VMA MARKET OUTLOOK WORKSHOP / August 2017

Global Petrochemical Market Outlook:

Will Expansion Activity in North America Continue?

Presented to:
VMA MARKET OUTLOOK WORKSHOP
OMNI Parker House, Boston, MA

Mark Eramo, Vice President

Oil / Midstream / Downstream / Chemicals
IHS Market - Houston, TX
mark.eramo@ihsmarkit.com

Confidential. © 2017 IHS MarkitTM. All Rights Reserved.

 VMA MARKET OUTLOOK WORKSHOP / August 2017 2

Addressing strategic
challenges with
interconnected
capabilities
Resources

Financial

Consolidated Markets
& Solutions

Transportation

Confidential. © 2017 IHS MarkitTM. All Rights©Reserved.

2017 IHS Markit. All Rights Reserved.
 VMA MARKET OUTLOOK WORKSHOP / August 2017 3

Brought together to form the most comprehensive

Best-in-Class single source for global data & information, key
Brand Names industry events, market insights, analysis &
forecasts, technology & analytical platforms, and
consulting services

Oil Markets / Midstream / Downstream / Chemicals

3
Confidential. © 2017 IHS MarkitTM. All Rights Reserved.
 VMA MARKET OUTLOOK WORKSHOP / August 2017 4

Core Segments within Energy & Natural Resources

Our core capabilities serve our energy and chemical customers across the value chain
through focused data and insight subscriptions as well as consulting.

OIL MARKETS, MIDSTREAM, POWER, GAS, COAL

UPSTREAM
DOWNSTREAM & CHEMICAL & RENEWABLES

• Country E&P Terms and • Crude Oil Markets • Chemical Week and • Global Gas
Above-Ground Risk • Midstream Oil and Market Daily Service • Coal
• Plays and Basins Natural Gas Liquids • Base Chemicals • Power and Renewables
• Costs and Technology • Refining and Marketing & Plastics • Regional Gas, Power
• Companies and • Company Strategies and • Specialty Chemicals and Coal Markets
Transactions Performance • Costs & Technology
• Company Benchmarking
& Analytics

ENERGY-WIDE PERSPECTIVES

• Long-Term Planning & Scenarios • Curated Content

• Climate Strategy • Integrated Energy Events & CERAWeek

Confidential. © 2017 IHS MarkitTM. All Rights Reserved.

 VMA MARKET OUTLOOK WORKSHOP / August 2017 5

CHEMICALS ENABLE MODERN LIVING

Chemical industry value chain Customers
• Transportation
• Consumer products
• Packaging
Formulated • Construction
Natural Base Chemical products / • Recreation
• Industrial
resources chemicals intermediates performance
• Medical
materials • Pharmaceutical
Polymers & plastics • Personal care
Oil Olefins Commodities
Engineering resins
Gas Aromatics Differentiated • Textiles
Synthetic fibers
Coal Chlor-alkali commodities Paints and coatings • Electronics
Minerals Syn-gas Technical Adhesives/sealants • Aerospace
Water treatment • Business equipment
Renewables Ag-chems specialties
Flame retardants….
© 2017 IHS Markit
 VMA MARKET OUTLOOK WORKSHOP / August 2017 6

Petrochemical Market Outlook

As global demand grows, North America will continue to
attract new investments

• Energy markets will see natural gas in North

America significantly advantaged versus crude oil
• Global economy will grow at 2.5-3.0 % leading to
annual demand growth of:
❖Ethylene ~ 5.5 to 6 million tons
❖Propylene ~ 4 to 4.5 million tons
❖Methanol ~ 3.5 to 4 million tons
• North America will remain an attractive region for
base chemical and derivatives capital investments Ethylene
Propylene
• Investments continue in China and Middle East at Methanol
a more moderate pace

Confidential. © 2017 IHS MarkitTM. All Rights Reserved.

