© 2013 Platts, McGraw Hill Financial. All rights reserved.

South Korean Aromatics, 2nd Renaissance or Crisis?

Michelle Kim, Editor at Petrochemical

Thursday November 14, 2013

Platts Petrochemicals Forum,

The Westin Chosun, Seoul Korea

Agenda

1. Overviewing Korean Aromatics Market

2. What challenges does Korean Aromatics face?

3. What are opportunities and strengths of Korean Aromatics? -S. Korean government’s NEA Oil Hub project

-Korean aromatics startup plans

4. What strategies can S. Korean petrochemicals take to keep its position as leading country in Asian petrochemicals? -Review of prices movement of Asian aromatics in 2013

2

1. Overview of Korean Aromatics Markets

Focusing on BTX/PX

Korea Petrochemical History -Expanding net-exports

4 Source: KPIA

Features

Ethylene Capacity

Export/Imports Balance

Top 3 Petrochem Exports/Imports Trends

1970s (Development)

1980s (Growing)

1990s (Taking Off)

Late 1990s-2000s (Restructuring)

Mid 2000s (Repeat Leaping)

Government-led Industry-led

Government-led development (Ulsan cluster)

Petrochem Infra-structure

(Yeosu cluster)

Large capacity expansion

(Daesan cluster)

Restructuring M&A

Economy of scale Globalization

115 KTA<‘78> 1 company

505 KTA<‘88> 2 companies

4,920 KTA>’97> 8 companies

5,720 KTA<‘03> 7 companies

8,350 KTA<‘12> 6 companies

Net-importer Net-

importer=>Balanced

Balanced=>Net-exporter

Net-exporter Expanding Net-

exports

Production

Local Demand

Exports

SK G

lob

al Ch

emical

(Ulsan

)

Yeoch

un

NC

C (Yeo

su)

Ye

och

un

NC

C #2

(Ye

osu

) Lo

tte C

he

mical (Y

eo

su)

KP

IC (U

lsan)

LG C

he

mical (D

aesan

) LG

Ch

em

ical (Ye

osu

) Sam

sun

g Total (D

aesan

) SK

Glo

bal C

he

mical #2

(U

lsan)

Ye

och

un

NC

C #3

(Ye

osu

)

Lotte C

hem

ical (D

aesan)

mil ton

South Korea Aromatics Plants

5

SK Energy (500 MX/200 BZ/160 TL)

HC Petrochem (800 PX/240 BZ)

Lotte Chem (60 SMX/120 TL/236 BZ)

Samsung Total (780 BZ/710 PX/180

MX*captive)

LG Chem (100 SMX/100 TL/200 BZ)

GS Caltex (350 MX/930 BZ/1.3 mil

PX/170 TL)

LG Chem (50 SMX/80 TL/180 BZ)

YNCC (130 SMX/380 BZ/200 TL)

Lotte Chem (750 PX)

SK Global Chem (1 mil MX/650 PX/238

BZ/291 TL)

S Oil (180 MX*captive)

Daesan

Yeosu

Asia Aromatics Capacity in 2013 -Korean aromatics ranked top 2-3

6 Source: Platts, KPIA, Market Estimation

Benzene Toluene

(1st) China 36%

(2nd) Japan 23%

(3rd) Korea 18% 5 mil

ton/year

Others 23%

Total=28 mil ton/year (2013/Jun)

(1st) China 51%

(2nd) Korea 21%

3.1 mil ton/year

Japan 15%

Others 13%

Total=15 mil ton/year (2013/Jun)

(1st) China 44%

(2nd) Japan 24%

(3rd) Korea 11%

3.7 mil ton/year

Others 20%

Total=33.3 mil ton/year (2013/Jun)

(1st) China 37%

(2nd) Korea 20%

6.3 mil ton/year

(3rd) Japan 13%

Others 30%

Total=31.2 mil ton/year

Mixed Xylene (Isomer) Paraxylene

Korean BTX/PX exports (2011 – 2013)

7

0

200000

400000

600000

800000

1000000

1200000

1400000

1600000

1800000

2011 2012 2013 (~Sep)

mt

US

Taiwan

China

Total

Source: Platts, Korea Customs

0

200000

400000

600000

800000

1000000

1200000

2011 2012 2013 (~Aug)

mt

China

Taiwan

India

Total

0

200000

400000

600000

800000

1000000

1200000

1400000

1600000

2011 2012 2013(~Sep)

Taiwan

China

Total

0

500000

1000000

1500000

2000000

2500000

2011 2012 2013(~Sep)

mt

China

Taiwan

Total

BZ TL

MX(Iso) PX

9.8% 9.7%

-52.8% 18.6%

2. Challenges to Korean Aromatics Markets

China/Japan/India/Middle East Aromatics

9

Source: Platts

Premium on FOB Korea markers -MX/TL: falling but main marker, PX: stable but secondary

-30

-10

10

30

50

70

90

1/4

/201

1

2/4

/201

1

3/4

/201

1

4/4

/201

1

5/4

/201

1

6/4

/201

1

7/4

/201

1

8/4

/201

1

9/4

/201

1

10/4

/201

1

11/4

/201

1

12/4

/201

1

1/4

/201

2

2/4

/201

2

3/4

/201

2

4/4

/201

2

5/4

/201

2

6/4

/201

2

7/4

/201

2

8/4

/201

2

9/4

/201

2

10/4

/201

2

11/4

/201

2

12/4

/201

2

1/4

/201

3

2/4

/201

3

3/4

/201

3

4/4

/201

3

5/4

/201

3

6/4

/201

3

7/4/

20

13

8/4

/201

3

9/4

/201

3

10/4

/201

3

Premium on FOB Korea isomer-MX premium on FOB Korea TL premium on FOB Korea PX

Startup Plans in China/India/SEA/ME

10

Country Company Quarter

2013 2014 2015

BZ TL MX PX BZ TL MX PX BZ TL MX PX

China Dragon Aromatics Q3(1) 180 800

Q4(2) 100 800

PetroChina Siuchuan Q1 350 680

Sinopec Hainan Q1 600

PetroChina Yangzhou - 400 1000

Sinopec Zhenhai - 1600

China Total 280 1600 350 2880 400 1000

India ONGC Q1 270 900

Reliance Q1 200 1500

Indian Oil Group Q1 370

India Total 270 900 200 1870

SEA Jurong Aromatics Q2 450 800

PetroViet Q2 240 700

SEA Total 450 800 240 700

Middle East SATORP(Aramco/Total) Q1 700

ME Total 700

Total 280 1600 1070 5280 840 3570

Total PX start up from 2013-2015: 10.4 mil mt

Total BZ start up from 2013-2015: 2.1 mil mt

Expanding Capacity in China/Japan/SEA/ME -2011 vs 2015 (e) Growth Rates-

11

Source: Platts, KPIA

0

2000

4000

6000

8000

10000

12000

Korea China Japan India Singapore MiddleEast

BZ 2011

2013

2014 e

2015 e

12% 101%

0

2000

4000

6000

8000

10000

Korea China Japan Middle East

TL 2011

2013

2014 e

2015 e

18%

5%

1,000 mt/year 12% 1,000

mt/year

0

5000

10000

15000

20000

Korea China Japan Middle East

MX 2011

2013

2014 e

2015 e

7% 17%

1,000 mt/year

0

2000

4000

6000

8000

10000

12000

14000

Korea China Japan India Singapore MiddleEast

PX 2011

2013

2014 e

2015 e

55%

117%

115%

30%

58%

1,000 mt/year

Competitiveness of Korea-origin BTX/PX -Looking at China market, the biggest BTX/PX buyers in Asia

