CAV: THE ROAD AHEAD. Prepared for Clorosur 2016 Buenos Aires, Argentina NOVEMBER 2016

Transcription

1 NOVEMBER 2016 CAV: THE ROAD AHEAD Prepared for Clorosur 2016 Buenos Aires, Argentina Hazel Kreuz, Global Director, Chlor-Alkali/Vinyls

2 About IHS Markit IHS Markit thinks about the world in a unique way. We call this The New Intelligence. IHS Markit s singular ability to look across complex industries, financial markets, and government actions that drive the global economy and provide our customers with insights, perspective and solutions for what really matters. Financial Markets Energy Chemical Automotive Aerospace, Defense & Security Product Design Technology, Media & Telecom Maritime & Trade 2

3 LG Chem / November 2016 Discussion Agenda 1. Economic outlook 2. Directions for Chlor-alkali 3. The PVC road ahead 4. Key take-aways

4 LG Chem / November 2016 Economic Outlook: What train are we on?

5 LG Chem / November 2016 Global economic growth remains subdued Global growth will stay below 3% in 2017 as slowdowns in Europe and China offset accelerations in the United States and emerging markets. US economic growth will pick up from 1.4% in 2016 to 2.2% in 2017, led by growth in consumer spending and business fixed investment. Economic and political uncertainty will hurt UK investment, consumer spending, and capital inflows in the year ahead. Eurozone growth is projected to slow from 1.6% in 2016 to 1.3% in 2017, reflecting increased political instability and banking problems. China s economic growth will slow further because of imbalances in credit, housing, and industrial markets. Deep recessions in Brazil and Russia are ending.

6 Annual percent change LG Chem / November 2016 Asia-Pacific (excluding Japan) will achieve the fastest growth in real GDP Real GDP NAFTA Other Americas Western Europe Emerging Europe Mideast- N. Africa Sub- Saharan Africa Japan Other Asia- Pacific

7 LAPPC / November 2016 Latin America 3 Regions on 2 Continents With Significant Potential Large market with 640 Million of finished goods consumers Mid America: MEX, VEN, COL North America East of Andes: BRA, ARG West of Andes: CHL, PER % GDP Growth Latin America World 3.0 Brazil Mexico Argentina Venezuela Colombia South America 7

8 Annual Percent Change LAPPC / November 2016 Real GDP Growth in South America Brazil Argentina Venezuela Colombia Chile Peru

9 GDP % Growth Average U.S real GDP growth 2.3% for US GDP Growth Year Bright consumer outlook based on robust employment growth, strong disposable income gains, modest inflation. IHS projects real GDP growth average growth rate to be 2.3% for Moderate inflation outlook. Average Consumer Price Index inflation forecast = 2.3% per year; Core inflation will average 2.0% Labor market improves; unemployment rate settles at around 4.6%. Low energy prices improve consumer spending

10 $ / MM Btu Gas-to-Crude Ratio LG Chem / November 2016 The Big Picture on Crude Oil Energy Price Trends % 100% 80% 60% 40% 20% 0% High product stocks will restrain prices in the near term. After significant surpluses in 2015 and H1-2016, the global liquids market will return to balance in late 2016 and in The US, China, and India drive global oil demand growth will be a similar to 2016 for natural gas based petrochemicals as natural gas remains close to parity with crude oil. Crude (WTI) Natural Gas

11 LG Chem / November 2016 The Chlor-Alkali Market: Picking up the pace

12 Percentage Thousand Metric Tons North America Caustic Supply Consolidation North America Caustic Capacity , ,000 15,500 15, Pre A/W Merge 2016 Post A/W Merge 14,500 Axiall Dow Dow/Mitsui FPC Georgia Gulf Olin OxyChem PPG Shintech Sunbelt Westlake Others Total Capacity

13 Million Dry Metric Tons Operating Rate Higher Asset Utilization In Chlor-Alkali Will Drive Improved Profitability By 2020 World: Caustic Soda Supply & Demand % Global operating rates currently below 80%; China operating rates below 70% % % % % % Demand Total Capacity Operating Rate No significant capacity increases on the horizon beyond 2017 EU mandate to close or convert mercury cell plants reduce capacity Steady demand growth over the forecast period raises operating rates to upper 80 s% in forecast period; some regional operating rates will be > 90% 13

