PE Market Trend under Stagflation

Qidong Deng

General ManagerXiamen Xiangyu Group Corporation

Xiamen Xiangyu Group Corporation was formed by integrating all logistics subsidiaries of Xiangyu Group

Listed on Shanghai Stock Exchange in August 2011

(Stock code:600057)

Xiangyu serves clients by creating values through logistics

Xiangyu: A purchase/supply management and logistics service provider

Logistics

Resources Services Platform

Plastics

Agro products

Metals

International purchase/allocation

International Multimodal transport

Domestic door-to-door logistics

Financial logistics

Logistic park

Trading market

Docks

Logistics business center

Integrated logistics service platform

Cap

ital f

low

Informa

tion flow

Commerce flow

Commodities purchase/supply & logistics service

Logistics platform (park) development & operation

Xiangyu: Our Line of Business

PP, PE, PVC, EVA, ABS, PS, PTA, MEG, CPL, BTX, SM, PA6, methanol, bisphenol A

Fish meal, palm oil, whey powder, pulp, barley, corn, white sugar

Plates, bars, billets, steel bands, iron ore, metallic silicon, copper, zinc, manganese

Commodities Purchase/SupplyChemicals & plastics

Agro products

Metals

Uncertainties in Macro Economy 2012 Petrochemical Industry Operates at High Costs PE Market Trends Factors Affecting PE Market Conclusion

Contents

• Europe’s debt crisis: now effective solution so far

文华商品指数

160

170

180

190

200

210

220

230

11

-1

11

-4

11

-7

11

-10

12

-1

12

-4

December 21: ECB LTRO 1 (489 billion Euro)

February 27: ECB LTRO 2 (529.5 billion Euro)

Two rounds of capital injection by European Central Bank from 2011 to 2012 helped stabilize the market in Q1;

However, the real economy is still weak in Europe, and Greece is now in the eye of the storm

April 2: Portugal's sovereign rating downgrade

January 14: 9 European countries’ sovereign ratings downgrade

August 6: US sovereign credit rating downgrade

Wenhua CCI

Uncertainties in Macro Economy 2012

• Will the crisis force any easing policy?

Economic position: stimulate economic growth

Economic position:

fiscal austerity

• China’s soft landing – export goes down, consumption not strong enough

Downtrend continues with import/export growth in April

In the Guangzhou Fair Spring 2012, total export was USD 36.03 billion, chain growth and yoy growth

were -4.8% and -2.3%. This was the first time that negative growth was observed since April 2009.

Midterm and short-term orders maturing in six months accounted for 86.3%, and long-term orders only

made up 13.7%. Data from Guangzhou Fair and April import/export confirm the shrinking

external demand.

YoY Growth of Export

YoY Growth of Import

• 2012: stagflation continues…

Monetary policy

turns loose

Real economy

slows down

• Geopolitical factors drive material price high

Average BRENT crude oil maintained at $118/bbl from Jan. to Apr. 2012, yoy

growth 8.4%; average naphtha price $1,024/t, yoy growth 7.9%.

Average BRENT Crude Oil Price

60

70

80

90

100

110

120

130

Jan

Feb

Mar

Apr

May Jun

Jul

Aug

Sep Oct

Nov

Dec

$/bbl

2010 2011 2012

Average Naphtha Price

500600700800

900100011001200

Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep Oct

Nov

Dec

$/t

2010 2011 2012

Petrochemical Industry Operates at High Costs

NaphthaCrude oil

Ethylene

Polyolefin

Plastics

• High cost & weak

demands

• Slow cost transfer

• Profitability

shrinks in every

link of the

industrial chain

LLDPE Price Movement

4000

6000

8000

10000

12000

14000

16000

18000

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

￥ /t

• Long-term trend – lasting bullish PE market comes to an end, and volatility dominates

2003-2008 bullish market

Volatility narrowed after 2010

PE Market Price Trends Analysis

LLDPE Price Movement (RMB)

8500

9000

9500

10000

10500

11000

11500

11-1

11-2

11-3

11-4

11-5

11-6

11-7

11-8

11-9

11-1

0

11-1

1

11-1

2

12-1

12-2

12-3

12-4

12-5

￥ /t

LLDPE(RMB)

60 Days moving average (LLDPE(RMB))

Credit tightening, pessimism about macro economy, weak demand, high stock

US debt crisis

Crude oil price climbed high due to Iran factor

Sinopec reduced utilization to protect price

Several domestic units shut down for maintenance

QE3 expectation failed, commodities prices dropped as a result

• Midterm and short-term trend - fundamentals sustain when macro economy is stable, and PE market will be impacted when macro economy goes down.

