Chemical Industry Overview

Presented by:
Dave Witte
SVP IHS & GM, IHS Chemical
February 14, 2013
2012 Southwest Chemical Association
2012 IHS No portion of this presentation may be reproduced, reused, or otherwise distributed in any form without prior written consent.
Agenda
Intro to IHS
Economic Outlook
Energy Drivers &
Backdrop
Chemicals Overview
2012 IHS No portion of this presentation may be reproduced, reused, or otherwise distributed in any form without prior written consent.
Agenda
Intro to IHS
Economic Outlook
Energy Drivers &
Backdrop
Chemicals Overview
2012 IHS No portion of this presentation may be reproduced, reused, or otherwise distributed in any form without prior written consent.
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2012 IHS No portion of this presentation may be reproduced, reused, or otherwise distributed in any form without prior written consent.
Agenda
Intro to IHS
Economic Outlook
Energy Drivers &
Backdrop
Chemicals Overview
2012 IHS No portion of this presentation may be reproduced, reused, or otherwise distributed in any form without prior written consent.
Peak
Q3
2008
Trough Q1 2009
Back to
Previous Peak
Q2 2010
7
7
05 06 07 08 09 10 11 12
Quarterly Annualized Value
Constant 2005 U.S. Dollars
Trillions
Source: IHS Global Insight
Global Economy
was off the growth
curve for seven
quarters

Pace of Expansion
slowed to less than
3 percent per year
(`12-`13) due to EU
& confidence loss
but is accelerating

Taking much longer
to regain trend line
performance
$44
$46
$48
$50
$52
$54
$56
$58
$60
13 15
Slower Pace of Economic Recovery
China Grows at about 7.9% per year and
Global rates are close to 3.5%
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2012 IHS No portion of this presentation may be reproduced, reused, or otherwise distributed in any form without prior written consent.
The sovereign debt crisis has abated somewhat, but most Eurozone
economies will struggle through 2013.
US growth will remain sluggish through 2013, then pick up in 2014-15.
Chinas growth pace is stabilizing near 7.5%, but a strong rebound is
unlikely, and government policies will remain cautious.
Emerging markets still offer the best growth prospects.
Risks to the outlook:
Eurozone debt crisis
US sequestration
Iran-related oil price shock
China hard landing
The Global Economy: Policy Uncertainties in the
U.S., Eurozone, and China Impede Growth
2012 IHS No portion of this presentation may be reproduced, reused, or otherwise distributed in any form without prior written consent.
The Eurozone will struggle with weak growth and sovereign debt problems;
necessary reforms will take years to work.
Signposts: sovereign bond yields, credit availability, ECB liquidity injections,
confidence indexes, PMIs, exchange rates, fiscal balances
The US expansion will continue at a modest pace, restrained by fiscal tightening
and supported by housing market recoveries.
Signposts: job growth, housing permits, capital goods orders, solution to
sequestration and budget
Chinas slowdown is both cyclical and structural.
Signposts: exports, property transactions, home prices, electricity use,
industrial production, credit growth
Asia will lead global growth; Latin America and Africa will do well by historical
standards.
Signposts: world trade flows, commodity prices, PMIs, retail sales
Summary and Signposts
2012 IHS No portion of this presentation may be reproduced, reused, or otherwise distributed in any form without prior written consent.
Agenda
Intro to IHS
Economic Outlook
Energy Drivers &
Backdrop
Chemicals Overview
2012 IHS No portion of this presentation may be reproduced, reused, or otherwise distributed in any form without prior written consent.
0%
10%
20%
30%
40%
50%
60%
0
2
4
6
8
10
12
14
16
18
07 08 09 10 11 12 13 14 15 16 17
Crude (WTI) Natural Gas Gas as % of Crude
Dollars Per MMBtu
Gas as a % of Crude, BTU Basis
North America Energy Price Trends
2012 IHS No portion of this presentation may be reproduced, reused, or otherwise distributed in any form without prior written consent.
Snapshot of US Energy Landscape
12
Unconventional oil sources have
increased oil production by 25% from
2008.
Twelve years ago, shale gas production
was only 2% of total US natural gas
production, today it represents 37%.
The increase in US natural gas production
from shale gas and tight gas plays is
making it possible that the United States
will become a net exporter of gas by the
end of this decade
Employment in the unconventional
upstream sector will account for more
than 1.7 million jobs in 2012.
2012 IHS No portion of this presentation may be reproduced, reused, or otherwise distributed in any form without prior written consent.
Cumulative capital investment by 2035 will surpass $5.1 trillion
$87B today, almost doubling to $173B by 2020
Average of $200B through 2035
Capital investments will also be dispersed throughout the United
States via an extensive network of domestic suppliers
Businesses in states that do not directly produce unconventional energy
will benefit as participants in the supply network.
Fosters employment gains across many industries and regions of the
US
Unconventional Capex and Opex creates jobs
In 2012, unconventionals supported more than 1.7 million jobs,
360,000 direct oil and gas jobs, 537,000 indirect supplier-industry
jobs, and 850,000 induced jobs.
A total of 3 million and 3.5 million jobs on 2020 and 2035,
respectively

