Product Yields Ethylene Propylene Butadiene Benzene Motor Fuel Heating Fuel Ethane 1340 1000 40 30 10 25 235 Propane 2290 1000 390 55 45 140 660 Butane 2650 1000 630 85 50 225 660 Lt.Naphtha 3280 1000 620 170 125 825 540 Kerosene 4060 1000 580 175 140 1170 995 Gas Oil 4700 1000 680 220 150 1380 1270
Global ethylene: Green-NWE, Red-NE Asia, Black-US
US spot ethylene regularly lowest in the world Many US PE producers are fully integrated The economics from ethane to polyethylene, MEG, etc have been huge US spot May ethylene spike from unplanned cracker outages Weak Asia ethylene due to weak Asia demand (China)
China s ethylene imports fall in 2010, 2011 even less 1,000,000 950,000 900,000 850,000 800,000 750,000 700,000 2009 2010
China s ethylene capacity rising China's ethylene capacity 25000 20000 1,000 mt 15000 10000 5000 0 2010 2011 2012 2013 2014
US, Canada ethylene advantage: Ethane US cash cost of ethylene from Jan-May averaged $647/mt, ethylene contract $1,138, HDPE blow molding averaged $1,490/mt US producers making a windfall NWE Jan-May ethylene contract $1,623 HDPE BM contract averaged $1,952/mt US producers sent ethylene derivatives to Europe. NWE companies cut rates Further tightened butadiene, propylene
Light feedstock impact Butadiene price doubles from year ago to $4,410/mt Propylene price up 57% to 80 cts/lb Propylene & butadiene demand strong from fast growing global auto sector Butadiene also firm from high natural rubber prices US Goodyear declares force majeure on styrene butadiene rubber, butadiene products on May 23 for indefinite period
Natural Rubber prices shooting up: IMF 260 240 220 200 180 160 140 120 100 Jan-10 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan-11
New Normal for US producers since 08 crash Global Petrochemical Index $/Mt 1800 1600 1400 1200 1000 800 600 400 200 1/2/2008 4/2/2008 7/2/2008 10/2/2008 1/2/2009 4/2/2009 7/2/2009 10/2/2009 1/2/2010 4/2/2010 7/2/2010 10/2/2010 1/2/2011 4/2/2011
What the New Normal means H2 2008 inventory losses were huge Produce to demand One month ahead for orders If you don t order it, you won t get it Created a tighter supply chain
Produce to Demand effects Every outage, small or large, leads to price spikes Producers issue allocation based on past orders Past orders at flat demand leaves no inventory Must continually buy Pushes prices up Produce to demand destruction
Case study Jan/Feb US PP market January propylene contracts shoot up 17 cts/lb to 77.50 cents/lb Pushes PP to mid-80 s (monomer + 7-8 cts/lb) Polypropylene buyers said NO!!! Produce to demand meant producers cut rates Buyers & Producers left with low stocks February prices came down
Case study continued Minimum contract volumes, some paid 85 Producers sold excess PP at & under monomer on spot market (to Mexico?) PP buyers came back in March Stronger demand lifts monomer, polymer prices Prices kept climbing May-June sees a similar cycle
Can US polyolefin demand absorb new capacities? Source: METI
New US Petrochemical plant list growing Taking advantage of low cost LPG Westlake, CP Chem, Shell, Dow new world-scale ethylene plants Dow to build new on-purpose propylene plants Ineos announces new MEG plant WHERE WILL ALL THE MATERIAL GO? Braskem/Idesa JV will takeaway much of the Mexican market also using ethane feedstock Likely to lead to rationalization and modernization Braskem/Idesa could target the US market
Margin slide to remind you of Europe s challenge
About Europe, applicable to all regions European polymer prices have recovered by around 80% since the debacle of 2008 Manufacturing growth in Germany, France, the UK with high feedstock costs led to a 12% average rise in Q1 polymer prices: Polypropylene up 15% Polyethylene Terephthalate strengthened by 14% Polyethylene & Polystyrene up by 13% respectively PVC increase by 6.7% in Q1 Plant shutdowns tighten supply, support price increases
