Company Strategies and Performance. LyondellBasell Braskem deal Creation of the world s largest PP producer

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1 ompany Strategies and Performance deal reation of the world s largest PP producer

2 After spending much of the past decade focused internally on improving reliability and its cost position, is now looking to acquisitions to accelerate growth. Industries bid to acquire would create the world leader in polypropylene (PP) and a top-five player in polyethylene (PE). has adopted a back-to-basics strategy to put the company on a profitable track and has focused on operating reliability and cost reduction to strengthen its core businesses in petrochemicals, polymers and refining, under EO Bob Patel. The company is now aggressively building a capability for growth, including the ability to execute simultaneous major capital investments as well as actively participating in potential M&A. On 15 June, confirmed that the company has entered negotiations to acquire Odebrecht s controlling stake in. In February 218, reached agreement to acquire A. Schulman, a North American supplier of plastics compounds and composites, for $2.25 billion to significantly expand its compounding business. is Brazil s dominant chemical producer. Outside Brazil, the company has manufacturing in the United States, Mexico, and Germany where the company has expanded mainly through acquisitions and joint ventures. s non-brazil assets include a JV petrochemical complex in Mexico that started up in 216, as well as polypropylene (PP) assets in the United States and Germany. The company s current major shareholders are Odebrecht, a Brazilian engineering and construction conglomerate, and state-owned Petrobras energy company, holding a 38.3% and 36.1% share, respectively, while Odebrecht holds 5.1% of the voting rights.

3 Revenue and net income margin and Revenue (US$ billion ) % 15% 1% 5% % Net income margin (%) Source: IHS Markit revenue revenue net income margin (%) net income margin (%) -5% 218 IHS Markit expected to move up from its current global position is one of the world s largest plastics, chemicals, and technology companies, with revenues of $34.4 billion in 217. It currently ranks eighth globally as per IHS Markit hemical Week Billion-Dollar lub 217 list, while stands at 16th rank. has enjoyed higher margins since 212 owing to efficient utilization of its assets, use of advantaged feedstock, and focus on production of specialty-grades polyolefins products, giving it a competitive advantage over other chemical companies. reported net revenues of $15.5 billion for 217. The company s overall profitability since 214 has increased owing to falling naphtha prices. However, s net income for 216 declined drastically because of the approximately $957 million fine that the company had to pay to international authorities. enters a new PP market s total polyolefins capacity (polyethylene and polypropylene) stands at 1.5 million metric tons per year. The company s polyolefins assets are concentrated in North America and Europe, accounting for about 9% of the company s total capacity. s share of revenue from emerging countries is quite low, reflecting its limited production presence in high-growth regions. s polyolefins assets, meanwhile, are primarily located in South America, notably Brazil, with additional assets in North America and Europe. The company s high dependence on Brazil makes the company susceptible to any volatility in the economy, leading the company to expand to North America and Europe to mitigate this risk. The deal will provide an access to manufacturing assets in South America. The total polyolefin asset-base will stand at 13.4 million metric tons per year once the acquisition is completed. The deal would also make the largest polyolefins maker overall, and a top-five player in chemicals in terms of revenue, as well as giving the company a geographically diversified portfolio. IHS Markit expects South American market to exhibit a higher growth rate for polyolefins market in the upcoming years as compared to last five years. 3

4 capacity for polyolefins by region 218 3% 5% 2% capacity for polyolefins by region 218 7% 44% 46% Total capacity: 1.5 MMT 63% 3% Total capacity: 7.9 MMT North America Southeast Asia Europe Northeast Asia Middle East North America South America Europe * capacity for polyolefins by region 218 2% 3% 4% Regional growth rates Polyethylene and Polypropylene 6.% 36% 42% Total capacity: 13.4 MMT 4.% 2.% 13% North America South America Europe % North America South America Western Europe Middle East Northeast Asia Southeast Asia World Northeast Asia Southeast Asia Middle East Polyethylene Polypropylene A better fit? has the flexibility to utilize advantaged NGL feedstock in the United States to over 9%. Previously, naphtha had been a key feedstock for s ethylene operations. However, the company has recently taken initiatives to diversify its feed-slate and add flexibility to its operations through the start-up of a JV ethane cracker in Mexico, and the modification of its Bahia cracker to use ethane. s Mexico cracker was the first new cracker in the North American shale gas revolution, providing the company with a firstmover advantage. As stated in the IHS Markit SP hemical (formerly ompetitive ompany Analysis (A)) report for, the company has a competitive ethylene cash cost position in the United States, benefiting from the advantaged feedstock in the region. However, naphtha consumption at its European crackers drags the company s overall position towards relatively higher cost compared with its peers. The graph indicates a high cash cost differential between and, resulted from high dependency on naphtha-based feedstock for. Eventually, overall ethylene cash cost for is expected to increase after the deal. * Odebrecht s share on equity shareholding basis