Launching a Game-Changing Transformation of
the US Economy
2012 IHS No portion of this presentation may be reproduced, reused, or otherwise distributed in any form without prior written consent.
From 2012 to 2035 the Employment Contribution of the
Unconventional Oil and Gas Industry will Double
-
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
2012 2015 2020 2025 2030 2035
Employment Contributions of
Unconventional Oil and Gas Activity
(thousands of workers)
Induced
Indirect
Direct
The greatest future job growth will occur between 2012 and 2020
3 million jobs by 2020.
2012 IHS No portion of this presentation may be reproduced, reused, or otherwise distributed in any form without prior written consent.
...Causing a Ripple Effect Through the Economy
Employment Contribution in 2020
Upstream unconventional
oil and natural gas activity,
on average, demonstrates
one of the larger
employment multipliers.
On average direct
employment will
represent about 20% of
all jobs resulting from
unconventional oil and
gas activity with the
balance contributed by
indirect and induced
employment.
Oil & Gas
Extraction
210,758
Professional,
Scientific, and
Technical
Services
102,294
Food Services
& Drinking
Places
157,807
Machinery
Manufacturing
115,730
Real Estate
107,660
Wholesalers
102,294
Others
2,188,625
2012 IHS No portion of this presentation may be reproduced, reused, or otherwise distributed in any form without prior written consent.
Agenda
Intro to IHS
Economic Outlook
Energy Drivers &
Backdrop
Chemical Overview
2012 IHS No portion of this presentation may be reproduced, reused, or otherwise distributed in any form without prior written consent.
Chemical Sector
Drivers and Trends?

International Trade
Pattern Changing?

Investment substantial
plans change US
landscape
A Perspective on the Future
2012 IHS No portion of this presentation may be reproduced, reused, or otherwise distributed in any form without prior written consent.
Global Megatrends Center Around Broad
Fundamental Value Creation Drivers
Demographic
Rapid population in the
developing world with
increased ageing in the
developed world shift
demand profile
Economic
Standard of Living rises
rapidly, merging developing
country standards with that of
the developed world and
leading to rapid technology
take-up
Sustainability
Growing populations and
economies create needs for
innovative solutions; market
drivers will be likely
supplemented by policy
Demographic
Rapid population growth in
the developing world with
increased ageing in the
developed world shift
demand profile
Economic
Standard of Living rises
rapidly, merging developing
country standards with that
of the developed world and
leading to rapid technology
take-up
Sustainability
Growing populations and
economies create needs for
innovative solutions; market
drivers will be supplemented
by policy initiatives
Create opportunities and threats for chemical producers
New geographic & end-use markets (products, logistics & channels)

Minimum operational footprint and maximum resource efficiency
(energy value creation & environmental excellence)

Linkages to fast growth markets (BRICS), coupled with an expanded
focus on the frontiers (e.g. Africa)


2012 IHS No portion of this presentation may be reproduced, reused, or otherwise distributed in any form without prior written consent.
Changing Demographics Impact Chemical Demand.
Advanced Economies Age-Emerging Markets Grow
Chemical Impact
Population driven demand will be centered in the emerging markets
Access to qualified technical, experienced human resources will be a challenge for the
chemical industry, especially in the advanced economies
Changing age profiles will likely change the end-use buying patterns (related to factors such
as household creation, technology adaptation etc.)
Associated impact on chemical business footprint (location, logistics, portfolio)



