care conference · plastics? • petrochemicals are the source of raw material supply – plastics...

SingaporeSingapore ShanghaiShanghai New YorkNew York HoustonHouston LondonLondon DüsseldorfDüsseldorf DubaiDubai

CARE ConferenceMay 9, 2007

CARE ConferenceCARE ConferenceMay 9, 2007May 9, 2007

Jacob Pittman, Jacob Pittman, Consultant, Nylon IntermediatesConsultant, Nylon Intermediates

(281) 752(281) 752--3229 3229 [email protected]@cmaiglobal.com


CMAI Is . . .CMAI Is . . .CMAI Is . . .•• Global petrochemical consulting firm Global petrochemical consulting firm

for over 25 yearsfor over 25 years•• Consultants from petrochemical Consultants from petrochemical

industryindustry•• Analysis Based On:Analysis Based On:

–– Price analysis and forecastingPrice analysis and forecasting–– Production capacities and costs Production capacities and costs –– Trade patterns Trade patterns –– SocioSocio--political factors political factors –– Governmental regulation Governmental regulation –– Emerging technologies Emerging technologies –– Materials/feedstock supplyMaterials/feedstock supply


Where Are We Located?Where Are We Located?Where Are We Located?

HoustonHouston

LondonLondon

SingaporeSingaporeDubaiDubai

New YorkNew York

ShanghaiShanghaiDDüüsseldorfsseldorf


CMAI Monthly Consulting ServicesCMAI Monthly Consulting ServicesCMAI Monthly Consulting ServicesAcetoneAcetone

AromaticsAromaticsAsian StyrenicsAsian StyrenicsC4 & ElastomersC4 & Elastomers

ChlorChlor--AlkaliAlkaliEuropean AromaticsEuropean Aromatics

Europe/Middle East Olefins & DerivativesEurope/Middle East Olefins & DerivativesGlobal Fibers & FeedstocksGlobal Fibers & FeedstocksGlobal Plastics & PolymersGlobal Plastics & Polymers

MethanolMethanolMonomersMonomers

Asian OlefinsAsian OlefinsAsian Plastics & Polymers WeeklyAsian Plastics & Polymers Weekly


CMAI Annual AnalysesCMAI Annual AnalysesCMAI Annual AnalysesBenzeneBenzene Cumene/Phenol & PolycarbonateCumene/Phenol & Polycarbonate

StyreneStyrenePS/EPSPS/EPS

ButadieneButadiene ButylenesButylenesChlorChlor--AlkaliAlkali VinylsVinyls

Soda AshSoda AshLight OlefinsLight Olefins PolyolefinsPolyolefins

EO/EGEO/EGMethanolMethanolNylon & FeedstocksNylon & FeedstocksXylenes & Terephthalates Terephthalates & PolyesterXylenes & Terephthalates Terephthalates & PolyesterToluene & Mixed XylenesToluene & Mixed Xylenes


Proprietary ServicesProprietary ServicesProprietary Services•• Feasibility studiesFeasibility studies•• Project appraisalsProject appraisals•• Post project auditsPost project audits•• Strategic planning Strategic planning

developmentdevelopment•• Mergers & acquisitionsMergers & acquisitions•• PresentationsPresentations•• Expert witnessesExpert witnesses


OutlineOutlineOutline•• Plastics, Energy, HydrocarbonsPlastics, Energy, Hydrocarbons

–– WhatWhat’’s oil got to do with it?s oil got to do with it?•• Relationships between oil and plasticsRelationships between oil and plastics

–– How do I apply this?How do I apply this?•• ConclusionsConclusions

–– Do the math!Do the math!


