ING Feedstock Outlook: A Decade of Change

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1 ING Feedstock Outlook: A Decade of Change Hamza.Khan@ING.com Head of Commodity Strategy Platts 6th Annual Asian Petrochemicals Markets, Shanghai, April 2017

2 Sea Change: The Feedstock World is Transforming by 2020 China Propylene Capacity (% share) % 40% 4% 3% 2020F 28% 25% 18% 11% 16% 2% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Refinery Naphtha Coal Methanol Propane/Butane Others Source: Argus, ING estimates 2

3 FIRST, WHERE ARE WE AND WHY? SECOND, CHANGES IN THE FEEDSTOCK WORLD THIRD, IMPACT ON OLEFINS 3

4 Feedstocks have different costs and outputs Cheapest to Priciest Ethane Mont Belvieu US$185/t Propane Mont Belvieu US$346/t Butane Mont Belvieu US$330/t Naphtha NW Europe US$482/t Gasoil NW Europe US$495/t 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% *Prices as on 10 April 2017; Source: Platts, Bloomberg, ING estimates 4

5 No Perfect Feedstock: Inherent Pros and Cons Ethane Naphtha Coal Lower feedstock prices Transportation is difficult Diversity of supply sources Higher feedstock prices Lower feedstock prices High capital costs Simple processing More localized market Optimum end product matrix High capital costs Increasing surplus Significant water consumption Low capital costs Mostly ethylene production Complex processing Domestic supply boosts security 5

6 Split is Defined Regionally on Historic Factors Global Petrochemical production capacity in 2014 Gas Quality Infrastructure Others 24% US 20% Mainly Ethane Based Wet gas has NGLs (including Ethane) while Dry gas is mostly Methane Usually, associated gas is wet while nonassociated gas is dry The US and Middle East produce large quantities of wet gas while Russia has mostly dry gas production (a large part of which is flared), leading to reduced ethane production in Russia Availability of ethane crackers to utilize the ethane Suitable transportation methods to ship it to crackers Extremely inflammable nature of ethane creates safety issues while transporting long distances in alternate transport methods including rail and trucks Cost Economics Demand Mainly Naphtha Based Japan 6% Korea 8% China 13% Europe 14% Middle East 15% Ethane recovery largely depends upon the price spread between ethane prices and natural gas prices at the hub The price spread should be enough to cover ethane recovery costs and transport costs at least; otherwise ethane would be left in the gas stream to be sold as natural gas Physically, the higher heat content of ethane can damage pipelines and limits ethane rejection Domestic manufacturing industry with high demand for end products Accessible external markets to absorb any domestic market surplus Liquid trading market Favorable arbitrage to secure long term supply contracts 6

7 FIRST, WHERE ARE WE AND WHY? SECOND, CHANGES IN THE FEEDSTOCK WORLD THIRD, IMPACT ON OLEFINS 7

8 US Will Become a Major Ethane Exporter US Ethane Production Consumption (MMbbls/d) Production Consumption Major export projects include: Enterprise Product Partners- increased capacity from 4.5 mtpa to 8.5 mtpa over recent years Targa increased capacity to 6.3 mtpa from just over 3 mtpa Sunoco came online in 2015 with its 5.8 mtpa terminal Phillips 66 Completed a 6 mtpa export facility One all completed, the US would have the capacity to export roughly 33 mtpa of LPG This is equal to roughly 30% of total LPG seaborne trade currently Source: EIA, ING estimates 8

9 US Projects Ship East Coast Ethane to Europe and India Import Company Origination Port Destination Quantity ( 000 tonnes/year) INEOS Marcus Hook Rafnes, Norway INEOS Marcus Hook Grangemouth, UK Borealls Marcus Hook Stenungsund, Sweden Reliance SABIC Morgan s Point Morgan s Point Scheduled for 240 3Q16 India 1,500 2Q16 Teesside, UK Versalis Dunkirk, France US LPG Exports to Europe (Mbbl/d) US Ethane export Capacity (Mbbls/d) Source: ICIS Presentation, Company reports, EIA, ING estimates 9

10 European Ethane Crackers are Coming Online Upcoming European Ethane Crackers European Petchem Capacity (M Tonnes) Orlen ENI-Versalis Ineos Grangemouth 700,000 tonnes/year Ineos Rafnes 620,000 tonnes/year Repsol SABIC Wilton 865,000 tonnes/year 1 Versalis Dunkerque 600,000 tonnes/year Borealis Stenungsund 5 625,000 tonnes/year ExxonMobil Dow Total SABIC INEOS PE PP Borealis LyondellBasell Source: ICIS, Borealis Presentation 10

11 In China, Coal to Olefins Technology Creates New Capacity Nearly 22 new projects with ethylene production capacity of c.7m t/y and propylene production capacity of c.8m t/yr are under advanced stages of discussion in China Coal/methanol based ethylene can increase its market share from currently c.20% in 2015 to c.35% in 2020 the share was almost 0 five years ago With the current drop in coal prices, the coal to olefins production cost has dropped to as low as c.us$ per ton in remote inner Mongolia or West China where coal mines are situated However, transporting these to the industrial hubs in the East (where olefins are converted into final products) remains a costly affair Heavy water usage in the process is also an operational challenge

12 CtO Boosts Propylene Output with Competitive Production Costs Coal (4.2 tonnes) Synthetic Gas Methanol (3.0 tonnes) MTO Process MTP Process Olefins (~1.0 tonne) 1,600 1,400 1,200 1, Coal to Olefin Production Costs (US$/t) 613 Mixed C4 11% MTO process C5+Othe rs 5% Fuel Gas 2% Ethylene 41% Gasoline 22% MTP process Fuel gas 6% 1,600 1,400 1,200 1, Naphtha to Olefin Production Costs (US$/t) 706 Propylen e 41% Propylen e 72% Source: ICIS, Platts, ING estimates 12

13 CtO Results in Slower Naphtha Demand Growth 4.5 China Apparent Naphtha Demand (M Tonnes) 4.0 Projected CAGR 5.9% CAGR 7.1% China Naphtha Demand China Naphtha Demand (Annual Average) Source: Bloomberg, ING estimates 13

14 FIRST, WHERE ARE WE AND WHY? SECOND, CHANGES IN THE FEEDSTOCK WORLD THIRD, IMPACT ON OLEFINS 14

15 Given PE/PP Demand Forecasts, PP Production Needs to Increase at a Higher Pace 45 China PE Demand/Supply Dynamics (M Tonnes) 35 China PP Demand/Supply Dynamics (M Tonnes) Demand growth +5% CAGR Required production growth +2% CAGR Imports from others Additional imports from ME Imports Demand Growth +5% CAGR Required production growth +4% CAGR Imports Additional Imports Imports Imports Additional imports from US Demand Demand Demand Demand 5 Production Production 5 Production Production a 2025 a 2016 a 2025 a Source: Nexant, Bloomberg, ING estimates 15

16 As Population Grows, Higher Plastics Usage Needs Diverse Feedstocks PE, PP and PVC Consumption (Kg/Capita) USA Japan Europe 40 China 30 Brazil Mexico India Source: Plastic insight, ING estimates 16

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