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Joseph Chang Editor

Joseph Chang Editor

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Joseph Chang Editor

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  1. Chemical Cycles and the Outlook for 2006ISM Chemical GroupMid-Winter Conference, Las VegasFebruary 24, 2006 Joseph Chang Editor

  2. Cycle upturn will continue in full swing Mostly true Further profit gains for commodity group, but easy money’s been made in stocks On the money! Specialty chemicals are next to advance—both in profitability and stock prices 20-to-life! Forecasts from February 2005 Forecasts: Verdict:

  3. Bullish CaseThe Best is Yet to Come! • Supply/demand to stay tight after years of underinvestment • Steady demand growth with consensus US GDP forecasts of 3.4% for 2006 • Gulf Coast rebuilding • Fed rate hikes to halt • Energy prices to stabilize or fall • Low inventories • Middle East capacity delays • Large number of planned maintenance outages

  4. Bearish CaseThe Party’s Over! • New global capacity coming on in 2006 in China and Iran • Capacity creep to take advantage of high prices • Large price gap between US and Asian spot prices • Shifting global trade balance to topple upcycle • Declining US exports, increasing imports • US supply/demand to normalize after Hurricane-related disruptions

  5. Wall Street Crystal Ball Source: First Call *Prices as of close of Jan 12, 2006 **Based on estimated 2006 EPS

  6. Psychology is Key to Predicting Cycles • Cycles derived from human nature (FEAR vs. GREED) • Contrarian approach needed

  7. Many analysts expect the next peak to occur in 2002 or 2003, and be predominantly monomer driver. By this time NOVA Chemicals will have approximately 2.5 times the polymer production capacity we had in 1995. Our growth, through construction and acquisition, has been timed to take full advantage of the expected peak in the earnings cycle. Prior Projections in 2000Why the Peak Never Came Source: Nova Chemicals

  8. Psychological Profile 2003Harbinger of the peak to come! Contrasting 2003 with 2000 • Much less talk about the coming peak • WALL STREET CUTS PEAK FORECASTS • High oil and natural gas costs • Companies struggling financially • Lack of North American projects in the works, low level of capital expenditures (Slide from CMR Speech 9/3/03)

  9. Capital Spending as % of DepreciationMajor/Commodity Chemicals Source: CMR

  10. Steel Industry CAPX as % of Depreciation

  11. US Steel (X) Source: Yahoo! Finance

  12. Dour Mood in Mid-2003 “In the previous ethylene trough of 1991 to 1992 and the peak of 1995 to 1996, US chemicals have been fortunate enough to enjoy a favorable oil to natural gas price ratio. Those lucky days seem to have gone. Higher ethylene feedstocks could mean that cash margins at the next cyclical peak are lower than in previous peaks.” June 2003 “The US is the highest cost ethylene producing region in the world at current natural gas price levels. Directionally, we expect the North American petrochemicals industry to become a high-cost globally uncompetitive producer serving a large local market.” June 2003 Source: CMR

  13. Bearish Forecasts Jun 2003 Nova Chemicals (NCX) Source: Yahoo! Finance

  14. Early 2005: LONGER AND STRONGER “We continue to believe that staggered ethylene/chlor-alkali/styrenic cycles will create a LONGER, STRONGER peak.” January 28, 2005 “We see a LONGER, STRONGER ethylene peak extending into 2007.” December 10, 2004 “We expect the coming peak to be LONGER and STRONGER, reminiscent of the 1988-89 peak.” January 6, 2005 Source: CMR

  15. Bullish Forecasts Dec-Jan 2005 Nova Chemicals (NCX) Source: Yahoo! Finance

  16. Conclusion: Upcycle Intact! • Wall Street bulls and bears battle it out • Investors skeptical • Valuations appear low • Companies positive, BUT CAPX REMAINS LOW • Healthy amount of fear • Specialty chemical prices and stocks to move higher along with commodities

  17. Thank You! Joseph Chang Editor ICIS – Chemical Market Reporter 360 Park Avenue South, 12th Floor New York, NY 10010 T: 212-791-4224 E: