SABIC EuroPetrochemicals Trends and Challenges in the European Polyolefin Industry Mark Vester 18 February 2003

SABIC EuroPetrochemicals

Trends and Challenges in the

European Polyolefin Industry

Mark VesterMark Vester18 February 2003


Short introduction to SABIC EuroPetrochemicals

Typical project investment WE and ME

Global and European S/D balance for Polyethylene

The European Case

Managing the cycle: The Past and The Future

ContentsContents


The Power to Provide …The Power to Provide …Resources to guarantee long term supplyResources to guarantee long term supply

Modern technology for efficiency and qualityModern technology for efficiency and quality

Global marketing and distribution network to serve our customersGlobal marketing and distribution network to serve our customers

… … for the long termfor the long term


SABIC …

… is 70% owned by Saudi government and 30% by private sector

… started from scratch in 1976

… produced first tons in 1983

… now produces 40 million tons of products per year

… has a turn-over of € 11,4 bln in 2002

SABIC’s vision: to be a leading global manufacturer and marketer of hydrocarbon and metal products.

Think about it:

2 mln tons of new capacity

added annually!


SABIC …

… is number 3 global PE player

… markets almost 5 million tons of PE/PP

… is now established in Europe

… has technical centres in KSA, USA, India and

The Netherlands

… accelerates its expansion

SABIC EPC: the Powerhouse comes to Europe …SABIC EPC: the Powerhouse comes to Europe …

SABIC’s Geleen site

SABIC’s headquarters in Riyadh


… … with the Power to Provide …with the Power to Provide …

Total SABIC NPC (ktpa)today Q4 2003

Ethylene C2 5.400 5.400Polyethylene 3.130 3.930Polypropylene 1.670 1.670

Gelsenkirchen

Ethylene C2 on-sitePolyethylene 570Polypropylene 505

ktpaGeleen

Ethylene C2 1.250Polyethylene 910Polypropylene 585

ktpa

YanbuEthylene C2 800Polyethylene 580Polypropylene 130

ktpa

4 highly integrated sites direct access to low cost feedstock

world-scale facilities direct market access

multiple lines per technology

… anywhere !!!

HoustonVadodara

Riyadh

Al JubailYanbu

GeleenGelsenkirchen

Kerteh

Al Jubail ktpa

Ethylene C2 3.350

Polyethylene 1.070 ( Q4 2003 1.870 )Polypropylene 450


Global Polyolefins position SABIC

0

2000

4000

6000

8000

10000

Basel

lDow

ExxonM

SABIC

BP/Solv

ay

Borea

lis

Atofin

a

Equis

tar

Philli

ps/Chev

ron

Formosa

Pla

s...

PP

PE

KTON

SABIC, after acquisition DSM Petrochemicals: number 4 global Polyolefins player number 3 global PE-player number 4 global PP-player


.. and anything !!.. and anything !!

Application

Automotive

Corrugated board

Dustbins

Foam

Furniture

Houseware and appliances

Geomembranes

Masterbatches

Multi purpose injection moulding

Packaging

Photo and imaging

Pipe

Sheet

Textiles

Wire and cable

…

Process

Bi-axially oriented film

Blow moulding

Blown film

Cast film

Extrusion coating

Extrusion compression moulding

Foam extrusion

Fibre, filament and tape extrusion

Injection moulding

Injection compression moulding

Masterbatch compounding

Pipe extrusion

Sheet extrusion

Thermo forming

…

Material

HDPE

High cristallinity polyolefin

LDPE

LLDPE

Long glass fibre reinforced PP

Modified PP

PP block copolymer MF

PP homopolymer

PP homopolymer MF

PP random copolymer

PP reactor elastomer modified

PP reactor elastomer modified MF


Low cost feedstock !!

Investment scale

Investment cost

Utilities cost are lower

No co-products credit

Middle East PE has significant cost advantageMiddle East PE has significant cost advantage

Naphtha cracker

650 kta

Ethane cracker

1050 kta

Middle East

Europe

Take into consideration:

License cost

Infrastructure

Marketing and Sales cost

Research and Development

Cost of overhead

Working capital

HDPE slurry

300 kta

LLDPE gasphase

350 kta

PP gasphase

2*200 kta

LLDPE gasphase

2*350 kta

HDPE gasphase

350 kta

Co-products

revamp cracker

650 kta


Structure of typical projects varyStructure of typical projects vary

revamp naphtha

cracker 650 kta

Ethane cracker

1050 kta

Middle East

Europe

HDPE slurry

300 kta

LLDPE gasphase

350 kta

PP gasphase

2*200 kta

LLDPE gasphase

2*350 kta

HDPE gasphase

350 kta

Co-products


DistributionDistribution

Customer

Warehouse

Plant

Plant

Warehouse

Hub

Middle East

Europe

Document cost

Outbound cost

Inbound cost and storage

Sea port to hub

Terminal cost

Sea freight

Terminal cost

Warehouse to sea port

Warehouse to customer

Import Duties

Warehouse to customer


Using ethane for ethylene leads to propylene deficits …Using ethane for ethylene leads to propylene deficits …

propylene sourcing

0

10000

20000

30000

40000

50000

60000

70000

2001 2007

54 mio

71,5 mio

Steam cracker

68 %

Steam cracker

65 %

FCC

30 %

FCC

32 %

other

… which leads to improved co-product contribution


20022002

+ 2750

+ 950

- 1400 +2700

- 1300 - 800

+ 800

Surplus: + 3,7 mln tSurplus: + 3,7 mln t

(= 6,4 % of CTP)(= 6,4 % of CTP)