 VMA MARKET OUTLOOK WORKSHOP / August 2017 7

Energy fundamentals impact chemical industry investment decisions,

short term demand growth

• Energy trends impact regional competitiveness, industry

profitability, and ultimately drive investment decisions in the global
petrochemical industry
• Advantaged investments in North America, Middle East and China
see lower margins in low crude oil market
• IHS Markit Vice Chairman Daniel Yergin observes that there are
two major forces currently operating on the global oil market,
rebalancing and recalibration.
• The North American natural gas market is becoming more
integrated, complex, and globally connected, subject to
demand uncertainties in a currently oversupplied world market.
• Crude oil (energy) “at the extremes” impacts demand for
chemicals and plastics. At the extremes, energy trends will both
destroy and stimulate demand
Confidential. © 2017 IHS MarkitTM. All Rights Reserved.
 VMA MARKET OUTLOOK WORKSHOP / August 2017 8

Combination of high crude prices and stable gas is attractive for North America
chemical investments, based on natural gas and natural gas liquids
Global crude oil vs. USGC natural gas
120 USGC Natural Gas 20

100 Brent Crude 17

$/ MMBtu, Natural Gas

Lower longer case
$/Barrel, Crude

80 13

60 10

40 7

20 3

0 0
00 02 04 06 08 10 12 14 16 18 20 22 24
Source: IHS Markit
Source: History: Argus (crude), Intelligence Press (gas); Forecast by IHS Markit Energy

Confidential. © 2017 IHS MarkitTM. All Rights Reserved.

 VMA MARKET OUTLOOK WORKSHOP / August 2017 9

Demand growth for chemicals & plastics directly linked to global economic growth

• Basic chemicals and plastics represent the

key building blocks for durable and non-
durable consumer goods
• Multiple years of positive economic growth
results in acceleration of base chemical
demand growth
• Aligning capacity additions with demand
growth is the balance producers are seeking
• Economic contractions/stimulus causing
supply-chains to respond rapidly (inventor de-
stock / re-stock).

Confidential. © 2017 IHS MarkitTM. All Rights Reserved.

 VMA MARKET OUTLOOK WORKSHOP / August 2017 10

Economic growth in advanced countries and emerging markets are key drivers to
petrochemical demand
Annual % Change in GDP
Real GDP, Annual % Change 2014 2015 2016 2017 2018 2019
10 World 2.8 2.8 2.5 3.0 3.2 3.1
8 USA 2.4 2.6 1.6 2.3 2.7 2.3
6 Canada 2.6 0.9 1.4 2.7 2.3 2.3
4
Eurozone 1.2 1.9 1.7 1.8 1.7
2.0
2
UK 3.1 2.2 1.8 1.4 1.0 1.2
0
China 7.3 6.9 6.7 6.6 6.3 6.1
-2
Japan 0.2 1.2 1.0 1.3 1.0 0.7
-4
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 India 6.9 7.7 7.0 7.3 7.4 7.6
World Advanced countries Emerging markets Brazil 0.5 -3.8 -3.6 0.2 1.7 3.5
Source: IHS Markit © 2017 IHS Markit Russia 0.8 -2.8 -0.2 1.5 2.1 1.8
Confidential. © 2017 IHS MarkitTM. All Rights Reserved.
 VMA MARKET OUTLOOK WORKSHOP / August 2017 11

Chemical demand growth (vs GDP) has been decelerating over time; forecast to
continue
Average global GDP elasticity, by market & time period
3.0

2.5

2.0

1.5

1.0

0.5

0.0
1990-1999 2000-2007 2011-2016 2017-2025

Ethylene Propylene Methanol Paraxylene

Source: IHS Markit Benzene Chlorine Weighted Average

Confidential. © 2017 IHS MarkitTM. All Rights Reserved.

 VMA MARKET OUTLOOK WORKSHOP / August 2017 12

Ethylene and propylene continue pattern of accelerating demand growth / strong

capacity growth is needed
Demand growth: past / present / forecast Nameplate capacity growth: past / present / forecast
(million metric tons) (million metric tons)
8.0 8.0

6.0 6.0

4.0 4.0

2.0 2.0

0.0 0.0
Ethylene Propylene Methanol Ethylene Propylene Methanol
2016 Dmd Growth 2016 Cap. Growth
Avg. Dmd Growth (2011-2015) Avg. Cap. Growth (2011-2015)
Source: IHS Markit Avg. Dmd Growth (2017-2021) Source: IHS Markit Avg. Cap. Growth (2017-2021)

Confidential. © 2017 IHS MarkitTM. All Rights Reserved.

 VMA MARKET OUTLOOK WORKSHOP / August 2017 13

Growth in base chemicals dominated by ethylene, propylene and

methanol; new capacity dominated by APAC
World base chemical capacity by market (MM tons) World base chemical capacity by region (MM tons)

900 Ethylene 900 China

800 Propylene (PG/CG) 800 Asia + India (less China)
Methanol North America
700 700
Chlorine Europe & Africa
600 Benzene 600 Middle East
500 Paraxylene 500 South America
400 400
300 300
200 200
100 100
0 0
00 02 04 06 08 10 12 14 16 18 20 22 24 00 02 04 06 08 10 12 14 16 18 20 22 24
Source: IHS Markit © 2017 IHS Markit

Confidential. © 2017 IHS MarkitTM. All Rights Reserved.

 VMA MARKET OUTLOOK WORKSHOP / August 2017 14

Other unknowns impact strategic investment decisions

• Energy risk in an OPEC / shale regime

• Demand risk given China’s economic and
industrial pivot
• Unpredictable capital and project EPC
performance
• Climate policy post Paris Accords
• Disruptive technologies (e.g. Siluria)
• Country risk with geo-political unrest
• Market access risk under protectionist
backlash
Confidential. © 2017 IHS MarkitTM. All Rights Reserved.
 VMA MARKET OUTLOOK WORKSHOP / August 2017 15

Capital investments in chemicals Braskem-Idesa Ethylene/PE Plant

Nanchital, Veracruz, Mexico
are seeking a sustainable Start-Up: June 2016

competitive advantage

Chemical Investment “Drivers”

• Secure an energy & feedstock
advantage.
• Leverage current technology and
build world-scale.
• Invest with proximity to local
markets and/or access to trade
routes.
• Build to leverage an upstream and/or
downstream integrated position.
Confidential. © 2017 IHS MarkitTM. All Rights Reserved. Photo courtesy of Braskem IDESA
 VMA MARKET OUTLOOK WORKSHOP / August 2017 16

Beyond energy and economic Additional Investment Considerations:

growth, there are many other • Crude oil/energy price trends
factors to consider: • Global economic growth
• Geo-political considerations
• Govt. fiscal policy / currency strength
• Global energy markets
• State of industry profit cycle
• China structural changes
• Non-conventional technology
• Sustainability
• Levels of integration
Braskem-Idesa Ethylene/PE Plant
Nanchital, Veracruz, Mexico • Regional CAPEX differentials
Start-Up: June 2016
• Logistics investments
• Evolving Consumer Products
Confidential. © 2017 IHS MarkitTM. All Rights Reserved. 16
 VMA MARKET OUTLOOK WORKSHOP / August 2017 17

GLOBAL BASE CHEMICAL ASSETS

BY LOCATION - 2016

Benzene
Chlorine
Ethylene
Methanol
Paraxylene
Propylene PG ❖ 470 MM metric tons of production in 2016
❖ What are the best locations for future investments?
Confidential. © 2017 IHS MarkitTM. All Rights Reserved.
17
 VMA MARKET OUTLOOK WORKSHOP / August 2017 18

Market uncertainty results in slowdown in new capacity additions; 2019 forecast to

decline to 2012 levels
Annual Base Chemical Capacity Change By Market

35.0

30.0

25.0
Million Metric Tons

20.0

15.0

10.0

5.0

0.0

-5.0
91 93 95 97 99 01 03 05 07 09 11 13 15 17 19 21
Ethylene Propylene Methanol Chlorine Benzene Paraxylene
Source: IHS Markit © 2017 IHS Markit

Confidential. © 2017 IHS MarkitTM. All Rights Reserved.

 VMA MARKET OUTLOOK WORKSHOP / August 2017 19

Driven by a number of major initiatives, China investment in base chemicals has

accelerated since 2000 and will continue into the 2020’s
• Secure an energy & feedstock Total base chemical capacity for select countries
advantage 300
United States Canada
• Leverage current technology 250
Mexico Saudi Arabia
Iran South Korea
and build world-scale

Million Metric Tons

Singapore China
200
• Invest with proximity to local India
markets and/or access to 150
trade routes
100
• Build to leverage an upstream
and/or downstream integrated 50
position
0
90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 20 22 24 26
Source: IHS Markit Base Chemical Capacity = ethylene, propylene, methanol, benzene, paraxylene, chlorine
Confidential. © 2017 IHS MarkitTM. All Rights Reserved.
 VMA MARKET OUTLOOK WORKSHOP / August 2017 20

Beyond China and the United States, since the early 90’s some countries have
continued to invest in base chemicals while others have seen investments stall
Total base chemical capacity for select countries
• Saudi Arabia, Iran; leveraging 45
Canada Mexico
low cost hydrocarbons to 40

Million Metric Tons

Saudi Arabia Iran
drive industrial development 35
South Korea Singapore
• S.Korea, Singapore, India are 30
India
driven by strong demand 25

growth in APAC 20

15
• Mexico and Canada linked to
10
strong demand via NAFTA,
5
but limited by energy
0
developments 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 20 22 24 26
Source: IHS Markit Base Chemical Capacity = ethylene, propylene, methanol, benzene, paraxylene, chlorine
Confidential. © 2017 IHS MarkitTM. All Rights Reserved.
 VMA MARKET OUTLOOK WORKSHOP / August 2017 21

Market uncertainty causing delayed project approvals, results in falling capital

spending across global chemical markets by early 2020’s
Capital Spending by Product (2014 Constant$, billions) Capital Spending by Region (2014 Constant$, billions)
90 90

80 80

70 70

60 60

50 50

40 40

30 30

20 20

10 10

0 0
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

Aromatics Fibers Inorganics Olefins Plastics Syngas Products AFR CEP FSU ISC MDE NAM NEA SAM SEA WEP

Source: IHS Markit © 2017 IHS Markit Source: IHS Markit © 2017 IHS Markit

Confidential. © 2017 IHS MarkitTM. All Rights Reserved.

 VMA MARKET OUTLOOK WORKSHOP / August 2017 22

Ammonia, along with ethylene, propylene (and related derivatives) make up the
vast majority of new capital spending in the next wave of investments
Capacity additions (MM tons) and Capital spending (US$ billions) by chemical market: 2016 to 2025
ETHYLENE
AMMONIA
PROPYLENE (PG/CG)
MIXED XYLENES
METHANOL
TEREPHTHALIC ACID
POLYPROPYLENE
MONOETHYLENE GLYCOL
PARAXYLENE
HD POLYETHYLENE
LD POLYETHYLENE
LLD POLYETHYLENE
CHLORINE
ETHYLENE OXIDE
BENZENE
BUTADIENE
PROPYLENE OXIDE

0.0 10.0 20.0 30.0 40.0 50.0 60.0 70.0 80.0 90.0
Capital Spending (US$ billions) Capacity Additions (million tons)
Source: IHS Markit © 2017 IHS Markit

Confidential. © 2017 IHS MarkitTM. All Rights Reserved.

 VMA MARKET OUTLOOK WORKSHOP / August 2017 23

North America Low Cost Brings Back Base Chemical & Associated Derivative
Investments
North America - Base Chemical Total Capacity
150
130
110
Million Metric Tons

90
70
50
30
10
-10
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

Ethylene Propylene (PG/CG) Methanol Chlorine Benzene Paraxylene

Source: IHS Markit © 2017 IHS Markit

Confidential. © 2017 IHS MarkitTM. All Rights Reserved.

