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Confidential. © 2018 IHS Markit®. All Rights Reserved.Confidential. © 2018 IHS MarkitTM. All Rights Reserved.

International Petrochemical

Industry Forum13 September 2018 | Chengdu, China

Dave Witte

Senior Vice President at IHS Markit

and General Manager of Oil, Midstream, Downstream & Chemicals

[email protected]

Confidential. © 2018 IHS Markit®. All Rights Reserved.

Key Topics

The outlook for the economy

Refining dynamics – IMO & Mobility

Key chemical industry trends

Challenges and risks to the outlook

Agenda


Global economic growth is expected to hold near its fastest pace since 2010; policy

mistakes are the biggest threat to growth

Real GDP

Percent change 2016 2017 2018 2019 2020

World 2.6 3.3 3.3 3.1 2.9

United States 1.5 2.3 3.0 2.7 1.7

Canada 1.4 3.0 2.2 2.3 2.2

Eurozone 1.8 2.5 2.0 1.7 1.5

United Kingdom 1.8 1.7 1.2 1.1 1.4

China 6.7 6.9 6.7 6.3 6.1

Japan 1.0 1.7 1.1 1.0 0.4

India* 7.1 6.7 7.1 7.3 7.2

Brazil -3.5 1.0 1.7 2.5 2.9

Russia -0.2 1.5 1.8 1.7 1.8* Fiscal years starting 1 April

Source: IHS Markit © 2018 IHS Markit

• Global outlook is brighter, but energy and

geopolitical risks are rising

• United States: Trade tensions ratchet up

amid strong economic momentum

• Europe: Growth is beginning to peak as

political risks increase

• Japan: The momentum through the end of

the year will remain solid

• China: The mild slowing trend is likely to

continue this year

• Bottom line: Global growth remains on a

good trajectory, but inflation risks and the

potential for policy mistakes (e.g. trade

wars) have risen


World real GDP growth slows significantly in the early years of full US-based

protectionism. Asia and NAFTA are the most affected regions.

-4%

-2%

0%

2%

4%

6%

00 02 04 06 08 10 12 14 16 18 20 22 24 26

Baseline

Protectionism

Real GDP - World - %change y/y

-0.4%

-0.6%

-0.7%

-0.8%

-0.8%

-1.4%

-1.5%

-2.5%

LATAM

MENA

AFR

EUR

EMU

NAFTA

WORLD

AP

Protectionism - Real GDP - Dec-20 - %deviation from

baseline


Key Topics





Agenda


Mobility services, driverless technology, and electric cars are likely to disrupt the

driving model across all modes of transport

Selling oil-powered cars to consumers for personal use is challenged by

new mobility services and powertrain options

Human-operated

versus driverless cars

Personally-owned cars

versus mobility services

Gasoline / diesel versus

electric powertrains


Driverless technology is disruptive for several reasons: Lowering the cost of

mobility via the car is among the most important

0.59 0.580.48

2.17

0.430.33

0.00

0.50

1.00

1.50

2.00

2.50

Human driver (ICE) Human driver (ICE) Human driver (EV) Human driver (ICE) Driverless (HEV) Driverless (EV)

Cost of mobility by car for U.S. market

Notes: BEV = battery electric vehicle. Hybrid = gasoline/electric with internal combustion engine. ICE = internal combustion engine.

Source: IHS Markit © 2018 IHS

Do

lla

r p

er

mil

e t

rave

led

,

Co

ns

tan

t 2

01

7 $

US

Personal owned car basis

No cost for driver.

12k mi per year.

Rivalry Scenario

Mobility as a service basis

Includes cost for driver/driverless kit.

60k mi per year.

Rivalry Scenario

Today 20402040 2040

2040

Today


In Autonomy, adoption of driverless cars and growth of mobility service companies

boost sales of EVs and lower the volume of new cars sold compared to Rivalry.

0

10

20

30

40

50

60

70

80

90

100

2000 2005 2010 2015 2020 2025 2030 2035 2040

RTW LV sales by powertrain: Rivalry


Mil

lio

ns

per

year

0

10

20

30

40

50

60

70

80

90

100

2000 2005 2010 2015 2020 2025 2030 2035 2040

RTW LV sales by powertrain: Autonomy

Source: IHS Markit. FCEV = fuel cell electric vehicle © 2017 IHS Markit

Mil

lio

ns

per

year

DieselHEV

BEV

FCEVOther

Gasoline

PHEV

Gasoline

Diesel HEV

PHEV

BEV

Other

EVs 64% of new

sales in 2040

EVs 34% of new

sales in 2040

EVs = BEVs + PHEVs

FCEV = fuel cell electric vehicle. BEV = battery electric vehicle. PHEV = plug-in hybrid electric vehicle.

HEV = hybrid electric vehicle with gasoline ICE


Next stage in the evolution of refinery &

petrochemical integration

• Higher fuel efficiency and increased use of EV’s

create a forecast for a declining growth rate in

the demand for refined products.

