cmai intro 22 lk8 · 2006 plastics processors conference ... 17, 2006 boston, ma, u.s.a. chase...

PET OverviewPET Overview

2006 Plastics Processors Conference2006 Plastics Processors ConferenceAugust 16 August 16 -- 17, 200617, 2006Boston, MA, U.S.A.Boston, MA, U.S.A.

Chase WillettChase WillettDirector Director –– Polyester & Polyester Raw Polyester & Polyester Raw

[email protected] [email protected]

Singapore Shanghai Houston New York London Dusseldorf Dubai

202

2006 Plastics Processors Conference

Asian Demand Grows, But Not Enough!Asian Demand Grows, But Not Enough!

JapanJapan ChinaChina Southeast AsiaSoutheast Asia TaiwanTaiwan KoreaKorea Indian Sub Cont.Indian Sub Cont.CapacityCapacity Net ExportsNet ExportsOp Rate Before TradeOp Rate Before Trade Op Rate After TradeOp Rate After Trade

00

11

22

33

44

55

66

77

88

99

20012001 20022002 20032003 20042004 20052005 20062006 20072007 20082008 20092009 20102010 201120114040

4545

5050

5555

6060

6565

7070

7575

8080

8585Op Rate %Op Rate %Million Metric TonsMillion Metric Tons

• Asia will sustain double digit demand growth.

• Capacity growth will slow post 2006, however, the gap between regional capacity and demand will remain large through the end of the decade.

• Asia will export at cash costs to improve operating rates but new expansion in other regions will diminish trade opportunities.

• Asian product will be available to the world at or near cash cost plus delivery in nearly unlimited quantities.

• Asian cash costs ocean freight, duty and domestic freight will be the cap for pricing worldwide.

203


Europe, no longer the land of opportunity for exporters!

Europe, no longer the land of opportunity for exporters!

West EuropeWest Europe Middle EastMiddle East Central EuropeCentral Europe AfricaAfrica CISCISNet ExportsNet ExportsCapacityCapacity Op Rate After TradeOp Rate After TradeOp Rate Before TradeOp Rate Before Trade

--22

--11

00

11

22

33

44

55

66

77

20012001 20022002 20032003 20042004 20052005 20062006 20072007 20082008 20092009 20102010 2011201100

2020

4040

6060

8080

100100

120120

140140


• Europe will continue to exhibit strong demand growth fueled by Central Europe and beer.

• Central European capacity growth will keep imports level but push regional operating rates down.

• Middle Eastern producers see Europe as their back yard. Europe will become the target market for new expansions in the Middle East toward the end of the decade.

• Producers will experience poor returns as domestic competition keeps prices at or below import parity.

204


Americas Are On A Building SpreeAmericas Are On A Building Spree

U.S.U.S. South AmericaSouth America MexicoMexico CanadaCanadaNet ExportsNet ExportsCapacityCapacity Op Rate Before TradeOp Rate Before Trade Op Rate After TradeOp Rate After Trade

--22

--11

00

11

22

33

44

55

66

77

88

20012001 20022002 20032003 20042004 20052005 20062006 20072007 20082008 20092009 20102010 201120116565

7070

7575

8080

8585

9090

9595


• The Americas will continue to be anchored by the world’s largest market, the U.S.

• North America will continue to sign signs of maturity with relatively slow growth in carbonated soft drink (CSD) balanced by strong growth in water, sports drinks and juices.

• CSD will continue to see some growth from replacement of 12 oz.(355 ml) aluminum beverage cans as aluminum pricing dynamics change and beverage companies recognize higher prices and margins available to clear, re-sealable PET.

• North America will continue to lose export opportunities to South America to Asian product and as capacity in that region grows.

• Increased capacity and competitiveness in the region will keep imports at bay, but at the cost of margins.

205


Capacity Growth Slowing but Not Enough

Capacity Growth Slowing but Not Enough

AmericasAmericas Europe, Middle East, AfricaEurope, Middle East, AfricaAsiaAsia Global Demand GrowthGlobal Demand GrowthExcess CapacityExcess Capacity Operating RateOperating Rate

00

11

22

33

44

55

66

20012001 20022002 20032003 20042004 20052005 20062006 20072007 20082008 20092009 20102010 201120116262

6666

7070

7474

7878

8282

8686

9090Million Metric TonsMillion Metric Tons Percent Operating RatePercent Operating Rate

• Capacity growth will slow globally by mid decade.

• There is an expectation that the Middle East and the Americas may go through a building spree at the end of the decade.

• Over capacity will rule the day until late in the decade at the earliest.

