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Global Ethylene Market

Outlook: Low Cost


Feedstocks Fuel The Next
Wave Of Investments In North
America and China

Mark Eramo
Vice President, Chemical
Insights
IHS Chemical

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Opening Session

Ethylene Market
Outlook

2
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executives &
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3
Chemical Industry Building Blocks

The Chemical Industry is a key


enabler of modern living:
Medical, Transportation,
Construction, Packaging, Food
Chlorine Processing, Water Distribution,
Fuel, etc
Investments driven by cost
advantage and/or proximity to
demand centers
Ethylene Propylene Demand growth is accelerating
outside of the developed regions
Strategy development requires
complete understanding of the
value-chain
Methanol Benzene

4
Petrochemical Value-Chain From The
Wellhead to Wal-Mart
Consumers Retail Consumer
Goods

Companies that have long term success in


the chemical industry are able to leverage
technology and low-cost supply strategies for
meeting demand
Energy at the right cost
Petrochemical with the
Derivatives
right productss using for the right
go-to-market strategies

5
Chemical Investment Seek To Leverage An
Advantage

Energy & Demand Technology


Feedstocks Growth Technology to
make up 60- Proximity to enable efficient
70% of the costs demand growth and competitive
of chemical essential without production costs
production. distinct cost or and high
Investments seek technology performance
a competitive advantage. Trade products. First to
advantage access also key. market is
important

6
Agenda
Chemical Building
Blocks
Changing Demand
Trends
Impact of Energy
Shift in New Capacity
Evolving Trade
Patterns
Profit Cycle is Mixed

7
Ethylene, Methanol and Propylene
Expanding At A Rapid Pace
Basic Chemical Capacity,
Ethylene is the largest Million Metric Tons
225
of the basic chemical 200
building blocks 175
Ethylene, propylene 150
and methanol are 125
expanding at a rapid 100
75
pacedriven by shale
50
in North America 25
Benzene and chlorine 0
showing more modest 2010 2015 2020
Benzene Chlorine
growth Propylene Methanol

8
Ethylene, Methanol and Propylene
Expanding At A Rapid Pace
Basic Chemical Capacity,
2020 Global Capacity: 225
Million Metric Tons

Ethylene: 200
175
200 Million Tons 150
Methanol: 125
100
160 Million Tons
75
Propylene: 50
140 Million Tons 25
0
2010 2015 2020
Benzene Chlorine
Propylene Methanol

9
Demand for Basic Chemicals Driven By
Durable/Non-durable Goods

Strong economic growth


supports basic chemical
demand growth
Modest growth in 2012/13
suggesting lower
consumer spending
Emerging markets are
driving tomorrows demand
growth
China dynamics are
changing, but remains
critical to most markets

10
The Rise of the Emerging Market Consumer

The share of Global GDP Ratio of Domestic Consumption


related to consumption is to Global
converging in noted markets
Emerging markets share will
match that of U.S. & Europe
within the next 7 years
Message to producers is
clear: do not ignore the
absolute size of U.S. and
European market, but for
rapid growth you need to look
to the emerging world GDP

11
11
Production growth continues to be supported
by rapid growth in real demand
Asia and India Basic Chemical and Plastics
Production Change (1990 Base)
600 600
Million Metric Tons
500 500

400 400

300 300

200 200

100 100

0 0
90 95 00 05 10 15 20

12
Challenging economic conditions & threats
of imports continue to weaken outlook
West Europe Basic Chemicals and Plastics
Production Change (1990 Base)
80 80
Million Metric Tons
70 70
60 60
50 50
40 40
30 30
20 20
10 10
0 0
90 95 00 05 10 15 20

13
New capacity is necessary to return this
region to historical production levels
North American Basic Chemicals and Plastics
Production Change (1990 base)
80 Million Metric Tons 80
70 70
60 60
50 50
40 40
30 30
20 20
10 10
0 0
90 95 00 05 10 15 20

14
Capacity Expansions' Driven By Low Cost
Feedstock & Integration Strategy

Cost of production is
closely tied to cost of
hydrocarbon feedstock's
Location of advantaged
feedstock's play key role
in capital investment
decisions
North America prepares
for a surge in capacity
Asia and Middle East
continue to build as
planned

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Hydrocarbon Feedstock Costs:
Key Driver In Chemicals Manufacturing
FCC Propylene Raffinate
Benzene
REFORMER BTX Extraction Toluene
Xylene
Pygas
Benzene
Refinery Naphtha Toluene/Xylene
Gas Oil Heavy Aromatics
C5/C6 Non Aromatics
Propane
Methane/Hydrogen
Ethane
Butane Ethylene
Butadiene
Crude Condensate
Unit Mixed Butylenes
Oil Propylene
Ethylene
Gas
Natural Gas Processing Fuel Oil
Unit SynGas
Steam Methanol Methanol
Reformer Synthesis

16
Brent Crude Oil and USGC Energy &
Feedstock Prices
Constant 2012 US Dollars Per Million Btu
25
Brent Crude
USGC Light Naphtha Forecast
20 Henry Hub Gas

15

10

0
2000 2005 2010 2015 2020

17
World Ethylene Cash Costs 2013 Forecast
US Dollars Per Metric
1400
Ethane cracking advantage
1200
forecast to exceed $600 per ton
1000

800

600

400

200

0
MDE U.S. Canada Europe MDE Asia LPG MDE LPG U.S. NEA SEA
Ethane Ethane Ethane Naphtha Naphtha Naphtha Naphtha Naphtha

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Ethane Cash Cost Advantage Is Significant
and Sustainable
US Dollars Per Ton, Ethylene
1,400
1,200
1,000
800
600
400
200
0
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20
U.S. Ethane WEP Naphtha SEA Naphtha

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Energy Dynamics In North America Are
Changing The Global Landscape
Abundance of New Hydrocarbons: Shale gas
and unconventional oil has ushered in a new era
of hydrocarbon production in North America.
Additional Natural Gas Liquids (NGLs):
Ethane, propane, and butane production to
increase sharply in conjunction with rapid growth
in gas production.

New Competitive Chemical Investments:


To leverage the supply of advantaged
feedstocks, chemical producers have
initiated plans to invest over $20 billion in
new chemical assets and infrastructure

20
China: Scarce in Oil and Gas Reserves, But
Plentiful in Coal
Crude Oil Natural Gas
China has limited 2% 3%
crude and natural
gas reserves, but a
large coal reserve
Majority coal
reserves are in the
west region
Logistic bottleneck
leads to Stranded Coal
95%
coal
Source: China National Bureau of Statistics

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Coal Chemical Product Chains

COAL

Calcium Syn Gas


Carbide

Acetylene Crude Oxalate


Methanol Intermediate
Methanol

MTO/MTP
Acetyl

PVC Ethylene Methanol Ethanol MEG


Propylene
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China Coal Chemicals Projects
A Black Gold Rush Opportunity

State owned, private and


foreign companies all
participating
Numerous projects were
announced however fewer
will be actually built due to:
Tight government
control
High capital cost
Water availability
Carbon emissions and CT Methanol
CTO/MTO
waste disposal issues
CT MEG
CT Ethanol

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Global Chemicals Investment Focused In Three
Regions With Varying Strategies
Strategies & Advantages Will Vary By Region
Or By Country
North America
Surge in new investment driven by
shale oil & gas
Stagnant domestic growth shifts
focus to exports
Middle East
Moderated investment pace
Seeking domestics/regional supply
options along with exports
China
Strong domestic investment
focused on reducing import
dependencies as domestic
demand evolves from re-exports
to domestic needs
Strategies & Advantages Will Vary By Region
Or By Country
Brazil
Surge in demand near term as Brazil
prepares for World Cup and Olympic
Games
Pause in the COMPERJ investment as
they assess Americas landscape
Europe
Defensive assessment of assets and
future position.
Seeking to add competitive feedstocks,
idle high-cost capacity
India
Domestic focus, with investments at
Jamnagar. High energy is an issue.
Remain short of key products like PVC
Consistent And Strong Growth In Asia Seen
In Ethylene Investments
Million Metric Tons, Ethylene Regional Ethylene Capacity Growth
30.0

25.0

20.0

15.0

10.0

5.0

0.0
North Europe Middle East Asia Pacific Others
America
1980 - 1990 1990 - 2000 2000 - 2010 2010 - 2020
Consistent And Strong Growth In Asia Seen
in Ethylene Investments
Percent of Total Capacity Growth Regional Ethylene Capacity Growth
50%

40%

30%

20%

10%

0%
1980 - 1990 1990 - 2000 2000 - 2010 2010 - 2020
North America Europe Middle East Asia Pacific Others
North America Ethylene Capacity
Expansions From 2012 through 2020
Company Location -000- Metric Tons
BASF/Total Port Arthur. TX 170
ChevronPhillips Cedar Bayou, TX 1,500
Dow Chemical Taft & Freeport 1886
Equistar All Locations 862
ExxonMobil Baytown, TX 1,500
Formosa Point Comfort, TX 1,150
Ineos Chocolate Bayou 120
Sasol Lake Charles, LA 1,400
Westlake All Locations 280
Williams Geismar, LA 300
Braskem Idesa Mexico 1,000
Nova Sarnia 250
OxyChem Ingleside, TX 550
Shell Chemical Monaca, PA 1,000

