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North America Light Olefins Market Review

North America Light Olefins Market Review. Presented To Petrochemical Feedstock Association of the Americas November 8-10, 2006 Austin, Texas.

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North America Light Olefins Market Review

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  1. North AmericaLight Olefins Market Review Presented To Petrochemical Feedstock Association of the Americas November 8-10, 2006 Austin, Texas Mark Eramo Vice President – Olefins CMAI Houston meramo@cmaiglobal.com

  2. LegalStuff • The petrochemical forecasts of prices, costs, margins and supply/demand are based on CMAI analysis. • Energy price forecast data are provided by Purvin & Gertz. • Please use at your own risk!

  3. Light Olefins Market Outlook • View At “50,000 Feet” • Economy & Light Olefins Growth • Energy Impact On Cost • Market Overviews • Supply / Demand / Trade • Utilization • Price & Margin Forecast • Strategic Issues

  4. Retail Sector Consumers Durable / Non-Durable Energy Olefins Production Derivatives Olefins Supply-Chain Dynamics

  5. Global Assembly Line Commodities to Converted Products to Retail Goods… Growth in Chemicals Demand Will Continue to Outpace That of The World Economies Extremely Efficient Supply Chains Have Been Developed – Global Companies and WTO Very Supportive Hydrocarbon Value Labor Cost Improving Standard of Living in China & India Have Significantly Increased Internal Consumption Implies That Current Pace of Additions Could be Absorbed Fairly Quickly Consumer Demand

  6. 2005 U.S. Film & Bag Imports (PE Resin Volume Equivalent) Canada Others 25% 31% Mexico France 4% 1% Israel 1% China South Korea Germany 28% 2% 1% Japan 1% Indonesia Malaysia 4% 2% Approx. 2.7 Billion Pounds of PE Resin

  7. $ / Ton 800 US Olefins/Polyolefins Integrated Cash Margins 700 600 500 400 300 200 100 0 -100 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 The Petrochemical Cycle Will Continue… Light Olefins Polyethylene (HDPE) Polypropylene

  8. The Economy & Light Olefins Growth

  9. World N. America W. Europe SE Asia NE Asia S. America Regional Economic Growth Comparison Most Likely Case Percent Change 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 -1.0 -2.0 -3.0 90 92 94 96 98 00 02 04 06 08 10

  10. 1.98 1.33 1.26 GDP Elasticity World Ethylene GDP Elasticity Elasticity 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

  11. Comparison of U.S. Non-Durable Goods Production Index in the 1990/92 & 2000/03 Recessions Index Source: Federal Reserve Board 125 120 1990/91 Recession 2000/03 Recession 115 Peaks: 110 September 1990 December 1999 105 Sept. ‘06 100 95 90 -6 0 +6 +12 +18 +24 +30 +36 +42 +48 +54 +60 +66 +72 +78 Months Prior Months After Peak to Peak

  12. 2.46 1.76 1.50 World Propylene GDP Elasticity Elasticity 6.0 5.0 4.0 3.0 2.0 1.0 0.0 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11

  13. Energy Impact on Regional Ethylene Economics

  14. North America Energy Price Trends $ / MM Btu Crude/Gas Ratio 14.00 10.00 While the absolute value of energy is higher, the price of natural gas relative to crude oil is what counts from a North America light olefins producer perspective 9.00 12.00 8.00 10.00 7.00 6.00 8.00 5.00 6.00 4.00 3.00 4.00 2.00 2.00 1.00 0.00 0.00 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 Natural Gas Crude (WTI) Crude / Gas Ratio

  15. 2010 Global Ethylene Cash Costs Unit-by-Unit Cost Curve Dollars per Ton 1250 High energy prices increase advantage for Middle East Units Crude Oil Prices 1998 = $15/bbl 2006 = $65/bbl 2010 = $48/bbl 1050 850 2006 650 450 1998 250 50 0 20 40 60 80 100 120 140 160 Cumulative Ethylene Capacity (Million Tons) Total Cash Cost Middle East U.S. Southeast Asia West Europe Western Canada

  16. "The Alberta Advantage" Ethylene Cash Costs Comparison Alberta Ethane Vs U.S.G.C. Ethane Cents Per Pound Dollars Per Ton 45 992 Periods of strong advantage for Forecast 40 882 Western Canada ethane cracking 35 772 30 661 25 551 20 441 15 331 10 220 5 110 0 0 -5 -110 00 A J O 01 A J O 02 A J O 03 A J O 04 A J O 05 A J O 06 A J O 07 A J O Delta USGC Ethane Alberta Ethane