14 Excess Capacity, Million Metric Tons Excess as a % of Demand Global Surplus Caustic Capacity To Decline Due To Limited Capacity Growth Global Caustic Soda Excess Capacity % 30% 25% 20% 15% 10% 5% % Excess Capacity Over Demand Average Excess as % of Demand, 90-07' Excess as % of Demand Average Excess as % of Demand, 08-22' 14

15 Dollars Per Metric Ton Dollars Per Short Ton USGC ECU Economics Improve with Higher Asset Utilization Caustic Prices Provide Majority of Earnings Contribution US Gulf Coast Chlor-Alkali Annual ECU Economics ECU Value from Chlorine (Asset-sharing) ECU Value from Caustic ECU Value ECU Cash Margin 15

16 $/ MMBtu, Natural Gas Global Crude Prices Recover as Oil Supply/Demand Balances Tighten 20 Crude Oil vs. Natural Gas Global Crude Oil vs. USGC Natural Gas 120 Demand growth of MMb/d from underpins oil market outlook. Oil prices remain low enough to force US crude production lower $/Barrel, Crude OPEC production remains high and surplus capacity available from OPEC falls to extremely low levels. Driven by power and LNG exports, North American gas demand reaches 105 Bcf/d by 2020, but N. American gas supply is plentiful and low cost. Rapid demand growth leads to higher natural gas prices, but remain under $4 per MMBtu Natural Gas WTI Brent 16

17 U.S. Dollars Per Metric Ton US Gulf Coast & China ECU Advantage Driven By Low Cost Energy Global ECU Cash Cost USGC Diap NEA Memb WEP Memb/Merc China Notes: * NEA Excludes China 17

18 Dollars Per Metric Ton Dollars Per Metric Ton ECU Cash Cost Curve North America has a sustainable advantage under current energy scenario World 2016 World Cost Curve: ECU 2019 World Cost Curve: ECU 1000 Brent Crude USGC Natural Gas 1000 Brent Crude USGC Natural Gas 800 ($/Bbl) ($/MM Btu) ($/Bbl) ($/MM Btu) NEA Avg 200 NAM Avg MDE Avg NEA Avg WEP Avg 200 MDE Avg NAM Avg WEP Avg Cumulative Production - MMT Cumulative Production - MMT 18

19 ERCO Port Edwards Day / September 2016 Shale Gas Driving ROI Advantage Indexed CAV ROI trend with time (NAM 2000 as 1) NEA xchina WEP NAM 19

20 MMT Mercury Phase-out Impact on European Capacity Will Help Improve Industry Asset Utilization European Chlorine Capacity Diaphragm cell Diaphragm Abestos cell Membrane cell Mercury cell Others Net Capacity loss 1 dmt Capacity loss limited by several membrane plants expansion: Akzo (Frankfurt) BASF (Ludwigshafen) Rokita (Brzeg Dolny) Spolchemie, CABB, ICL Some conversion delays expected Asbestos extension and conversion 20

21 Dollars Per Metric Ton ECU Cash Margin In Europe Improves With Capacity Rationalization All Regions Benefit From Higher Asset Utilization Global ECU Margins North America West Europe Northeast Asia China 21

22 Million Metric Tons ERCO Port Edwards Day / September 2016 US Caustic Trade Reflects Global Cost Advantage 2Q 2016: Record USGC exports Net exports must increase to handle the additional caustic generated by chlorine chain exports Imports on North America s East coast will decline Growing exports become a more significant percentage of output United States: Caustic Soda Trade 3.5 Forecast 3.0 Exports Imports Imports Exports Net Trade 2015 IHS 22

23 Caustic Trade Grows: Three Export Powerhouse Regions 612 kt 576 kt 610 kt 173 kt 239 kt 455 kt -234 kt 157 kt 218 kt 1635 kt 1417 kt 1520 kt 33 kt 298 kt 337 kt 1692 kt 1826 kt 1917 kt kt 461 kt 541 kt Global Trade: 2011 = 8.6 Million Metric Tons 2016 = 9.1 Million Metric Tons 2021 =10.1 Million Metric Tons

