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© 2015 Kline & Company
CHINA, OIL PRICES, AND EUROPE: WHAT CAN THE CHEMICAL INDUSTRY EXPECT?"
October 21, 2015
A presentation to :
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There is so much that could be said about the drivers of the turmoil we in the chemical industry are experiencing and will likely continue to experience . . .
Massive drop in the price of crude − Possible impacts of long-term comprehensive nuclear deal with Iran
The slowdown in growth in China Concerns about lending and real estate bubbles in China Economic and financial struggles in Europe Emerging economy travails Geopolitical challenges in the Middle East Trans-Pacific Partnership (TPP) Free Trade Agreement
. . . but the format for today’s panel allows us to say a little about a lot or focus – so we will focus
Oil & gas Ripples: US and Europe China
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Oil
China
Summary
Contents
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Oil
China
Summary
Contents
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The relative strength of the U.S. economy in 2015 is reflected in both macroeconomic and chemical indicators, though exports are growing slower than imports due to the strengthening Dollar
0%
1%
1%
2%
2%
3%
3%
4%
4%
Real GDP Real Disposable Income Plastics Resins Consump. Ethane to PC Feed
Growth in U.S. Economic Indicators (1st Half 2015 vs. 1st Half, 2014)
0%
20%
40%
60%
80%
100%
Yuan RMB GB £ Yen Euro Can $ Ruble
Appreciation of the U.S.$ (June, 2014 to Sept. 2015)
Oil
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U.S. oil and gas rig counts have fallen in proportion to the decline in pricing of each commodity, but domestic production continues to rise, even in shale-rich Texas, North Dakota and Pennsylvania
U.S. Active Oil Rig Count vs. Brent Crude Oil Price
Production Jan-July, 2015 (9.4 Million B/D)
TX
ND
All Other
0
200
400
600
800
1000
1200
1400
1600
1800
Crude Oil Rig Count
Brent Crude ($/10Bbls)
Production Jan-July, 2015 (90 BCF/D)
TX
PA
All Other
0%
5%
10%
15%
20%
TX ND All Other
Production Growth (Jan-July 2015 YOY Growth
over Same Period 2014)
0%
5%
10%
15%
TX PA All Other
Production Growth (Jan-July 2015 YOY Growth
over Same Period 2014)
U.S. Crude Oil Production U.S. Natural Gas Production
Oil
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The oil price collapse of the second half of 2014 has also rippled through the natural gas and NGLs industries…
Declines in Energy Raw Materials Prices from June 2014 to Sept. 2015
(in $/MMBtu)
0
2
4
6
8
10
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Brent Crude Propane (USGC)
Ethane (USGC)
Natural Gas (USGC)
Natural Gas (NWE)
Price Changes for Chemical Feedstocks (in US cents/pound)
0
5
10
15
20
25
30
35
40
45
Gasoil (NWE) Naphtha (NWE) Propane (USGC) Ethane (USGC)
Price Reductions from June 2014
Sept. 2015 Prices
…though the greatest reductions in feedstocks costs have been for heavy liquids plants
Oil
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U.S. ethane prices have been at rejection values for 3 years, a trend which will continue, enabling a sustainable export trade to Canada and eastward
U.S. NGL Cracks over Spot Natural Gas Prices (in $/MMBtu)
-4
-2
0
2
4
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2010 2011 2012 2013 2014 Jan-Sept. 2015
Ethane Crack
Propane Crack
NGL Composite Crack
Substantial volumes of U.S. ethane will continue to be rejected, despite the start-up of new C2-based PC plants in the East and Gulf Coasts Pipeline exports of U.S. ethane to
Eastern and Western Canada began in 2014 The infrastructure to liquefy, transport
and receive cryogenic ethane in Northwest Europe (and India) is readying, with shipments commencing shortly from the East and Gulf Coasts
Ethane Buyer Plant(s) Contracted Ethane
Volumes (KBD)
Ineos Rafnes Grangemouth
45 10
Borealis Stenungsund 26
SABIC Teesside 44
Reliance Jamnagar 73
Oil
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Low crude is a two edged sword. There is significant benefit in the US and elsewhere . . .
US much more competitive from a feedstock standpoint With increasing oil and gas production exports become attractive
− Fracking has yielded substantial volumes of NGLs − The surplus of ethane could lead to increased exports Especially of interest in Europe
− Concerns about accelerated depletion of oil and gas reserves in Saudi Arabia, including the Ghawar field which accounts for +/- 60% of its production
− Evaluating options Cryogenic facilities and transport are in development, as noted
earlier Ineos has bought 12 North Sea gas fields ($750 million) to “help its
UK petrochemical assets to have ongoing access to competitive energy”.
− Momentum building to lift ban on US oil exports
Oil
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. . . but there have also been less positive impacts . . .
Decrease in active/operating rigs has cost jobs in much need regions − Impacted suppliers as well, and supporting services and organizations − Decline in demand for oil field chemicals
EP&C firms are seeing a growing number of contracts cancelled and opportunities
completely disappear Questioning investments being made or already underway based on
advantageous fracking economics (built around much higher crude prices)
Oil
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. . . and driven rapid change in the landscape for bio-based materials
More emphasis on specialty/performance chemicals vs. chemical intermediates − Rivertop – water treatment vs. adipic acid − Amyris – personal care/cosmetics/food with farnasene derivatives − Verdezyne -- DDDA vs. Adipic acid − Solazyme focus on food and personal care
VCs have little patience and even less money Strategic investors are diverging in terms of approach Chemical strategic investors are backing off
− BASF – acrylic acid with Cargill; TDCC – acrylic acid with OPX Ag based fermentation strategic investors are doubling down with investments in
newer companies or distressed assets − ADM with Rennovia; Cargill with OPX, Rivertop
10
Oil
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Oil
China
Summary
Contents
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GDP growth was 7.4% in 2014, the lowest in ten years
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12000
16000
GDP (Billion USD)
GDP: Historic and Forecast
9.4%
22.0%
13.8%
47.6%
7.1%
Sector Contribution to GDP (2014)
Agriculture Manufacturing Mining Services Others
China
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China’s economic growth is slowing down, but in a controlled fashion, with the country now heading down a more sustainable path
Chinese economy is expected to decelerate further in the near future with the government now focused on moderate but sustainable growth − China’s GDP is expected to grow +/- 7%annually in 2015, 2016 and 2017, compared to
double digits in the past − China remains a dynamic market full of opportunities despite growth shifting into a lower
gear, especially since the country is seeking to improve the quality of its economic and social development
− This is the ‘new normal’, an age where China’s growth rate will be modest and a more mature economy will reorient itself away from an investment-led model to one that focuses on consumption and services
A key point to understand is that SOE’s are not purely economic organizations; they have social functions and objectives as well − They may not always be efficient and competitive operations − But they employ a lot of people − Clearly could be more competitive, but then social stability will suffer
13
China
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Mixed signals from various indicators have clearly shown the economy is in transition
Sources: China Association of Automobile Manufacturers (car sales); Civil Aviation Administration of China (airline traffic); China Railway Corporation (freight traffic)
China
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Electricity data appeared to have indicated that the industrial growth has slowed, but the economy is not falling off a cliff
China
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The central bank, the People’s Bank of China, devalued the currency by a cumulative 4.4% against the US dollar in August 2015
− Many analysts suggested that the move was designed to make Chinese exports more competitive.
− The recent devaluation is unlikely to bolster the economy significantly given it is the exchange rate catching up with its actual market value after having been fixed for much of the last year
− A overlooked angle to the central bank's play is China's desire to get the yuan into the IMF's reserve assets known as special drawing rights (SDR).
− Joining the other currencies would validate that the yuan has become an international currency and as such the currency like the others would be 'freely usable,' and their values are generally determined by market forces.
− The IMF will not decide on the yuan’s inclusion until next year − Should that happen, the bank’s devaluation of the yuan could be viewed key in
getting it viewed as a qualified candidate for the SDR
China
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11.4%
0.8%
9.6%
0.9%
-2.5%
1.8%
-10.0%
0.0%
10.0%
20.0%
Steel Production Coal Production Cement Production
2013 2014
Growth Rates of Select Industries, 2013 vs. 2014
Growths in such heavy industries as steel, coal mining and cement have also struggled in 2014
China
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China, already the world’s biggest chemical market, is on a trajectory over the next decade to become an even larger but much more competitive one China’s economic expansion has slowed, but the country remains the most important
growth market for most—if not all—global chemical companies International companies have a strong hand to play in China
− Not only will the country continue to be a major importer of commodity chemicals over the next decade, but international companies also have the more sophisticated products that will be needed in the coming stages of China’s economic development
Chinese companies are increasingly trying to step out of low-profit commodity segments and climb up the technology ladder to more sophisticated sectors, as well as enjoying many home-player advantages in the more competitive environment
One testimony to the growth models that international companies have been employing in China is that these companies have by and large escaped the worst effects of the slowdown
Different sectors of the chemical industry have shown very different levels of attractiveness and international companies have tended to be relatively selective about the segments they have chosen to participate in, and this has paid off
But for Chinese companies, the fast demand growth of the past decade has encouraged a wave of “me too” investments that, with the slowdown, have led to overcapacity not only in commodity sectors like methanol and polyvinyl chloride but even in some specialties sectors such as vitamins, depressing profitability
China
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Oil
China
Summary
Contents
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So if we look forward where oil prices are headed or how effective the moves made by China will be is anyone’s guess.
There is a view – albeit somewhat controversial – that the US will drive the global chemical industry due to its technology leadership and increasingly advantaged cost position − Even if you disagree, the sentiment of most interviewed for this presentation
are positive about the outlook for the US chemical industry, less so for Europe While often viewed as a competitive threat, China will continue to be an important
market for chemicals Most companies looking outside their regions/country markets for growth –
depending on home country/market it might be exports, but more likely M&A − Chinese and Indian companies making significant bets overseas − Though such majors as BASF and Dow are looking at portfolio restructuring to
spur growth and performance, geographic expansion is also an important strategic option China and Africa are especially of interest to Dow – who is seeking to
increase sales in Africa by fivefold
Summary
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One other factor impact dramatically impacting the chemical landscape is the influence of activist investors/hedge funds,
Much more so in US than Europe or elsewhere − APC – Pershing Square/William Ackman − Ashland - Jana/Barry Rosenstein – exited Ashland holding in May 2015 − Dow –Third Point/Daniel Loeb − DuPont – Trian Management/Nelson Peltz − Lubrizol – Berkshire Hathaway/Warren Buffet
This is a discussion for another day
Summary
Americas ____________ Asia ___________ Europe ___________
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