• Forecast is causing many refining companies to

re-think their petrochemical strategy.

• Options range from continued but growing

feedstock supply relationships to major direct

investments in the sector.

• Current assets being built in China and others in

the planning stages, seek to enter the

petrochemical market with significant scale.

000

300

600

900

1200

2010 2015 2020 2025 2030 2035 2040

Petrochemicals products Refined products

Index of base chemicals and refined products growth

Source: IHS Markit ©2018 IHS Markit

Petrochemicals and refined products markets, cumulative

Millio

n T

on

s

Petrochemicals forecasts to grow at a multiple above

GDP, as economies expand and urbanization increases.

Refined products growth is forecast to flatten by 2030.


-30

-20

-10

0

10

20

30

40

0 5,000 10,000 15,000 20,000 25,000 30,000 35,000

Fully Integrated Ethylene Integrated Paraxylene Integrated Non Integrated

2020: East-of-Suez refinery margin analysis

Source: IHS Markit © 2018

Cumulative crude capacity, thousand b/d

Net

Cash

Marg

ins,

1st 2nd

Quartile

3rd

Quartile4th

Quartile

From a financial standpoint, diversification and integration lead to more competitive

and stable financials

Most refineries in the

1st quartile are highly

integrated with

petrochemicals

0%

10%

20%

30%

40% Refining Petchem

Companies Included: ExxonMobil, BP, Shell, Chevron, P66

Historical ROCE – chemicals and refining

© 2017 IHS Markit

RO

CE

Source: IHS Markit


IMO bunker fuel quality rules


The global ship fleet will need to reduce bunker fuel S from 3.5% to 0.5%

beginning in 2020 - a major disruption to the “bottom” of oil markets

Switch to

compliant

low-

sulphur

bunker

fuel

Install exhaust gas

cleaning systems,

aka scrubbers

Switch to

liquefied

natural gas

Non-compliance,

sanctioned or

otherwise (Not a

true pathway)

Four

pathways


0

1,000

2,000

3,000

4,000

5,000

6,000

2000 2005 2010 2015 2020 2025 2030 2035 2040

Global bunker fuel demand


Th

ou

san

d b

/d

IMO Bunker fuel rules will create a spike in gasoil demand…real issue is residual

disposal

Gasoil demand increases from

20% to 51% (+1.3 million b/d).

1. Scrubber uptake

2. More hybrid fuels

3. Gasoil market share falls to 23% by 2030

High Sulfur Residual Bunker

Gasoil BunkerLS Bunker

LNG Bunker

1. Hybrid fuel

2. LS Residual blends


Our residue balance is in excess of around 200,000 b/d in 2020 assuming a large

price signal to optimize the global system

0

1

2

3

4

5Disposition

Creation

Global residue in bunker sector – 2014 to 2020


Millio

n B

/D

Crude run &

bunker growth

Changes in conversion runs

Bunker market

Surplus


IMO Bunker S spec change from 3.5% to 0.5% disruptive to refining AND chemicals

Source: IHS Markit

• Supports higher overall crude prices

• Increases production of straight run naphtha

• FCC runs reduced as LSFO redirected to meet

new bunker fuels

• Reduced production of RGP

• Increase gasoline cracks

• Reduces netback margins for exporting countries

• Increases needs for high octane blends

• Higher baseline value of aromatics


Key Topics





Agenda


• Steady global economic expansion driving

growth across most markets

• Oil volatility, reduced Chinese reinvestment and

a focus on M&A has constrained global build

• Extended up-cycle is one major Harvey-type

event away from triggering a ‘super-cycle’

• Wider oil to gas spreads support margins for N.

American and Middle East gas-based producers

• Primary near-term risks are economic and

policy related

• Watching developments on developing supply-

side risks post 2021

-$50

$0

$50

$100

$150

$200

91 93 95 97 99 01 03 05 07 09 11 13 15 17 19 21

Weighted Average EarningsChemical Industry Weighted average earnings, $/Ton


EB

IT $

/ t

on

Chemical industry in a sustained and

unprecedented peak of earnings


Base planning case show earnings to be elevated, stable, for extended period

across all regions

0

100

200

300

400

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

World Africa_MidEast Americas Asia Europe

Regional Weighted Average Cash Earnings (US$ per metric ton)