24 Near-to-Medium Term Chlor-Alkali Take-Aways US cost advantage (energy and ethylene) declined near term with lower oil; expected to recover with rising oil and steady gas prices, and higher utilization. Trade flow shifts Europe becomes net importer; US poised to increase caustic and vinyls exports; South America imports increase from the US Merger & acquisition activity continues as the global market consolidates(olin/dow, INOVYN/VYNOVA, Westlake/Axiall, Solvay/Unipar Carbochloro) New US capacity requires higher vinyls and caustic exports Availability of ethylene becoming a potential limiting factor for merchant US buyers. Ethylene integration in the US remains key question. Europe is high cost but with modern C-A industry and higher utilization and margins post 2017; note risk of currency movement on export strategy. Asia has high cash cost and excess capacity. China is self-sufficient in PVC production crude to coal ratio will play a role in domestic asset utilization 24

25 LG Chem / November 2016 PVC: The Road Ahead

26 14 M M J S N 15 M M J S N 16 M M J S N 17 M M J S N 18 M M J S N Dollars Per Metric Ton LG Chem / November 2016 Global Ethylene Prices US moves up: higher cash cost on ethane feed and spot price increases Global Monthly Ethylene Prices 1,800 1,600 1,400 1,200 1, US Average Acquisition Price WEP Contract Price SEA CFR Spot Price

27 Thousand Metric Tons LG Chem / November 2016 Timely Start-up of Ethylene Crackers is Critical New Ethylene Capacity in NAM 5,000 4,500 * Capacity is prorated depending on startup date. 4,000 3,500 3,000 2,500 2,000 1,500 1, Mexico US

28 Million Metric Tons Operating Rate LG Chem / November 2016 Higher PVC Operating Rates as Capacity Stabilizes World: PVC Supply & Demand % 90% % 70% 60% % Demand (2.6/3.0) Total Capacity (2.1/1.3) Operating Rate (% AAGR = 11-16/16-26)

29 PVC Trade Grows, More Intra-Region Flow 515 kt 570 kt 292 kt 260 kt 180 kt 300 kt 511 kt 535 kt 465 kt 500 kt 1,164 kt 1,450 kt 612 kt 950 kt Trade: 2015 = 8.6 Million Metric Tons 2018 = 8.9 Million Metric Tons

30 Thousand Metric Tons LG Chem / November 2016 West Europe: A Much More Balanced Market Come 2018 WEP Surplus Production 6,000 20% 5,000 4,000 3,000 Declining net trade Gradual domestic demand growth Capacity rationalisation More balanced to tight from % 10% 2,000 1,000 More competitive cost base 5% Demand Production* Net Trade* Excess Production, %* 0% * Assumes base-case scenario of 400kt capacity closures.

31 US Dollars Per Metric Ton LG Chem / November 2016 PVC Global Prices: From Downhill To Uphill Regional PVC Netback Comparison 1,200 1, Note: Contracts After Discount and Freight U.S. Netback West Europe Netback Asia Spot

32 LG Chem / November 2016 PVC Market in the Balance Crude oil rebounding Volatile ethylene prices in US New PVC capacity Relative low ECU & PVC costs Weak Market Factors PVC North America Snug ethylene supply in spring due to turnarounds High growth in multifamily and single family residential construction Strong Market Factors

33 Dollars per Metric Ton LG Chem / November 2016 PVC Margins: Recovery On The Horizon Regional PVC Margins NAM WEP NEA

34 LG Chem / November 2016 PVC Key Take-Aways Ethylene trend is a key driver for PVC prices. The cost advantage for PVC producers in North America has narrowed, but rising oil price will increase advantage. US housing starts are still increasing. Excess PVC capacity curtailments in China. No more new PVC capacity announced, hence operating rates are expected to increase in the next few years. Growth demand in Asia is key for the global market.

35 LG Chem / November 2016 The Big Picture: Road map take-aways for the CAV Future Caustic soda, PVC and ethylene prices trend up through the forecast period CAV Until operating rates reach a level sufficient to sustain reinvestment grade returns, there will be no significant new capacity Location of new investment will be defined by relative energy costs South American growth will be fueled by caustic soda and vinyls imports through the forecast period

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