market drivers, supply and demand for pvc

© 2015 IHS

Presentation

ihs.com

IHS

Market Drivers, Supply and Demand for PVC North America

Ana Gamboa, Chlor-Alkali & Vinyls Assoc. Director, +1 281 752 3291, [email protected]

April 2015

CHEMICAL

Contents

© 2015 IHS

ENERGY AND ECONOMY OVERVIEW

ETHYLENE FEEDSTOCK

GLOBAL PVC MARKET

US PVC MARKET UPDATE

HOUSING TRENDS IN THE US

FINISHED PRODUCTS TRADE

OUTLOOK

2

© 2015 IHS

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Economy and Energy

6

© 2015 IHS

The US economic expansion will continue • Accelerations in consumer spending and homebuilding, along with continued

robust capital spending, will support growth.

• As the largest net importer of crude oil, the United States is a beneficiary of lower oil prices, but oil industry investment will be cut in 2015.

• Consumers will boost spending in response to declining gasoline prices and gains in employment, real disposable income, and net worth.

• The recovery in homebuilding will gain momentum as labor markets improve and credit standards ease.

• Interest rates will rise significantly over the next three years as monetary accommodation is withdrawn. The petrochemical industry is exposed to a global market.

7

© 2015 IHS

US economic growth by sector

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Real GDP and its components

Percent change 2014 2015 2016

Real GDP 2.4 3.1 2.7

Consumption 2.5 3.4 3.0

Residential investment 1.6 11.1 11.3

Business fixed investment 6.3 4.8 5.4

Federal government -2.0 -0.3 -0.4

State & local government 0.9 1.2 0.9

Exports 3.2 3.9 3.3

Imports 3.8 5.3 5.6

Source: IHS © 2015 IHS

© 2015 IHS

Energy: Global Crude / North American NG

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0

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2020

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WTI Crude Brent Crude Henry Hub Gas

Natural gas vs oil price differential will recover


Con

stan

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2 D

olla

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© 2015 IHS

Regional Energy Chain Flows

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China Coal Carbide Acetylene Coal Electricity Chlor-Alkali VCM PVC

North America & Middle East Natural Gas Ethane Ethylene Natural Gas Electricity Chlor-Alkali EDC VCM PVC

Most of the World Oil Naphtha Ethylene Oil valued energy Electricity Chlor-Alkali EDC VCM PVC Pipe/Siding &

Other

Fabricated Products

© 2015 IHS

The Great Deflation Drives Naphtha Costs Down

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0

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00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18

NAM Ethane WEP Naphtha SEA Naphtha

Annual Regional Ethylene Cash Costs


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US – Ethylene Capacity Integration

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(4,000)

(2,000)

----

2,000

4,000

6,000

8,000

10,000

12,000

2012 2013 2014 2015 2016 2017 2018 2019 2020Net Feeds New Ethylene Capacity New Ethylene Consuming Capacity

Ethylene Merchant Market is Difference between the two lines


Thou

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© 2015 IHS

Global Ethylene Prices On Course With Energy

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NAM Ethylene Avg. Acq WEP Ethylene Contract Pipeline NEA Spot CFR NE Asia

North American Ethylene Price Remains Set by WEP and NEA


US

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Chlorine

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© 2015 IHS

The Chlorine Chemistry

• Discovered in 1774 by Carl W. Scheele

• Is an element on the periodic table.

• Named after the Greek word ‘chloros’,

meaning green-yellow.

• Produced by electrolysis of brine solution

with large amount of electricity.

• Major end uses: as an element or

intermediate for producing organic

molecules such as PVC.

Chlorine

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© 2015 IHS

Growth 4.2%

The Boom and Bust Of The Chlorine Cycle

Global Demand

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30

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90 92 94 96 98 00 02 04 06 08 10 12 14 16 18

Decline 1.0%

Growth hh3.4%

Decline -

c ece-

eee2.0%

Decline - -2.6%

Growth 4.3%

Gro th 4 2%%%GGrowtthh 4%43 %%

2.0%%%

G tth

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Chlorine Annual Demand Growth Pattern

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© 2015 IHS

How Has World Demand Changed ?

