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“Catching the Asian Wave”
UBS Warburg Grass Roots Conference February 11, 2004
Ed DineenSr. Vice President – Chemicals & Polymers
2
Safe Harbor LanguageStatements in this presentation relating to matters that are not historical facts are forward-looking statements. These forward-looking statements are just predictions or expectations and are subject to risks and uncertainties. Actual results could differ materially, based on factors including but not limited to the cyclical nature of the chemical and refining industries; availability, cost and volatility of raw materials and utilities; governmental regulatory actions and political unrest; global economic conditions; industry production capacity and operating rates; the supply/demand balance for Lyondell's and its joint ventures' products; competitive products and pricing pressures; access to capital markets; and technological developments and other risk factors. For more detailed information about the factors that could cause our actual results to differ materially, please refer to Lyondell Chemical Company’s Annual Report on Form 10-K for the year ended December 31, 2002, filed in March 2003, Lyondell’s Quarterly Report on Form 10-Q, filed in November, 2003, and Lyondell’s Annual Report on Form 10-K for the year ended December 31, 2003, which will be filed in March 2004. Reconciliations of GAAP financial measures to non-GAAP financial measures are provided at the end of this presentation.
3
Lyondell Has Built a Balanced Portfolio
Lyondell
IC&D
LCR
Equistar
Commodity Leverage-- A leading North American producer of ethylene, propylene
and polyethylene-- Low cost position based on feedstock flexibility and scale
Growth & International Presence-- A leading global producer of PO and derivatives-- Process technology strength
Cash Generation-- Unique capability to refine heavy crude oils-- Contractually stable business; strong cash flow generator
($ MM)
Revenues EBITDALyondell
OwnershipIC&D $3,801 $245 100.0%Equistar 6,545 175 70.5LCR 4,162 377 58.75
2003
4
Leading Product Positions Create Significant Earnings Leverage
1 Source: LYO capacities as of Jan 2004, CMAI2 Includes 100% of joint venture volumes.3 Does not include refinery-grade material or production from the product flexibility unit at Equistar’s Channelview
facility.4 Based on 1¢/gal change.
Inte
rmed
iate
Ch
emic
als
an
d D
eriv
ati
ves
Eq
uis
tar
Product Annual Capacity 1Capacity Position
Propylene Oxide2 (lbs) 4.5 billion 1st in North America1 st in the world
Styrene Monomer (lbs) 5.1 billion 1st in North America1st in the world
MTBE (bbl/day) 58,500 1st in North America1st in the world
Ethylene (lbs) 11.6 billion 2nd in North America5th in the world
Propylene (lbs) 5.0 billion 2nd in North America7 th in the world
Polyethylene (lbs) 5.7 billion 3 rd in North America4 th in the world
1
3
$23MM
$21MM
$ 94MM
$116MM
$50MM
$57MM
Pre-TaxLeverage(∆1¢/unit)
2
5
Future Earnings Are Driven Primarily By The Industry Cycle Rather Than New Investment
0
500
1000
1500
2000
2500
3000
2003 1999/2000Margins
1995 Margins 1988 Margins
$MM
LCR IC&D Equistar
1 Chem Data/CMAI industry margins conditions for IC&D and Equistar products (ex. MTBE) applied to current capacities and ownership, LCR 2003 EBITDA. Note: Assumes current capital structure; 175 MM shares.