 VMA MARKET OUTLOOK WORKSHOP / August 2017 24

North America ethylene capacity growth including firm and announced projects
Firm Projects: 2017 - 2022 Announced Projects: 2022+
Total Growth Total Growth
Company Location Timing Company Location
-000- metric tons -000- metric tons
Dow Plaquemine, LA 1H-17 250
Ascent / Braskem West Virginia 1,000
Equistar Corpus Christi, TX 1H-17 401
Badlands NGL 1 North Dakota 1,500
Oxy/Mexichem Ingleside, TX 1H-17 550
ChevronPhillips Cedar Bayou, TX 2H-17 1,500 Badlands NGL 2 “Shangri-La” 1,000

Dow Freeport, TX 2H-17 1,500 ChevronPhillips 2 Cedar Bayou, TX 1,500

ExxonMobil Baytown, TX 1H-18 1,500
Formosa St James Parish, LA 1,000
Indorama Lake Charles,LA 2H-18 420
Formosa Point Comfort, TX 2H-18 1,150 Formosa LA 1,000

Shin-Etsu Plaquemine, LA 1H-19 500 Hanwha TBA 1,000

Sasol Lake Charles, LA 1H-19 1,550
Indorama LA or TX 1,500
LACC Lake Charles, LA 1H-20 1,000
PTTCG/Marubeni Shadyside, OH 1,000
Shell Monaca, PA 1H-22 1,500
Total additions 11,821 Total additions 10,500
Confidential. © 2017 IHS MarkitTM. All Rights Reserved.
 VMA MARKET OUTLOOK WORKSHOP / August 2017 25

Chemical industry earnings forecasts to decline with new waves of capacity in the
near term; Chlor-alkali market showing good recovery by 2020
Global Cash Earnings Trends by Chemical Value-Chain
Global
900
800
Dollars Per Metric Ton

700
600
500
400
300
200
100
0
-100
-200
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

Aromatics Chlor Alkali Olefins Plastics Syn Gas

Source: IHS Markit © 2017 IHS Markit

Confidential. © 2017 IHS MarkitTM. All Rights Reserved.

 VMA MARKET OUTLOOK WORKSHOP / August 2017 26

Lower earnings in Americas and Middle East are offset by stronger earnings in Asia
and Europe where new capacity discussions are also underway
Regional Weighted Average Cash Earnings
400
350
Dollars Per Metric Ton

300
250
200
150
100
50
0
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
World Africa_MidEast Americas Asia Europe
Source: IHS Markit © 2017 IHS Markit

Confidential. © 2017 IHS MarkitTM. All Rights Reserved.

 VMA MARKET OUTLOOK WORKSHOP / August 2017 27

Final Thoughts As You Plan Your

Next Move In The Chemical Sector
• Energy markets will see natural gas in North America
advantaged versus crude oil (BTU basis)
• Two major forces in the global oil market, rebalancing
and (cost) recalibration will play out in the near term
• Global economic fundamentals remain solid;
uncertainty indicators have declined; US is strong;
Europe is brighter; China remains resilient.
• Capital spending slowdown will create tight market
conditions in olefins and chlor-alkali by end of the
decade
• North America will remain an attractive region for
petrochemical and related investments; investors to
include both domestic and foreign companies
Confidential. © 2017 IHS MarkitTM. All Rights Reserved.
 VMA MARKET OUTLOOK WORKSHOP / August 2017

Global Petrochemical Market Outlook:

Will Expansion Activity in North America Continue?

Presented to:
VMA MARKET OUTLOOK WORKSHOP
OMNI Parker House, Boston, MA

Thank You!
Mark Eramo, Vice President
Oil / Midstream / Downstream / Chemicals
IHS Market - Houston, TX
mark.eramo@ihsmarkit.com

Confidential. © 2017 IHS MarkitTM. All Rights Reserved.