world petrochemical market outlook & strategies to survive
TRANSCRIPT
2009 APIC – CMAI SeminarSingapore Shanghai Houston New York London Düsseldorf Dubai
May 14, 2009
Seoul, South Korea
Insert
Consultant
Picture
Gary AdamsPresident
World Petrochemical Market Outlook & Strategies to Survive the Downturn
2009 APIC – CMAI Seminar
Where we concluded last year’s APIC…
2009 APIC – CMAI Seminar
Defining Market Conditions Through The Cycle
Determining Duration and Path to Recovery
Predicting (Changing) Value Chain Pricing Power
Positioning Your Business For The Next Upturn
…Embracing change : Opportunity at a time of market uncertainty!
Use This Annual APIC to
Augment Your Efforts Regarding…
2009 APIC – CMAI Seminar
Consumers
Retail
Compounds
Finished
Goods
Chemicals &
PlasticsEnergy
Tightly Connected Value Chain
2009 APIC – CMAI Seminar
Current State of the Global Industry
Market
Fundamental Status What it is Telling Us
Demand No Change to Improving Restocking & Reacting
Supply Tighter due to Closures Short Term Disruptions
Capacity Exponential Growth Supply Side Downturn Here
Petchem Markets entered a structurally long period
coincidental with the worse economic conditions seen
during our careers. Aggressive responses will continue…
Cash Costs Steady at Low Value Price Capped by Raw Material
Sector Prices Low with some inflation No Producer Pricing Power
Chain Margins Minor Improvement Highly Leveraged at High Risk
2009 APIC – CMAI Seminar
Economy performed quite well until 2008 (despite energy values)
Developed economies struggled ~ sustaining global economic growth bequeathed to the BRICs and other emerging economies
Energy demand growth held outside Old Economies, adding price support but ultimately inhibiting consumer spending
Hyper-Inflated energy prices and deflated financial community led to global recession, eliminating chances for prompt petchem recovery
Expansionary period over; Finding Bottom with Slow Climb Back…
Late
2010+
Not to Scale
2009 APIC – CMAI Seminar
First the Bad News
• Steady flow of negative news
destroys confidence
• Most severe contraction seen
since 1930s
– Globally synchronized
– Centered in finance sectors
– Engulfing physical world too
Worst of all…
– Magnitude and ferocity was
underestimated by everyone
2009 APIC – CMAI Seminar
February Internet Poll: What changes, if any, have you
made in your personal spending in the past six months?
More Bad News…
Consumer adverse to spending; overly indebted already
Auto Industry living on inventory – focused on survival
Inflation will become a significant issue; tomorrow’s problem
Credit somewhat restricted; a high debt load might be fatal
Developed economies declining – rest barely growing, if at all
Reduced spending - 79%
No change - 19%
Increased spending - 2%
2009 APIC – CMAI Seminar
2Q09
Deeper?
Alternate
Forecast
Economic Activity Levels as Defined by World GDP
2007 2008 2009 2010 2011
Trillions of Constant 2007
Dollars by Quarter4Q11
3Q08 1Q11
"The Global Return to Good Business"
Main Forecast
“…unusually gradual and prolonged” says Federal Reserve
Very weak fourth quarter GDP
data clearly highlighted depth
of global slowdown
China was not immune from
the global economic downturn
(heavily export-oriented)
Production was strong during
the economic boom – has
experienced rapid decline as
consumption at all levels has
fallen – all along the chain
Especially severe in
developed markets – i.e.,
Japan, U.S. and Europe.
Return to previous peak may
take longer
$52
$53
$54
$55
$56
$57
$58
2009 APIC – CMAI Seminar
Economic Activity Levels as Defined by GDP
Trillions of Constant 2007
Dollars by Quarter 4Q11
3Q081Q10
(Maybe One
Quarter Later)
"The Return to Good Business In Asia-India"
“…next year (2009) will be a "difficult" period.” says President Lee Myung-bak
1Q09
Two-year Loss in
Growth Curve
$12.5
$13.0
$13.5
$14.0
$14.5
$15.0
2007 2008 2009 2010 2011
2009 APIC – CMAI Seminar
Some Good News
Much lower energy prices “releases” beneficial spending
Consumers see prices falling for food and other commodities
Unemployment benefits extended & foreclosures delayed
Construction costs declining; interests rates at historic low
Services remain strong – especially health care and “legal”
Perception is reality; all are engaged in fighting back
Trillions being poured into restarting economic growth
China has the cash (+$2 Trillion) and the manpower to fight this
Global GDP growth will resume ~ back to trend rate by late 2010
2009 APIC – CMAI Seminar
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
91 93 95 97 99 01 03 05 07 09 11 13 15
Global Basic Chemicals & Plastics Additions
Annual Percentage Increase
Volume of new (low cost) capacity adds sufficient
pressure for restructuring in mature markets…
Short Term Growth
Rate Well Below
Long Term
Averages
Long Term Demand Growth Rate
2009 APIC – CMAI Seminar
A Full Measure of
Global Market
Weakening
0
5
10
15
20
25
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 150
5
10
15
20
25
“New Gulf” Basic Chemicals & Plastics
(Low Production Cost) Capacity Additions
Million Metric Tons
A Measure of Inexperienced Commissioning
2009 APIC – CMAI Seminar
Basic Chemicals and Plastics
Global Demand
0
100
200
300
400
500
600
700
800
85 90 95 00 05 10 15
Million Metric Tons
More Good News Longer term growth still occurring – developing economies
emergence has been and will still be very beneficial
Economic recessions have been mere bumps in the road for this
innovative sector
Value chain remains highly influenced by non-durables (goods
we consume)
2009 APIC – CMAI Seminar
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
86 88 90 92 94 96 98 00 02 04 06 08 10 12 14
Sold
Out!
