Vinyls Industry Outlook - vinylinfo.org Carr - IHS Markit Final... · • Lower service sector...

Confidential. © 2017 IHS MarkitTM. All Rights Reserved.Confidential. © 2017 IHS MarkitTM. All Rights Reserved.

Vinyls Industry OutlookVinyls 360 Conference – Ponte Vedra Beach, Florida

November 2017

Chuck Carr, Vice President/Global Business Leader Inorganics

+1 281 752 3201, [email protected]

mailto:[email protected]

Confidential. © 2017 IHS MarkitTM. All Rights Reserved.

IHS and Markit are now IHS MarkitIHS Markit thinks about the world in a unique way. We call this The New Intelligence. IHS Markit’s singular ability to look across complex industries, financial markets, and government actions that drive the global economy and provide our customers with insights, perspective and solutions for what really matters.

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Energy Chemical AutomotiveFinancial Markets

Product Design Technology, Media & Telecom Maritime & TradeAerospace, Defense & Security

Contents

© 2017 IHS Markit

SLATNEMADNUF EHT

SKOOLTUO ECIRP EVITARAPMOC :YGRENE

HSUP LATNEMNORIVNE WEN :TCAPMI S’ANIHC

NOITAZINREDOM YRTSUDNI :EPORUE

EPDH .SV CVP :ACIREMA HTRON

KOOLTUO CVP & ENELYHTE

3


Market fundamentalsChlorine & Caustic: Always in market tension

4


Chlor-Alkali /Vinyls production costs are energy dependent

VCM

Caustic Chlorine+

+ SaltElectricity

Ethylene

PVCEDC

Electricity

Ethylene

5


Regional energy costs favor USGC / Middle East … in spite of A-C PVC

+ AcetyleneCarbide

+ Ethylene

Chlor-alkali

ChinaCarbide Process

N. America,Middle East

W. Europe,Northeast Asia Ethylene+

6


Chlorine and caustic demand are set by different economic drivers

• Construction activity dominates chlorine demand>PVC: Infrastructure and residential>Isocyanates (MDI/TDI): Building products and

furnishings>Propylene Oxide: Durable goods and

furnishings

Construction end use markets

Chlorine Demand

7


Manufacturing activity sets caustic demand

• More fragmented end use sectors• Alumina: Largest consumption sector …

and growing• Pulp: Paper and board tied to

manufacturing activity• Most sectors tied to manufacturing activity

8


Caustic Soda demand growth is most significant in the developing world

41 MMt

5.5 MMt

5.1 MMt

2.1 MMt

1.4 MMt

9.2 MMt

12 MMt

3.9 MMt

2021 Global Demand = 80.2 MMt

6 – 7 Million dmt of caustic demand growth equals 10 – 12 world-scale plant

equivalents

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EnergyComparative energy costs determine chlor-alkali/vinyls advantage and disadvantage

10


The oil industry is reducing costs to make up for lower prices

• The “cost of oil” (reinvestment price) has fallen everywhere, but by different degrees depending on geography and development

• Lower service sector costs and improved project design, build and operating approaches have reduced the cost of oil around the world

$0

$10

$20

$30

$40

$50

$60

$70

$80

$90

$100

Middle Eastonshore

Globaldeepwater

US tight oil Russiaonshore

Canadian oilsands (SAGD)

2014 2016

Break-even prices for representative new projects, 2014 and 2016

© 2017 IHS Markit

Full-

cycl

e co

sts

in D

ated

Bre

nt te

rms

(US

dolla

rs p

er b

bl)

Source: IHS Markit

Notes: Full-cycle costs are expressed in terms of the Dated Brent price necessary for a project to break even, assuming a 10% internal rate of return. The 2014 and 2016 break-even estimates for these supply sources are intended to broadly depict the change from the start of the oil price collapse in mid-2014 to the latter part of 2016.

$0

$10

$20

$30

$40

$50

$60

$70

$80

Q1 2013Q3 2013Q1 2014Q3 2014Q1 2015Q3 2015Q1 2016Q3 2016

Median well break-even prices of several US tight oil wells

Source: IHS Markit © 2017 IHS Markit

Bre

ak-e

ven

pric

e in

WTI

term

s (U

S do

llars

per

bbl

)

Notes: The break-even price is the WTI price required for the project to cover all of its estimated capital and operating costs and generate a 10% rate of return. The plays are the Bakken, Bone Spring, Eagle Ford, Niobrara/Wattenberg, Scoop, Stack, Wolfcamp Delaware, and Wolfcamp Midland.

