Global Vinyls: Shale Gas as Driver

Joel Lindahl, Director Chlor-Alkali & Vinyls Joel.Lindahl@ihs.com Phone: 1 (281) 752-3218 Vinyl India April 2013

The Vinyl Chain in the Shale Gas Era

The vinyl chain is. Energy intensive via chlorine And, connected to oil/gas through ethylene Changed by the Shale Gas Era
North American chemical rebirth is underway
US chlor-alkali and vinyl producers are globally

advantaged
But what does it mean to the global landscape?
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U.S. Shale Gas Changes Dynamics

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Shale: Double Benefit to Vinyls Chain

Electricity

Salt

OxyChlor EDC

HCL

Caustic

Chlorine Ethylene

Direct Chlor EDC

VCM

PVC

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U.S. Energy Cost Structure: The Bedrock for the New Landscape
Dollars per MMBtu 18 16 50% 14 12 10 30% 40% Gas as % of Crude 60%

Low cost gas Chlorine

8 6
4 10% 2 0 07 08 09 10 11 12 13 14 15 16 17 Crude (WTI) Natural Gas 0% Gas as % of Crude

derivatives, vinyls go offshore

.Changing

20%

trade
Generating

caustic soda
5

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Low Cost Electricity: First Advantage

2012 Operating Costs, Dollars Per ECU Ton 400 350 300 250 200 150

Electricity Costs (Cents/kWh)

161 NAM = 3.5 Europe = 8.0 Brazil = 8.0

100
50 0 West Europe Membrane Asia Membrane North America Membrane Middle East Membrane
6

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How to Use Low Cash CostsChlorine End-Use Applications

Others 31% Vinyls 33%

50+% Durable Goods

Water Treatment 6% Pulp & Paper 3% Inorganics 2% Chlorinated Intermediates 5% Organics 20%

2012 World Demand = 62.2 Million Metric Tons

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Export Derivative: PVC, the Construction Polymer, Competes Globally

Wire & Cable 8% Bottles 2% All Others 12% Pipe & Fittings 43%

Rigid Film & Sheet 17%

Profiles & Tubes 18%

Durable Goods = 70% of Demand

2011 Total Global Demand = 36 Million Metric Tons

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Total Global Construction Spending

2013 Vs. 2012
World positive
World
N. America South America Western Europe Eastern Europe Middle East & Africa Asia India Turkey -2 0 2 4
Percent
Source: IHS Global Insight Global Construction Outlook Q2, 2012

construction growth will be supported by developing regions.

Housing construction

gaining momentum in North America.

Brazil gets ready for the

World Cup and Olympics.

West Europe struggles

while Russia and Poland are supported by stimulus programs.

Asia growth led by China
6 8

mostly into infrastructure.

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Where Is the PVC Demand Growth?

NEA (ex CHI) 8%

ROW 20%

Region

% AAGR 2012-17

U.S. 11%

ISC China U.S. SEA ROW West Europe

NEA (ex China)

7.7 5.0 4.8 4.3 4.0 2.9

1.0

W. Europe 12% SEA 5% ISC 7%

CHI 38%

Total Global Demand 2012 = 37.4 Million Metric Tons

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10

U.S. Annual Housing Starts

Housing Starts, Total Privately Owned (Thousands) 2,200 2,000 1,800 1,600 1,400 1,200 1,000 800
Source: U.S. Bureau of Census Forecast: IHS Global Insight

600
400

90

92

94

96

98

00

02

04

06

08

10

12

14

16

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11

The United States Exports to the World

3.3 2.5 0.6 0.3

1.0

0.7 0.2 -0.1

-0.5

-0.7

-0.6

-0.1 1.5

1.7 0.8

-1.1

-1.3

-1.2 -0.4

-1.0 -1.9

-0.4

-0.7

-1.0

-0.5

-0.5

-0.7

0.2 0.0 0.0

2007 2012 2017

PVC Net Trade, Million Metric Tons

12

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High Cost Energy Regions Demand Growth Will Be Met by Imports

India
Increasing need for

housing and infrastructure No large scale expansions Demand will grow by one million metric tons EDC and PVC import options South America Similar profile
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13

India PVC
Million Metric Tons Capacity Domestic Demand Imports Per Capita Consumption (Kg per Year) 2000 779 741 18 0.7 2010 1345 1949 729 1.6 2020 1635 3654 2090 2.6

Indias fast-growing economy

will require significant PVC supply Capacity will grow at a slower pace than demand Imported PVC will make up the difference

U.S. PVC Per Capita Consumption 2012 = 12.5 kg

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14

The US Exports the Shale Advantage

Million Metric Tons 6 PVC VCM 5 EDC Contained chlorine net trade 4
3 2 1

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Shale: Double Benefit to Vinyls Chain

Electricity

Salt

OxyChlor EDC

HCL

Caustic

Chlorine Ethylene

Direct Chlor EDC

VCM

PVC

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16

NAMs Low Cost Ethylene Is Hard to Beat

Ethylene Production Cash Costs, $/MT
Brent Crude 2012 = 111 $/bbl Average Feedstock Basis

