Olefin Report: 2008-2009

Outlooksfor Ethylene Production Capacities

The eight largest (of the more than200) producing companies account for about 30% of worldwide polyolefin fibercapacity. Major companies have been increasing their share through acquisitionsand capacity additions over the last five years.

Changes in Outlooks for EthyleneProduction Capacities by Country and Region

Global Ethylene Scenario

The world's largest ethylene producers in descending order are Equistar Chemicals, ExxonMobil, Chevron-Phillips, Shell andInnovene (formerly BP). Other major producers include BASF, FinalPetrochemicals, Formosa, Lyondell, Sabic, Sinopec, Total Final Elf and WestlakePetrochemicals.

More than half of the world'sethylene production is converted to polyethylene for use in film applicationsfor packaging, carrier bags and trash liners. Other applications includeinjection molding, pipe extrusion, wire and cable sheathing and insulation, aswell as extrusion coating of paper and cardboard.

In the U.S., 60% of total ethylene production capacity comes from liquefied natural gas (mostly ethane) and 38% from naphtha. Therelatively high cost of U.S. natural gas is a major factor in the forecast forflat U.S. ethylene production in the next several years. Ethylene is cheaper to produce from naphtha than from liquefied natural gas. In the Middle East, mostethylene is produced from liquefied natural gas according to Eramo. However, henotes, "In the Middle East, producers are now introducing naphtha intotheir ethylene production strategies in order to build a more diversifieddownstream chemical industry.

Western European Ethylene Capacity,Production and Consumption

The demand grew by 0.9 % in 2005, well below the 2004 growthrate of 3.5 %, and also less than the growth forecast of 1.6 % p.a. for the2005-2010 periods. The demand growth in 2004 and 2005 reflects regionalindustrial production growth figures of 1.8 % and 0.4 % respectively.Consumption of ethylene is driven mostly by polyethylene, for which domestic production is forecasted to increase 1.5 % p.a. in the period 2005-2010.

SOUTH AMERICAN PLANT CAPACITIES

GlobalProduction of Ethylene (Million Ton)

Higher Growth in Asian Countries

EUROPEAN PLANT CAPACITIES

AMERICAN PLANT CAPACITIES

Global Production of Propylene (Million Ton)

Higher Growth in Asian Countries

PROUDCTION SHIFTS TO EASTERN COUNTRIES

The global olefins business is enjoying a period of unprecedented high capacity utilization rates, expected to continue through 2008 before a move towards oversupply in 2009-10. Supply in the olefin markets has been affected by dual forces: It has been kept tight by robust demand due to sustained high economic growth rates (particularly in Asia), and on the other hand, supply has been affected on account of delays in several major projects and feedstock restrictions. This situation is expected to reverse by 2011- Several large scale projects that have been delayed, will be completed coinciding with a cyclical downturn in demand growth, leading to a trough in operating rates and profitability. The polypropylene market has been driven by similar forces : with high gasoline prices affecting supply. Demand for octane has increased propylene demand, diverting the material to production of alkyls within refineries, leaving less available for chemical uses. High operating rates and profitability have been restored recently to butadiene, on account of various reasons: A long period of low investment in butadiene extraction capacity, rejuvenation of derivative markets by the rapidly developing automotive industry in Asia.

Regional competitiveness, though existent, is less apparent in the present globally tight market scenario. Global olefins producers have been able to pass high feedstock costs downstream in the current tight derivative markets. Producers in the Middle East region, with access to cheap and abundant feedstock, have enjoyed a competitive advantage over the last few years, manifesting into record profits for Middle Eastern producers. It has also attracted unprecedented levels of investment in new capacity in the Middle East, and financed the acquisition of producers from other regions.

Regional competitiveness will become increasingly apparent as operating rates drop in 2010. The situation will change as the global markets move towards oversupply, high operating rates in the Middle East will leverage advantage, while producers in other regions will be forced to cut back production. As global olefins producers increasingly include low-cost assets in the Middle East in their portfolios, there will be a tendency for them to maximize output at the Middle Eastern plants at all times, leading to larger fluctuations in output at their assets in other regions. The cost advantage enjoyed by the Middle Eastern producers in the current high oil price scenario is sufficient to outweigh other competitive considerations many times over. The cash cost of ethylene production in 2007 spiked over US$700/MT in Western Europe and the United States, while the cost for a typical gas-based producer in the Middle East remained under US$100/MT. Along with the capacity developments in the Middle East has come acceleration in capacity addition in Asia, primarily in China. Following long delays to the first world scale, projects in China are increasing in number, scale and speed of development. Cracker projects developed by Chinese producers in joint venture with BASF, Shell and BP are increasingly integrated with refineries, and exploit the advantages of lower fixed cost and proximity to market.

The growth outlook for olefins is strongly positive in the long term, supported by consumption growth in plastics and intermediates. The global market is thus not expected to show significant signs of maturing over the next decade, and growth rates will be broadly similar to those seen over the past ten years.

The operating rates will remain above 90% through 2007-08, before declining sharply in 2009-10. Global consumption of ethylene is expected to increase from 112 mln tons in 2006 to 168 mln tons by 2015. The next five years will see capacity in the Middle East surpass that in Western Europe and the United States. The Middle East currently accounts for 10% of global capacity, but will account for 22% by 2010. Capacity in China will also grow dramatically, although demand for ethylene derivative imports will continue to rise. Capacity development elsewhere in Asia will mainly be restricted to countries in the early stages of development and those that currently import ethylene. Capacity in the Asias ethylene-derivative exporting regions such as South Korea and Japan will be slowest.