-1.0 0.0 1.0 2.0 3.0 4.0
Developing Countries
Emerging Markets
Advanced Economies
(Population by age segment, compound
annual growth rate, 2000-2020)
Age 65+ Age 15-64 Age 0-14
(200) - 200 400 600 800 1,000
Developing Countries
Emerging Markets
Advanced Economies
Age 65+ Age 15-65
Population Growth by Age Segment, 2000 - 2020
Millions of People
2012 IHS No portion of this presentation may be reproduced, reused, or otherwise distributed in any form without prior written consent.
More Disposable Income Impacts the Application
and Type of Chemical Products Demanded
0
10
20
30
40
50
Brazil Russia India China U.S.
2000 2020
(Food consumption share of total consumption)
0
3000
6000
9000
12000
15000
18000
Brazil Russia India China U.S.
Cars, units sold (thousands)
2000 2020
Source: IHS Global Insight, IHS Automotive
Consumer market & income growth
trends
The U.S. will remain the largest
consumer market while the share
of European countries will
stagnate or decline
Diversity of spending patterns
exist as economies are at
different stages of growth.
Food and other necessity
spend tends to be higher with
economies in early
development.
Necessity goods/services still
dominate but gradual shift
towards discretionary items.
As incomes rise, spending shifts
to towards households goods,
communication, leisure,
education, and upgrade to higher-
value goods.
20
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Demand migrates to the developing
economies
Population growth
Economic growth
Leverage on labor resources create
economic rent to developed
economies

Growing dislocations in supply and
demand equilibrate with increased
trade
Supply chain and channel
optimization differentiate
Risks to loss of market access
create trading blocks between
hydrocarbon supply and growing
markets


