CMAI Day 1
It’s All About Shale Supremacy
28 March 2012 ¦ 10 pages
ir.citi.com 
Shale Gas Buzz Generates Record Conference Attendance – This week we are
attending the 27th annual CMAI World Petrochemical Conference, one of the premier
conferences in the chemical industry. Attendance this year is very strong, with ~1,200
participants. The mood is generally upbeat and the outlook is bright as the US ethylene
industry remains highly profitable due to plentiful shale gas supply. CMAI is forecasting
a peak in the 2015-16 timeframe, compared to our expectation of a peak in 2015 prior
to new capacity starting up. While Asia is operating near break-even levels and Europe
only slightly better, North America is in a much better competitive position due to a
feedstock advantage from low-cost ethane. Several other key takeaways came from an
industry executive panel which focused on shale gas.
Executive Panel Focuses on Shale Gas – Key executives from Shell, LyondellBasell,
Dow Chemical, Saudi Aramco, and Reliance discussed the impact of shale gas on the
chemical industry. Today shale-produced ethane accounts for only 10% of total ethane
supply, a figure that could reach 50% by 2020. Growing liquids production is enhancing
returns for drillers. LYB’s CEO noted that for E&P producers to generate a 15% return,
natural gas prices would need to be $3-$4/mmbtu for dry gas, but could be less than
$3/mmbtu for wet gas due to valuable liquids.
A View on New Ethylene Capacity... – With 7 or 8 new crackers on the horizon in
North America, we believe the domestic market cannot absorb all of this new ethylene
capacity. This underscores the need for derivative exports as ~80% of incremental PE
would need to be exported. With lengthy permitting processes and rising construction
costs, project delays could push the proposed new ethylene crackers further into the
future. Importantly, new capacity should not significantly impact the global ethylene
market given the combined capacity would account for ~5-6% of global capacity. There
was a clear understanding at the conference that Asia would bear the brunt of new
ethylene capacity. There was also interest among industry participants including LYB
and Braskem in forming joint ventures to reduce capital costs.
...Including the New Shell Ethylene Cracker – Of the new ethylene announcements,
Shell’s decision to build in western Pennsylvania has garnered much of the attention.
The decision was predicated on both advantaged feedstocks from the Marcellus and
market access (50% of the US population is within 500 miles of western Pennsylvania).
Although the company doesn’t have a US presence in polyethylene, it appears willing
to establish one. We agree that: 1) there is a market for local chemical production in
the Northeast, and 2) that vast new ethane production from the Marcellus will need
multiple outlets and cannot rely solely on an ethane pipeline to the US Gulf Coast.
However, some question marks remain around infrastructure to support a new cracker
Please see page 2 for additional takeaways...
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CMAI Day 2
Middle East Shifts Gears; US PVC Dominance Continues, but
Some Concern on Acetyls & TiO2
30 March 2012 ¦ 7 pages
ir.citi.com
Highlights from CMAI Day 2 – While day one of the 2012 CMAI World Petrochemical
Conference focused on the shale supremacy (please see CMAI Day 1 - It’s All About
Shale Supremacy), day two focused on individual chemical product chains and the
Middle East ethylene market. We would highlight the following key takeaways: 1) the
Middle East is running out of cheap ethane and the new ethylene crackers are using
more mixed feeds like LPGs that are less advantaged, 2) North America’s PVC export
prowess is here to stay as the region is exporting ~40% of production, 3) Acetic acid
pricing is likely to remain flat in the near term with Chinese operating rates close to
60%, 4) TiO2 demand destruction of up to 1% per year is likely due to high prices. The
April TiO2 price increase appears likely to stick, although TiO2 margins are unlikely to
improve due to high titanium ore prices.
Middle East Ethylene Advantage Hinges on Cheap Ethane – CMAI's Middle East
expert discussed life in the region beyond cheap ethane, which is dwindling rapidly.
Recall we pointed to the end of cheap ethane after our recent visit to the Middle East in
December (see Arab Spring Changes Strategy for Middle East Chemical Players). For
new crackers, Middle East companies are using more mixed feeds like propane and
butane (LPGs) which are abundantly available. LPGs have two advantages: 1) they
create more diversified products like propylene & butadiene, and 2) they can be used in
existing crackers with no major modifications. However, LPGs have a global price since
they can be exported, and do not provide a production cost advantage. Some new
crackers like Dow's Sadara project will use mixed heavy feeds including naphtha, plus
20-25% cheap ethane as a "sweetener" to boost profitability.
North America’s PVC Export Prominence is Growing – North America has become
a major supplier of PVC to the rest of the world, exporting ~2.6mmt today (35-40% of
production) compared to a negligible amount just five years ago. With no major US
PVC expansions until 2016, utilization rates are expected to increase from 80% in 2011
to at least 90% by 2016. The North America PVC production cost is ~$700/t compared
to ~$1,000/t in Europe and for acetylene-based producers in China. In addition to
advantaged ethylene production, the ECU cost of production in the US is lower at
$225/t compared to $350/t in Asia and $400/t in Europe, benefitting chlor-alkali
producers like DOW and PPG.
Acetyls Markets Vary by Region – Global acetic acid operating rates are near 70%
although regional differences exist with the US operating at 90% compared to China at
60%. China's low utilization is due to high inventory levels and lower exports. Current
export prices are in the range of $400-$415/t, an uneconomical level for exports to
Western markets, and below the average price last year of ~$500/t. US exports in 2011
were near 900kt, representing 32% of total demand, with average export prices slightly
above $600/t. Acetic acid prices are expected to remain flat in the near term as margins
are reasonable for the US and Europe, but Chinese average producer margins are
expected to be near zero or at cash cost. The oversupply in acetyls is a mild negative
for CE, although we acknowledge that CE is a low-cost player and tends to operate its
plants at higher rates than the industry, particularly in China |
