Appe Presentation

Impact of the crisis on petrochemicals and derivatives

John Baker

Global editor

ICIS

APPE/PlasticsEurope General Assembly 28 May 2009

Topics today Economic and market conditions Industry reaction Slight recovery? Restructuring/M&A Capacity developments European strategies



Economic and market conditions Petrochemicals sector had enjoyed extended peak of cycle

performance for several years – high oil prices/tight supply Was expecting supply-led downturn into 2009-10 – added Middle

East capacity BUT – severe demand-led slump in December 2008 and Q1 2009 The result of financial crisis and ensuing economic slowdown Driven by automotive, construction and electronic goods sectors… Food, agchems, personal care, etc… much less impacted


Global demand declines

European car production expected to fall 25% in 2009 – EU projection German construction output down 26% in January 2009, y-on-y;

euro zone activity down by 9.1% - Eurostat Japan’s export value shrinks by 50% in February 2009 Global trade to fall by 9% in 2009 – WTO forecast Global GDP to contract by up to 1.0% in 2009 - IMF European petrochemicals output drops 40% in December 2008,

polymers by 33% - Cefic/Eurostat


1

The current recession has hit the chemicals sector hard and driven down valuations

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0

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2008Q42007Q42006Q42005Q42004Q42003Q4

Quarterly Operating Income(Average of selected companies: BASF, Dow

DuPont, Akzo Nobel, PPG and Sabic)

Source: Chemsystems, Bloomberg

Enterprise Value — 2000-2009(Inflation-adjusted -- $B08 -- 35 Chemical Companies)

7550

350325

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2009200820072006200520042003200220012000


Industry reaction Reaction was rapid and largely effective Plant idling and closures; reduced working, job cuts…

“flexibilisation” of the workforce Intense focus on cash flow and reducing working capital Reduction of inventory at the producer Reductions in capital expenditure – project delays… Repsol YPF at

Sines, for example Cut backs in discretionary spend – travel, etc…


Main metrics being used at present


Most common actions in the crisis - production


Most common actions in the crisis – workforce


Slight recovery – or just stabilisation? Volumes and prices recovering a little in Europe Excess inventory in supply chain being worked off Signs of slight pick up in Latin America and Asia - but Japan

suffering badly – trade down 25%, GDP down 4% in Q1 Europe expected to recover more slowly Most producers expecting rest of 2009 to be flat and 2010 difficult Even with demand recovery, 2011-12 will be difficult as supply-side

effects finally kick in – new Middle East capacity comes onstream after delays

2013-14 could be good times – for those that pull through


IPEX May 2009

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Restructuring/M&A Most agree downturn will prompt restructuring in European

petrochemical base Already Total, LyondellBasell and SABIC have said they will close

units in Europe (LDPE); Rhodia (nylon), Total (PS)… PVC in Italy, Ineos (chlorinated solvents…)

More plant closures to come – old and underperforming units Difficult decisions due to integrated nature of the sector Only two ethylene units closed since Baglan Bay in 1994 – Gela

(2007) and Carling (2009) Now is an ideal time to act


Restructuring/M&A M&A activity depressed - but companies will be looking to sell non-

core assets – to focus on core activities and raise cash Producers focusing on cash conservation Private equity out of the market as debt financing has disappeared Sovereign wealth funds one possible source of funds – IPIC and

Nova Chemicals But some deals possible – Dow Chemical/Rohm and Haas – leading

petchem asset divestments; Mitsubishi Rayon/Lucite; Rhodia/McIntyre

Debt-laden companies suffering – LyondellBasell in Chapter 11, Ineos renegotiating covenants….

Cash-rich and oil-backed may emerge as stronger players


Capacity developmentsThis year and next sees large amounts of petrochemicals capacity

coming onstream in China and the Middle East


Capacity developmentsMore capacity due 2010-12 – but timing of many projects is uncertain

New crackers and major expansions in planning 2010-2015: China (20) India (8 ) Saudi Arabia (9) Oman, Qatar and Abu Dhabi (7)

Iran (5) Singapore (2) Taiwan (2) Thailand (2)


European strategy Closure of laggard plants and restructuring of asset base Focus on R&D and innovation for lower-volume, higher added-value

products Optimise supply chain operations and customer closeness Establish or maintain production base in Middle East – for standard

and high volume grades

Impact of the crisis on petrochemicals and derivatives

John Baker

Global editor

ICIS


Appe Presentation

Business

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