setawwa presentation shale as a cost driver

Chlor-Alkali:

Shale Gas as a Cost

Driver

Joel Lindahl, Director Chlor-Alkali, Vinyls

[email protected]

SE TAWWA

December 2012

© 2012, IHS Inc. 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 Inc. No portion of this presentation may be reproduced, reused, or otherwise distributed in any form without prior written consent. 4

World Chlorine Demand Growth

Vs. GDP Growth

-4

-2

0

2

4

6

8

10

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Chlor-Alkali Demand Growth GDP Growth

Percent, %

Forecast


Economy & Energy Global economy enters another difficult period

Real GDP % 2010 2011 2012 2013

U.S. 3.0 1.8 2.2 1.8

Eurozone 1.8 1.5 -0.2 -0.0

Japan 4.5 -0.7 2.4 1.3

China 10.4 9.3 7.7 7.9

Brazil 7.5 2.7 1.9 3.8

India 9.6 6.9 5.8 6.7

Russia 4.3 4.3 3.6 3.5

World 4.3 3.0 2.6 2.7

Updated September 2012

• Eurozone real GDP to decrease

in 2012 and 2013

• GDP Forecast for all regions

revised downwards

• Weakened global economy

exerts downward pressure on

many commodity prices- but

makes caustic short

• Most GDP risks are on the

downside

5


•North America

−Shale Gas Changing the Industry

•Asia

−Overcapacity Makes the Market

•Europe

−Challenges of Technology Conversion

6

Issues Shaping Chlor-Alkali


0%

10%

20%

30%

40%

50%

60%

70%

0

2

4

6

8

10

12

14

16

18

06 07 08 09 10 11 12 13 14 15 16

Crude (WTI) Natural Gas Gas as % of Crude

Dollars Per MMBtu Gas as a % of Crude, BTU Basis

Stranded Natural Gas vs. Global Oil North America Energy Price Trends


Importance of Energy in Chlor-Alkali

Oil Naphtha Ethylene

Oil Electricity Chlor-Alkali

EDC VCM PVC

Most of the World

Natural Gas Ethane Ethylene

Natural Gas Electricity Chlor-Alkali

EDC VCM PVC

North America & Middle East

Coal Carbide Acetylene

Coal Electricity Chlor-Alkali

VCM PVC

China

Pip

e/S

idin

g &

Oth

er

Fa

bric

ate

d P

rod

uc

ts


U.S. Shale Gas Changes Dynamics

© 2012, IHS Inc. No portion of this presentation may be reproduced, reused, or otherwise distributed in any form without prior written consent. 10 Source: EIA

Steam Crackers

Stranded Liquids from Wet Shale Gas

Flow Into Gulf Coast Chemicals


Salt/Chemicals $27 13%

Fixed $93 45%

Variable $9 4%

Electricity $80 38%

11

U.S. ECU Cash Costs – 2012 Membrane

Importance of Electricity

2012 Total ECU Cash Cost = $209/ECU MT

• The key cash cost driver for

chlor-alkali is electricity

• Large scale producers in

North America derive

electricity from natural gas,

through co-generation, the

structure of which forms the

basis of our forecasts

• Chlorine isn’t directly

exportable, and needs to be

transformed into a derivative

to become a global

commodity- but caustic is a

classic global commodity

2011 Electricity Costs

(Cents/kWh)

North America = 3.0

Europe = 8.4

Brazil = 7.3


ECU Cash Costs: Shale Gas Improves U.S.

100

150

200

250

300

350

400

450

500

550

600

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

USGC ECU Cash Costs WEP ECU Cash Costs

NEA ECU Cash Costs CHI ECU Cash Costs

Cash Costs, Dollars Per Metric Ton

Middle East


Direct

Chlor EDC VCM PVC

Ethylene

OxyChlor

EDC

Oxygen

HCL

Caustic Chlorine +

Shale Gas Double Benefit to Vinyls…

Ethylene-Based Vinyls Flow

Electricity


How to Use Low Cash Costs-

Chlorine End-Use Applications

Vinyls 33%

Organics 20%

Chlorinated Intermediates

5%

Inorganics 2%

Pulp & Paper 3%

Water Treatment

6%

Others 31%

2011 World Demand = 60.6 Million Metric Tons

50+% Durable

Goods

(Infrastructure &

Housing)