12

BZ Demand (mt) Korea

Taiwan

China

Japan

Sinapore

India

Others

35%

PX Demand (mt) Korea

Taiwan

China

Japan

Indonesia

India

Others

41%

MX Demand (mt) Korea

Taiwan

China

Japan

Thailand

India

Others

45%

TL Demand (mt) Korea

Taiwan

China

Japan

Thailand

India

Others

57%

Source: Platts, KPIA Data in 2012

Where does China buy? -Portion of Korean BZ/TL decreased, PX stable but…

13

Source: Platts, Korea Customs

0%

50%

100%

2012(~Sep) 2013(~Sep)

Others

Iran

India

Malyasia

Thailand

Japan

Korea

BZ

0%

50%

100%

2012(~Sep) 2013(~Sep)

Others

Singapore

Taiwan

Philippines

Japan

Thailand

Korea

TL

0%

50%

100%

2012(~Sep) 2013(~Sep)

Others

Iran

Singapore

Oman

Malaysia

Thailand

Taiwan

Japan

Korea

PX

Threats on Korean BTX/PX Summary

• Taiwan/Thailand-origin PX imports from China increased

• China/India/SEA/ME capacity expansion

• China/SEA/ME capacity expansion

• China-origin MX imports to Asia market increased

• FOB Korea isomer-MX premium falling

• Korea-origin TL imports from China declined

• Japan/Taiwan-origin TL imports from China increased

• FOB Korea TL premium falling

• China/ME capacity expansion

• Korea-origin BZ imports from China declined

• Thailand/Malaysia-origin BZ imports from China increased

• China/SEA(Singapore/Thailand)/ India/ME capacity expansion

BZ TOL

PX MX

14

3. Opportunities & Strengths of Korean Aromatics -NEA Oil Hub Project -Korean aromatics startup plans

North East Asia Oil Hub Project

Source: Korean Ministry of Trade, Industry and Energy16

Strengths Weaknesses

- Geopolitical center in NEA - High oil products capacity and exports volume - Petroleum and petrochemical industrial clusters - High technology in refining - Good facilities in distribution and ports - Large oil storage capacity

- Lack in commercial tank storage - High costs in land - Lack in infrastructure - High entry barriers for foreign companies - Less developed oil trading market

Opportunities Threats

- High growth rates in NEA - Singapore oil trading liquidity heading to NEA - Limitation of Chinese oil refining capacity considering high demand - New sources of oil (Russia Siberian ) - Relating to Asia Pacific markets

- China’s large scale commercial tank storages development - China’s distribution and ports facilities development - Singapore’s distribution and ports facilities develo

pment

Freight

($/B)

Cost of

refining

($/B)

Surplus refining

capacity

(1,000 B/D)

Port Fees

($/50,000 ton)

Average depth

of water

(m)

Korea 1.37 2.33 484 20,157 20.6

China 1.38 6.12 -344 32,882 16.3

Japan 1.43 3.12 1,870 35,501 18.3

Impact on Korea Petrochemical (esp. Aromatics) Market

• Stable supply in upstream feedstock

• Cost savings with using improved Ulsan and Yeosu ports

• Benefits of supply-demand management for producers

• Strengthening importance of FOB Korea market

• Revitalization in Korea petrochemical trading markets

17

Startup Plans in S. Korea (~2016)

18

Company Location Timing

2013 2014 2016

BZ TL MX PX BZ TL MX PX BZ TL MX PX

Hyundai-Cosmo Petrochem

Daesan Q1 14

0

80

0

SK Global Chemicals

Ulsan Q2

10

00

SK Energy/JX Nippon Oil

Incheon Q2

10

00

Samsung Total Daesan Q3

10

00

GS Caltex/Taiyo Oil/Showa

Shell

Yeosu H2 40

0

10

00

Total 14

0

80

0

30

00

40

0

10

00

Total PX start up from 2013-2016: 4.8 mil mt

Total BZ start up from 2013-2016: 540 kt

4. Toward 2nd Renaissance

Overview of Asian Aromatics Prices

Toward 2nd Renaissance

Asia BZ Market Review 2013

21

Source: Platts

$/m

t

1100

1150

1200

1250

1300

1350

1400

1450

1500

1550

1/2/2013 2/2/2013 3/2/2013 4/2/2013 5/2/2013 6/2/2013 7/2/2013 8/2/2013 9/2/2013 10/2/2013

