© 2016 IHS Markit

China Growth Prospect Under “New Normal”

Paul Pang, Vice President, +86 21 24229016, paul.pang@ihsmarkit.com

Presentation Name / Month 2016

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© 2016 IHS Markit

AGENDA

2

• Economy under “new normal”

• Macro trend in chemical industry

• Status of unconventional chemicals

• Sustainability

© 2016 IHS Markit 3

Slowdown is concentrated in industry and construction

0

2

4

6

8

10

12

14

16

2007 2008 2009 2010 2011 2012 2013 2014 2015

Con

trib

uti

on

to r

eal

GD

P g

row

th

percen

t

Secondary Primary

Chinese economic, growth by sector

Tertiary

© 2016 IHS Markit

Industrial sector output and profit growth mismatch reveals distortions in state-led industries

-20

-10

0

10

20

30

40

50

60

2007 2010 2013 2016

Utilities Light manufacturing

Heavy manufacturing Mining

Total growth

China industrial profits growth, nominal

Perc

en

tag

e p

oin

t co

ntr

ibu

tio

n

0

1

2

3

4

5

6

7

8

2007 2010 2013 2016

Construction Utilities

Light manufacturing Heavy manufacturing

Mining

Contributions to Chinese GDP growth

Perc

en

tag

e p

oin

t co

ntr

ibu

tio

n

4

© 2016 IHS Markit 5

China economic outlook

• Real GDP growth held at 6.7% supported by fiscal and monetary policy stimulus.

• Investment by state-owned enterprises has surged in 2016, while investment by nonstate firms has stalled.

• Excess industrial capacity, financed by growing debt, is the major risk.

• Service and urbanization will be the new growth drivers.

• Industry consolidation and oversea growth strategy are the new theme.

0

3

6

9

12

2010 2012 2014 2016 2018 2020

Real GDP growth (%)

© 2016 IHS Markit 6

Great economic success, but big disparity

10-15 6-9

> 15

5-6

< 5

GDP per cap in 1,000 US$ in 2015

-

10,000

20,000

30,000

40,000

50,000

60,000

China US

GDP Per Cap, US$

© 2016 IHS Markit

China’s continuous urbanization

• Urbanization rate will grow from 55% to over 60% in 13th Five year

• 70 million people will migrate into cities

• The urbanization will continue to create infrastructure demand

• Growing middle class will eventually generate higher spending

Urbanization Rate, Percent

13th 12th 11th 10th

30

40

50

60

70

2000 2005 2010 2015 2020

7%

7%

6 %

5 %

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© 2016 IHS Markit

AGENDA

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• Economy under “new normal”

• Macro trend in chemical industry

© 2016 IHS Markit

Industry performance diverges

• Demand growth decelerate

• Base chemical capacity growth also slowed

• Supply tightness and low crude price lead to improved margin for base petrochemicals

• Large excess capacity and poor profitability for intermediates and materials

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0%

2%

4%

6%

8%

10%

12%

14%

0

50

100

150

200

250

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

PE PP Caustic MEOH

PET PVC SM Soda ash

TDI MDI PC Nitrile rubber

Polybutadiene SBR Growth Rate

Demand, million tons Demand growth

© 2016 IHS Markit

Private Investment Continues to Gain Market Share

• SOE’s dominance has been challenged

• Private and provincial companies continue gaining market share

• Private investment Intensifies competition and drives down prices and margins

Aggregated capacity for benzene, PX, ethylene, propylene, MEG, PTA, methanol

Capacity (million tons) Ownership (Percent)

0%

20%

40%

60%

-

30

60

90

120

150

180

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

PetroChina

Local Provincial Private

CNOOC Foreign

Private & Local

Sinopec

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© 2016 IHS Markit

Headwind under “new normal”

• Weak demand growth and supply tightness in base chemicals compress intermediates and downstream materials.

• Tightening regulations increases cost.

• Many uncompetitive companies now fall into “zombie” companies.

• The government promotes consolidation to combat pollution and improve efficiency.