5 Ethylene cash cost ($/ton) Ethylene cash cost analysis Westlake Mubadala hevron Phillips Source: IHS Markit ompetitive ost and Margin Analytics (MA) DowDuPont ExxonMobil Formosa Group Royal Dutch/Shell -* Ethane LPG Naphtha Plus On purpose Ethylene ash ost urve 1% 9% 8% 7% 6% 5% 4% 3% 2% 1% % 218 IHS Markit Feedstock split (%) Propylene integration analysis for and North America South America Middle East Europe Asia Propylene Acrylonitrile Acrylic Acid umene Oxo-Alcohol Polypropylene Propylene Oxide Others Net Surplus Net Deficit All values are in million metric tons per year. = apacity; = internal demand. Source:IHS Markit For, North America continues to account for the largest share of propylene capacity by far, followed by Western Europe, the Middle East, and Asia. Being particularly strong in PP and propylene oxide derivative production, the company has a huge requirement for propylene feedstock. Although the company is the third-largest propylene producer globally, the company is still dependent on the merchant market for propylene requirements. In North America, has a balanced propylene position, while has a net deficit position in the region. depends on long-term propylene contracts with third parties to secure feedstock for its North American and European assets. North America South America Middle East Europe Asia - * Propylene Acrylonitrile Acrylic Acid umene Oxo-Alcohol Polypropylene Propylene Oxide Others Net Surplus Net Deficit All values are in million metric tons per year. = apacity; = internal demand. Source:IHS Markit * Odebrecht s share on equity shareholding basis

6 The upcoming deal will bring to a better negotiation platform with feedstock providers in the North American region. However, the company is also considering a makeversus-buy decision on its propylene supply and the cost-effectiveness of building a US polypropylene (PP) plant. will also gain access to s proprietary technologies, as the latter has multiple proprietary polyolefin process technologies. Global rankings for 218 PP and PE Top global players in polypropylene 218 Top global players in Polyethylene 218 Million metric tons per year 8, 6, 4, 2, Formosa Group Exxon Mobil orp. Total Reliance Industries Mubadala SABI NP Polypropylene capacity SINOPE -* Million metric tons per year 12, 1, 8, 6, 4, 2, INEOS NP-Iran hevronphilips NP Mubadala SINOPE Polyethylene capacity SABI DowDuPont Exxon Mobil orp. -* Upon completion of this acquisition, will own the largest and relatively more diverse polyolefin portfolio, geographically. The company will become the world leader in polypropylene and a top-five player in polyethylene. Opportunities and risks The deal meets EO Bob Patel s stated first M&A criteria, portfolio fit. However, the second criteria, earnings accretion within two years, needs to be scrutinized once the agreement is finalized. has been looking to strengthen its foothold in the PP value chain with focused investments including organic and inorganic expansions. urrently, does not have significant operations in South America other than PP compounding in Brazil. This deal will open opportunities in the South American market, where the conditions are expected to improve in next few years. The company will benefit from s already strong market position in the region. is also a leader in sustainable olefin/polyolefin production, with the capacity to produce 2, metric-tonsper-year of ethylene from ethanol using its own proprietary technology. The political and economic crisis in Brazil over the last few years hindered domestic chemical and petrochemical demand. This drove to increase export volumes to North America, Europe, and Asia. The company has prioritized growing in a relatively stable location where demand is expected to rise in the short term and is currently looking for global opportunities, especially in the Americas and Europe, where it has a strong industrial footprint. This deal will also add opportunities for as the company can benefit from s strong marketing network in Asian and European markets.

7 Summary: Although this deal makes strategic sense, both companies will have to work through the ensuing complexities. While will have to deal with Brazil s current political situation, needs to establish how the Brazilian government will view this takeover, as is the largest petrochemical producer of the country. The merged entity will be the largest PP manufacturer in terms of capacity, however, companies like DowDuPont and Exxon will still be the most geographically diverse producers. - will, however, be the largest PP producer in Western Europe, North American and South American market. Meanwhile, it still needs to take a decision around secure feedstock procurement for its PP value chain to bolt its world s largest and strongest position. can draw on previous playbooks to improve asset integration, operating capabilities, and capital discipline. And just as shale lifted prospects for in the United States, promising developments and the recent surge in Brazil s pre-salt oil production should reduce dependence on imported naphtha and improve the cost position in Brazil. The scale of that feedstock advantage won t nearly match the shale benefit, but it will significantly aid the cost position and competitiveness for the dominant player in Brazil and South America. Richa Sharma Research and Analysis Associate Manager, hemical Research, IHS Markit For details on how we can help support your competitive research and analysis, visit customer care americas T (Outside US/anada) customer care europe, middle east, africa T customer care asia pacific T E ustomerare@ihsmarkit.com About IHS Markit IHS Markit (Nasdaq: INFO) is a world leader in critical information, analytics and solutions for the major industries and markets that drive economies worldwide. The company delivers next-generation information, analytics and solutions to customers in business, finance and government, improving their operational efficiency and providing deep insights that lead to well-informed, confident decisions. IHS Markit has more than 5, key business and government customers, including 85 percent of the Fortune Global 5 and the world s leading financial institutions. Headquartered in London, IHS Markit is committed to sustainable, profitable growth. opyright 218 IHS Markit. All Rights Reserved VL-818