20072007

+ 1300

- 600

- 4700 +6100

-1700 - 900

+ 700

Surplus: + 0,2 mln tSurplus: + 0,2 mln t

(= 0,3 % of CTP)(= 0,3 % of CTP)

ME suppliers will export most PE to Asia, however …ME suppliers will export most PE to Asia, however …

Net export position (CTP > demand)

Net import position (CTP < demand)

Global overcapacity will be

reduced from 3700 kton in 2002

to potentially 200 kton in 2007

Note: Balance is calculated as Local CTP -/- local demand (trade is excluded)

Asia is growth market

ME export net backs will make European pricing follow Asian balance


West European demand will outpace capacity growth in coming years

… … West Europe leaves opportunity window …West Europe leaves opportunity window …

-400

-200

0

200

400

600

800

1000

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

consumption growth

capacity growth

Realisation Forecast

kton


600

800

1000

1200

1400

1600

1800

2000

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Imports Exports

Middle East imports will make up for WE production deficit.

… … for ME to further increase its market share.for ME to further increase its market share.

Realisation Forecast

Room for 100 kt extra

imports per year


Despite ME producers’ cash cost advantage over WE …Despite ME producers’ cash cost advantage over WE …

Gas price ($/mmBTU) Naphtha (EUR/t)

Structural

delta

in cash cost

Typical ranges for

gas and naphtha

ME producer NWE producer

Delta depends on oil price and co-product values

Low High Low High


… … WE capacity has outpaced demand, WE capacity has outpaced demand,

kton

Margin as C4 LL -/- C2 (EUR/t)

contributing to deterioration of margins …contributing to deterioration of margins …

… … and resulting in poor profitability; even for WE leaders!and resulting in poor profitability; even for WE leaders!


ME re-investment level is lower than average WE levelME re-investment level is lower than average WE level

Gas price ($/mmBTU) Naphtha (EUR/t)

Delta in

re-investment level

ME producer

Within WE players differ in site scale and integration, portfolio, …

Only strong WE super sites (cost leaders) remain

Re-investment level required for IRR of 20%

Delta in

cash cost

NWE producer

Low High Low High


Pricing in Europe will be affected Pricing in Europe will be affected

WE

ME

Re-investment

level

Middle East attracts investment at lower levels than Europe


ddp NWE

cif FE

Revenue Platt’s low ’96-’01 900 750

Discount -/-25 -

Import duties (4%) -/-35

Inland logistics -/-50 -

Transport overseas -/-45 -/-20

Contribution 745 EUR/t 730 EUR/t

Future PE flow over the globeFuture PE flow over the globe

Asia is growth market

Export to Europe is 100 - 150 EUR/t more expensive

European price will follow Asian balance and average at 100 - 150 EUR/t above Asia


Cyclicality in Petrochemicals is “a fact of life”

The cycle

……is due to• Long lead time of investments• No reliable forecast global economic gowth • Globalisation

……affects mainly margins but also volumes

and

…… leads to strong fluctuations in cash flow


Essentials of the Petrochemical Business

Global Utilisation Rate

drives the margins

Position on the global cost curve

indicates the chance to survive the dip in the cycle

Position on the learning curving

quantifies the yearly needed cost improvement


86 87 88 89 90 91 92 93 94 95 96 97 98Utilisation rate crackers world wide as % of CTP*

g

ross

mar

gin

W.E

. cra

cker

Cracker margins correlate with the global utilisation rate

Global Utilisation rates > 92 % are needed for a healthy cracker margin

CTP = Capacity to Produce


Position on the global cash cost curve

A low cost position is essential to survive the dip in the cycle and is determined by:

Scale

Integration

Technology

Cracker feedstock position / flexibility

Upgrading cracker co-products

Logistics

Employees


Global cash cost curve crackers

Low cost ethane

Naphtha/ethane/LPG in Europe/USA

Small scaled Laggards

Cas

h co

sts/

ton

C2

Cumulative ethylene capacity


Learning curve of ethylene productionC

ash

cost

s/to

n C

2

Cumulative ethylene production


Managing through the cycleC

ash

cost

s/to

n C

2

Cumulative ethylene capacity

First Quartile

Hors category

(Potential) Super sites

Sitting ducks

Losers


No rationale for investment in additional integrated ethylene and PE

capacity in Europe

Potential for scrap and build

Little further improvement of cost position

All cost laggards in Europe will disappear

Central and Eastern Europe have the same future as WE

European cost leaders will be able to compete

Future PE source for West Europe

WE super sites

Growth will come from Middle East

ConclusionsConclusions


Drivers for European industry: We enter a new eraDrivers for European industry: We enter a new era

Period ’95 – ’02Scale and cost

Site integration and M&A

Technology and Catalyst Development

Period ’02 – ’09Cost & Rationalisation

Bottomline cashflow

Invest and grow

Re-establishment of sustainable profit levels

scale cash flow

Documents

SABIC EuroPetrochemicals Trends and Challenges in the European Polyolefin Industry Mark Vester 18 February 2003