Relentless rally impacts converters profitability Relentless rally in Q1 polymer prices has savaged European plastics converters profitability dented, credit facility strained some in danger of financial collapse struggle to pass the full weight of higher prices to end-users. "When you have rises in the tens of percent, that's not a level of increase our industry can afford or absorb, particularly as raw material purchases can represent up to 50% of the cost of the product. - Dick Searle, CEO of UK s Packaging Federation
Eurozone demand strong, exports rising Euro-zone manufacturing activity grew in February at its fastest pace in almost 11 years Rising exports from Germany in particular led to high manufacturing activity Euro-zone Purchasing Managers Index for the manufacturing sector rose 1.7 points on the month to 59 points in February This is the strongest pace of growth since June 2000 A reading above 50 points signals expansionary trends, a reading below 50 points shows contraction Weak euro accelerated growth in new orders Euro-zone Industrial orders gained 2.9% in January from a revised slump in December of 3.6% Strongest rise was in domestic demand, which gained 4.5% on the month
Germany pulling Eurozone out of the rut German, consumer good output rose 5.1%, a sign German households have brighter outlook German government forecast 2011 GDP growth of 2.3%, down from 3.6% in 2010 Unemployment fell in February to 7.3%--the lowest level since the current measure was first presented in 1999 Beijing become Berlin's third-largest trading partner and biggest overall provider of imports France was the biggest buyer of German goods, as it has been since 1961, followed by the US and the Netherlands
Turning to Benzene: Benzene to crude ratio
Styrene in red, tracking benzene in blue
Tips for tracking benzene, styrene For every 10 cts/gal drop in BZ, styrene tends to fall 1 ct/lb Ethylene can be a wildcard, but benzene is the driver Asia s benzene length comes to the US Asian BZ almost a by-product to Asian PX production (PX needed for PTA to fuel Asia s polyester industry) US government just announced styrene a likely carcinogen How will consumers react? If like bisphenol A expect some styrene demand destruction
China snapshot million mt/yr 4 3.5 3 2.5 2 1.5 1 BTX imports BZ PX TL Key players are all state-owned: Sinopec, PetroChina and CNOOC China s imports have fallen as its own petrochemical industry matures Still building new refineries, expanding existing ones Kuwait-Sinopec JV in Zhanjiang, Guangdong province expects to have more than 1 million mt/yr of PX Sinopec Tianjin awaiting approval to expand PX capacity by 1 million mt/yr PetroChina Sichuan (600kt/year, Sinopec Hainan 600kt/year) 0.5 0 2006 2007 2008 2009 2010
China growing, still needs imports Japan key supplier 1.4 1.2 1 0.8 0.6 0.4 0.2 0 1.25 1.12 0.77 0.62 0.47 2008 2009 2010 1 Japan is South Korea and China s top PX source 2008: Japanese PX makes up 45.7% of S. Korea s total import volume and 35.5% of China s total import volume 2009: Japanese PX makes up 55.3% of S. Korea s total import volume and 29.6% of China s total import volume. 2010: Japanese PX makes up 55.4% of S. Korea total import volume and 28.4% of China s total import volume. S. Korea China
Inventory at 6-month high amid falling demand, tightening credit Weak demand persisted after Chinese New Year. Labor shortage meant downstream plants could not operate at full capacity Monetary curbs: On Feb 24, Chinese central bank raised bank reserve ratio by 0.5 percentage point to 19.5% In the US, the reserve requirements range from 0% to 10%, depending on the size of the institutions. In the UK, there is no minimum reserve requirement. But average cash reserve ratio across UK is around 3.1% Rising Yuan hurts exports. The Yuan has risen 3.9% against the US dollar since last June.