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Energy and feedstock prices impact global Chlor-alkali / PVC outlook Ethane off the Natural Gas floor

0

5

10

15

20

25

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27

Brent Crude Henry Hub Gas China Coal NEA Naphtha USGC Ethane

Con

stan

t201

4 D

olla

rs P

er M

MB

tu

Crude Oil - VS - Natural Gas & NGLs


Crude Oil - VS - Natural Gas & NGLsCrude Oil - VS - Natural Gas & NGLsCrude Oil - Vs - Natural Gas (Naphtha Vs NGLs & Coal)

1. Oil price stays lower longer2. Very stable USGC shale gas price3. Demand moves USGC ethane off

the Natural Gas floor

12


China ImpactA new view towards the environment is causing major changes to take place

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PVC outlook “wild card”: Pollution reduction in China 13th Five Year Plan (2016 – 2020) for Economic & Social Development ….

• 80% of about 300 cities failed to meet official air quality standards in 2015

• Approved March 2016: > Focus on Fine Particulate Matter

> Stronger environmental targets than previous Five Year Plans

• Manufacturing site inspections commenced early 2016, continue through the end of 2017

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Emphasis on enforcement, consequences, and accountability

“We must ensure that the newly revised Environmental Protection Law (EPL) is strictly enforced, that those who emit pollutants beyond the limit allowed by their permit or

without a permit are severely punished, and that those who knowingly allow such violations are held to account.”

Premier Li Keqiang (March 2016)

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• Strong legal foundation to the pollution control efforts

• Tighter environmental controls,• No new capacity, • Persistent imbalance between supply and

demand.


Will the Minamata Convention impact chlor-alkali supply?

• Minamata Convention:

> International treaty addressing mercury / mercury compound emissions

> Entered into force 16 August 2017

> No mercury-cell chlor-alkali capacity exists in China

> Impacts acetylene carbide process VCM production

• IMPACT> No new projects authorized with the acetylene

carbide technology.

> Target: To reduce per unit consumption to 50% by 2020 with low mercury catalysts.

> Research & development for non-mercury catalyst.

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PVC Integration By Feedstock Type

Source: World Vinyls Analysis 2018

17

80+% PVC is Acetylene Carbide in China


Capacity

Production

Operating Rates

• Potential for further small plant closures in China; some increase in India.• Acetylene-based producers need to invest in R&D for mercury-free VCM catalyst.

• Seasonal variations in operating rates• Northeast Asia operating rates go from 77% in 2017 to 90% in 2022

• PVC production rises with the higher operating rates and strong domestic demand.

Prices&

Margins

• Increasing demand and limited capacity additions adds upward margin and pricepressure. Some seasonality of PVC pricing may occur with monsoons.

• Vinyls margins will tend to rise, but PE competition could pose a challenge.

Asia PVC Market Outlook Scoreboard

•DomesticDemand,

AAGR

NEA SEA ISC

PVC 3.3% 4.7% 7.1%

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Europe Modernization Technology is changing the face of the continental market as the economy rebounds

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Technology upgrade changing the face of Europe: At the top of the mercury-cell conversion mountain

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Today

Dea

dlin

e

2015 2016 2017 2018

Mercury plant conversion/expansion

Unannounced

Closures

Confidential © 2017 IHS Markit™ All Rights Reserved


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2

4

6

8

10

12

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2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

Cap

acity

(MM

T)

European Technology Evolution 2011-2021

Membrane

MercuryDiaphragm Asbestos

Diaphragm Others

53% 82%

29%Phase-out D

eadline

Impact of the mercury-cell phase out on European capacity

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Technology• Average mercury-cell plant cash cost is 25% higher than typical membrane-cell plant• By 2019, all mercury-cell plants on the continent will have been closed or converted to

membrane-cell technology, significantly improving global cash cost competitiveness

22European Market Outlook Scoreboard

Energy • Energy cost trend benefits producer economics: Western European gas price willdecrease by about 20% between 2016 and 2019, thanks to Russian supply

Prices • No significant capacity additions are on the horizon. A tighter market led by lowerproduction, flat demand and no availability of cheap imports, will put upward pressureon margins and prices thru the chain.

Margins

• A higher efficiency at newly converted chlor-alkali plants, lower energy costs andhigher caustic soda prices will generate higher margins for producers

• Better returns than those of recent history will be needed to finance futureinvestments in Europe


North America: PVC vs HDPE New HDPE capacity coming on-stream creating polymer competition

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There are different pipe materials

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PVC vs HDPE: Different market drivers.

