Trends and Challenges in the European Polyolefin Industry

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Trends and Challenges in the European
Polyolefin Industry

• Mark Vester
• 18 February 2003

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Contents

• Short introduction to SABIC EuroPetrochemicals
• Typical project investment WE and ME
• Global and European S/D balance for Polyethylene
• The European Case
• Managing the cycle The Past and The Future

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The Power to Provide Resources to guarantee
long term supply Modern technology for efficiency
and quality Global marketing and distribution
network to serve our customers for the long term
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SABICs vision to be a leading global
manufacturer and marketer of hydrocarbon and
metal products.
SABIC is 70 owned by Saudi government and
30 by private sector started from scratch in
1976 produced first tons in 1983 now
produces 40 million tons of products per year
has a turn-over of 11,4 bln in 2002
Think about it 2 mln tons of new capacity added
annually!
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SABIC EPC the Powerhouse comes to Europe
SABICs headquarters in Riyadh
SABICs Geleen site
SABIC is number 3 global PE player markets
almost 5 million tons of PE/PP is now
established in Europe has technical centres in
KSA, USA, India and The Netherlands
accelerates its expansion
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with the Power to Provide
4 highly integrated sites direct access to low
cost feedstock world-scale facilities direct
market access multiple lines per technology
Gelsenkirchen
Geleen
Al Jubail
Vadodara
Riyadh
Kerteh
anywhere !!!
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Global Polyolefins position SABIC

• SABIC, after acquisition DSM Petrochemicals
• number 4 global Polyolefins player
• number 3 global PE-player
• number 4 global PP-player

KTON
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.. and anything !!
Application Automotive Corrugated board Dustbins Foam Furniture Houseware and appliances Geomembranes Masterbatches Multi purpose injection moulding Packaging Photo and imaging Pipe Sheet Textiles Wire and cable Process Bi-axially oriented film Blow moulding Blown film Cast film Extrusion coating Extrusion compression moulding Foam extrusion Fibre, filament and tape extrusion Injection moulding Injection compression moulding Masterbatch compounding Pipe extrusion Sheet extrusion Thermo forming Material HDPE High cristallinity polyolefin LDPE LLDPE Long glass fibre reinforced PP Modified PP PP block copolymer MF PP homopolymer PP homopolymer MF PP random copolymer PP reactor elastomer modified PP reactor elastomer modified MF
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Middle East PE has significant cost advantage
LLDPE gasphase 350 kta

• Take into consideration
• License cost
• Infrastructure
• Marketing and Sales cost
• Research and Development
• Cost of overhead
• Working capital

HDPE slurry 300 kta
PP gasphase 2200 kta
Co-products
Naphtha cracker 650 kta
revamp cracker 650 kta
Europe
Middle East
HDPE gasphase 350 kta

• Low cost feedstock !!
• Investment scale
• Investment cost
• Utilities cost are lower
• No co-products credit

LLDPE gasphase 2350 kta
Ethane cracker 1050 kta
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Structure of typical projects vary
LLDPE gasphase 350 kta
HDPE slurry 300 kta
Europe
PP gasphase 2200 kta
Co-products
revamp naphtha cracker 650 kta
HDPE gasphase 350 kta
LLDPE gasphase 2350 kta
Middle East
Ethane cracker 1050 kta
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Distribution
Customer
Warehouse to customer Import Duties
Warehouse to customer
Warehouse
Hub
Document cost Outbound cost Inbound cost and
storage Sea port to hub Terminal cost Sea
freight Terminal cost Warehouse to sea port
Plant
Europe
Middle East
Warehouse
Plant
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Using ethane for ethylene leads to propylene
deficits
71,5 mio
other
FCC 32
54 mio
FCC 30
Steam cracker 65
Steam cracker 68
which leads to improved co-product contribution
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ME suppliers will export most PE to Asia, however