• A delicate balance between economic growth, social stability and industry restructuring.

• Investment made during high crude era are now trapped in low crude dilemma.

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© 2016 IHS Markit

Investment has peaked, and will fall rapidly

Billio

n U

S D

ollar

Conventional Olefins PX

0

4

8

12

16

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

CTO/CTP MTO PDH CTMEG

Capital Expenditure

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© 2016 IHS Markit

AGENDA

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• Economy under “new normal”

• Macro trend in chemical industry

• Status of unconventional chemicals

© 2016 IHS Markit 14

Coal-to-olefin is real, and will more than double M

illi

on

To

ns

Capacity (C2, C3)

Production

Construction

Planning

In Production

Under Construction

China

Mongolia

South Korea

-

5

10

15

20

25

30

2016 2018 2025

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-

2

4

6

8

10

12

2016 2018 2025

There are also many merchant methanol-based MTO projects

Mil

lio

n T

on

s

Capacity (C2, C3)

Under Construction In Production

Ethylene Propylene

Derivatives

Import Domestic

Production

Construction

Planning

© 2016 IHS Markit Chemicals Enter New Frontiers: Industry Innovates and Adjusts to Uncertainty in Energy and Economy 16

PDH projects have come as planned

Under construction Planning

• Ten PDH Projects on-stream with four million ton capacity

• One more will be on stream this year

• All feedstock propane is imported

• Poor economics challenged operation

• Most planned projects will not be built

Operating

© 2016 IHS Markit 17

Unconventionals dominate olefin growth M

illi

on

to

n

% of Unconventional chemical capacity

0%

20%

40%

60%

20

30

40

50

60

70

80

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Conventional MTO CTO/CTP PDH % of Unconventional

Light olefin capacity

© 2016 IHS Markit 18

However, economics are challenged by low oil price

• Low oil price squeezes all unconventional chemicals

• Margins are severely compressed

• naphtha cracking enjoys the best margin in two decades

-2,000

2,000

6,000

10,000

2014 2015 2014 2015 2014 2015 2014 2015

VC(Exclude FD) TFC FD Cost

Cost (RMB/Ton)

Gross Margin

CTO (West )

MTO (East )

PDH (East)

Naphtha Cracker(East)

Depreciation

© 2016 IHS Markit 19

A major improvement in coal-to-MEG

• CTMEG technology has achieved a major improvement

• Quality issue is partially resolved

• CTMEG is now used in fiber application

• More projects are under way

Mil

lio

n T

on

s

CTMEG Capacity and Production

Operating Rate

0%

20%

40%

60%

80%

0

1

2

3

4

5

6

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

CTMEG Production CTMEG Operating rate

© 2016 IHS Markit

AGENDA

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• Economy under “new normal”

• Macro trend in chemical industry

• Status of unconventional chemicals

• Sustainability

© 2016 IHS Markit

China is the largest CO2 emission country; ETS is coming after a long preparation

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2011 2012 2013

Shenzhen becomes the first pilot to start trading

2015

NDRC approves seven regional pilot ETS:

Beijing, Tianjin, Shanghai, Shenzhen,

Guangdong, Chongqing, and Hubei

Start nation-wide CO2 trading

Preparatory work on regional pilots officially starts

2020

Four pilots start trading (Beijing, Shanghai, Guangdong, Tianjin)

2014

Hubei and Chongqing start

trading

2006

China outranked US as the largest source of CO2 in

the world

195 countries adapted Paris Agreement

Oct.

Nov/ Dec

June

Dec

Complete nation-wide quota allocation

2016 2017

Q3

2018

Paris agreement

enter into force

China Signed off Paris Agreement during Hangzhou

G20

Sept

Nov 4

Carbon Tax

???

Q1/Q2

© 2016 IHS Markit

Strategic implications • China’s slow growth has hit global

economy, but not all are bad

• China continues to be the largest

growth country, and potential remains

strong

• The performance of chemical industry

varies from sector to sector

• Industry consolidation is highly likely

• Macro policy and tightening

environmental regulations will

reshuffle the industry

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