Regional
Recession
Regional
Recession Global
Recession
Asia
Crisis
Price
Shock
Global Basic Chemicals and Plastics
Annual Demand Change
Reality Check… Surviving today and next week remains the concern of many
Demand change is quite dramatic and slow conditions will
continue well into 2010 – maybe later
Easily the largest challenge current management has faced –
very difficult decisions are necessary in very short order
2009 APIC – CMAI Seminar
“Innovations and new developments in chemicals, which simplify
operations or processes, while improving performance such as fuel
efficiency, emission reduction and improvement in aesthetics are of
interest to the auto industry.”
B.B. Parekh, Chief of Strategic Sourcing at Tata Motors.
Tata Nano
2009 APIC – CMAI Seminar
Defining Market Conditions Through The Cycle:
• Slow Consumer Demand evident throughout 2009
• Stimulus Packages etc. “stimulate” demand by 2010
• Basic Commodities remain severely oversupply through 2011
…Embracing change : Opportunity at a time of market uncertainty!
Use This Annual APIC to
Augment Your Efforts Regarding…
2009 APIC – CMAI Seminar
Defining Market Conditions Through The Cycle
Determining Duration and Path to Recovery
…Embracing change : Opportunity at a time of market uncertainty!
Use This Annual APIC to
Augment Your Efforts Regarding…
2009 APIC – CMAI Seminar
-20
-10
0
10
20
30
40
50
-20
-10
0
10
20
30
40
50
86 88 90 92 94 96 98 00 02 04 06 08 10 12 14
90% of Capacity Growth100% of Demand Growth
Global Basic Chemicals and PlasticsMillion Metric Tons
Absorbing Surplus Capacity
Adding Surplus Capacity
May well be the most severely over-supplied
market that has emerged since the early 1980s…
2009 APIC – CMAI Seminar
It looks like the mid 1980s all over again…
-5%
0%
5%
10%
15%
20%
25%
85 88 91 94 97 00 03 06 09 12 15
Global Segment Surplus Capacity (adjusted to 90%)
Olefins Aromatics Chloralkali Plastics
2009 APIC – CMAI Seminar
How Bad Could This Down Cycle Become?
Impact Of Recession and a Scenario
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
85 88 91 94 97 00 03 06 09 12 15
Effective Global Operating Surplus*(Limiting to 90% Rates)
Prior Case (Pre-recession)
Surplus as a Percent of Capacity (January)
Additional Rationalization Forecast
Percent of Capacity
* Basic Chemicals and Plastics Excluding Methanol
Producer “Pricing Power” Band
Returning to band prediction:
25 now, then up to 50 million
metric tons more will close
2009 APIC – CMAI Seminar
0
5
10
15
20
25
30
35
40
45
0
5
10
15
20
25
30
35
40
45
90 95 00 05 10 15
Basic Chemicals and Plastics Net Trade Balance
Asia-India Net Trade
Million Metric Tons
New Gulf Exports
Industry’s Challenge… Asia-India continues to invest in local capacity, moderating the
growth in its import requirements despite rise in real consumption
The “New Gulf” has been essentially satisfied with directing its low-
cost, export-oriented production to Asia-India
Justifiably aggressive additions in the “New Gulf” force reactive
closures of high-cost capacity – everywhere!
2009 APIC – CMAI Seminar
Defining Market Conditions Through The Cycle
Determining Duration and Path to Recovery
• Capacity and Demand Growth are out of sync due to recession
• New capacity being added is mostly low cost (price taker)
• Higher cost capacity will have to be closed (U.S., W.E., NEA)
• Natural Gas prices are an advantage for NGL based producers
• Closures critical to achieving 2012-2013 recovery
…Embracing change : Opportunity at a time of market uncertainty!
