World Petrochemical Market Outlook & Strategies to Survive ...

2009 APIC – CMAI SeminarSingapore Shanghai Houston New York London Düsseldorf Dubai

May 14, 2009

Seoul, South Korea

Insert

Consultant

Picture

Gary AdamsPresident

[email protected]

World Petrochemical Market Outlook & Strategies to Survive the Downturn

2009 APIC – CMAI Seminar

Where we concluded last year’s APIC…


Defining Market Conditions Through The Cycle

Determining Duration and Path to Recovery

Predicting (Changing) Value Chain Pricing Power

Positioning Your Business For The Next Upturn

…Embracing change : Opportunity at a time of market uncertainty!

Use This Annual APIC to

Augment Your Efforts Regarding…


Consumers

Retail

Compounds

Finished

Goods

Chemicals &

PlasticsEnergy

Tightly Connected Value Chain


Current State of the Global Industry

Market

Fundamental Status What it is Telling Us

Demand No Change to Improving Restocking & Reacting

Supply Tighter due to Closures Short Term Disruptions

Capacity Exponential Growth Supply Side Downturn Here

Petchem Markets entered a structurally long period

coincidental with the worse economic conditions seen

during our careers. Aggressive responses will continue…

Cash Costs Steady at Low Value Price Capped by Raw Material

Sector Prices Low with some inflation No Producer Pricing Power

Chain Margins Minor Improvement Highly Leveraged at High Risk


Economy performed quite well until 2008 (despite energy values)

Developed economies struggled ~ sustaining global economic growth bequeathed to the BRICs and other emerging economies

Energy demand growth held outside Old Economies, adding price support but ultimately inhibiting consumer spending

Hyper-Inflated energy prices and deflated financial community led to global recession, eliminating chances for prompt petchem recovery

Expansionary period over; Finding Bottom with Slow Climb Back…

Late

2010+

Not to Scale


First the Bad News

• Steady flow of negative news

destroys confidence

• Most severe contraction seen

since 1930s

– Globally synchronized

– Centered in finance sectors

– Engulfing physical world too

Worst of all…

– Magnitude and ferocity was

underestimated by everyone


February Internet Poll: What changes, if any, have you

made in your personal spending in the past six months?

More Bad News…

Consumer adverse to spending; overly indebted already

Auto Industry living on inventory – focused on survival

Inflation will become a significant issue; tomorrow’s problem

Credit somewhat restricted; a high debt load might be fatal

Developed economies declining – rest barely growing, if at all

Reduced spending - 79%

No change - 19%

Increased spending - 2%


2Q09

Deeper?

Alternate

Forecast

Economic Activity Levels as Defined by World GDP

2007 2008 2009 2010 2011

Trillions of Constant 2007

Dollars by Quarter4Q11

3Q08 1Q11

"The Global Return to Good Business"

Main Forecast

“…unusually gradual and prolonged” says Federal Reserve

Very weak fourth quarter GDP

data clearly highlighted depth

of global slowdown

China was not immune from

the global economic downturn

(heavily export-oriented)

Production was strong during

the economic boom – has

experienced rapid decline as

consumption at all levels has

fallen – all along the chain

Especially severe in

developed markets – i.e.,

Japan, U.S. and Europe.

Return to previous peak may

take longer

$52

$53

$54

$55

$56

$57

$58


Economic Activity Levels as Defined by GDP

Trillions of Constant 2007

Dollars by Quarter 4Q11

3Q081Q10

(Maybe One

Quarter Later)

"The Return to Good Business In Asia-India"

“…next year (2009) will be a "difficult" period.” says President Lee Myung-bak

1Q09

Two-year Loss in

Growth Curve

$12.5

$13.0

$13.5

$14.0

$14.5

$15.0

2007 2008 2009 2010 2011


Some Good News

Much lower energy prices “releases” beneficial spending

Consumers see prices falling for food and other commodities

Unemployment benefits extended & foreclosures delayed

Construction costs declining; interests rates at historic low

Services remain strong – especially health care and “legal”

