petrochemicals - pfc energy - abu dhabi (12th nov. 2009)

8/2/2019 Petrochemicals - PFC Energy - Abu Dhabi (12th Nov. 2009)

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Strategic Advisors in Global Energy



Change Creates Opportunities:Petrochemicals

PFC Energy Abu Dhabi Seminar

by Carlo Barrasa, Downstream & Petrochemicals Group

12 November 2009


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Abu Dhabi Seminar | Page 2

Within Context Of Global Energy Demand

Petrochemical and chemical energy demand represents approximately 10% of totalenergy demand

This represents a significant portion of total energy demand & is the single largestconsumer of energy in the industrial sector

228 MMb/d (2008 oil equivalent)

33%Industrial

71% OtherIndustrial

29% Chemical &Petrochemical

67%Transport,Residential,Agricultural

& Other

75 MMb/d (2008 oil equivalent)


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The History of Plastics

Only two consumption declines have ever occurred in the history ofpetrochemicals, but the most recent decline is demand driven

Data excludes polyester fibers

Impact of1973 Oil

Embargo

Impact of

GreatRecession


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The Future of Plastics

The Great Recession will cause the plastics industry to lose fiveyears of growth

Data excludes polyester fibers

Demand pullbackconcentrated inOECD markets


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Global Polyolefins Penetration

In order to its maintain penetration rate, polyolefins producers willcontinue building products that promote displacement

Increasedadoption ofpolyolefins

Gradual inter-material substitutionof other plastics


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Polyolefins Demand Outlook

All developing markets will exhibit robust growth in polyolefinsconsumption as light manufacturing continues moving out of OECD

08 15 1.8% 4.8% 1.7% 4.3% 4.8% 4.8% 4.3%CAGR



Regional Polyolefins OutlookPer capita consumption

Asia Pacific alone will comprise nearly 55% of the global consumptiongrowth with over 15 million tons in additional demand

Figures in kg per person



Rationale For Demand Growth

Significant upside potential in developing countries for additionalconsumption on a per capita basis

Expanding economies will gradually move towards moreconsumer-oriented markets

Product innovation will promote continued displacement oftraditional materials

OECD countries will still be significant markets as they will drivematerial innovations



Capacity AdditionsRegional breakdown of steam cracker announcements

Over 44 million tons of ethylene capacity has been announced with nocapacity additions being added in OECD markets

4 projects,3.8 milliontons






How Much Cracking Capacity Will Be Needed?

With only 23 million tons of incremental demand, approximately 12

million tons of announced is unlikely to be added

Capacity rationalization is likely to occur within the next five years

Installed base of nearly 130 million tons

Utilization at less than 80% for 2009

Likely additions are announced projects that have been probability-adjusted


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Will Capacity Shutdown?

Weak consumer demand in OECD

markets

High oil prices increasing the input

cost of liquids-based cracking

Prevailing refining economics

dictating shutdowns of refinery-

integrated complexes

Climate change policy initiativesthat add incremental costs

Signs of increasing demand in

developing markets

Favorable co-product economics

to promote continued operation

Increased rate of rationalization of

refineries that produce

petrochemicals

Protectionist measures by worldgovernments

Environment that wouldfavor rationalization

Environment that wouldfavor over-capacity

In a high priced, higher capacity environment, smaller operators willtremendous pressure to maintain necessary utilization


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What Will Future Capacity Look Like?

1999Average Cracker Size

344 KTA Ethylene

2009Average Cracker Size

538 KTA Ethylene

AnnouncedAverage Cracker Size

1,010 KTA Ethylene

Increasing economies of scale


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Economies of ScaleEthylene production cost, USGC example

On a non-integrated basis, average sized crackers from ten years agoare ill-equipped to compete in the present environment


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Economies of ScalePolyethylene production cost, USGC example

On an integrated basis, oil-based producers without economies ofscale are the most at risk of rationalization

PE conversion costs include cash cost of HDPE production ex ethylene costs


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How Much Capacity Is At Risk?