North America

Chlorine Net Equivalent Trade

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

Chloroform EPI Methylene Chloride EDC VCM PVC

Million Metric Tons

Forecast Net Exports • Vinyl chain exports

are the derivative

of choice to move

low cost chlorine

and ethylene from

the region

• Cash costs of the

region bring the

opportunity to

compete globally


Implication for Capacity: Shale Gas Advantage

Leads to Investment in Chlor-Alkali

Producer Timing Capacity

(-000- MT Chlorine)

2010 12,480

Added Capacity

2010-2014

Shintech Q4-2010 162

FPC Mid-2011 175

Shintech Mid-2011 482

Dow/Mitsui 2H-2013 800

Westlake 2H-2013 350

OxyChem 2H-2013 183

Others Various 18

Total Announced Additions 2,170

2014 14,650


• The Shale Gas Shift in the USGC is changing dynamics

− USGC cash costs of ECU production are lower relative to other regions

− Cash costs of EDC, VCM, PVC are lower

• New investments are based on exports of chlorine (as derivatives)

− Generating excess caustic soda production for this region

− Creating a trade shift for caustic soda - more net exports

• Creating a two-tier US industry

− Large multi-nationals integrate chains for exports

− Small, close -to -merchant producers serve more of the domestic

market, answering transportation concerns for chlorine

17

Shale Gas – Broad Implications


•North America


•Asia


•Europe


18



Too Much Capacity-

China Drives for Self-Sufficiency

-1

0

1

2

3

4

5

2000 2002 2004 2006 2008 2010 2012 2014

NAM WEP CHI

Capacity Additions, Million Dry Metric Tons

China’s Cumulative Capacity

Change = 27 Million DMT


N. America 19%

S. America 3%

Europe 16%

CIS & Baltics 2%

Africa/Middle East 4%

Indian Subc. 4%

NE Asia 49%

SE Asia 3%

2012 World Demand = 62.2 Million Metric Tons

2012 World Chlorine Demand by Region


2012 World Caustic Soda Demand

N. America 18%

S. America 6% Europe

15%

CIS & Baltics

2%

Africa/ Middle East

3%

Indian Subc.

5%

NE Asia 44%

SE Asia 7%

12%

14%

17% 15%

12%

5%

25%

Pulp

Alumina

Organics

Soaps/Detergents/Textiles

Product Segments

Inorganics

Water Treatment

Others Global Demand = 66.4 Million Dry Metric Tons


Chlorine Operating Rates Excluding Hypothetical Capacity

60

65

70

75

80

85

90

95

100

Global

North America

West Europe

Northeast Asia

China

Operating Rates

• Recession and

massive overbuild in

China drove

unhealthy operating

rates

• Recovery in North

America precedes

other regions

• Low capacity

utilization in Asia

has global

implications – high

cost region


Arbitrage Yields a ‘Global Caustic Price’

