kralowetz presentation 2015 petrochemical conference

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Market Reporting

ConsultingEvents

Chinese petrochemical sector demandCanadian Energy Research Institute Petchem ConferenceKananaskis

Jeff Kralowetz8 June 2015

illuminating the markets

Independently held energy markets price reporting agency

600+ staff, 23 countries

Publish > 8,000 daily commodity price assessments + energy market intelligence

78 daily Asia-Pacific LPG price assessments, including Far East Index basis for swaps

21 staff in China 2 full-time staff in Calgary

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Who is Argus

Copyright 2015 Argus Media Ltd. All rights reserved.


Perspectives on Asian petchems


Chinas GDP and manufacturing growth rates have slowed Chinese naphtha cracker capacity growth slowing; expansions

have been delayed; overbuilt demand growth in 2015 Strong naphtha prices vs C3, C1 & coal incentivize diversity in

feeds Ethane/LPG is taking greater share in ethylene cracker feed China continues to need on-purpose propylene, especially as

naphtha cracking sees reduced share of feed slate

What we see on Chinese and Asian demand


Market Reporting

ConsultingEvents

Core context: Chinese economic growth



GDP growth of 7.0pc in 1Q15 slowest since 2009

March 15 industrial growth 5.6pc annual rate, slowest since Nov 2008

Exports down 15pc in March (but were up 43pc in Feb)

IMF says China will grow at 6.8pc in 2015

Chinese growth slowing


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2010 2011 2012 2013 2014 2015

Chinese GDP growth

Sources: World Bank, IMF, Natl Bur Statistics, Tradingeconomics.com

Market Reporting

ConsultingEvents

Slowed naphtha cracker growth



Only two projects are under construction CNOOC 2nd phase 1mn t/yr cracker,

start up end-2016 Sinopec Hainan Petrochemical 1mn

t/yr cracker, start up 2017

Approved, but construction put on hold Huajin Petrochemical, Panjin

Liaoning, 1mn t/yr Sinopec/Kuwait, Zhanjiang

Guangdong, 800kta PetroChina/Shell/Qatar, Taizhou

Zhejiang, 1.2mn t/yr Sinopec, Zhangzhou Fujian, 1.2mn

t/yr Sinochem, Quanzhou Fujian, 1mn

t/yr

Reasons for delays: demand slow-down, margin squeeze, CTO/MTO-based capacities enhanced

Chinas naphtha cracker expansions being delayed matching slowed capacity growth across Asia



Downstream startups will boost ethylene demand Expect + 8mn t/yr in

2015 for derivative capacity expansions

Just 4mn t/yr of new ethylene capacity

Part of the 8mn t/yrproject will be further delayed to 2016.

Chinas new ethylene cracking capacity trailing demand



Naphtha cracker capacity had increased in the past to absorb the additionalnaphtha produced

But this is slowing now, CTO/MTO accounts for the majority of the capacityincrease

Asian ethylene capacity sees feedstock diversity


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Asia Ethylene Production Capacity (million t/y)

Naphtha Ethane Coal Methanol


Across Asia, CTO/MTO take away growth from naphtha

Asia ethylene capacity expansions, effective



Since 2008, South Korea has overtaken Japan as the largest naphtha importer of the region

NE Asia is the largest importer of cracking naphtha. Full range naphtha is also imported for aromatics production

Import growth likely to resume after current plateau

Argus sees long-term growth in Chinese petchem demand resuming, boosting NEA naphtha imports

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Naphtha export to the Northeast Asia increased from about 200kt/yr in 2011 to 1.6 mn t/yr now

We expect US naphtha to compete for feedstock market in Asia as domestic US production rises

US naphtha exports to NEA rising, LTO (shale) effect

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China Taiwan Japan South Korea

India16%

South Korea18%

Middle East38%

US4%

Others24%

Japan Naphtha Import

Middle East50%

India12%

Other Asia10%

US7%

Others21%

Taiwan Naphtha Import

Market Reporting

ConsultingEvents

Balancing naphtha and LPG

Propane makes a run, but not as much in China



Share of LPG in ethylene crackers to climb from 8-10pc: Supported by new LPG

handling and storage facilities

Limited by cracker configurations and demand for cracker co-products

Naphtha and LPG prices unlikely to move on Asian LNG prices Direct substitution is not

expected

Asia is worlds balancing market for cracker feedsFlexibility allows response to feedstock pricing


Source: Argus Media


Chinese crackers have LPG import limitation

Most tied to refineries and most tied to refineries

China has less feedstock flexibility


Chinese LPG output from refining up, but doesnt meet new demand

Source: Argus China Petroleum, May 2015


Chinese LPG imports up 164pc YTD vs 2014 despite restrictions; 259,000 b/d in March 2015


Source: Argus China Petroleum, May 2015


China is #2 consumer and #3 producer of LPG


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Source: 2014 World Statistical Review of Global LP Gas

Market Reporting

ConsultingEvents

Closer Look: Propylene and PDH



Expected derivative demand addition = 2.8mn t/yr in 2015

Propylene additions up to 6mn t/yr Close to 40pc from

CTO/MTO 30pc from PDH and 24pc from RFCC

(residue FCC)

Unlike ethylene, new propylene capacity exceeds demand for 2015


Propylene expansions in NEA mainly from PDH/MTO


Northeast Asia Propylene Capacity Additions (effective)

Unit: million tonnes


Consistent PDH premium of 50 100 USD/T over C3 cracking is observed.