Demand Growth in the Developing World
Drives Increased Trade
2012 IHS No portion of this presentation may be reproduced, reused, or otherwise distributed in any form without prior written consent.
(35% of Globe)
19
$0
$200
$400
$600
$800
$1000
$1200
MDE Canada
-------- Ethane ---------
U.S. U.S.
Naphtha
MDE
LPG
MDE
Naphtha
Europe Asia
LPG
NEA SEA
Naphtha
Ethylene Cash Cost Comparison
U.S. Dollars Per Metric Ton
2012
Feedstock Costs are Key to Earnings and
Increasing Supply/Demand Dislocation
Differences in
cost position
remain very
substantial
Condensates
even favor U.S.
vs. naphtha used
elsewhere
Margins remain
very wide for
ethane based or
close-to-zero for
oil based
Price
2012 IHS No portion of this presentation may be reproduced, reused, or otherwise distributed in any form without prior written consent.
Cents Per Pound of Polyethylene
U.S. Ethane to Polyethylene
Chain Margin Distribution
-10
0
10
20
30
40
50
60
Ethylene
Ethane
Polyethylene
High Oil Prices Mean Profits for Ethane Chain
Incentives remain
high regarding
investment in
Integration
U.S. Ethane to PE
producers enjoy
the benefits of a
very advantaged
gas-oil price ratio
Feedstock and
ethylene margins
support increase in
net export activity
1990 1995 2000 2005 2010 2015 2020
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North America Net Exports
Million Metric Tons
Naphtha cracking
economics remain in
place as the Global
Price Maker
Business Plans for
new capacity will
include a significant
export presence
Exports could
represent 50% of
future production
methane & ethane
cost position critical
0.0
2.5
5.0
7.5
10.0
12.5
15.0
90 95 00 05 10 15 20 25
Polyethylene
Polypropylene
Vinyls
0%
5%
10%
15%
20%
25%
30%
35%
Percent of Production
Trade Connects Advantaged Hydrocarbons to
High Demand Growth Markets
2012 IHS No portion of this presentation may be reproduced, reused, or otherwise distributed in any form without prior written consent.
Methanol Benefiting Strongly from Shale Gas
Low priced methane in the U.S. as
a result of shale gas is providing a
low cost feedstock for methanol
production.
Methanol capacity in the U.S. will
grow ~5 fold from 2010 to 2017.
Capacity additions exceed US
demand for growth
US will switch from a net importer
to an exporter
The U.S. will transition from being
the highest priced country to
second lowest globally.
New end uses for methanol in the
region such as methanol-to-
chemicals, gasoline as well as
direct blending into gasoline could
help accelerate demand growth.
2012 IHS No portion of this presentation may be reproduced, reused, or otherwise distributed in any form without prior written consent.
$0
$2
$4
$6
$8
$10
$12
$14
13 15 17 19 21 23 25 27 29
Billions of Dollars
required to fund
chemical plant
capital plans
attributable to the
shale gale
IHS estimates
$95B to be spent
over this timeframe
Generating job
growth & CAPEX
risk in construction
to operations
North American Capital Spend
Billions
Other Chemicals
Propylene Chain
Ethylene Chain
Methane Chain
Chlorine Chain
Capital Build will Challenge Resource
Availability
2012 IHS No portion of this presentation may be reproduced, reused, or otherwise distributed in any form without prior written consent.
Caustic Soda Trade Volumes Rising; Driven by
Export Co-product PVC Demand
High Cash Costs in most of
the world
Global price set by high cost
regions tied together via
shipping costs
Low USA Cash costs
Higher production in USA
Higher net exports of caustic
from USA
Lower imports of caustic soda
into USA
Global traded volume of
caustic soda increases
0%
5%
10%
15%
20%
25%
0
1
2
3
4
5
00 02 04 06 08 10 12 14 16 18 20 22 24 26 28 30
Imports Exports Net Exports as % of Total Demand
Million Metric Tons Percentage
US Trade Outlook for Caustic Soda
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Shales Impact on Aromatics is More Indirect
Demand pulled by Asian appetite for
PS, nylon, PC, polyester fibers and PET
with solvents being relatively small
Benzene production diminished with
shift of crackers to light feeds and
lightening crude feed slate pushing up
BZ prices.
Toluene and xylene blend values rise as
high octane components are driven up
by the same shift.
Despite expensive benzene, styrene
exports up 10-15% driven by low
ethylene and competitive production
costs pull benzene imports
2014 will provide some modest relief in
BTX with improving capacity in Asia.
BENZENE
TOLUENE
CH
3
para - XYLENE
CH
3
CH
3
2012 IHS No portion of this presentation may be reproduced, reused, or otherwise distributed in any form without prior written consent.
The global economy is expected to trend up through 2013
with improvement forecast 2014. The risk of economic
shock is diminished but not gone
Unconventional energy will create significant economic
opportunity in the US and help drive employment higher
Demographic trends will impact the type and location of
demand growth
Hydrocarbon supply drives investment: North America
becomes a much larger participant in the global chemical
market, with builds increasing CAPEX inflation risks
To connect low-cost hydrocarbon supply and developing-
world demand, trade will grow at 2x demand, 4x GDP


Key Conclusions & Trends
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Nariman Behravesh
Chief Economist
IHS
Bill Sanderson
Vice President,
Downstream Research
and Consulting - Energy
Insight
IHS
Gary Adams
Chief Advisor, Chemical
IHS
Dave Witte
Senior Vice President &
General Manager,
Chemicals
IHS

Stephen D. Pryor
President
ExxonMobil Chemical
Company
Moayyed Al Qurtas
Vice Chairman & CEO
Tasnee
Graeme Burnett
Senior Vice President
Refining & Chemicals
Americas
Total SA
Jos Luis Uriegas
CEO
Grupo IDESA
Susan Esserman
Chair of the International
Department; former
Deputy US Trade
Representative
Steptoe & Johnson LLP
Zbyszko Tabernacki
Vice President,
Economics & Country Risk
IHS
Richard Meserole
Vice President of
Operations and General
Manager
Fluor
Mark Eramo
Chemical Industry Insights
IHS
Charles T. Drevna
President
American Fuel &
Petrochemical
Manufacturers (AFPM)
Arnaud Franco
Senior Analyst
Graphic Papers
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Products Council
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