Perception is reality; all are engaged in fighting back

Trillions being poured into restarting economic growth

China has the cash (+$2 Trillion) and the manpower to fight this

Global GDP growth will resume ~ back to trend rate by late 2010


0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

91 93 95 97 99 01 03 05 07 09 11 13 15

Global Basic Chemicals & Plastics Additions

Annual Percentage Increase

Volume of new (low cost) capacity adds sufficient

pressure for restructuring in mature markets…

Short Term Growth

Rate Well Below

Long Term

Averages

Long Term Demand Growth Rate


A Full Measure of

Global Market

Weakening

0

5

10

15

20

25

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 150

5

10

15

20

25

“New Gulf” Basic Chemicals & Plastics

(Low Production Cost) Capacity Additions

Million Metric Tons

A Measure of Inexperienced Commissioning


Basic Chemicals and Plastics

Global Demand

0

100

200

300

400

500

600

700

800

85 90 95 00 05 10 15

Million Metric Tons

More Good News Longer term growth still occurring – developing economies

emergence has been and will still be very beneficial

Economic recessions have been mere bumps in the road for this

innovative sector

Value chain remains highly influenced by non-durables (goods

we consume)


-4%

-2%

0%

2%

4%

6%

8%

10%

12%

86 88 90 92 94 96 98 00 02 04 06 08 10 12 14

Sold

Out!

Regional

Recession

Regional

Recession Global

Recession

Asia

Crisis

Price

Shock

Global Basic Chemicals and Plastics

Annual Demand Change

Reality Check… Surviving today and next week remains the concern of many

Demand change is quite dramatic and slow conditions will

continue well into 2010 – maybe later

Easily the largest challenge current management has faced –

very difficult decisions are necessary in very short order


“Innovations and new developments in chemicals, which simplify

operations or processes, while improving performance such as fuel

efficiency, emission reduction and improvement in aesthetics are of

interest to the auto industry.”

B.B. Parekh, Chief of Strategic Sourcing at Tata Motors.

Tata Nano


Defining Market Conditions Through The Cycle:

• Slow Consumer Demand evident throughout 2009

• Stimulus Packages etc. “stimulate” demand by 2010

• Basic Commodities remain severely oversupply through 2011





-20

-10

0

10

20

30

40

50

-20

-10

0

10

20

30

40

50

86 88 90 92 94 96 98 00 02 04 06 08 10 12 14

90% of Capacity Growth100% of Demand Growth

Global Basic Chemicals and PlasticsMillion Metric Tons

Absorbing Surplus Capacity

Adding Surplus Capacity

May well be the most severely over-supplied

market that has emerged since the early 1980s…


It looks like the mid 1980s all over again…

-5%

0%

5%

10%

15%

20%

25%

85 88 91 94 97 00 03 06 09 12 15

Global Segment Surplus Capacity (adjusted to 90%)

Olefins Aromatics Chloralkali Plastics


How Bad Could This Down Cycle Become?

Impact Of Recession and a Scenario

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

85 88 91 94 97 00 03 06 09 12 15

Effective Global Operating Surplus*(Limiting to 90% Rates)

Prior Case (Pre-recession)

Surplus as a Percent of Capacity (January)

Additional Rationalization Forecast

Percent of Capacity

* Basic Chemicals and Plastics Excluding Methanol

Producer “Pricing Power” Band

Returning to band prediction:

25 now, then up to 50 million

metric tons more will close


0

5

10

15

20

25

30

35

40

45

0

5

10

15

20

25

30

35

40

45

90 95 00 05 10 15

Basic Chemicals and Plastics Net Trade Balance

Asia-India Net Trade

Million Metric Tons

New Gulf Exports

Industry’s Challenge… Asia-India continues to invest in local capacity, moderating the

growth in its import requirements despite rise in real consumption

The “New Gulf” has been essentially satisfied with directing its low-

cost, export-oriented production to Asia-India

Justifiably aggressive additions in the “New Gulf” force reactive

closures of high-cost capacity – everywhere!