206


0

2

4

6

8

2006 2007 2008

Demand Net ExportsCapacity

0

2

4

6

8

2006 2007 20080

2

4

6

8

2006 2007 2008

Net Imports

SGlobal PET Supply/DemandGlobal PET Supply/DemandMillion Metric Tons

Europe, Middle East & Africa Asia The Americas

• Globally, excess capacity will dominate pricing and margins through most of the forecast period.

• Expansions in all regions and a higher level of competitiveness will limit trade opportunities and growth.

• Asia will be the incremental net exporter with the Americas and Europe the destination.

• The excess capacity in Asia will result in trade flows that level out operating rates globally although Asia will remain the lowest.

207


Americas Capacity IncreasesAmericas Capacity IncreasesIncreases in Capacity / Decreases in Demand

Decreases in Capacity / Increases in Demand

Wellman, USA Q2 2007 130

Starpet, USA Q1 2007 80Invista, Mexico Q1 2007 200DAK, USA Q1 2007 200

Total 1460

Market Growth 2006-2007 583Increase in Net Imports 80

Excess Capacity at beginning of 2005 217 5%Excess Capacity at end of 2006 874 15%

Eastman Q1 2007 350

Net Change in Excess Capacity 657

Thousand Metric TonsThousand Metric Tons

RationalizationsEastman 100Expected Others 200

M&G, Brazil Q4 2006 500

Expected market availability

• From 2006 to 2007 the Americas will be in a rapid expansion mode.

• Nearly 1.5 million metric tons of new capacity will be added in that time period.

• The region grows less than 300 thousand metric tons per year. Without rationalizations or increasing exports, the new expansion will not be consumed for nearly 5 years.

• The market is expected to rationalize at least 300 thousand metric tons over the coming years as limited margins push non-competitive assets out.

• Operating rates will drop into the 70s.

208


Quarterly Balance

0

100

200

300

400

500

600

700

800

900

QTR-1

QTR-2

QTR-3

QTR-4

QTR-1

QTR-2

QTR-3

QTR-4

QTR-1

QTR-2

QTR-3

QTR-4

55

60

65

70

75

80

85

90

95

100

Bottle Grade Resin A-PET/C-PET/Other Total Oper. Rate %Exports Imports Capacity

Operating Rate, %Qtrly Demand,kTons

2005 20072006

U.S. PET Supply/Demand U.S. PET Supply/Demand

• The U.S., with the lion’s hare of the increases will see operating rates drop toward the mid 70s.

• After strong import years in 2005 and 2006 due to the hurricanes in late 2005 and strong gasoline markets in 2006, imports will fall precipitously in 2007.

209


We’re not done yet!We’re not done yet!

Eastman, USA 2009 700

Starpet, USA 2009 200

Thousand Metric TonsThousand Metric Tons

ExpansionExpansion StartupStartup CapacityCapacity TechnologyTechnologyIntegrex (integrated with TPA)

Conventional Non-Integrated

2009 – The Gauntlet Has Been Laid Down2009 – The Gauntlet Has Been Laid Down

• At least two producers have announced placeholders for 2009.

• Eastman plans a 700 thousand metric ton PET plant with the equivalent quantity of terephthalic acid in 2009. This plant is not yet been put before their board. The plant will utilize their new Integrex technology which they claim has significant capital and operating cost savings from conventional integrated facilities. This expansion will most likely be located in the Gulf Coast region to minimize raw material transportation costs.

• Starpet is planning a 200 thousand metric ton conventional non-integrated PET facility with likely location in the U.S. Gulf Coast in 2009.

210


Raw Material UtilizationPer Unit of PET

Raw Material UtilizationPer Unit of PET

Paraxylene (PX)

0.58O2

Terephthalic Acid (PTA)

+0.86

Polyethylene Terephthalate

(PET)

+Ethylene Glycol

(MEG or EG)0.36

Ethylene0.22

O2+ + H2O

EthyleneOxide (EO)

+ H2O

• This slide represents the basic raw flow for polyethylene terephthalate (PET).

• The units represent the number of pounds or tons of that feedstock needed to make a pound or ton of PET. For instance it takes roughly 0.58 pounds of paraxylene to make one pound of PET. That 0.58 pounds of PX will be oxygenated to make 0.86 pounds of purified terephthalic acid (PTA). This will then be added to 0.36 pounds of mono ethylene glycol (MEG – a key component in antifreeze).