  17. Light Olefins Market Outlook Trends in Supply, Demand, Trade, Utilization, Price & Margins

  18. North America 2006 Ethylene Supply/Demand Production by Feedstock Demand by End-Use PE Ethane 58% 49% Propane Others 15% 5% Others Gas Oil Butane Ethylene Oxide 11% 5% Naphtha 4% EDC EBZ 22% 13% 13% 5% Domestic Demand = 31 Million Metric Tons

  19. North America 2006 PG/CG Propylene Supply/Demand Production by Source Demand by End-Use PP Stm. Crackers 59% 49% Cumene 1% Others Acrylo-nitrile 6% Others Propylene Oxo Alc. FCC/Splitters Acrylic Acid 10% 3% Oxide 6% 48% 12% 6% Domestic Demand = 16 Million Metric Tons

  20. Supply Growth Outlook • Capacity additions slowed in 2003/2004 supporting current recovery • Peak-cycle conditions accelerating investments in Middle East and Asia • Modest additions in other regions • Supply growth by end of decade too much too fast • Acceleration in “On-Purpose” propylene Yanpet Ethylene Plant, Saudi Arabia

  21. World NAM MDE WEP Asia Regional Ethylene Capacity Growth Regional World Million Tons Million Tons 50 200 40 160 30 120 20 80 10 40 0 0 00 01 02 03 04 05 06 07 08 09 10 11 12

  22. 2005 2010 '05 to '10 Major Region Capacity Capacity Delta Middle East / Africa 13,353 29,410 16,057 Asia Pacific 33,200 47,837 14,637 America's 39,295 41,235 1,940 Europe 30,330 31,735 1,405 World Total 116,178 150,217 34,039 Global Ethylene Capacity Growth ( -000- Tons )

  23. Ethylene Investments In The Americas • Western Canada limited by ethane availability. Naphtha cracking based on oil sands development under study • U.S. Gulf Coast priority shifts to feed flexibility, energy efficiency and domestic market focus • Mexico looking to leverage upstream and downstream integration • Trinidad and Venezuela offer “advantaged feedstock” based investments • Brazildriven by upstream and downstream integration, focused on MERCOSUR

  24. Alternative Technologies Proportion 14% 12% 10% 8% 6% Alternative Technologies 4% Alternative Technologies Amount 2% Global Propylene Supply Trends Propylene Supply – Million Tons 90 80 70 60 50 40 30 20 Refineries Steam Crackers 10 0 00 01 02 03 04 05 06 07 08 09 10

  25. KSA Iran Qatar Kuwait UAE Oman Other Middle East Propylene Capacity Million Metric Tons 10 8 6 4 2 0 00 01 02 03 04 05 06 07 08 09 10

  26. Olefins Derivative Trade Dominated By The Middle East • By 2009, ethylene net trade is dominated by the Middle East Region • All other major regions are net importers, including North America • Asia imports, mainly China, remain the largest • Middle East emerges in propylene trade

  27. Middle East Net Equivalent Exports Asia/Pacific Net Equivalent Imports Ethylene Equivalent Trade Surplus From Middle East Million Metric Tons 30 25 20 15 10 5 0 00 01 02 03 04 05 06 07 08 09 10 11 12

  28. North America Ethylene Net Equivalent Trade Million Metric Tons 5.0 Net Exports 4.0 3.0 2.0 1.0 0 -1.0 -2.0 Net Imports -3.0 01 02 03 04 05 06 07 08 09 10 11 Ethylene Vinyls Styrenics Polyethylene Glycol Others

  29. North America Propylene Net Equivalent Trade Million Tons 3.0 Net Exports 2.5 2.0 1.5 1.0 0.5 0 Net Imports -0.5 01 02 03 04 05 06 07 08 09 10 11 Propylene Acrylonitrile Polypropylene Others

  30. Olefins Demand Growth Remains Steady With The Economy • A strong and resilient global economy continues to drive demand growth for light olefins • Ethylene demand growth forecast at ~4% per year • Strongest Growth In PE and EO/EG • Propylene demand growth forecast at ~5% per year • Strongest growth in PP and Cumene

  31. North America Ethylene Demand Forecast Total Demand Growth = -0.7% AAGR 2006-11 Million Metric Tons 40.0 35.0 30.0 25.0 20.0 15.0 10.0 5.0 0.0 01 02 03 04 05 06 07 08 09 10 11 PE Ethylene Oxide EDC EBZ Others Capacity