Major trends shaping the future of the global chemical industry

STRUCTURAL CYCLICAL

Trend

Sustainability

Developing

world = center

of growth

Technological

change

Plateauing

fuels demandProtectionism

Capital vs

feedstocks

vs labor

optimization

Relative

feedstock

valuation

Cyclical pace

and nature of

investment

Influencing

mechanismRegulations,

public opinion

Demographics,

economic

development

Market

opportunity /

process risk

Policy, technology Policy

Demographics,

economic

efficiency

Energy markets,

policy

Chemical markets,

economic

Impact

Investment risk,

operating cost,

and demand

growth

Consumer

preferences,

market access

Investment risk,

Relative

competitiveness,

CAPEX/OPEX

Market

structure/disruptionInvestment risk

Supply chain

structure,

investment

location

Relative

competitivenessMargin volatility

Examples

• Plastics waste

• Pollution

• Circular

economy

• Size and growth

of OECD vs

non-OECD

• AI & IOT

• Siluria

• Coal-to-olefins

• Crude to

Chemicals

• Aramco/ADNOC

chemical

investment

• Anti-dumping

• Trade wars

• Non-tariff

barriers

• Ethane

fungibility

• US CAPEX

• MTO in Canada

to China

• Coal-to-oil &

Coal-to-gas

differentials

• Naphtha vs

LPG

• China provincial

• Refinery

integration

Confidential. © 2018 IHS Markit®. All Rights Reserved.Confidential. © 2018 IHS Markit®. All Rights Reserved.

Winning in chemical markets

requires long-term sustainable

competitive advantage

Chemical Investment “Drivers”

• Build to leverage an upstream, downstream or horizontally

integrated position

• Secure an energy & feedstock advantage

• Invest with proximity to local markets and/or access to

efficient and open supply chains

• Leverage current world-scale technology and efficiently

deploy capital cost

• A ‘friendly’, stable and predictable regulatory framework

BASF/Yara

Ammonia

Freeport, Texas

Photo courtesy of BASF


Enabled by trade in finished goods, economic growth in emerging markets is the

key driver to petrochemical demand growth

-5%

10%

25%

40%

55%

70%

85%

0

20

40

60

80

100

120

Perc

en

tag

e,

%

Developed Countries

Developing Countries

Developing Countries as % of World Growth

World Demand Growth 1990-2040

So

urc

e: IH

S M

ark

it© 2018 IHS Markit

Millio

n M

etr

ic T

on

s

0

20

40

60

80

100

120

140

160

180

200

220

0 20000 40000 60000

GDP (Constant 2010 PPP $) per Capita

Dem

an

d p

er

Cap

ita (

KG

)

Developing

Developed

Per Capita Chemical Demand 1990-2040

2017

2.6

X

Great Recession

2040

1.5

X


Rising crude oil prices will continue to favor U.S. gas-based producers

0

4

8

12

16

20

24

1995 2000 2005 2010 2015 2020

Crude Oil Brent Henry Hub Gas USCG Ethane

USCG Propane WEP Naphtha NEA Naphtha

Crude Oil - VS - Natural Gas & NGLs (Current $)


US

$ / M

MB

TU


But CAPEX advantages costs favor APAC investmentDrives capacity additions in regions with an advantage capital cost structure.

Can China maintain this level of advantage in the longer run? This would/could change supply location & trade.

Construction Location Factors (2017)

USGC

1.00

NAM (ex UGGC)

1.03 - 1.16

SAM

0.91 - 1.15

CEP

0.75-0.82

WEP

0.99-1.04

FSU

1.05 - 1.25

AFR

0.90 - 0.95

MDE

0.75 - 1.19

China

0.68 to 0.53?

NEA (ex. China)

0.82 – 0.95

SEA

0.85 - 1.10

Should location factors re-equilibrate? Could change Western economics on assets at some point.


Key Topics





Agenda


Sustainability focus turns to plastics with

major media attention

• The most critical issue that will influence the industry

during the decade of the 2020’s.

• Local communities exploring bans on single-use

plastic applications as the issue of plastics waste in

the oceans has become an international media

issue: CNN, Economist, National Geographic's, BBC

• United Nations “World Environmental Day” had

plastics waste as a central theme.

• The solutions will come from a cooperative,

approach that brings all the stakeholders together to

solve this very complex issue.

• A slowdown (versus history) in growth for

commodity plastics demand must now be

considered in long term forecasting.


Chemical companies can contribute to sustainability goals in many ways

FeedstocksChemicals & Monomers Polymers

Polymer Processing

Polymer Consumer Products

Chemical/

Biological

Recycle Physical

Recycle

Energy Recycle

Other uses

(Road, Steel,

Cement)

Leakage to

Environment

Renewable

Degradable

Least

environmental

Impact

Design &

Production

- Energy efficiency

- Less Emissions

- Less water and

solid wastes

Responsible Care

- Plant security

- Process safety

- Product safety


Conclusions

• Global economies remain strong, but trade-

related policies increase uncertainty

• Base case projects strong and stable

earnings across most value chains and regions

• Variability of demand growth, market access,

capital costs and feedstock costs creates risks

and challenges to investment

• Policy and regulatory dynamics add

additional complexity

• Strategies must consider a variety of

potential scenarios and outcomes


Thank you

IHS Markit Customer Care

[email protected]

Americas: +1 800 IHS CARE (+1 800 447 2273)

Europe, Middle East, and Africa: +44 (0) 1344 328 300

Asia and the Pacific Rim: +604 291 3600

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time of writing and do not necessarily reflect the opinions of IHS Markit. Neither IHS Markit nor the author(s) has any obligation to update this presentation in the event that any content, opinion, statement, estimate, or projection (collectively, "information") changes or

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