U.S. Consumption of Energy and Petrochemical Production (Oil Equivalents)

U.S. Consumption of Energy and U.S. Consumption of Energy and Petrochemical Production (Oil Equivalents)Petrochemical Production (Oil Equivalents)

•• Domestic Supply Domestic Supply –– Oil 37%Oil 37%

•• OPEC OthersOPEC Others

–– Gas 85%Gas 85%•• Canada & LNGCanada & LNG

–– All others 100%All others 100%

•• Average 71%Average 71%

1.1%1.1%

Source: International Energy Agency and CMAI Analysis Source: International Energy Agency and CMAI Analysis

CoalCoal23.2%23.2%

ProductsProductsPetroleumPetroleum

Natural GasNatural Gas22.4%22.4%

Oil Crude Oil Crude 39.8%39.8%

Solar, etc.Solar, etc.Geothermal Geothermal –– 0.5%0.5%Hydro Hydro -- 1.0%1.0%

Nuclear Nuclear -- 9.0%9.0%Waste RenewablesWaste Renewables

Combustibles Combustibles –– 3.0%3.0%


~

OilOil20 MM20 MMBPDBPD

RefiningRefining

93%93%TransportationTransportation

&&Heating FuelsHeating Fuels

NaphthaNaphthaGas OilGas Oil 7%7%

PetrochemPetrochem

GasGas60 B Cubic60 B CubicFeet/dayFeet/day Ethane, PropaneEthane, Propane

Natural Gasoline,Natural Gasoline,ButaneButane 5%

MethaneMethane(Fuel Gas)(Fuel Gas) 95%

GasGasProcessingProcessing

U.S. PetrochemicalsU.S. PetrochemicalsU.S. Petrochemicals


Why Do Oil & Gas Matter to Plastics?

Why Do Oil & Gas Matter to Why Do Oil & Gas Matter to Plastics?Plastics?

•• Petrochemicals are the source of raw Petrochemicals are the source of raw material supplymaterial supply–– Plastics are just organized hydrocarbonsPlastics are just organized hydrocarbons

•• Energy demand establishes floor prices for Energy demand establishes floor prices for petrochemical feedstockspetrochemical feedstocks–– 62% of U.S. energy is supplied by Oil & Gas62% of U.S. energy is supplied by Oil & Gas

•• Where does it come from and where does Where does it come from and where does it go?it go?


World Crude Oil Production and UsageWorld Crude Oil Production and UsageWorld Crude Oil Production and UsageCrude Oil SupplyCrude Oil Supply

7%7%6%6%

13%13%

4%4%

35%35%

35%35%

U.S.U.S.North SeaNorth Sea

CISCISChinaChina

OPECOPECOtherOther

Crude Oil DemandCrude Oil Demand

25%25%

20%20%

5%5%8%8%7%7%

35%35%

U.S.U.S.North SeaNorth Sea

CISCISChinaChina

Middle EastMiddle EastOtherOther


U.S. Crude Oil Supply and DemandU.S. Crude Oil Supply and DemandU.S. Crude Oil Supply and Demand

Source: U.S. Energy Information AdministrationSource: U.S. Energy Information Administration

PetroleumPetroleum DemandDemandPetroleum SupplyPetroleum Supply

AlaskaAlaska4%4% Federal Gulf of Federal Gulf of

Mexico 6%Mexico 6%

Other Lower 48Other Lower 4815%15%

Net ImportsNet Imports60%60%

Natural GasNatural GasLiquids 8%Liquids 8%

OtherOther7%7%

MotorMotorGasolineGasoline 44%44%

Jet FuelJet Fuel8%8%

Distillate Fuel OilDistillate Fuel Oil20%20%

Residual FuelResidual FuelOil Oil 4%4%

Other OilsOther Oils24%24%


U.S. Natural Gas End Uses(20,495,108 MMCF)

U.S. Natural Gas End UsesU.S. Natural Gas End Uses(20,495,108 MMCF)(20,495,108 MMCF)

ResidentialResidential23.3%23.3%

IndustrialIndustrial35.8%35.8%

Vehicle FuelVehicle Fuel0.1%0.1%

Electric PowerElectric Power26.1%26.1%

CommercialCommercial14.7%14.7%



Electric Power Generation by Fuel Type (2005)

Electric Power Generation by Electric Power Generation by Fuel Type (2005)Fuel Type (2005)