211


p-XYLENE

Petrochemicals have to buy away feedstocks from gasoline and heating fuels…

Petrochemicals have to buy away feedstocks from gasoline and heating fuels…

NaturalGas

GasSeparation

Unit

RefineryCrude

OilReformer

Reformate BTXExtraction

SteamCracker

ButaneHydrogen

Propylene/PP

BTX

Ethylene

ETHYLENE GLYCOL

POLYETHYLENES

ETHYLBENZENE/STYRENE

ETHYLENE DICHLORIDE/PVC

NaphthaGas Oil

EthanePropaneButane

TOLUENE

m-XYLENE

BENZENE

o-XYLENE

XYLENES

PTA/DMT PETPET

PIA

Methane

Octane

Heating Fuel

• This is a simplified view of how the raw materials for PET fit into the overall refinery scheme.

• The important thing to note is that the paraxylene side of the molecule comes from the reformer section of the refinery where the primary function is upgrading low octane products to high octane products for gasoline blending. Therefore, PX production competes with gasoline blending for feedstocks.

• The mono ethylene glycol side of the molecule can come from either the natural gas side or from the crude oil side through naphtha. In N. America glycol production is mixed between ethane (natural gas) and naphtha with a slight edge to ethane. In Europe and Asia, production is predominantly from naphtha. In the Middle East production is primarily from ethane based on cheap natural gas that was previously flared.

• Naphtha is a basic building block for both the chemical industry and gasoline blending.

• Refineries in the Western world are built primarily for transportation and heating fuels with petrochemicals as minor products. Petrochemicals represent less than 7 percent of U.S. refinery production.

• Refineries in Asia focus somewhat more on petrochemicals due to lower gasoline demand, but even in Asia transportation and heating fuels make up the majority of refinery production.

212


Tight RefiningTight Refining--U.S. Refining OperationsU.S. Refining Operations--

Capacity Oper Rate

15.0

15.5

16.0

16.5

17.0

17.5

91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 0675

80

85

90

95

100Operating Rate %Million Barrels/Day)

Effective Oper Rate

• U.S. and global refining have been running very tight over the past several years as demand growth has overwhelmed the existing refining base and expansions.

• U.S. refining has run particularly tight since the mid 90s with expansions only keeping up with demand.

• The hurricanes of 2005 limited operations at several refineries in the U.S. Gulf Coast with residual effects into 2006. Effective operating rates for refineries in 2005/2006 were 100 percent after accounting for the outages.

• As refinery operations get tight, refiners maximize production for high margin products where they have strong pricing power such as gasoline and minimize production of low margin products such as petrochemicals.

213


Alternatives and Drivers Vary Between Regions

Alternatives and Drivers Vary Between Regions

US Asia

Approx. Refining Capacity (mbpd)* 17.5 25

Gasoline Consumption (mbpd) 9 4

**MMT = million metric tons

PX Production (MMT** per annum) 3.9 16.4

PX Consumption as a percent of gasoline demand >1% 4%

*mbpd = million 42 gallon barrels per day

In U.S. refining, gasoline is king. PX is more significant to Asian refiners than to their U.S. counterparts and is less impacted by gasolinealternatives. Asian producers are not “stealing” molecules from their gasoline pool to make PX.

• The U.S. and Asian paraxylene markets can have different drivers at different times of the year.

• During second quarter and early third quarter in the U.S. with strong gasoline demand, octane is king in the refinery. Paraxylene with an octane number exceeding 105 and good blending characteristics such as low volatility is a premium blending stock (actually, PX is rarely blended back into gasoline – it is simply left in the reformate, resulting in less aromatics/PX available for the chemical industry).

• U.S. PX prices tend to rise with rising gasoline prices and often in disproportion to movements in Asian markets. This is problematic to U.S. paraxylene consumers who producer PTA and polyester in direct competition with imported polyester from Asia.

• Asia, with a dramatically smaller gasoline market does not have the same pressure from octane. Asian markets tend to be more impacted by naphtha prices which tend to be more linked to crude oil.

• With tight refining in the U.S. the gasoline season disparity between the U.S. and Asia has become large in the past couple of years. We are likely to continue to see this disparity until global refining capacity goes long in 2009 and beyond.

214


Raw Material Regional DifferencesRaw Material Regional DifferencesUS Asia

PX

PTA

Mono Ethylene Glycol (MEG)

Driver Octane/Asian movement

Impact of spot market

Minimal/fully contracted

Advantage

Driver •US PX Contract•minimal competition•formula price

Impact of spot market

•None/fully contracted

Naphtha/Spot DemandDominant

•Spot PX/Spot Demand•highly competitive

Dominant

Advantage

Globally competitive

• On top of the differences in alternative values from the refineries, the regional markets can have other differences in drivers.