1
1 1
Recession/ Trough
Pre-Recession
PeakCycle EBITDA Potential
$6.90 / share
$1.40 / share
2003Proportional
Interest,Dividends &
Capital
6
The Lyondell Enterprise Has A Well-Established Presence in Asia
Presence established in 1972
40% interest in Nihon Oxirane
$1 B revenue 1
2.5 Blbs of Sales 1
Leading PO and Derivative Positions
Strong Styrene Relationships
1 - Includes 100% of Nihon Oxirane
BeijingTokyo
Shanghai
Taipei
Hong Kong
Guangzhou
Offices
Inventory
Point
Manufacturing
7
0
10
20
30
40
50
60
70
80
90
100
PE MEG SM PO
China Asia
Asia Will Represent 40-60% of Global Demand Growth for Chemicals and Plastics
Source: CMAI for PE and SM, LYO estimates for PO
0
10
20
30
40
50
60
70
80
90
100
PE MEG SM PO
% %Asian Share of 2002
Global DemandAsian Share of 2002-2006
Global Growth
8
Asian Opportunities And Threats Are Shaped By Several Factors
Local Demand Growth
Inexpensive Labor– Construction Costs
– Finished Products
Global Customer Trends
Hydrocarbon Resource Avails
Intellectual Property Protection
Cultural Integration Challenges
New JV’s / Competitors
Evolving Political / Financial Structures
Plus Minus
9
In The Ethylene Chain, The Following Considerations Drive Our Strategy In Regard To Asia
Demand Growth Vs. Local And Mid-East Expansions
Competitive Position In Export And North American Markets
Finished Product Economics / Trade Flows
Potential For Differentially Advantaged Investments
10
0
20
40
60
80
100
120
0 5, 000 10, 000 15, 000 20, 000 25, 000 30, 000 35, 000 40, 000
US
Korea
Taiwan
WE
Singapore
Japan
Thailand
Malaysia
ChinaIndiaIndonesia
The Emergence of a Middle Class Increases Local Demand for Plastics
Sources: CMAI 2001; Nexant Chemsystems
0
2
4
6
8
10
12
Domestic Exports
1995 2001
China PE Demand
Domestic vs. Export
PE Consumption/capita, lbs
2000 GDP/Capita
11
In Ethylene, Raw Material Costs Are The Only Significant Differentiator
Technology– Widely Licensed
– Only Minor Advances Over Several Decades
Construction Costs:– Equipment Is Sourced Globally
– Labor Costs Provide Some Differentiation
– Infrastructure Can Differentiate
Operating Labor Cost Is A Minor Factor
Feedstocks:– Crude Oil Based Raw Materials
– Natural Gas Based Feedstocks Currently Advantaged In The Middle East
12
Long-Term Asian Growth Will Largely Be Supplied By The Middle East
Delivered to China
05
1015202530354045
Saudi - Ethane Asia - Naphtha NA - Ethane
Cash Costs w/Freight Capital Recovery
Po
lyet
hyl
ene
Cas
h C
ost
(ce
nts
/lb d
eliv
ered
)
Source: PACE, Lyondell estimate
13
Existing US capacity is competitive in its home market – E/P crackers are likely to be the high cost global facilities
Po
lyet
hyl
ene
Cas
h C
ost
(ce
nts
/lb d
eliv
ered
)
Source: PACE, Lyondell estimate
Delivered to U.S.
05
1015202530354045
Saudi - Ethane Asia - Naphtha NA - Naphtha NA - Ethane
Cash Costs w/Freight Capital Recovery
14
Asian Bag Production Has Been Advantaged But The Impact Has Been Less Than You Might Think
0
10
20
30
40
50
60
70
80
90
100
'96 '97 '98 '99 '00 '01 '02
%
Source: CMAI
0
10
20
30
40
50
60
70
80
U.S. China to U.S. China to U.S. @ equal RM Cost
Bag P
rodu
ction
Cos
t, cen
ts/lb
Raw Material Labor Conversion ex labor Ocean Freight U.S. Domestic Freight
Source: CMAI & Lyondell
Bag/Film Imports As Percent
Of N. American Ethylene Demand
PE Bag Production Costs
U.S..
China to U.S.
China to U.S. @ Equal RM Cost
15
Labor Costs Drive The Advantage But In The Future Other Factors Should Help Level The Playing Field
Regional Pricing Differences, ¢/lb China vs. U.S.
Peak TroughMay, 1995 May, 2003
PE 3 (18)
Styrene 23 (8)
Ocean Shipping Constraints Q3 1997 Q3 2003
U.S. to Asia 6 ¢/lb 4.25 ¢/lb
Asia to U.S. 6 ¢/lb 8.5 ¢/lb
Availability of New Ships: First Half, 2006
Tariffs– Temporary Plastic Bag Duties: 0 – 120%
Currency Valuation
Source: CMAI, U.S. Govt. Maersk Sealand
16
Our View Of The Ethylene Situation Can Be Summarized As:
Demand Growth Will Balance Middle East Supply
Asia Is Not A Differential Production Cost Environment
U.S. Naphtha-Based Production Is Not Threatened
Some Fabricated Products Will Migrate To Low-Cost Labor– Publicity Outweighs The Impact
– Playing Field Becoming More Balanced
17
The Propylene Oxide Situation Is Very Different Than Ethylene
Technology / Market Structure
Lyondell Relationships
Propylene Supply
PO Supply / Demand
No Mid-East Advantage Or Capacity Plans
18
Our Propylene Oxide and Derivatives Business Benefits From a Strong Position
Co-Product Technology
Chlorine-Based
Technology
LYO &Partners
Others
DowLYO &
Partners
Shell /BASF
PO Technology Source
PO Industry Capacity
Source: SRI, Tecnon , Lyondell estimates
19
Propylene Oxide Technology Is Not Widely Licensed
Chlorine Technology
Peroxidation Technologies
Direct Oxidation
PO / MTBE
POSM
PO
Age Early 1900’s
1960’s 1970’s 2000’s 2010’s
Economic Attractiveness
0 0 ++ + ++
Commercial Operators
Dow Asia
Lyondell Huntsman
Lyondell Shell
Repsol SKC
Sumitomo Lyondell R&D
20
Lyondell Has Long Standing Relationships With Strong Asian Companies
Sumitomo– Partner In Nihon Oxirane
– 30-Year Relationship
Chi Mei– 15-Year Relationship.