Natural & Other Gas Natural & Other Gas 18.9%18.9%

Hydroelectric Hydroelectric ConventionalConventional

6.6%6.6%

PetroleumPetroleum3.0%3.0%

NuclearNuclear19%19%

CoalCoal49.5%49.5%

Other Other RenewablesRenewables

2.3%2.3%



Relationship of Oil & PlasticsRelationship of Oil & PlasticsRelationship of Oil & Plastics

•• If plastics come from oil (hydrocarbons) If plastics come from oil (hydrocarbons) can baseline value relationships be can baseline value relationships be developed?developed?–– YesYes


$/kg ratio to Crude Oil($/Tonpolymer per $/TonCrude)

$/kg ratio to Crude Oil$/kg ratio to Crude Oil($/($/TonTonpolymerpolymer per $/per $/TonTonCrudeCrude))

NylonNylon PolypropylenePolypropylene PolyesterPolyester HDPEHDPE

00112233445566778899

1010

20022002 20032003 20042004 20052005 20062006 20072007

Ratio (Polymer $/ton to Crude $/ton)Ratio (Polymer $/ton to Crude $/ton)




PolypropylenePolypropylene

00112233445566778899

1010

20022002 20032003 20042004 20052005 20062006 20072007


Range = +/Range = +/-- 1 1 Standard DeviationStandard Deviation




NylonNylon PolypropylenePolypropylene PolyesterPolyester HDPEHDPE

00112233445566778899

1010

20022002 20032003 20042004 20052005 20062006 20072007



Establishing a Floor PriceEstablishing a Floor PriceEstablishing a Floor Price•• Since we are comparing hydrocarbons Since we are comparing hydrocarbons

substitutions shouldnsubstitutions shouldn’’t we also look at the t we also look at the relationship on an energy (Btu) basis?relationship on an energy (Btu) basis?–– Yes, the laws of thermodynamics still apply, Yes, the laws of thermodynamics still apply,

consuming less hydrocarbons is ecologically consuming less hydrocarbons is ecologically preferable to consuming more preferable to consuming more

–– Lowest value in concept is a products fuel value Lowest value in concept is a products fuel value (plastics are just organized hydrocarbons)(plastics are just organized hydrocarbons)

•• Hydrocarbons Hydrocarbons ↔↔ EnergyEnergy•• Hydrocarbons Hydrocarbons ↔↔ PlasticsPlastics•• Plastics Plastics ↔↔ EnergyEnergy


Price and Intended UsePrice and Intended UsePrice and Intended Use

Energy Content, $/BtuEnergy Content, $/Btu Value, $/lb.Value, $/lb.

(Approximate Q107)(Approximate Q107)(Approximate Q107)

(5,000)(5,000)

00

5,0005,000

10,00010,000

15,00015,000

20,00020,000

25,00025,000

CarpetCarpet CoalCoal CornCorn GasolineGasoline PEPE PPPP(0.25)(0.25)

(0.05)(0.05)

0.150.15

0.350.35

0.550.55

0.750.75

0.950.95Btu per PoundBtu per Pound Dollars Per PoundDollars Per Pound


Fitness for UseFitness for UseFitness for Use

•• Why do different hydrocarbon forms (oil, Why do different hydrocarbon forms (oil, gas, coal, etc.) have different prices?gas, coal, etc.) have different prices?–– Fitness for use via systems economicsFitness for use via systems economics

•• Capital, operations, environmental, conversion efficienciesCapital, operations, environmental, conversion efficiencies

•• There are not adequate systems available There are not adequate systems available for thermal recyclingfor thermal recycling


How Do I Determine Market Price For My Product?

How Do I Determine Market Price How Do I Determine Market Price For My Product?For My Product?

1.1. Sell some (A lot actually)Sell some (A lot actually)2.2. Estimate vs. available alternativesEstimate vs. available alternatives3.3. Discounted Ratio vs. Oil Discounted Ratio vs. Oil

•• Deduct for less than prime grade; quality, Deduct for less than prime grade; quality, delivery, terms, etc.delivery, terms, etc.