Vinyls 34%

Organics 20%

Chlorinated Intermediates

7%

Inorganics 2%

Pulp & Paper 2%

Water Treatment 7%

Others 28%

2014

Disinfectant 65%

Industrial Applications

30%

Others 5%

1914

Demand < 1.0 Million Tons

Demand = 68 Million Tons

54%

Durable goods

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© 2015 IHS

Overcapacity

Rebalancing

Revival

US Revival Supported By Energy Advantage

(0.8)

(0.4)

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0.8

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00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19

Capacity ChangesSource: IHS © 2015 IHS

US Chlor-Alkali Capacity Changes

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© 2015 IHS

Bringing It All Together

• North America still stands out as low cost producing region.

• On average, Northeast Asia and West Europe have cash cost above North American producers.

• China position in the middle, marginally lower than average for Northeast Asia.

0 100 200 300U

SAW

EPN

EA (e

xclu

ding

Chi

na)

Chi

na

2014 (Dollars per ECU Metric Ton)

Regional ECU Cost Position


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© 2015 IHS

Chlorine Take-Aways

• Chlorine demand growth at trend level amid slowing expansion.

• Rebalancing working its way: North America is still in good position, West Europe should look better in due course, Asia still struggle to get into position

• Beginning of margins recovery for all regions.

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Polyvinyl Chloride

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© 2015 IHS

Global PVC Demand Trend

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0.20

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09 10 11 12 13 14 15 16 17 18 19China Rest of World Ratio of China against Rest of the World

China Still a Big Driver for PVC Demand


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Regional PVC Consumption Per Capita

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2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019North America West Europe South America India China World

China Increasing Consumption of PVC


KG

Per

Cap

ita

© 2015 IHS 24

Global PVC: Planned Capacity Additions

Capacity Expansions

Producer Timing Capacity (-000- MT)

Many in China 2015 1257

RusVinyl 2015 256

Shintech 2016 300

Trust Chem Ind. 2016 200


-1.0

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2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

North America Northeast Asia ROW

Hypothetical NAM Hypothetical Europe

PVC Global Capacity Expansions


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© 2015 IHS 25

Main Regional PVC Issues – Short Term

• West Europe • Tight PVC supply due to

operational constraints.

• Underlying demand is better.

• Export netbacks are attractive as a result of lower ethylene.

• Annual demand growth rate of ~1%.

• Asia • Strong demand

recovery in India.

• Sluggish demand in the rest of Asia.

• Market on an upward trend but losing momentum.

• Chinese carbide-based PVC exports will re-emerge when price recovers.

• North America • Announced price

increases for Q1 and Q2.

• Producers reducing exports to supply their domestic customers.

• Domestic demand looks positive for the next several years.

• Adequate ethylene supply restored.

© 2015 IHS 26

Currency Appreciation Plus Energy Swings Can Change the Competitive Landscape

400

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Chart Title

North America West Europe * Northeast Asia China Cash Cost (Acetylene based)

*NEA excludes China

2015 Regional PVC Cash Costs – Chlor-Alkali Integrated Asset Sharing Method


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© 2015 IHS

Regional PVC Cash Costs Converge in 2015

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09 10 11 12 13 14 15 16 17 18 19North America West Europe Northeast Asia

*NEA excludes China

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Average Regional PVC Cash Costs Will Follow Energy Trends

© 2015 IHS

PVC Margins Get a Boost

© 2015 IHS, Inc. No portion of this presentation may be reproduced, reused, or otherwise distributed in any form without prior written consent.

-100

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09 10 11 12 13 14 15 16 17 18 19NAM Margin WEP Margin NEA Margin

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Europe and Northeast Asia Margins Improve in the Long Term

© 2015 IHS

Global PVC Net Trade

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-1,5

57

-2,1

46

-2,3

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AFR&MDE

241 48

3

25

EUR -3

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-730

-976

SAM

1,74

5 2,21

1 3,10

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NAM

-853

-1,5

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-2,3

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ISC

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NEA

Net Trade Flows

2009 2014 2019 Thousand Metric Tons

© 2015 IHS

There is Domestic Demand Growth Potential in North America For PVC

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0.50

0.55

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0.75

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0.95

1.00

J F M A M J J A S O N D

Bill

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Poun

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5 yr min-max range 2013 2014 2015