  32. AAGR 2006-11 Ethane -2.9% Propane 0.1% Butane -0.1% Naphtha 1.9% Ethane Propane Butane Naphtha Gas Oil Others North America Ethylene Production By Feedstock Million Metric Tons - Ethylene Capacity Thousand Barrels per Day 2500 40 2000 35 1500 30 1000 25 500 20 0 15 01 02 03 04 05 06 07 08 09 10 11

  33. 20.0 15.0 10.0 5.0 0.0 01 02 03 04 05 06 07 08 09 10 11 North America PG/CG Propylene Demand Forecast Total Demand Growth = 1.7% AAGR 2006-11 Million Metric Tons Polypropylene Cumene Acrylic Acid Propylene Oxide Acrylonitrile Oxo Alc. Others

  34. Peak-Cycle Conditions Sustained In 2006…What Lies Ahead ? • 2006 developing into peak year in the current cycle • We remain optimistic for 2007 and early 2008 • Massive expansions in 2009 expected to influence 2H-2008 • Trough returns by 2009 and it could be another long one • P:E price ratio’s remain higher for all regions

  35. Regional Ethylene Capacity Additions Million Tons 12.0 * Two-year rolling average 10.0 8.0 6.0 4.0 2.0 0.0 01 02 03 04 05 06 07 08 09 10 11 North America Middle East Southeast Asia West Europe Northeast Asia Others Annual Demand Change*

  36. Operating Rate, % 96 94 92 90 88 86 84 82 80 78 Demand Capacity % Operating Rate Global Ethylene Market Outlook Million Tons 180 160 140 120 100 80 60 40 20 0 1995 1997 1999 2001 2003 2005 2007 2009 2011

  37. Regional & World Ethylene Capacity Utilization Percent 110 105 100 95 90 85 80 75 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 World NAM WEP NEA SEA MDE

  38. North America Ethylene Demand, Capacity & Operating Rate Million Metric Tons % Operating Rate 40.0 110 35.0 105 30.0 100 25.0 95 20.0 90 15.0 85 10.0 80 5.0 75 0.0 70 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 Demand 2.2 / -0.7 * Capacity 0.9 / 0.1 * % Operating Rate *%AAGR 01-06 / %AAGR 06-11

  39. North America Effective Utilization Estimate Ethylene Demand, Capacity & Operating Rate Million Metric Tons % Operating Rate 40.0 110 35.0 105 30.0 100 25.0 95 20.0 90 15.0 85 10.0 80 5.0 75 0.0 70 01 02 03 04 05 06 07 08 09 10 11 Demand 2.1 / -0.7 * Capacity 0.6 / -0.1 * % Operating Rate *%AAGR 01-06 / %AAGR 06-11

  40. U.S. Ethane U.S. Integrated Lt. Naphtha U.S. Cash Margins By Feedstock Type % Operating Rate Dollars Per Ton 800 95 700 90 600 500 85 400 80 300 200 75 100 0 70 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15

  41. Global Annual Ethylene Prices (Constant 2006 Dollars) Dollars Per Ton 1,300 1,200 1,100 1,000 900 800 700 600 500 400 300 200 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 U.S. Contract Price WEP Contract Price SEA CFR Spot Price

  42. Propylene to Ethylene Price Ratios Ratio Ratio 1.5 1.5 Forecast 1.4 1.4 1.3 1.3 1.2 1.2 1.1 1.1 1.0 1.0 0.9 0.9 0.8 0.8 0.7 0.7 0.6 0.6 0.5 0.5 90 92 94 96 98 00 02 04 06 08 10 12 14 Southeast Asia West Europe North America

  43. Market Outlook Conclusions • Strong global demand growth supported by steady economic growth • Peak-cycle conditions well into 2007 and maybe 2008 • Middle East and Asia capacity additionswill outpace demand growth by a sizeable amount • Cycle-trough margin conditions seem unavoidable by 2009/2010 from over-supply • Downturn will be sooner if economy slows

  44. Strategy Implications For North America Olefins Producers

  45. Looking Ahead for North America…Key Issues for Olefins Producers Increase imports of finished goods & derivatives impact domestic growth for monomer North America remains high growth (end-use) market… Product mix becomes essential Price/Margin peak during 2005/07; bottom out in 2009/11 Margin low-point similar to 2001; price low point is higher due to energy base Additional mergers/closures likely and will lend support to supply discipline in trough Crude-To-Gas ratio critical to regional competitiveness

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