LTRO 1 & 2 stabilized market confidence

• Stock – domestic stock level rose due to price markup since April, but stock level at ports is not that high so far.

PE Stock Level in Major Ports1,000t

Shanghai Huangpu Tianjin Total

Factors Affecting PE Market

• Supply overviewExpansion of domestic capacity and supplies dumping to China after the financial crisis

jointly drove China's PE pellet market to grow. The capacity of PE market in 2011 was 17.6

million tons/year, and import dependence was around 42%.

Apparent PE Pellet Supply

0

400

800

1200

1600

2000

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

10,000t

Import

Production

PE Import Dependence

30%

35%

40%

45%

50%

55%

60%

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

%

• Domestic supplyDomestic PE production in 2011 was 910,000 tons per month, and the figure was

smaller in the first months of 2012 due to low profit level and scheduled

maintenance. This was the cause for PE price to rise in Q1.

China’s Monthly PE Production

75

80

85

90

95

100

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

10,000t

8000

8500

9000

9500

10000

10500

11000

11500

Yuan/t

Production 2011 Production 2012 Market Price 2012 Market Price2011

In addition to PetroChina and Sinopec, more and more PE suppliers emerged in

domestic PE market. The diversified source of supply plus the impact of futures

market have made the pricing power in spot market even more complex.

• Domestic supply

Domestic Supply 2009

PetroChina

38%

Sinopec42%

Joint ventures15%

Local suppliers5%

Domestic Supply 2012

PetroChina30%

Sinopec42%

Joint ventures19%

Local suppliers9%

Domestic Supply 2014 (est.)

PetroChina36%

Sinopec35%

Joint ventures13%

Local suppliers16%

PE import volume in 2011 was 610,000 tons per month. In Q1 2012 PE import

volume was moderate due to the price fall in late 2011 and scheduled

maintenance of some near-sea units.

• Import supply

China’s Monthly PE Import

0

10

20

30

40

50

60

70

80

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

10,000t

1000

1100

1200

1300

1400

1500

1600

$/t

Import 2011 Import 2012 Price 2011 Price 2012

As import volume grows, the structure

of supply source also changes: supply

from the Middle East gradually shows

its competitive advantage with a

growing share in total supply.

• Import supplyStructure of HDPE Import

0%

20%

40%

60%

80%

100%

2011 2009

Middle East Near-sea Ocean

Structure of LDPE Import

0%

20%

40%

60%

80%

100%

2011 2009

Middle East Near-sea Ocean

Structure of LLDPE Import

0%

20%

40%

60%

80%

100%

2011 2009

Middle East Near-sea Ocean

全球新增聚乙烯产能• New capacity: the world

2011 witnessed the slowest growth of global PE capacity. In 2012, a new round of capacity expansion led by China will begin.

New PE Capacity in the Word

0

100

200

300

400

500

600

700

800

2009 2010 2011 2012 2013 2014 2015

10,000t

RoW

China

• Launch of new overseas PE capacity (2012-2015)

2012 2013 2014 2015

Apr. 2012: Philips 1.1mt/a HD, Saudi Arabia

Dec. 2012: ExxonMobil 600,000t/a FD, Singapore

Dec. 2012: Qatar Petrochemical 300,000t/a LD, Qatar

Borouge Phase III 1.5mt/a ethylene, UAE

Petro Rabigh Phase II 1.3mt/a ethylene, Saudi Arabia

Sadara 1.5mt/a ethylene, Saudi Arabia

Exxon/QP 1.6mt/a ethylene, Qatar

Oct. 2013: International Polymer 200,000t/a LD, Saudi Arabia

Oct. 2013: Kayan 350,000t/a LD, Saudi Arabia

Jan. 2013: Kermanshah Ploy 300,000t/a HD, Iran

Jul. 2013: India BCPL 220,000t/a FD, India

May 2012: Honam Petrochemical 250,000t/a PE, Korea

Note: American units not included in the list.

No large-sized PE units will be launched until second half of 2012, so new capacity added previously will be digested during 2011 - first half of 2012.From Q4 2012 to 2014, a new round of capacity expansion can be expected.China’s PE capacity is estimated to reach 17 million tons as of 2015, or a 58% growth.