US & Canada PVC Seasonal Domestic Demand


© 2015 IHS

PVC Demand by Conversion Process

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Calendering 7%

Coatings 3%

Wire & Cable 4%

Siding 8%

Rigid Pipe & Tubing 44%

Windows & Doors 4%

Resellers & Compounders

15%

All Others 15%

YTD February Domestic Demand = 1.7 Billion Pounds

US & Canada PVC End Use Demand - YTD February 2015


© 2015 IHS

North America PVC By The Numbers

US & Canada PVC Scoreboard

2013-2015

(Million Pounds)

Forecast % Change

Market Factor 2013 2014 2015 13-14 14-15

Capacity 17,730 17,831 17,979 0.6 0.8

Supply* 15,560 15,214 15,653 (2.2) 2.9

Domestic Demand 10,248 10,516 10,823 2.6 2.9

Export Sales 5,275 4,739 4,830 (10.2) 1.9

Total Sales 15,523 15,254 15,653 (1.7) 2.6

Operating Rate, % 86.7 84.3 86.1

* Includes Imports

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© 2015 IHS

North America: US Housing Market In Recovery

US Housing Market Scoreboard

Feb-15 Jan-15 Feb-14 % Change

M/M Y/Y

Thousand Units, SAAR Housing Starts 897 1,081 928 (17.0) (3.3)

Building Permits 1,092 1,060 1,014 3.0 7.7

Housing Completions 850 986 866 (13.8) (1.8)

Million US$, SAAR

Total Construction Spending 967,170 967,930 947,088 (0.1) 2.1

Private Residential Construction 349,852 350,469 357,267 (0.2) (2.1)

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Source: US Census Bureau © 2015 IHS

© 2015 IHS

The Traditional Demand Pattern Strengthens

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-4.0

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93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18

Wire/Cable, Calendaring, Coating GDP

PVC Demand into Wire/Cable, Calendering & Coating vs. GDP


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Poun

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DP

© 2015 IHS

Finished Products Trade Trends

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US Imports for PVC Footwear


Mill

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Pairs

© 2015 IHS

Textile Imports Compete With Domestic Product

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US Imports for Textile Fabric Coated with PVC


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© 2015 IHS

But Not In Every Buying Sector…

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US Imports for PVC Handbags


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© 2015 IHS

Other Finished Product Import Demand

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US Imports for PVC Film/ Sheet with Plasticizer


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© 2015 IHS 39

High Correlation Between Crude Oil & Ethylene

R² = 0.8083

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NEA Ethylene vs WTI Crude Oil Correlation


WTI Crude Prices($/Barrel)

Ethy

lene

Spo

t Pric

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/MT)

)

R² = 0.6286

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NAM Ethylene vs WTI Crude Oil Correlation


WTI Crude Oil ($/Barrel)

Ethy

lene

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/MT)

© 2015 IHS 40

The Correlation Dilutes Downstream in PVC

R² = 0.6991

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NEA PVC vs WTI Crude Oil Correlation


WTI Crude Prices($/Barrel)

PVC

Spo

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/MT)

R² = 0.2056

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NAM PVC vs WTI Correlation


WTI Crude Oil ($/Barrel)

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© 2015 IHS

What Can We Expect For The Future? Regional Netback Comparison After Discounts and Delivery

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NEA Spot NAM Contract-Market WEP Contract-Market

Annual Price Forecast Annual PVC Price Forecast


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© 2015 IHS

North America PVC Resin Outlook

Rest of 2015 • Stable ethylene market ahead.

• Supply/demand fundamentals to play key role in price negotiations.

• Resin producers will try to keep PVC market balanced with exports.

• Continued strength anticipated in the housing market.

2016 • Increasing cash cost for ethylene may pressure PVC prices through the year.

• Supply/demand fundamentals to play key role in price negotiations.

• New PVC capacity coming on line.

• Continued strength anticipated in the US housing market.

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© 2015 IHS 43

Key Take Aways

• North America advantaged cash cost position continues for PVC, however currency appreciation in combination with the energy swing have changed the competitive landscape in the short term.

• Ethylene availability is key for vinyl capacity expansions in the future for non integrated producers.

• Domestic demand in North America will continue to grow hand in hand with activity mainly in the construction market.

PVC Demand in North America is Doing Better Than Before

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