• In general, the Asian market tends to be much more focused on spot values. While there are contract volumes and prices for PX and PTA in Asia, typically these contracts, especially the newer ones will have a portion of the volume priced on the monthly spot average. In same cases the spot pricing component of the supply contract can be up to 50 percent. At times, the Asian contract price (ACP) for PX will settle well below then spot numbers with producers receiving relief on contract priced volumes in return.

• As a result, the contract prices in the region do not tend to carry as much weight in the pricing dynamics of the downstream products. Spot raw material pricing tends to rule the day with downstream polyester pricing.

• In PTA, the Asian region is particularly advantaged versus the U.S. The Asian PTA market is oversupplied with many competitors and pricing has tended to be close to cash costs based on spot PX.

• N. America on the other hand has only three merchant suppliers and operates off a formula price based on the U.S. contract PX price, energy, and a built in margin. At times the disadvantage for U.S. PTA consumers can exceed $250 per ton versus their Asian competition, thus subsidizing the freight costs for Asian exporters.

• It is likely that the U.S. formula price for PTA will be negotiated down in the future, however it will likely remain at a premium to Asia.

215


R2= 0.7912R2= 0.4811

R2= 0.8581

R2= 0.7782

1,060

1,080

1,100

1,120

1,140

1,160

1,180

1,200

800 850 900 950 1,000 1,050 1,100 1,150

Asian PET Spot $/ton

Asian Polyester Raws $/ton

Asian Spot vs Asian Contract PX/MEG Asian Spot PET vs Asian Spot PX/MEGAsian Spot PET vs. Asian Spot PTA/MEG Asian Spot PET vs. Asian Contract PTA/MEG

2006 YTD

Asian PET Pricing DriversAsian PET Pricing Drivers

• The chart above shows the relationship between Asian PET prices and the various raw material prices in the market place.

• The high R squared for the Asian spot PET vs. Asian spot PTA/MEG data set indicates a strong correlation between Asian spot PET prices and Asian spot PTA and spot MEG prices.

216


0200400600800

1,0001,2001,4001,6001,8002,000

Jan-05 Apr-05 Jul-05 Oct-05 Jan-06 Apr-06 Jul-06

Dollars per Ton

Asian Spot PX/MEG Combined Cost Asian Spot PTA/MEG Combined CostAsian Spot PET Price Asian Spot PET - PX/MEG Asian Spot PET - PTA/MEGUS PET Price US PET - Asia Spot PTA/MEG US PET - Asia Spot PX/MEG

PET Prices Vs. Asian CostsPET Prices Vs. Asian Costs

• Not only are the Asian PET prices strongly correlated to Asian spot raw materials, but U.S. PET prices in order to be competitive with Asian imports have become strongly correlated to Asian spot raw material prices.

• Since the first of the year, the spreads for U.S. and Asian PET price have been fairly flat over Asian spot raws.

217


Regional Cost DriversRegional Cost Drivers

0200400600800

100012001400160018002000

Aug-05 Nov-05 Feb-06 May-060

50

100

150

200

250

300

US Octane Value Asian Naphtha Asian Spot PET PriceUS PET Price US PTA/MEG - Asia PTA/MEG

Cost Diff. $/tonPrices/Cost s $/ton

• As discussed in the previous slides, Asia tends to be driven more by naphtha/crude oil prices than gasoline.

• The above chart shows the Asian PET price movement with Asian naphtha prices.

• The Chart also shows the U.S. octane value for paraxylene in the blue area.

• The green line shows the difference in raw material costs (PTA and MEG) between the regions. This is the U.S. cost minus the Asian cost.

• As gasoline pressure grows and gains margin over naphtha, the U.S. cost structure becomes more disadvantaged versus Asia.

• It is worth noting that despite the strong cost pressure in the U.S., pricing for U.S. PET tracks closely with Asian PET. When it does not, imports start to flood in.

218


0200400600800

10001200140016001800

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011-50

0

50

100

150

200

250

US Octane Value Asian NaphthaAsian Spot PET Price US PET PriceUS PTA/MEG - Asia PTA/MEG

Cost Diff. Prices/Costs $/ton

Regional Cost DriversRegional Cost Drivers

• In the annual view of the previous chart, we are showing our prediction that the differential in cost base between the regions will still be larger than historical but will begin to trail off after 2006.

• Some of this will come from lower gasoline pressure in the future and gasoline markets in the U.S. become accustomed to some of the recent changes.

• A large part of the change is the assumption that the U.S. PTA formula price will be adjusted downward over the next few years.