Use This Annual APIC to
Augment Your Efforts Regarding…
2009 APIC – CMAI Seminar
Defining Market Conditions Through The Cycle
Determining Duration and Path to Recovery
Predicting (Changing) Value Chain Pricing Power
…Embracing change : Opportunity at a time of market uncertainty!
Use This Annual APIC to
Augment Your Efforts Regarding…
2009 APIC – CMAI Seminar
Timing the Petchem Cycle
Over-
Investment
We Are
Right Here
Pricing Power
Returns
Consolidation
& Closures
Competitive
Devaluation
Weakness
in Pricing
Power
Excess
Capacity
Investment
2012 - 2013
2009 APIC – CMAI Seminar
Basic Chemicals and Plastics
2009 Global EBIT Weighting Factors
545* Million Tons of Demand(* was 585 in 2008)
Light Olefins
25%
Aromatics
17%Chlor-alkali
20%
Methanol
7%
Plastics
31%
2009 APIC – CMAI Seminar
-$75
-$50
-$25
$0
$25
$50
$75
$100
$125
$150
$175
$200
$225
85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15
$-50
$-25
$0
$25
$50
$75
$100
$125
$150
$175
$200
$225
$-75
Plastics
Methanol
Chloralkali
Aromatics
Olefins
Dollars Per Metric Ton
Global Basic Chemicals and Plastics EBIT Contribution
Future Earnings Expectations Rely on Consolidations
and Successful Economic Stimulus
Three Challenging Years!
2009 APIC – CMAI Seminar
Defining Market Conditions Through The Cycle
Determining Duration and Path to Recovery
Predicting (Changing) Value Chain Pricing Power
• Market based feedstock regions will suffer (Asia, WE, NAM)
• Caustic Soda Profits (ECU Margins) had been notable
• Price Takers (New Gulf) offset very weak margins elsewhere
• Integration with NOCs may be necessary to “out perform”
…Embracing change : Opportunity at a time of market uncertainty!
Use This Annual APIC to
Augment Your Efforts Regarding…
2009 APIC – CMAI Seminar
Defining Market Conditions Through The Cycle
Determining Duration and Path to Recovery
Predicting (Changing) Value Chain Pricing Power
Positioning Your Business For The Next Upturn
…Embracing change : Opportunity at a time of market uncertainty!
Use This Annual APIC to
Augment Your Efforts Regarding…
2009 APIC – CMAI Seminar
Asia faces a heightened need for both
strategic focus and flexibility to
emerge from this downturn on a
stronger footing...
Basic Chemicals and Plastics
Short Term Challenges
Massive new capacity
Declining or very soft demand
Economic recession
Severe industry down-cycle
Supplier & customer financial issues
Much Uncertainty about the
severity and length of the above
Long Term Trends
Continuing commoditization
Converging commodity and
specialty returns
Declining “Old World” vs. Robust
“New World” and shifting trade
Increasing customer sophistication
Increasing importance of low cost
Increasing availability of technology
2009 APIC – CMAI Seminar
Asia’s Strategic Priorities center on
restructuring and realigning of wide-
ranging portfolios, assets and markets...
Basic Chemicals and Plastics
Strategic Focus to:
Build and execute a global (or a
viable regional niche) presence
Engage in an additive global portfolio
of Joint Ventures and Alliances
Strategic Flexibility to:
Execute targeted strategic or even
opportunistic acquisitions/divestitures
Respond to evolving/maturing
markets in emerging economics
Support an increased need for
broad based financial flexibility
Planning and Execution Excellence to:Monitor, plan for, and respond to an increasingly volatile and changing environment
with responsive and size-appropriate investment or divestment timing
2009 APIC – CMAI Seminar
No matter what I did to the money, you still wanted it
because it did not decrease in value. Each bill was
still worth $100….
Who would like one of these $100 bills?
I am going to give away one of
these $100 bills to one of you -
but first, let me do this…
Who still wants one of them?
…now crumpled and dirty. Who still wants
one of the $100 bills
What if I wad them up and grind them under
my feet?
2009 APIC – CMAI Seminar
Maybe the petchem industry has been dropped,
crumpled, and damaged by certain decision and the
economic conditions that have come our way.
Maybe you feel if though it is worthless; but no
matter what has happened or what will happen, this
industry will not lose its longer term value.
Dirty or clean, crumpled or finely creased, our
industry is still full of innovation, making new
products (and old) that are part of our everyday lives
in Asia and all around the world. The value or worth
comes, not in what today brings, but in the enduring
and innovative nature of this global business…
2009 APIC – CMAI SeminarSingapore Shanghai Houston New York London Düsseldorf Dubai
This is a special industry…
…Please do not ever forget it
And I appreciate the Korea Petrochemical
Industry Association for providing a
chance for me to say that!
Thank You for Allowing Us to be Part of Your Success –Now and in the Future!