• Capacity and Demand Growth are out of sync due to recession

• New capacity being added is mostly low cost (price taker)

• Higher cost capacity will have to be closed (U.S., W.E., NEA)

• Natural Gas prices are an advantage for NGL based producers

• Closures critical to achieving 2012-2013 recovery





Timing the Petchem Cycle

Over-

Investment

We Are

Right Here

Pricing Power

Returns

Consolidation

& Closures

Competitive

Devaluation

Weakness

in Pricing

Power

Excess

Capacity

Investment

2012 - 2013



2009 Global EBIT Weighting Factors

545* Million Tons of Demand(* was 585 in 2008)

Light Olefins

25%

Aromatics

17%Chlor-alkali

20%

Methanol

7%

Plastics

31%


-$75

-$50

-$25

$0

$25

$50

$75

$100

$125

$150

$175

$200

$225

85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15

$-50

$-25

$0

$25

$50

$75

$100

$125

$150

$175

$200

$225

$-75

Plastics

Methanol

Chloralkali

Aromatics

Olefins

Dollars Per Metric Ton

Global Basic Chemicals and Plastics EBIT Contribution

Future Earnings Expectations Rely on Consolidations

and Successful Economic Stimulus

Three Challenging Years!





• Market based feedstock regions will suffer (Asia, WE, NAM)

• Caustic Soda Profits (ECU Margins) had been notable

• Price Takers (New Gulf) offset very weak margins elsewhere

• Integration with NOCs may be necessary to “out perform”








Positioning Your Business For The Next Upturn





Asia faces a heightened need for both

strategic focus and flexibility to

emerge from this downturn on a

stronger footing...


Short Term Challenges

Massive new capacity

Declining or very soft demand

Economic recession

Severe industry down-cycle

Supplier & customer financial issues

Much Uncertainty about the

severity and length of the above

Long Term Trends

Continuing commoditization

Converging commodity and

specialty returns

Declining “Old World” vs. Robust

“New World” and shifting trade

Increasing customer sophistication

Increasing importance of low cost

Increasing availability of technology


Asia’s Strategic Priorities center on

restructuring and realigning of wide-

ranging portfolios, assets and markets...


Strategic Focus to:

Build and execute a global (or a

viable regional niche) presence

Engage in an additive global portfolio

of Joint Ventures and Alliances

Strategic Flexibility to:

Execute targeted strategic or even

opportunistic acquisitions/divestitures

Respond to evolving/maturing

markets in emerging economics

Support an increased need for

broad based financial flexibility

Planning and Execution Excellence to:Monitor, plan for, and respond to an increasingly volatile and changing environment

with responsive and size-appropriate investment or divestment timing


No matter what I did to the money, you still wanted it

because it did not decrease in value. Each bill was

still worth $100….

Who would like one of these $100 bills?

I am going to give away one of

these $100 bills to one of you -

but first, let me do this…

Who still wants one of them?

…now crumpled and dirty. Who still wants

one of the $100 bills

What if I wad them up and grind them under

my feet?

http://www.panama-guide.com/mediagallery/mediaobjects/disp/e/e_100_dollar_bill.jpg


Maybe the petchem industry has been dropped,

crumpled, and damaged by certain decision and the

economic conditions that have come our way.

Maybe you feel if though it is worthless; but no

matter what has happened or what will happen, this

industry will not lose its longer term value.

Dirty or clean, crumpled or finely creased, our

industry is still full of innovation, making new

products (and old) that are part of our everyday lives

in Asia and all around the world. The value or worth

comes, not in what today brings, but in the enduring

and innovative nature of this global business…

2009 APIC – CMAI SeminarSingapore Shanghai Houston New York London Düsseldorf Dubai

This is a special industry…

…Please do not ever forget it

And I appreciate the Korea Petrochemical

Industry Association for providing a

chance for me to say that!

Thank You for Allowing Us to be Part of Your Success –Now and in the Future!

World Petrochemical Market Outlook & Strategies to Survive ...

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