Premium increased since 2010, providing relatively strong incentive for PDH projects in Asia.

Better margins across Asia for PDH than for C3 cracking;encourages building PDH units in Asia.

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Gross Margin Comparison - NEA C3 PDH vs C3 Cracking (U$/t)

PDH Attractive

C3 Cracking Attractive


Asias propylene feedstock is now more diverse


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NE Asia Propylene capacity mnt

FCC Naphtha CTO Others MTO PDH


Across NEA, less propylene coming from refineries or steam crackers, more from PDH, CTO, MTO



China propylene imports may have peaked last year

Mideast is increasing propylene output for export to Asia.

But Chinese demand for imports may have peaked last year



China had 2.1mnt of PDH start-ups in 2013-2014Added about 40,000 b/d in C3 demand


Tianjin Bohua600,000 t/yr started up in October 2013.Stabilised only in Jan 2014

Shaoxing Sanyuan450,000 t/yrStarted up in late September 2014.Currently operating at full rate

Ningbo Haiyue600,000 t/yrStarted up in early September 2014.Currently operating at full rate (not integrated)

Zhejiang Satellite450,000 t/yrStarted up in mid September 2014.Currently operating at half rate


New PDH Capacities in 2015


South Korea:

300,000Hyosung

660,000Yangzijiang

750,000Wanhua

t/yr


Capacity additions outstrip demand growthfor now



Supply surpluses will force lower propylene operating rates in NE Asia



Chinas PDH plans now less aggressive


New propane demand from PDH could hit 230,000 b/d by 2018

NEA propylene prices have recovered vs ROW


Source: Argus DeWitt Propylene report, 3 June 2015


Cash margins of Asian PDH recovered from January


Source: Argus Media

Market Reporting

ConsultingEvents

Conclusions


Chinas GDP and manufacturing growth rates have slowed Naphtha cracker capacity growth in China has slowed & some

naphtha cracker expansions have been delayed But new capacity in 2015 will fall short of new demand

Chinese petchem sector diversifying feedstocks China continues to need on-purpose propylene

China using less naphtha and more CTO/MTO for ethylene cracking means making less propylene

Margins for Chinese PDH still good in spite of big capacity additions.

Slowed growth, but advantaged feedstocks


Copyright notice Copyright 2015 Argus Media Ltd. All rights reserved. All intellectual property rights in this presentation and the information herein are the exclusive property of Argus and and/or its licensors and may only be used under licence from Argus. Without limiting the foregoing, by reading this presentation you agree that you will not copy or reproduce any part of its contents (including, but not limited to, single prices or any other individual items of data) in any form or for any purpose whatsoever without the prior written consent of Argus.

Trademark notice ARGUS, ARGUS MEDIA, the ARGUS logo, DEWITT, FMB, FUNDALYTICS, METAL-PAGES, JIM JORDAN & ASSOCIATES, JJ&A, ARGUS publication titles and ARGUS index names are trademarks of Argus Media Limited.

Disclaimer All data and other information presented (the Data) are provided on an as is basis. Argus makes no warranties, express or implied, as to the accuracy, adequacy, timeliness, or completeness of the Data or fitness for any particular purpose. Argus shall not be liable for any loss or damage arising from any partys reliance on the Data and disclaims any and all liability related to or arising out of use of the Data to the full extent permissible by law.

Jeff KralowetzVP Business Development, Argus Media Inc.

Email:Phone:Office:Web:

[email protected]+1 832-492-6082Houstonwww.argusmedia.com

Slide Number 1Who is ArgusPerspectives on Asian petchemsWhat we see on Chinese and Asian demandCore context: Chinese economic growthChinese growth slowingSlowed naphtha cracker growthChinas naphtha cracker expansions being delayed matching slowed capacity growth across AsiaChinas new ethylene cracking capacity trailing demandAsian ethylene capacity sees feedstock diversityAcross Asia, CTO/MTO take away growth from naphthaArgus sees long-term growth in Chinese petchem demand resuming, boosting NEA naphtha importsUS naphtha exports to NEA rising, LTO (shale) effectBalancing naphtha and LPGAsia is worlds balancing market for cracker feedsFlexibility allows response to feedstock pricingChina has less feedstock flexibilityChinese LPG imports up 164pc YTD vs 2014 despite restrictions; 259,000 b/d in March 2015China is #2 consumer and #3 producer of LPGCloser Look: Propylene and PDHUnlike ethylene, new propylene capacity exceeds demand for 2015 Propylene expansions in NEA mainly from PDH/MTO Better margins across Asia for PDH than for C3 cracking;encourages building PDH units in Asia.Asias propylene feedstock is now more diverseAcross NEA, less propylene coming from refineries or steam crackers, more from PDH, CTO, MTOChina propylene imports may have peaked last yearChina had 2.1mnt of PDH start-ups in 2013-2014Added about 40,000 b/d in C3 demandNew PDH Capacities in 2015 Capacity additions outstrip demand growthfor nowSupply surpluses will force lower propylene operating rates in NE AsiaChinas PDH plans now less aggressiveNEA propylene prices have recovered vs ROWCash margins of Asian PDH recovered from January ConclusionsSlowed growth, but advantaged feedstocksSlide Number 35

kralowetz presentation 2015 petrochemical conference

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