caps & closures – pe & pp markets

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September 16, 2015By James Ray

Caps & Closures – PE & PP Markets

www.icis.com 2

Over 9,200 price assessments in 1,200reports covering 180 commodities

More than 30 years of industry

insight and data

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Customers include virtually every

major chemical company

Weekly contact with thousands

of market participants

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employees

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The game has changed

Feedstocks

Polymer Markets

Agenda

Copyright 2015 ICIS

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The game has changed

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Shale Oil

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Production - 2010 vs. 2014

What has been leading up to the current oil price collapse?

Demand ~ 93 million bpd

Only a 1.6 million bpd increase from these countries (~ 1.7%)

Source: EIA, ICIS Consulting

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Production - 2010 vs. 2014

1.6 million bpd from most large producers, except...

With US added – difference is now 5.85 million bpd

Not 1.7% increase, but 6.3%!

Source: EIA, ICIS Consulting

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Shale oil production history

Source: EIA

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Shale gas growth similar to oil

Source: EIA

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Shale well life expectancy

Source: Oil & Gas Journal

This decline in output will reduce supply & lead to higher prices

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• Gas cracking is solely

focussed on the

production of ethylene

• Heavier feedstocks

produce significantly

more co-products

Naphtha to Ethane:•95% reduction in propylene

•96% reduction in butadiene

•98% reduction in raffinate-1

•98% reduction in pygas

Cracker yield patterns vary greatly across feedstock slates

Typical Yield Patterns of Different Steam Cracker

Feedstocks

0.0

0.5

1.0

1.5

2.0

2.5

3.0

ETHANE LPG NAPHTHA

Cu

mu

laiv

e y

ield

of

pro

du

cts,

to

nn

e

Ethylene Propylene Butadiene

Raffinate-1 Pygas Fuel oil

Source: ICIS Consulting

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Feedstocks

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Propylene - U.S. #1 source refinery gases#2 source cracker co-productGrowing source – on purpose production with propane dehydrogenation (PDH)As more light crude oil processed, lighter feed to crackers:

Less propylene producedPDH production becomes very important

Source: ICIS Consulting Global Supply & Demand Data base

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Propylene supply is down

Source: ICIS Dashboard - Copyright 2015 ICIS

Excess capacity is not utilized when cracking ethane.

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Propylene exports are down


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PP

His

tori

cal P

rice

ce

ilin

g

Source: ICIS Consulting Forecast Report

About 60% of the

PP market is

paying the

nominal price +/-

$0.03 cents/lb

according to the

ICIS Consulting

Spring 2015

Benchmark

Survey.

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Ethylene supply is up


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Ethylene exports are up


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Polymer Markets

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Understanding PP Economics

For a full methodology, click here

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Propylene, C3=

Source: ICIS Advanced Purchasing Course

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PP Margins via naphtha cracking

PP Margins around have increased from low single digit cents to over 20 cents recently, making it finally become a viable investment.

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New US PDH Capacity to the rescue

Source: ICIS Consulting

Company Capacity (000) Location Announced Start-upDow Chemical 750,000 tonnes Freeport, Texas 2015Enterprise Products 750,000 tonnes Mount BelvieuTexas 2016Williams Partners 500,000 tonnes Alberta, Canada 2017

C3 Petrochemicals 560 tonnesChocolate Bayou

Texas 2017

C3 Petrochemicals 560 tonnesChocolate Bayou

Texas 2018Formosa Plastics 658tonnes Point Comfort, Texas 2018Alpek ~500 tonnes Altamira, MX 2018?BASF Corporation 475 tonnes USGC 2019?Dow Chemical 350 tonnes Freeport, Texas 2018?Enterprise Products - Mount BelvieuTexas 2019?REXtac 300 tonnes ODESSA/TX On HoldSunoco Logistics Partners 600 tonnes Marcus Hook, PA 2 019?