CFR Australia

$430 FOB

Middle East

$450 FOB

Northeast Asia $410 FOB

USGC

$94

February 2012 Spot Caustic Prices


Energy and Caustic: Price Support

60

70

80

90

100

110

120

130

0

100

200

300

400

500

600

Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11 Jan-12

FOB NEA Spot CFR SEA Spot Dubai Crude Oil

Caustic, U.S. Dollars per DMT Crude, U.S. Dollars per Barrel

2010 Avg = $78 per Barrel

2011 Avg = $106 per Barrel

Japan Tsunami

Tosoh Explosion


Regional Caustic Netbacks Constant U.S. Dollars

0

100

200

300

400

500

600

700

800

900 NAM WEP NEA xChina

U.S. Dollars • Caustic soda global

price equilibrium will

occur in a bounded

range based on energy

costs in marginal

producing regions

• Chlorine contributes

little to revenue until

operating rates improve

• A cycle peak is forecast

in 2016/2018 once

operating rates improve


ECU Margins Differ Widely

-100

0

100

200

300

400

500

North America ECU Margin

West Europe ECU Margin

Asia ECU Margin

U.S. Dollars Per ECU Asset Share Methodology

• Combining the caustic

prices set in high cost

regions with North

American cost position

generates good ECU

margins there

• Europe high cost

inhibits investment for

technology upgrades

• Asia overcapacity

persists


•North America


•Asia


•Europe


27



• Europe has structural differences from other developed

regions

− More fragmented Industry

− Many smaller units, resistance to closures

− Significant installed mercury capacity

• Regulatory Pressures

− Mercury conversion target date

− REACH complexity, cost

− CO2 abatement, cost

• Weak Margin environment

− High cost of energy

− Middle East Producers on one side, USA on the other

28

Europe’s Compounding Issues


0

2

4

6

8

10

12

05 06 07 08 09 10 11 12 13 14 15

Mercury Diaphragm Membrane

Chlorine Capacity, Million Metric Tons

West Europe Needs Investment


Higher cash costs,

Price setter,

Marginal

production

Growth region

but extreme

overcapacity

Weak cost

position,

Needs investment,

Price setter

Large import

demand,

Higher cash cost

Price taker

New low-cost

position,

Growing reliance

on exports,

Investing

Price Taker

Fabulous cost

structure

Largest volume

import demand,

Price equilibrator

between regions

30

Given Shale, China, Europe…

Caustic Soda Regional Roles Defined


2012

2007

2017

Net Trade Flows

United States

South America

West Europe

Northeast Asia

Southeast Asia

1109

1586 2467

1633

1848

2482

145

295

289

2799

2948

3759

2173

2588

3297

Middle East

528

569

11

32

Outlook for Caustic Trade Global Caustic Soda Net Trade, Thousand Dry Metric Tons


U.S. Caustic Soda Net Trade

0%

5%

10%

15%

20%

25%

0

1

2

3

4

07 09 11 13 15 17

Imports Exports Net Exports as % of Total Demand

Million Metric Tons Percentage • Net exports must

increase to handle

the additional

caustic generated

by chlorine chain

exports

• Imports on our

East/West coast will

decline

• Exports will become

a significant

percentage


Closer to Home… U.S. Market Transforms

• Chlorine transportation costs are changing the industry

• Liability and cost structure of rail transport is changing

economics of the industry

• Merchant supply moving near merchant demand

• Rising influence of regional production

• Shipping acid, bleach preferred over chlorine

• Chlorine burners abound

• ‘High strength’ bleach travels farther



• Consider these new names in the industry in recent

years…. there is a reason

• Bleach Tech, Trinity, Odyssey, Kuehne, K2 Pure,

Colorado Salt, Allied Universal

• All service a specific regional market

• Consider these statistics in recent years…there is a reason

• 1995 ~24 producers Top 10 = 92% of capacity

• 38 % of chlorine internally consumed

• Today ~16 producers Top 10 = 95% of capacity

• 52 % of chlorine internally consumed



• Industry morphing into two tiers

• Integrated players do not sell chlorine

• Merchant producers smaller, local

• Consolidation continuing- now occurring in the

distribution sector

• Rise of the acid market

• Demand into shale gas is new parameter

• Value of acid to market is higher

• More ‘on purpose’ acid in the market


U.S. HCL Prices- Shale gas ‘Pull’ Delivered Midwest

0

25

50

75

100

125

150

175

200

225

250

275

300

325

07 Q3 08 Q3 09 Q3 10 Q3 11 Q3 12 Q3 13 Q3 14 Q3

HCL 20 Be

HCL 22 Be

Dollars Per Solution Short Ton, Delivered

Forecast


Conclusions…Where to Now?

•We see 2013 as similar to 2012

• Economies sluggish, energy unchanged….

• Some variation around prices, but no major shift

• Chlorine, caustic prices remain ‘bounded’

• Incidents and temporary events drive

• New capacity arrives, but does new production-NET?

• Input costs to water treatment….

• Don’t expect major price relief or escalation

Thank you!

Available now- Vinyls and

Chlor-Alkali World Analyses

Available Soon- Global

Chlor-alkali Cash Cost

Curves

setawwa presentation shale as a cost driver

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