Global overcapacity will be reduced from 3700
kton in 2002 to potentially 200 kton in 2007
Net export position (CTP gt demand)
Net import position (CTP lt demand)
Asia is growth market ME export net backs will
make European pricing follow Asian balance
Note Balance is calculated as Local CTP -/-
local demand (trade is excluded)
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West Europe leaves opportunity window
kton
Realisation
Forecast
West European demand will outpace capacity
growth in coming years
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for ME to further increase its market share.
Room for 100 kt extra imports per year
Realisation
Forecast
Middle East imports will make up for WE
production deficit.
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Despite ME producers cash cost advantage over WE

ME producer
NWE producer
Typical ranges for gas and naphtha
Structural delta in cash cost
Low
High Low
High
Gas price (/mmBTU)
Naphtha (EUR/t)
Delta depends on oil price and co-product values
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WE capacity has outpaced demand,
kton
contributing to deterioration of margins
Margin as C4 LL -/- C2 (EUR/t)
and resulting in poor profitability even for
WE leaders!
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ME re-investment level is lower than average WE
level
ME producer
NWE producer
Re-investment level required for IRR of 20
Delta in re-investment level
Delta in cash cost
Low
High Low
High
Gas price (/mmBTU)
Naphtha (EUR/t)
Within WE players differ in site scale and
integration, portfolio, Only strong WE super
sites (cost leaders) remain
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Pricing in Europe will be affected
Re-investment level
WE
ME
Middle East attracts investment at lower levels
than Europe
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Future PE flow over the globe

• ddp NWE cif FE
• Revenue Platts low 96-01 900 750
• Discount -/-25 -
• Import duties (4) -/-35
• Inland logistics -/-50 -
• Transport overseas -/-45 -/-20
• Contribution 745 EUR/t 730 EUR/t

• Asia is growth market
• Export to Europe is 100 - 150 EUR/t more
  expensive
• European price will follow Asian balance and
  average at 100 - 150 EUR/t above Asia

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Cyclicality in Petrochemicals is a fact of life

• The cycle
• is due to
• Long lead time of investments
• No reliable forecast global economic gowth
• Globalisation
• affects mainly margins but also volumes
• and
• leads to strong fluctuations in cash flow

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Essentials of the Petrochemical Business

• Global Utilisation Rate
• drives the margins
• Position on the global cost curve
• indicates the chance to survive the dip in the
  cycle
• Position on the learning curving
• quantifies the yearly needed cost improvement

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Cracker margins correlate with the global
utilisation rate
CTP Capacity to Produce
Global Utilisation rates gt 92 are needed for a
healthy cracker margin
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Position on the global cash cost curve

• A low cost position is essential to survive the
  dip in the cycle and is determined by
• Scale
• Integration
• Technology
• Cracker feedstock position / flexibility
• Upgrading cracker co-products
• Logistics
• Employees

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Global cash cost curve crackers
Small scaled Laggards
Cash costs/ton C2
Naphtha/ethane/LPG in Europe/USA
Low cost ethane
Cumulative ethylene capacity
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Learning curve of ethylene production
Cash costs/ton C2
Cumulative ethylene production
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Managing through the cycle
Losers
First Quartile
Sitting ducks
Cash costs/ton C2
(Potential) Super sites
Hors category
Cumulative ethylene capacity
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Conclusions

• No rationale for investment in additional
  integrated ethylene and PE capacity in Europe
• Potential for scrap and build
• Little further improvement of cost position
• All cost laggards in Europe will disappear
• Central and Eastern Europe have the same future
  as WE
• European cost leaders will be able to compete
• Future PE source for West Europe
• WE super sites
• Growth will come from Middle East

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Drivers for European industry We enter a new era

• Period 95 02
• Scale and cost
• Site integration and MA
• Technology and Catalyst Development
• Period 02 09
• Cost Rationalisation
• Bottomline cashflow

Invest and grow
scale cash flow
Re-establishment of sustainable profit levels