State of the Industry Planning for an uncertain future Dave Witte Senior Vice President, IHS Markit GM - Oil Markets, Midstream, Downstream and Chemicals +1 281 752 3276 dave.witte@ihsmarkit.com Building a Foundation for Profitable Growth in Uncertain Markets
The question that faces the strategic decision maker is not what his organization should do tomorrow. It is, what do we have to do today to be ready for an uncertain tomorrow? Peter Drucker Photo: Jeff McNeill - http://www.flickr.com/photos/jeffmcneill/5789354451/in/photostream/, CC BY-SA 2.0, https://commons.wikimedia.org/w/index.php?curid=15597498
Planning for an uncertain future Macro-level uncertainties Regional dynamics The global perspective
Macro-level uncertainties
Macro-level headlines demonstrate uncertainty These dynamics create uncertainty: Country risk with shifting geo-politics Market access risk under protectionist backlash Demand risk, especially in the developed world Energy volatility co-existence of shale and OPEC?
IHS Markit Country Risk routinely assesses how Trump presidency affects the global framework U.S.A. Israel Russia Winners Reduced regulations, corporate tax changes Increased military support Improved ties Losers Reverse embargo changes Cuba Iran Reverse Nuclear Agreement Mexico NAFTA renegotiation China Tariffs, environmental regulations
Border Adjustment Tax also creates winners and losers Barriers to Equilibrium High Low Crude Domestic Pricing Rules Propane Ethane PE Ethylene Price = Import Parity * 1.25 Time for Barrier Removal Nat Gas Long
Other unknowns impact strategic decisions China s economic pivot in an increasingly protectionist framework Energy and OPEC interaction under shale regime Unpredictable capital and project EPC performance Climate policy post Paris Accords Disruptive technologies
Mobility a technologically enabled disruptor to the Auto, Energy and Chemical industries Old School New School Mobility as a Service Personal Car Ownership Ride Hailing (e.g. Uber) Car Sharing (e.g. Zimride or Lyft) Personal Car Ownership
Implication; lower gasoline demand, higher miles driven and different chemical demand Powertrain variability under accelerated Autonomy (China + US) 60 Annual Auto Sales, Millions 50 40 30 20 10 0 2000 2010 2015 2020 2025 2030 2035 2040 ICE Base Case EV Base Case ICE Autonomy EV Autonomy Source: IHS Markit Note: ICE = internal combustion engine, EV = Electric + Conv. Hybrid
Spending past peak; organic investment declines Capital Spending in the Chemical Industry 100 8% Million of Tons or Billion $ (2014) 80 60 40 20 Additions well below 4% required to balance growth 6% 4% 2% Percent Base Added 0 2000 20012002 2003 20042005 20062007 2008 20092010 20112012 2013 20142015 20162017 2018 20192020 2021 0% China Asia ex China Middle East & Africa Americas Europe Spend % Base Added Source: IHS Markit
Instead capital has driven chemical M&A to record levels 250 15 Deal Volume, US$ (Billion) 200 150 100 50 12 9 6 3 X LTM EBITDA 0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Transaction Size Commodity Specialty 0 Sources: Company research, FactSet, Capital IQ, press releases, HSBC Notes: Multiples based on LTM EBITDA at the time of the transaction
Regional dynamics
China: Repositioning and restructuring Dynamic Environmental focus leading to increased compliance costs Made in China 2025 and One Belt-One Road Low margins from poorly positioned assets Opening refining to private companies Strategy Shut down non-compliant assets Drive toward higher margin business Target specialties increase M&A for technology Develop partnerships / opportunities Rationalization Build outside of China Back-integration by financially-strong chemical producers More conventional focus
Middle East: Optimizing and adjusting to changing feedstock positions Dynamic Strategy Advantaged feedstock limitations Cash generation in excess of local opportunities Return of Iran post-sanction Asset optimization/org restructuring Vertical integration, portfolio diversification and differentiation Industry consolidation Develop ex-gcc opportunities Broader product mix Local M&A for growth Iran accelerates investment, access to capital remains an issue Non-conflicted companies eye potential future investment
North America: Improving business climate with growing CAPEX and export risks Dynamic Made in America, regulatory relaxation, recovery of gas-oil differentials, shale resilience Cost overruns and project delays Strategy Continue integration investments and consolidation Focus on competitively servicing offshore demand New strategies to mitigate capital risk Protectionist trade policies and border tax changes Mitigation options unknown analysis underway
The global perspective
Supply demand tighten on emerging market growth Base chemicals and plastics distribution of demand growth 1700 Million Metric Tons 1500 1300 1100 900 2016 North America West Europe China Asia (exclude China) Middle East All Other 2021 Source: IHS Markit Demand Capacity
EBIT for gas-based producers and products recover with crude; others with S/D tightening Chemical earnings by region Chemical earnings by value chain 250 $169 250 200 $166 $171 $166 $154 $164 $144 $144 $159 200 150 $142 150 Billion$ 100 Billion$ 100 50 50 0 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 0 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Americas Europe Middle East & Africa Asia $/ton Olefins Aromatics CAV Syngas Source: IHS Markit Source: IHS Markit
Planning for an uncertain future Geo-political, economic and technology bring uncertainty and impact outlook Despite (or because of) uncertainties, profits expand with tighter value chains Strategy deployment needs to either boldly shape industry structure or create agility via optionality
It is not the strongest of the species that survives, nor the most intelligent, but the one most responsive to change. Charles Darwin