• New capacity: China

New PE Capacity in China

0

50

100

150

200

250

2009 2010 2011 2012 2013 2014 2015

10,000t

Apr. 2013

Jul. 2013

Fushun Petrochemical expansion,

350,000t/a HD & 450,000t/a FD

Daqing Petrochemical

expansion, 550,000t/a FD

Qilu Petrochemical

expansion, 250,000t/a HD

Jieyang Ethylene, 250,000t/a HD,

250,000t/a LLD & 250,000t/a LD

Wuhan Petrochemical,

300,000t/a HD & 300,000t/a LLD

湛江石化

Jul. 2012

Sep. 2012

Dec. 2012

Feb. 2013

Sichuan Petrochemical,

300,000t/a HD & 300,000t/a LLD

Oct. 2013

2015

2014

Zhanjiang Petrochemical,

600,000t/a FD

Pucheng New Energy

MTO 300,000t/a FD

Shaanxi Yulin MTO

600,000t/a FD

2014Yankuang Guohong

MTO PE 600,000t/a

Yanchang Petro

MTO PE 400,000t/a

2014

MTO: emerging in the new round of capacity expansion

Shanxi Coker MTO

PE 300,000t/a

2015

• Launch of new PE capacity in China (2012-2015)

• Rise of MTO

CoalCoal to olefinsCoal to olefins Methanol Monomer Polyolefin

×9China boasts abundant coal resources, especially in middle and western

regions where coal price is relatively low. For the moment technology takes up a large part of MTO plants’ cost.

However, after successful launch of the first unit, the cost will be constantly lowering during capacity duplication. With the crude oil price above $70/bbl, MTO plants will have an apparent cost advantage over petrochemical industry.

Development of MTO will change PE market pattern and shock conventional petrochemical industry with its cost advantages. On a background of capacity expansion, some near-sea supply sources with higher cost will be forced out of China market.

• Demand analysisThe demand for plastics is rigid because they are closely connected to people’s

life. However, negative growth was observed for the first time in 2011. This was

caused by the slowdown of economic growth and lowered willingness to stock

plastics in all links.

China’s Plastics Production

0

1000

2000

3000

4000

5000

6000

2007 2008 2009 2010 2011

10,000t

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

The seasonal nature of demand for plastic film has determined that busy

season occurs in March and after August. Midyear is traditionally the off

season.

• Demand analysis

Seasonal Variation of Plastic Film Production

0.50

0.60

0.70

0.80

0.90

1.00

1.10

1.20

1.30

1.40

1.50

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Export has recovered slowly after the financial crisis, but growth slowed down

in 2011. China’s competitiveness of exports will be impacted by increasing

labor cost and exchange rate fluctuation.

• Demand analysis

China’s Plastics Export

0

100

200

300

400

500

600

700

800

900

2007 2008 2009 2010 2011

10,000t

-15%

-10%

-5%

0%

5%

10%

15%

Cost has been growing since the end of 2011, resulting in adjustment of supply.

This is a key factor that drove rising market price.

• Cost analysis

LLDPE Price in RMB

8000

8500

9000

9500

10000

10500

11000

11500

11-1

11-2

11-3

11-4

11-5

11-6

11-7

11-8

11-9

11-1

0

11-1

1

11-1

2

12-1

12-2

12-3

12-4

12-5

￥ /t

80

85

90

95

100

105

110

115

120

125

130

LLDPE(RMB) Brent crude oil

• Cost analysis

According to IHS’ latest forecast, crude oil price will reach the top in 2012 and then gradually go down.Downtrend of crude oil price will also bring down the price of polyolefin.

IHS Forecast on Crude Oil Price

112

114

116

118

120

122

124

Q1 2012 Q2 2012 Q3 2012 Q4 2012

$/bbl

Brent Dubai

Ethylene Price in Northeast Asia Market

800

900

1000

1100

1200

1300

1400

1500

10-1

10-3

10-5

10-7

10-9

10-1

1

11-1

11-3

11-5

11-7

11-9

11-1

1

12-1

12-3

12-5

$/t

• Cost analysis

As for ethylene, the price movements show that price cap usually occurs in Q1.

• Stagflation in macro economy will continue, and Europe’s debt crisis will further evolve in stages, so the environment for polyolefin market will not be that optimistic for short term. Midterm and long term movements will depend on the recovery of global economy.

• End demand will go weak for short term, and the willingness to stock will go down in all links of the industry due to uncertainties in macro economy.

• The polyolefin industry will experience a new round of capacity expansion from the second half of 2012. With the demand growth smaller than capacity expansion, cost-oriented supply adjustments will be inevitable. For long term, supply sources with higher cost will be eliminated by the market.

• In general, big moves are not likely to show up in polyolefin market, and volatility caused by cost will be the theme for a period of time.

Conclusion