China growth rate moderating
China inflation curbs accelerate update from June 14 China s May inflation rate highest since 2008 at 5.5% year-on-year Government s official target was 4% Bank of China to raise banks reserve ratio 50 basis points from June 20 Analysts expect China to also raise interest rates by June 20 Tighter & more expensive credit to limit petrochemical demand Prices fall
China as exporter to the world (offers from June 14) 1 LLDPE 253S 2 Maker Japan 300 1330 L/C AS shanghai 2 LLDPE 3224 2 Maker Formosa 139 1340 L/C AS shanghai 3 LDPE Coating C170X 7 Maker PETLIN 300 1750 L/C AS shanghai 4 HDB HD5502GA 0.23 Maker Philippine 300 1420 L/C AS shanghai 5 HDB BL3 0.3 Maker PCC 400 1400 L/C AS shanghai 6 PP block M1600 26 Maker LG 275.2 1730 L/C AS NINGBO 7 PP block 3204 26 Maker FORMOSA 54 1670 L/C AS NINGBO 8 PP block EP548R 21 Maker BASELL 67.95 1660 L/C AS NINGBO 9 PP block AV161 5 Maker SUMITOMO 125 1660 L/C AS NINGBO 10 PP block PP300S 30~36 Maker BASELL 325 1640 L/C AS NINGBO Freight rates CFR WCSA(West Coast South Asia) : FOB + 170 CFR TURKEY & EUROPA : FOB + 160 CFR SEA(Southeast Asia) : FOB + 20~40
Middle East Expansions to continue Petro Rabigh to tender for its $6.67 billion Phase II expansion project comprising 17 products including caprolactum, cumene, phenol, acetone, acrylic acid, LDPE SABIC sets up holding company for JVs to manufacture downstream specialty petrochemicals. Expects annual sales to reach $60 billion/year by 2020. SABIC signed JV with ExxonMobil in Jubail to produce 400kt/year of rubber and thermoplastic polymers SABIC planning billions of dollars of investments in India Octal mulling PET bottle chips expansion to cater to Middle East, European, Indian markets
Sanctions not hurting Iran s exports Iran exported 11.18 million mt of petrochemicals from Jan- Sep 2010. The company had exported 11.55 million mt for the whole of 2009. Iran s petchems exports to Europe expected to reach $2 billion by March, up 100% year on year. Iran exports to 65 countries, 17 of which are in Europe. India's purchases of petrochemicals from PCC grew by 5% on year to 17% of the company's total exports in the first nine months of this year at 1.92 million mt or $837 million. The increase pushed India past Far East Asia (excluding China) as PCC's third largest customer so far this year.
Percentage break-down of who s buy from Iran Europe, 11 SEA, 7 Africa, 1.2 China, 37 India, 18 18 Mid-East, 25
Iran s trading partners/patterns Chinese imports of Iranian PX have fallen 42.6% on year from an average of 22,296 mt/month in 2009, to 12,796 mt/month in the first eight months of this year. China still key buyer of Iranian products in 2011 The Far East is the leading destination for Iranian petrochemicals, taking 41.5% of its exports, while the Middle East takes 23.9% and India 10.7% while 9% of the total goes to southern and southeast Asia. African countries account for just 1% of the export market. Traders polled across the Middle East and Asia said that they used various payment methods to get around the problem of banks not willing to open LCs when doing business with Iranian companies. Iranian petrochemicals exports amounted to $2.3 billion (2005), $3.3 billion (2006), $6 billion (2007), $7.8 billion (2008) and $6.5 billion (2009). It is is also in talks with Bolivia, Brazil, Ecuador and Venezuela to expand its exports market.
Conclusions Light cracker feedstocks to continue to exert influence Produce to demand to keep US supplies tight US Fed said no more stimulus bearish for oil and petchems (Goldman Sachs forecast higher 2012 prices) Scramble for new markets Africa the next focus where to put the new product Latin American markets open up Brazil 5 th largest economy in the world, more China imports Europe to suffer Eni announces closure of steam cracker US industry sees rebirth needs to be open to import
Questions?
Thank you, please keep in touch Thank You Benjamin Morse Senior Editor, Petrochemicals Telephone : 1-212-904-3133 Email : benjamin_morse@platts.com