Propylene Capacity Additions

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New Global PP Capacity

Source: ICIS Supply & Demand Database

Country Site Company TypeCapacity

tonne/yearDate

US Marysville (Michigan) Flint Hills Resources Closure -85,000 Jul 2015Egypt Suez Oriental Petrochemical Re-start 180,000 Jun 2015U.A.E. Ruwais Borouge New plant 2x 480,000 Q2 2015China Fuqing (Fujian) Zhongjing Petrochemical New plant 350,000 Sep 2015

Guangzhou (Guangdong) Sinopec Guangzhou Petrochemical New plant 200,000 Q4 2015Zhanjiang (Guangdong) Sinopec/Kuwait Petroleum Corp New plant 450,000 2015Ordos City (Inner Mongolia) China Coal Mengda New Energy & Chemical Ind. New plant 300,000 2015Ordos City (Inner Mongolia) Jiutai Energy Group New plant 350,000 Q4 2015Zhangjiagang (Jiangsu) Oriental Energy New plant 400,000 Jun 2015Changzhou (Jiangsu) Full-Tech Changzhou Chem. New plant 300,000 2015Golmud (Qinghai) Qinghai Salt Lake Industry Group. New plant 170,000 Q2 2015Weinan (Shaanxi) Pucheng Clean Energy Chem. New plant 400,000 Q1 2015Urumqi (Xinjiang) Shenhua Xinjiang Energy New plant 450,000 2015

India Dahej (Gujarat) ONGC Petro-Additions (OPaL) New plant 340,000 Q4 2015Lapetkata (Assam) Brahmaputra Cracker and Polymer (BCPL) New plant 60,000 Q4 2015Mangalore (Karnataka) Mangalore Refining and Petrochemicals (MRPL) New plant 440,000 Q4 2015

Philippines Mariveles Philippine Polypropylene Expansion +90,000 2015

PP - WORLD ANNOUNCED CAPACITY CHANGES (2015)

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Ethylene Economic Model

Ethylene yield model from Linde Engineering and pricing data from ICIS pricing

Simple cost and margin measures are highly representative of typical manufacturing facilities

Models Europe, US, NEA and SEA crackers

Models naphtha and LPG feedstocks (Europe and Asia) and ethane and light naphtha feedstocks (US)

Methodology/guide:

www.icis.com/margins


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Polyethylene Economic Model

• Integrated analysis – the vast majority of PE business is integrated

• Contribution measure across supply chain from cracker feedstock through

to PE and important cracker co-products

PE unitPurchase

Naphtha*Polyethylene

Sales

Purchase

Utilities etc.

ECONOMIC

BOUNDARY

Cracker unit

Cracker

Co-product Sales**

Ethylene

* Naphtha is dominant feedstock in Europe/Asia but different in other regions (ethane/LPG in US)

** Includes propylene, butadiene, raffinate-1, fuel gas, gasoline blending components etc.


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Ethylene, C2=


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Where should PE prices be?


Margins grow

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Ethylene Margins via ethane cracking

Ethane cracking margins are very attractive investments because of low cost ethane feedstocks

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Ethylene Margins via naphtha cracking

Naphtha based ethylene is much less attractive and is the Marginal Producer that sets the market price.

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LDPE Margins on February 27, 2015

1. Sell LDPE at: 80.00 cpp

2. Purchase Ethylene at: -35.25 cpp

3. Operating cost is: -9.59 cpp

===========

Margin is: 35.16 cpp


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LDPE Margins on Sept 4, 2015

1. Sell LDPE at: 80.00 cpp (+0.00)

2. Purchase Ethylene at: -29.50 cpp (-5.75)

3. Operating cost is: -9.93 cpp

===========

Margin is: 40.57 cpp (+5.41)


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PP Margins 3X average on Sept 4, 2015


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Cost Curve View of Derivative Market Structure

Cumulative Supply

Ca

sh C

ost

$/t

Advantaged

feedstock

Players

(Middle East)

Marginal producers set pricing in tight markets

Extended long markets slowly move to lower prices

‘longer’

Market

More efficient or Integrated Producers

Regional Capacity

Total

Capacity

Marginal or

Stand alone

Producers,

naphtha

crackers

Marginal producer driven pricing

Regional Demand

‘tighter’

Market

Long market pricing

Regional Demand

& US


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Summary

Shale Oil has changed the GameLighter feed stocks like Ethane change the mix of products, producing more ethylene and less propyleneOn-purpose propylene will fill the void and eventually have ample propylene, but….The PP Capacity will become tight and a constraint, keeping prices and margins higher than recent years. PE will continue to be priced just below imported alternatives until new players seek to win domestic market share driving regional competition.

Copyright 2015 ICIS

Thank you

James RaySenior Consultant

ICIS Consulting, Americas Direct: +1 713-525-2633

Cell: 1 903 245 [email protected]

http://www.linkedin.com/company/30337?trk=tyah&trkInfo=tas%3AICIS%20%2Cidx%3A3-1-5

www.linkedin.com/pub/james-ray/5/356/20b

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APPENDIX

caps & closures – pe & pp markets

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