2012

NEA SEA

WEP

NAM MDE Ethylene Aggregate Demand

0 20 40 60 80 100 120 140 160

Cumulative Ethylene Capacity, Million Metric Tons

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17

Shale Drives New Ethylene Projects in North America

Announced (-000- MT)
BASF/Total (Port Arthur) Chevron Phillips (Cedar Bayou) Dow (Taft / Freeport) Eastman Equistar (All locations) Exxon (Baytown) Formosa (Point Comfort) Ineos (Chocolate Bayou) Oxy (Ingleside) Sasol (Lake Charles) Shell (Northeast) Westlake (Lake Charles/Calvert City) Williams (Geismar) Nova (Sarnia) Braskem/Idesa (Mexico) Total Cumulative Total * Shell, NOVA, and Oxy capacity additions shown are IHS estimates
Dow, 18 Shell, NOVA, and Oxy capacity additions shown are CMAI estimates

2012-2014 180
386 90 521

2016-2020
1500 1500

1500 800 107

550* 1400 1000*

310 300 250* 1000 9,500 11,394
18

1,894

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Feedstocks & Cracker Economics

Lots of Gas!

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19

U.S. PVC Cost Leadership Shale Part II

Dollars Per Metric Ton 1,200 Integrated - Asset Sharing Method 1,100 1,000
* NEA excludes China

900
800 700 600 500 400 07 08 09 North America * Northeast Asia 10 11 12 13 14 15 16 17 West Europe China Cash Cost (Acetylene based)
20

ADVANTAGE $150 +

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NAM Profits Remain Highest

Cents Per Pound 20 15 10 5 0 -5 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Dollars Per Metric Ton 440 Avg. diff. = $130 US per MT 330 220 110 0 -110

North America

West Europe

Northeast Asia

China (Acetylene Based)

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Consequences for North America Vinyls: Future Looks Different

Past: PVC producers stood alone, often buying chlorine

and ethylene
Present: Consolidation, Chlor-alkali integration strategies

completing, gained caustic soda benefit

Next Phase: Vinyls producers focus on ethylene

integration strategy
Large Vinyls producers populate top tier of chlor-alkali

producers Chain operating rates depend on global picture Differentiation not chlor-alkali, it is ethylene
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22

Integration Drives Chlor-Alkali Investment

Producer 2010 Shintech FPC Q4-2010 Mid-2011 Timing Capacity (-000- MT Chlorine) 12,480 162 175

Shintech Added Capacity 2010-2014 Dow/Mitsui Westlake

OxyChem

Mid-2011
2H-2013

482
800

2H-2013
2H-2013

350
183

Others
Total Announced Additions

Various

18
2,170

2014
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14,650
23

Who Benefits? Implications along the Value Chain

Ethylene Chlorine EDC VCM PVC Resin Compounding Fabrication

Full Chain Integrated Players

Formosa, Westlake

Partially Integrated Players

Oxy

Non Fully Integrated Players

PPG/Georgia Gulf

Non Fully Integrated Players

Shintech

Non Fully Integrated Players

Dow

Non Fully Integrated Players

Mexichem Pemex Mexichem, CertainTeed

Non Fully Int. Players

Pemex

Specialties
PolyOne

PVC Converters

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24

Global Shaping of Chlor-Alkali/Vinyls

North America Shale Gas Changing the Industry Asia Overcapacity Makes the Market Europe Challenges of Technology, Demand, Margins
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25

PVC Capacity China and Rest of World

Country Capacity, Million Metric Tons 6.0
5.0 Avg. Demand Growth 2007 2017: 1.1 Million Metric Tons Total Global Capacity, Million Metric Tons

4.0 3.0 2.0

1.0 0.0 -1.0 -2.0

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
China United States Iran Egypt ROW
26

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China Is Number One, but Not in Margins

Largest PVC demand and
China PVC Capacity 2012
Acetylene Based 81% Ethylene Based 19%

capacity
Demand lags supply

expansions
Non-integrated carbide-

based producers under increasing cost pressure

Cost disadvantage for

most coastal producers

Total Capacity: 23.5 Million Metric Tons

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Northeast Asia PVC

Million Metric Tons 35 30 25 20 15 10 5 0 Operating Rate 100% 90% 80% 70% 60% 50% 40% 30% 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Production (3.6/3.0) Domestic Demand (4.9/2.8) Total Capacity (11.2/0.9) Forecast (% AAGR = 07-12/12-22)
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West Europe PVC: Issues Ahead

Poor growth

Demand/Capacity, Million Metric Tons 8

7 6 5

Op. Rate, Percent 100 95 90 85

profile
High cost

structure
Old technology

80
75 70 65 60 2007 2009 2011 2013 2015 2017
Domestic Demand -6.9/ 2.9* Capacity -1.3/ 0.2* Production -4.1/ 1.8* Operating Rate
(% AAGR = 07-12/12-22)

in chlor-alkali
Lack of

3 2 1 0

reinvestment

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Top European PVC Producers More Consolidation Likely and Beneficial

Annual Nameplate Capacity, Million Metric Tons 2.0 1.8 1.6 1.4 1.2 1.0 0.8 0.6 0.4 0.2 0.0

2008

2012

Picture Source: INEOS

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Regional Realities
North America
Able to make money with shale gas advantage

Reinvesting and expanding

Europe
Lights flickeringexpensive energy Weak economy keeps Europe from growing, reinvesting

Asia/China
Still the growth engine, but severely overbuilt Demand growing, but at slower pace

India, Brazil, etc huge potential met mostly by imports

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31

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