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

2011 2012 2013 2014 2015 2016 1H 2017 2018

HDPE % growth PVC % growth

Resin demand growth in the US and Canada for pipe applications

Source: ACC, IHS Markit © 2017 IHS Markit

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PVC among the cheapest polymers

1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5

ABS

PET

PS

PP

HDPE

PVC

2017 2015Cents Per Cubic Inch

US Comparative Prices of Thermoplastic Polymers

Source: IHS Markit © 2017 IHS MarkitNotes: Delivered Discounted Basis

-10%

-5%

+20%

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PVC among the cheapest polymers

1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5

ABS

PET

PS

PP

HDPE

PVC

2018 2017Cents Per Cubic Inch

US Comparative Prices of Thermoplastic Polymers

Source: IHS Markit © 2017 IHS MarkitNotes: Delivered Discounted Basis

+12%

-8%

-2.5%

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Americas PVC Market Outlook Scoreboard

DomesticDemand

Capacity &

Production

Operating Rates

• No capacity increase forecasted through 2021. Investment decisions could be on thehorizon.

• Production runs hard to meet growing domestic demand – exports from the US arelikely to increase. Exports from SAM to decline as the local market recovers.

• NAM Operating rates climb from 87% in 2017 to 94% by 2021.

• Modest domestic PVC demand growth in the Americas. US and Canada market ismature with high consumption per capita. South America with improving demand afterBrazil’s recession.

Prices&

Margins

• Tighter market puts upward price pressure as construction market grows.• USGC cash costs competitive versus the rest of the world allows higher margins.• Reinvestment potential with low cost and stable investment environment in US

NAM SAM

PVC 1.8% 3.2%

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Ethylene and PVC OutlookNew ethylene capacity and low global energy prices help prime demand pump

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North America Ethylene Capacity Growth*

Starting Company Location Total Growth**

Q1-17 Dow Plaquemine, LA 250

Q1/2-17Equistar Corpus Christi, TX 401

Oxy/Mexichem Ingleside, TX 550

Q3-17 Dow Freeport, TX 1,500

Q1-18

ExxonMobil Baytown, TX 1,500

ChevronPhillips Cedar Bayou, TX 1,500

Indorama Lake Charles,LA 420

Q4-18 Formosa Point Comfort, TX 1,250

Q1-19Shin-Etsu Plaquemine, LA 500

Sasol Lake Charles, LA 1,550

2020

LACC Lake Charles, LA 1,000

Dow Freeport, TX 500

TOTAL Port Arthur, TX 1,000

Total additions 11,921

*Firm 2017 through 2020 **000 metric tons 30


USGC Ethylene remains cost advantaged

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027

US Average Acquisition Price WEP Contract Price SEA CFR Spot Price

Global Annual Ethylene Prices


31


The Construction Industry is PVC’s Swimming Pool

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

-10 0 10 20 30 40 50 60 70

US Japan

India

Poland

Indonesia

BrazilRussia

China

Canada

Mexico

UAE

Construction Market Expansion

Source: IHS Markit © 2017 IHS MarkitConstruction Risk Score

Annu

alAv

erag

e G

row

th,

2016

-202

1

Germany World Average: 3.2%

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Northeast Asia is today’s PVC consumption powerhouse.

20 MMt6 MMt

3.5 MMt

3MMt

1 MMt

2MMt

5.5MMt

2017 Global Demand = 43 MMt

2MMt

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PVC Global Net Trade Patterns

Trade:2016 = 9.2 Million mt2021 = 9.7 Million mt

2.5 2.3 2.7

-3

-1

1

3

NAM

-0.8 -0.4 -0.6-3

-1

1

3

SAM

0.1 0.2 0.6

-3

-1

1

3

EUR

-1.3 -1.1 -1.4-3

-1

1

3

MDE

0.82.1 2.6

-3

-1

1

3

NEA

-0.9-1.8 -2.2-3

-1

1

3

ISC

0.0

-0.6 -0.9-3

-1

1

3

SEA

201120162021

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© 2017 IHS Markit

Wrapping Up • Continuing low energy prices provide economic boost

• Environmental regulation for the PVC industry taking front stage in China.

• New ethylene capacity and new HDPE capacity competing in North America.

• Tighter environment for PVC in the US & Canada because of healthy growth with construction industry momentum.

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Q & A

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IHS Markit Customer [email protected]: +1 800 IHS CARE (+1 800 447 2273)Europe, Middle East, and Africa: +44 (0) 1344 328 300Asia and the Pacific Rim: +604 291 3600

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