Benzene FOB Korea Marker

Falling -Long supply on imports from Middle East -Closed Asia->US arbitrage on weak demand amid bearish economy in the US

All-year low -Unexpected outage in downstream SM plant (Lotte Chem 560 kt/year SM June 10 for a month/Saudi Arabia’s Sadaf 580 kt/y SM in April)

Recovering -Tight supply in China due to TA

Asia TL Market Review 2013

22

Source: Platts

$/m

t

900

950

1000

1050

1100

1150

1200

1250

1300

1350

1400

1/2/2013 2/2/2013 3/2/2013 4/2/2013 5/2/2013 6/2/2013 7/2/2013 8/2/2013 9/2/2013 10/2/2013

Toluene FOB Korea Marker

Falling -High East China inventory -Weak demand -Tracking downstream BZ and PX market

Hit all-year low -Persistent low demand environment for the product amid market length

Stable -TA and feedstock changes (less output of aromatics) may reduce supply -Prices start to taper lower toward the end of the year due to macro economic situations -China inventory levels start to decline but not yet increase demand in TL

Asia isomer-MX Market Review 2013

23

Source: Platts

1050

1100

1150

1200

1250

1300

1350

1400

1450

1500

1/2/2013 2/2/2013 3/2/2013 4/2/2013 5/2/2013 6/2/2013 7/2/2013 8/2/2013 9/2/2013 10/2/2013

Isomer-MX FOB Korea marker

Hit 54-month high -tight supply & tight US MX market -Startup of new PX plant of HC Petrochem (Jan 7)

Hit 9-month low at 1,119/mt FOB Korea -High OR on good MX/Naphtha margin -Weak downstream (PX/PTA) less demand

Recovering -Tight supply due to TA season in Korea, Japan -Peak summer season of PTA -Tight supply in US MX

Falling -PX producers cut OR/shut plants -PX producers sell MX -Weak downstream (poor PX/MX margin, off-peak of PTA)

$/m

t

Asia PX Market Review 2013

24

Source: Platts

$/m

t

1300

1350

1400

1450

1500

1550

1600

1650

1700

1750

1800

1/2/2013 2/2/2013 3/2/2013 4/2/2013 5/2/2013 6/2/2013 7/2/2013 8/2/2013 9/2/2013 10/2/2013

Paraxylene FOB Korea Marker

Falling -Lower PTA plants OR partly due to poor PTA production

Stable -Buyers/sellers standstill

Hit all-year high -New PTA startup in China -PTA over production

Potential Opportunities & Strategies for Korean Aromatics

Toward 2nd Renaissance

Korean BTX/PX Balance -MX will be further short

26

-1000000

0

1000000

2000000

3000000

4000000

5000000

6000000

BZ(2012) BZ(2013 ~Aug)

TL(2012) TL(2013 ~Aug)

MX(2012) MX(2013 ~Aug)

PX(2012) PX(2013 ~Aug)

Production

Local Demand

Balance

Source: Platts, KPIA

Long Short Long Long

Asia BTX/PX Balance -TL and MX are short

27 -5000000

0

5000000

10000000

15000000

20000000

25000000

30000000

35000000

BZ(2012) BZ(2013 e) BZ(2014 e) TL(2012) TL(2013 e) TL(2014 e) MX(2012) MX(2013 e) MX(2014 e) PX(2012) PX(2013 e) PX(2014 e)

Production Demand Balance

Source: Platts, KPIA

Long Short Long Balanced Short

mt/year

From Challenges Toward 2nd Renaissance

1. Optimal Producing/Selling Strategy

2. Establish Economy of Scale

3. Plant Integration to mitigate feedstock risk and optimize production efficiency

4. Create synergy with Korean government’s NEA Oil Hub plans

28