Given the proximity to low cost Middle East production & the regionsoil-based feedslate, European capacity is most at risk to shutdown

Cracking capacity excludes China & India


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Strategy In A Volatile Environment

With the looming additions, existing capacity will be underpressure with rationalization occurring within the next few years

However, it will be difficult to shutdown enough capacity to

achieve historical utilization due to stickiness of existing sites This environment will produce a more volatile environment with

petrochemical cycles lasting months rather than years

Given such an environment, producers will need to be steadfast in

their operating strategy to weather the storm Option 1: Focus on being the lowest cost producer

Option 2: Focus on being a niche producer

Option 3: Focus on being a customer-centric producer


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Strategic Options For ProducersOption 1: Focus on being the lowest cost producer

Maximize economies of scale

Lower transition cost by minimizing the number of grades produced

Focus production on high volume fungible grades of product

Work with feedstock suppliers in order to secure necessary feedstock to maximize uptime

Continuously seek out cost reductions

Focus marketing group to target high volume customers to minimize transaction costs (e.g.physical product traders)

Invest in feedstock flexibility to ensure the lowest feed costs

Seek opportunities to increase scale by buying other high volume sites


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Strategic Options For ProducersOption 3: Focus on being a customer-centric producer

Maximize customer touch points to promote intimacy

Increase customer service staff to address administrative issues

Increase tech service staff to help customers solve processing problems Develop marketing programs designed to maintain customer loyalty (e.g. rebates, joint advertising)

Offer product logistics & terminal inventory to offer product on just-in-time basis

Consider investing in companies that have considerable exposure to productdistribution


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Conclusions

The industry has grown aggressively with only two demanddeclines over the past forty years

Despite the recent demand loss, the industry will resume itsgrowth trends in 2010

By 2015, over 55% of the growth in polyolefins consumption will occur inAsia Pacific

OECD markets will still be significant accounting for over 20% of the growthpolyolefins consumption

Given the forecasted level of consumption and capacity additions,existing capacity will need to be rationalized

Smaller, oil-based producers are most at risk of shutting down

This will produce an environment that will be more volatile thanprevious downturns

Thus, necessitating a focused operating strategy to weather the

storm


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Main regional offices:

Asia

PFC Energy, Kuala Lumpur

Level 27, UBN Tower #21

10 Jalan P. Ramlee

50250 Kuala Lumpur, Malaysia

Tel (60 3) 2172-3400

Fax (60 3) 2072-3599

PFC Energy, China

15/F NCI Tower,

Kerry Center N-11371 Guanghua Road

Chaoyang District

Beijing 100020, China

Tel (86 10) 6599 9111

Fax (86 10) 6599 9100

Europe

PFC Energy, France19 rue du Gnral Foy

75008 Paris, France

Tel (33 1) 4770-2900

Fax (33 1) 4770-5905

PFC Energy International,

Lausanne

19, Boulevard de la Fort

1009 Pully, Switzerland

Tel (41 21) 721-1440

Fax: (41 21) 721-1444

Middle EastPFC Energy, Bahrain

Bahrain Financial Harbor (BFH)

East Tower

5th Floor

P.O. Box 11118

Manama- Bahrain

Tel (973) 7705 8880

Nor th Amer ica

PFC Energy, Washington D.C.1300 Connecticut Avenue, N.W.

Suite 800

Washington, D.C. 20036, USA

Tel (1 202) 872-1199

Fax (1 202) 872-1219

PFC Energy, Houston

4545 Post Oak Place, Suite 312

Houston, Texas 77027-3110, USA

Tel (1 713) 622-4447

Fax (1 713) 622-4448

www.pfcenergy.com | [email protected] regional offices are shown in blue.

PFC Energy consultants are present inthe following locations:

Bahrain

Beijing

Brussels

Buenos Aires

Houston

Kuala Lumpur

Lausanne

London

Mumbai

New York

Paris

Rio de Janeiro

Washington, D.C.

petrochemicals - pfc energy - abu dhabi (12th nov. 2009)

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