– Largest Global Styrene Consumer
21
The Asian / Middle East Propylene Chain Supply / Demand Balance Is Much Different Than The Ethylene Chain
0
2
4
6
8
10
12
14
16
18
20
Demand Growth Supply Growth0
1
2
3
4
DemandGrowth
SupplyGrowth
DemandGrowth
SupplyGrowth
Propylene Oxide GrowthPropylene Growth
2002 - 2007 2002 - 2007 2007 - 2010Blbs Blbs
Ethylene
Co-Product
FCC
Co-Product
Source: CMAI, SRI, Lyondell Estimates
22
For Lyondell And Equistar Products / Markets, The Situation Can Be Summarized As Follows:
Asian Development Is Critical To Global Growth
Asian Labor Rates Advantage Finished Product – Offsetting Pressures Are Developing
U.S. Ethylene Plants Continue To Be Competitive
Propylene Oxide Is Differentiated By:– Technology
– Relationships
– Raw Material Availability
23
Lyondell’s Asian Strategy Addresses These Conclusions
Near Term:
– Maximize Cash Generation
– Adjust Selling Channels To Reflect Opportunities
– Leverage Long-Standing Relationships
Long Term:
– Potential Propylene Oxide Expansion
– No Differential Ethylene Chain Advantage
24
The Asian Strategy Is Consistent With Our Financial Strategy
Maintain Sufficient Liquidity
Repay Debt
25
Lyondell net loss (302)$ Add: Benefit from income tax (179)
Interest expense, net 392 Depreciation and amortization 250 Loss from equity investment in Equistar 228 Income from equity investment in LCR (144)
Lyondell EBITDA 245$
Equistar net loss (339)$ Add: Depreciation and amortization 307
Interest expense, net 207
Equistar EBITDA 175$
Proportionate Share - 70.5% 123$
LCR net income 228$ Add: Depreciation and amortization 113
Interest expense, net 36
LCR EBITDA 377$
Proportionate Share - 58.75% 222$
Lyondell and Proportionate Share of Equity Investments - EBITDA Lyondell EBITDA 245$ 70.5% of Equistar EBITDA 123 58.75% of LCR EBITDA 222
Lyondell and Proportionate Share of Equity Investments 590$
LYONDELL CHEMICAL COMPANYRECONCILIATION OF NET INCOME (LOSS) TO EBITDA
(Millions of dollars)For the Twelve Months Ended December 31, 2003
26
Lyondell IC&DInterest expense, net 392$ Capital expenditures (a) 50 Dividends 116
Total 558$
Equistar Interest expense, net 207 Capital expenditures 106
Total 313$
Proportionate Share - 70.5% 221$
LCRInterest expense, net 36 Capital expenditures 46
Total 82$
Proportionate Share - 58.75% 48$
Lyondell and Proportionate Share of Equity Investments - Interest, Capital Expenditures and DividendsLyondell IC&D 558$ 75% of Equistar 221 58.75% of LCR 48 Lyondell and Proportionate Share of Equity Investments
Interest, Capital Expenditures and Dividends 827$
________(a) Excludes contributions to PO-11 and U.S. PO joint ventures and the purchase of the BDO-2 facility.
Lyondell Chemical Company
(Millions of dollars)For the Twelve Months Ended December 31, 2003
Reconciliation of Lyondell and Proportionate Share of Ventures' Interest, Capital Expenditures and Dividends