Announced but not firm First new unit to start-up Total ~ 12,000

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North America Ethylene Capacity
Forecast To Reach 45 Million Metric Tons
Million Metric Tons,
50
45
40
35
30
25
20 After declining to 33 million tons in
15 2010, ethylene capacity in North
10 America could reach 45 million tons by
5 the year 2020
0
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Coal Chemicals Will Play A Bigger Roles in
Chinas Chemical Supply
Coal-based and
Million Metric Tons Percent, Coal-Based
Non Coal-based Capacity
80 30%

60
20%

40

10%
20

0 0%
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Olefins (Non-coal) Olefins (Coal) Olefins (Coal) %
Investment In Capacity Away From Demand
Centers Will Drive Exports Higher

North America returns as a


competitive supplier with increasing
capacity
Accelerating demand growth in
developing regions outpace
capacity growth requiring
increasing imports
Assume low cost Middle East and
North America suppliers grow
market share
Logistics infrastructure investment
must keep pace to support
By 2020, as much as 40% of low cost expanding trade patterns
ethylene capacity will be based in
North America and the Middle East
Tomorrows Global Chemical Market is more
Globally Interconnected
2020 % of Global Production
Trade will continue to as Exports
60%
accelerate, connecting
% Exported, 2020
resource-rich 50%
geographies with high
growth markets 40%

Supply-chain expertise 30%


and well-crafted go-to-
20%
market strategies will
increase in importance 10%
Pressure on high-cost
0%
producers servicing
high-growth markets will
be especially intense
World Ethylene Equivalent Trade

Million Metric Tons


40.0
30.0
Net Exports
20.0
10.0
0.0
-10.0
-20.0
-30.0
Net Imports
-40.0
00 02 04 06 08 10 12 14 16 18 20
N. America West Europe Middle East
Ethylene Derivatives From Ethane Cracking
Will Dominate International Trade
16.5 27
7.6
5.1

6.2 14.5

2010 2015 2020 2025


S. Korea Japan Taiwan

2010 2015 2020 2025


USA Canada
5.0
3.0
Ethylene Net
Equivalent
2010 2015 2020 2025
Exports (million
Saudi Arabia Iran 2010 2015 2020 2025
metric tons)
Qatar Kuwait Singapore Thailand Malaysia
Profit Cycle Dynamics Vary By Feedstock
& Region

Overall market recovery


delayed on slower demand and
acceleration of capacity
Gas-based producers see
steady high margins and no
downturn
Market fundamentals suggest
high-cost producer margins will
struggle; shutdowns likely
Capacity additions likely to be
moderated versus current
forecast; influenced by capital
costs, resource limitations
Cyclicality In The Market Makes Investment
Timing Critical To Sustainable Returns
Dollars Per Metric Ton Global Base Chemicals & Plastics
Weighted Average EBIT
$225
$200
$175
$150
$125
$100
$75
$50
$25
$0
-$25
-$50
85 90 95 00 05 10 15 20
U.S. & West Europe
Integrated Polyethylene Cash Margins
Cents Per Pound Polyethylene Dollars Per Ton
50 1,102
45 992
40 882
35 772
30 661
25 551
20 441
15 331
10 220
5 110
0 0
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20
US Ethane to PE Chain Margin
Trends In Ethylene Are Impacting The
Propylene Supply Scenario

Propylene
On-Purpose production will
continue to rise
Technology related to region
and feedstock
Propane Dehydro increasing
Steam cracker and FCC
supply trends also vary by
region
Demand growth trending
towards ethylene (GDP) due
to higher price relative to
ethylene
BTX Supply In Transition And Impacted By
Many Factors

Benzene
Supply trends complicated
by ethylene, gasoline, and
paraxylene and shifting
environmental regulation
Refinery operations and
renewable fuel trends are
critical to supply
Shale crude oil results in
lower benzene yield
Growth in demand and
capacity migrating to Asia
Conclusions

Improving economic
fundamentals are expected to
enhance pace of demand
growth
Economic Megatrends shift
demand to developing world
at an ever-increasing pace
Unconventional feedstocks
play a larger role in shaping
the global industry
High-cost supply reacts to
more competitive pressure by
stepping up
rationalization/conversion
Conclusions

Supply & demand dislocation


increases need for sound
supply-chain strategies
New competitors slowly
emerge as markets expand
west in China in distinct
products
Unconventional resource
owners enter the stage for
certain product offerings
Level of success defined by
right cost for the right product
for the right market strategies
Thank you!

Mark Eramo
Vice President, Chemical
Insights
IHS Chemical

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