219


0

200

400

600

800

1000

1200

1400

1600

1800

2005 2006 2007 2008 2009 2010

Dollars Per Ton

PX MEG PTA Conv & Margin Asian PET Conv & MarginU.S. Freight

DutyU.S. PET Cash Conv & DeliveryPET Margin

Asia Delivered to The USUS Delivered Price/Economics

Asian Delivered Cash Costs Versus U.S. Price/Costs

Asian Delivered Cash Costs Versus U.S. Price/Costs

• As shown in the supply demand charts, Asia is grossly oversupplied and therefore will ship almost unlimited quantities to other regions at or near cash costs.

• The chart above represents the component costs of Asian PET delivered into the U.S. market versus the component cost of U.S. PET delivered to the same location.

• 2005 was an anomaly due to the extreme shortage associated with the hurricanes.

• In 2006 we are seeing U.S. pricing limited by the landed cost of Asia product despite an extreme disparity in raw material cost structure that disadvantages the U.S.

• U.S. margins will continue to be limited by the length in Asia and the excess capacity in this market moving forward.

• With our assumption that the PTA formula will be adjusted downward, some margin will return to U.S. producers in 2008 and beyond but pricing will still be capped by Asian cash costs delivered.

220


-

10

20

30

40

50

60

70

Jan-05 Apr-05 Jul-05 Oct-05 Jan-06 Apr-06

-000 Metric TonsThailand South KoreaIndonesia IndiaTaiwan ChinaOther Asia

Through May 2006U.S. PET Resin Imports from AsiaU.S. PET Resin Imports from Asia

• U.S. imports of Asian PET have been on the rise since late 2004. The shortage of domestic resin in the hurricanes attracted in record volumes of Asian product.

• Despite dropping prices to meet Asian product nearly head on, total imports of Asian product have held relatively steady at 25 to 30 thousand tons per month, nearly 15% of the U.S. demand.

• Consumers see Asian imports as a credible threat to keep U.S. domestic prices in line.

221


(100)

(80)

(60)

(40)

(20)

-

20

40

Apr-04

Jun-04

Aug-04

Oct-04

Dec-04

Feb-05

Apr-05

Jun-05

Aug-05

Oct-05

Dec-05

Feb-06

Apr-06

Mexico Canada AsiaEurope South America Middle East & AfricaNet Exports

-000- Metric Tons Through May 2006 - Annualized

Net Imports

Net Exports

U.S. PET Resin Net TradeU.S. PET Resin Net Trade

• Net trade in the U.S. has been on the decline since 2004 with losses of exports to South American and Europe due to a lack of competitiveness with Asian resin.

• Imports as discussed above have been on the rise keeping the U.S. at a net import position.

222


(700)

(600)

(500)

(400)

(300)

(200)

(100)

-

100

200

300

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011Canada Mexico AsiaEurope South America Middle East & AfricaNet Trade

-000- Metric Tons Through May 2006 - Annualized

Net Imports

Net Exports

U.S. PET Resin Net TradeU.S. PET Resin Net Trade

• 2006 should be the last banner year for imports.

• Better economics in the U.S. resulting from forecasted lower PTA costs as well as increased competition from expansions in this region will drive out some of the imports over the next several years.

223


-500

0

500

1000

1500

2000

Jan-05

Apr-05

Jul-05

Oct-05

Jan-06

Apr-06

Jul-06

Oct-06

Jan-07

Apr-07

Jul-07

Oct-07

PX Comp PTA CompMEG Comp Conv Costs & Oth RawPET Price PET MarginAsian Imports - Delivered

Dollars per TonUnited States PET EconomicsUnited States PET Economics

• While production volume will improve in the U.S., margins are unlikely to do so anytime soon.

• Pricing should peak in the U.S. by late August and begin a slight downturn for the year as some of the pressure comes off of octane.

• Length in the U.S. market and the threat of imports will likely keep margins very low for the rest of the year and into 2007.

• We do expect another gasoline related cost peak in Q2 and early Q3 next year.

224


-200

0

200

400

600

800

1000

1200

1400

1600

1800

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011PX Comp PTA CompMEG Comp Conv Costs & Oth RawContract Price MarginAsian Dlvd Cost

Dollars per TonUnited States PET EconomicsUnited States PET Economics

• Longer term U.S. margins will return as the cost structure versus Asia improves.

• In addition, global improvements in operating rates should take some pressure off late in the decade.

• Pricing will still be close to Asian cash costs delivered otherwise imports will flow.

225


ConclusionsConclusions• PET continues to show

strong global growth• Asian product and cash

costs will set the tone for pricing worldwide.

• Raw material disconnects will threaten margins in the U.S. through 2007.

• Producer margins should see some recovery in late decade.

226

cmai intro 22 lk8 · 2006 plastics processors conference ... 17, 2006 boston, ma, u.s.a. chase...

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