Estimating vs. Available Alternatives

Estimating vs. Available Estimating vs. Available AlternativesAlternatives

•• Obtaining estimated pricesObtaining estimated prices–– Trade magazines publish prices that are high Trade magazines publish prices that are high

relative to the market and prices rarely move relative to the market and prices rarely move with short term price changeswith short term price changes

•• Industry Reports (CMAI)Industry Reports (CMAI)–– Report prices are less expensive than bad Report prices are less expensive than bad

decisions!decisions!–– Good indicators of the market (contracts often Good indicators of the market (contracts often

tied to these reports)tied to these reports)–– Large buyers typically buy at a discountLarge buyers typically buy at a discount


Polypropylene Price Ratio to CrudePolypropylene Price Ratio to CrudePolypropylene Price Ratio to CrudePo

lym

er, $

/lbPo

lym

er, $

/lb

Crude $/barrelCrude $/barrel

0.000.000.100.100.200.200.300.300.400.400.500.500.600.600.700.700.800.800.900.901.001.001.101.10

00 1010 2020 3030 4040 5050 6060 7070 8080

Virgin price Virgin price typically falls typically falls within this rangewithin this range

PP minPP min

PP maxPP max

High/Low Price RatioHigh/Low Price RatioPrice at Avg. MarginPrice at Avg. Margin Crude PriceCrude Price



lym

er, $

/lbPo

lym

er, $

/lb


0.000.000.100.100.200.200.300.300.400.400.500.500.600.600.700.700.800.800.900.901.001.001.101.10

00 1010 2020 3030 4040 5050 6060 7070 8080


PP minPP min

PP maxPP max

High/Low Price RatioHigh/Low Price RatioPrice at Avg. MarginPrice at Avg. Margin

PP Market PricePP Market PriceCrude PriceCrude Price Hurdle PriceHurdle PriceHigh/low PP PriceHigh/low PP Price

$0.77/lb.$0.77/lb.

$0.61/lb.$0.61/lb.


How Do I Use This Information?Go/No-Go Evaluations

How Do I Use This Information?How Do I Use This Information?Go/NoGo/No--Go EvaluationsGo Evaluations

•• Maximum ratio to crude $/ton = Highest Maximum ratio to crude $/ton = Highest price obtainable for virgin polymer (not price obtainable for virgin polymer (not likely sustainable)likely sustainable)–– $60$60 x x 7.3 Bar.7.3 Bar. x x 3.9 3.9 tontonoiloil = = $1,708$1,708 = = $0.77$0.77

Bar. Bar. tontonoiloil tontonpolymerpolymer tontonpolymerpolymer lb.lb.polypoly

•• Minimum ratio to crude $/kg = Lowest Minimum ratio to crude $/kg = Lowest price virgin material is likely to be supplied price virgin material is likely to be supplied to the market to the market –– $60$60 x x 7.3 Bar.7.3 Bar. x x 3.1 3.1 tontonoiloil = = $1,344$1,344 = = $0.61$0.61

Bar. Bar. tontonoiloil tontonpolymerpolymer tontonpolymerpolymer lb.lb.polypoly



lym

er, $

/lbPo

lym

er, $

/lb


0.000.000.100.100.200.200.300.300.400.400.500.500.600.600.700.700.800.800.900.901.001.001.101.10

00 1010 2020 3030 4040 5050 6060 7070 8080

PP minPP min

PP maxPP max



$0.70/lb.$0.70/lb.



lym

er, $

/lbPo

lym

er, $

/lb


0.000.000.100.100.200.200.300.300.400.400.500.500.600.600.700.700.800.800.900.901.001.001.101.10

00 1010 2020 3030 4040 5050 6060 7070 8080


PP minPP min

PP maxPP max



$0.70/lb.$0.70/lb.

Margins nearmiddle of range


Establishing Hurdle PriceEstablishing Hurdle PriceEstablishing Hurdle Price$0.42/lb. Feedstock cost $0.42/lb. Feedstock cost $0.05/lb. Processing (grinding, cleaning, packaging, $0.05/lb. Processing (grinding, cleaning, packaging,

etc.)etc.)$0.02/lb. Shipping$0.02/lb. Shipping$0.01/lb. Overhead and other$0.01/lb. Overhead and other$0.50/lb. Total delivered to customer cost$0.50/lb. Total delivered to customer cost

15% Target margin15% Target margin

$0.57/lb. Hurdle Price$0.57/lb. Hurdle Price



lym

er, $

/lbPo

lym

er, $

/lb


0.000.000.100.100.200.200.300.300.400.400.500.500.600.600.700.700.800.800.900.901.001.001.101.10

00 1010 2020 3030 4040 5050 6060 7070 8080

PP minPP min

PP maxPP max



$0.70/lb.$0.70/lb.

$0.57/lb. Hurdle price$0.57/lb. Hurdle price


Estimating Actual Recycled PriceEstimating Actual Recycled PriceEstimating Actual Recycled Price

$0.70/lb. Published Price$0.70/lb. Published Price-- $0.02/lb. Less 2% for indexing to reach actual price$0.02/lb. Less 2% for indexing to reach actual price-- $0.07/lb.$0.07/lb. Less 10% for recycle delta to virgin priceLess 10% for recycle delta to virgin price$0.62/lb. Total delivered to customer cost$0.62/lb. Total delivered to customer cost

Margin at $0.62/lb. = 24%, Not bad butMargin at $0.62/lb. = 24%, Not bad but……what what happens when virgin margins go to bottom of range?happens when virgin margins go to bottom of range?



lym

er, $

/lbPo

lym

er, $

/lb


0.000.000.100.100.200.200.300.300.400.400.500.500.600.600.700.700.800.800.900.901.001.001.101.10

00 1010 2020 3030 4040 5050 6060 7070 8080

PP minPP min

PP maxPP max



$0.61/lb.$0.61/lb.


Estimating Actual Recycled PriceEstimating Actual Recycled PriceEstimating Actual Recycled Price

$0.61/lb. Virgin price with low margins in chain$0.61/lb. Virgin price with low margins in chain-- $0.01/lb. Less 2% for indexing to reach actual price$0.01/lb. Less 2% for indexing to reach actual price-- $0.06/lb.$0.06/lb. Less 10% for recycle delta to virgin priceLess 10% for recycle delta to virgin price$0.54/lb. Total delivered to customer cost$0.54/lb. Total delivered to customer cost

Margin at $0.54/lb. = 8%Margin at $0.54/lb. = 8%



lym

er, $

/lbPo

lym

er, $

/lb


0.000.000.100.100.200.200.300.300.400.400.500.500.600.600.700.700.800.800.900.901.001.001.101.10

00 1010 2020 3030 4040 5050 6060 7070 8080

PP minPP min

PP maxPP max



$0.61/lb. Virgin price & $0.61/lb. Virgin price & $0.57/lb. Recycled price$0.57/lb. Recycled price

$0.57/lb. Hurdle price$0.57/lb. Hurdle price

$56 per barrel$56 per barrel


Do The Math!Do The Math!Do The Math!

•• Challenge your assumptions!Challenge your assumptions!–– Have a non vested party challenge your Have a non vested party challenge your

assumptions (be careful who you ask!)assumptions (be careful who you ask!)•• You told your wife she looked nice in that dress You told your wife she looked nice in that dress •• Your mother told you that you could be PresidentYour mother told you that you could be President•• Your friends said she would go out with youYour friends said she would go out with you


ConclusionsConclusionsConclusions

•• Polymer prices track crude oilPolymer prices track crude oil•• Value is determined by propertiesValue is determined by properties•• Accurate math performed on bad Accurate math performed on bad

assumptions yields a bad assessment assumptions yields a bad assessment –– Do the Math!!!Do the Math!!!

•• Check your workCheck your work•• Have someone else check your work and assumptionsHave someone else check your work and assumptions•• Conventional wisdom is often wrongConventional wisdom is often wrong


CMAI & OUR CLIENTSCMAI & OUR CLIENTSCMAI & OUR CLIENTS

Thank you for your timeThank you for your time

Providing high quality, clientProviding high quality, client--focused services directed towards focused services directed towards developing valuable relationships for nowdeveloping valuable relationships for now……

and in the futureand in the future

care conference · plastics? • petrochemicals are the source of raw material supply – plastics...

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