Capacity developments are focused in the Middle East and Asia, motivated respectively by feedstock cost and proximity to market. The scale of the capacity addition in the Middle East is unprecedented, and will see the regions capacity more than double over the next five years. Expansion has been enabled by the increasing use of private finance, the availability of non-associated gas and the development of new industrial cities outside Saudi Arabia. Projects in the Middle East include an increasing proportion of propylene, due to a move towards heavier feedstock in Saudi Arabia, as well as major refinery sourced propylene developments, and large scale on-purpose production from propane dehydrogenation and metathesis. The major liquids based steam cracker developments in Asia will produce large quantities of propylene, and also most of the worlds new butadiene capacity. The Middle East will supply the growing demand for ethylene and propylene derivative imports in Asia Pacific, but also most other markets, including Western Europe and North America.

Demand growth for ethylene and propylene will remain above global GDP levels over the next cycle, but will drop slightly below GDP after 2020. Demand growth for butadiene will remain significantly lower than that of ethylene and propylene. The heavy additions of liquids-based steam cracking capacity in Asia will lead to an increasing surplus of crude C4s in the region, despite the focus of new butadiene extraction capacity there. Selective hydrogenation and co-cracking of C4s in Asia will increase accordingly.

Poly-olefins remain the largest sector of olefins demand, and have the highest overall growth rate. Monomers and intermediates form the second largest grouping for ethylene and propylene, comprising products such as EO/MEG, EDC, ethyl-benzene/styrene, propylene oxide and cumene/phenol. Elastomers account for the majority of butadiene demand. Other applications include a very wide range of large and small derivatives, which collectively track GDP growth and industrial activity.

The current extended period of high operating rates is expected to be followed by an abnormally low trough in 2011. This is an exaggeration of the normal cyclical phenomenon, where excess investment in new capacity is caused by the high levels of income generated in the long up-cycle. Due to the apparent severity of the upcoming trough, and the escalation of project costs, the delay of a number of announced projects particularly in Asia are likely to be delayed in preference to developments in the Middle East.

References:

• Plastemart
• APPC/PMRC
• Chemical week
• Indianchemicalnews
• METI Japan
• GPCA

W. European Capacity of Ethylene Production

Source: Appe/PMRC

Western European Ethylene Capacity Expansion

Despite a lower demand growth in 2005, Western European crackers operated at a loading rate of just under 91% of nameplate capacity, only slightly lower than in 2004, as trade and capacity changes were small. Production increased around 200 kt / year to 21.6 million ton/year. With a similar increase in capacity, this kept loading rates flat.

Net ethylene imports over 2005 were steady at around 300 kt into Western Europe. About 75 % of the 400 kta imports came from Saudi Arabia, USA, Mexico and Russia.

In Eastern Europe, the total crackers capability stood at 1,624,000 tons for a production of 1,595,000 tons. Looking forward, loading rates are projected to rise slightly, and then flatten out at a level between 92 and 93 % as a result of production increases with minimal capacity additions.

2006 Ethylene Production Capacity:

Total world ethylene production capacity: Amounted to 116 M. Ton in 2006

North America (30 %)

Asia-Pacific (27 %)

Western Europe (20 %)

Ref (OGJ, 2006)

Cracker Capacity in Europe in 2005

At the end of 2005, there were 57 crackers operating in Western Europe and 9 in Central/Eastern Europe, with annual ethylene capacities of 23,964,000 ton and 2,390,000 respectively, Totally 26,354,000 ton.

WESTERN EUROPE (000 Kt)

Source: Appe/PMRC

Source: Appe/PMRC

Russian Ethylene Supply

Russian Propylene Production

The Russian Petrochemical industry is gradually being restructured & streamlined into more profitable companies or holding groups. Productions of feedstocks are the key to the development of the petrochemical industry beyond 2011, in addition to logistics and the infrastructure. The dilemma facing Russian investors for future projects are good. Output from new plants could be sold at profitable levels in neighbouring market is developing and Russia is connected to it with roads. Production is set to rise over the next 2-3 years as a series of projects see completion. At the same time the focus remains targeted on cost reduction and quality improvements from existing operations.

NEW POLYMER PROJECTS ANNOUNCED IN INDIA

Company Project Existing Players 2005

Reliance Industries Limited Expansion of cracker capacity by 0.25 million ton and PP capacity by 0.28 million ton by 2006-07

Indian Petrochemicals Corporation Limited

• Expansion of Vadodara (Gujarat) cracker capacity by 40,000 ton,
• PP capacity by 15,000 ton

Gas Authority of India Limited

• Expansion by 50,000 ton in PE completed in 2004-05, Further expansion by 0.13 million ton by 2006-07 Multi-feed cracker at Kasargod, Kerala with downstream polymer plants and Assam Gas Cracker project

Haldia Petrochemicals Limited Expansion in PE and PP capacity by 0.1 million ton and 50,000 ton by de-bottle-necking by 2005-2006

DCM Shriram Consolidated Limited Expansion by 28,000 ton by 2005-2006

New Players

Indian Oil Corporation Limited

• Naphtha cracker at either Koyali (Gujarat) or Panipat (Haryana)
• Naphtha cracker at Haldia / Paradeep /Chennai
• a new petrochemical complex by 2011-12
• Investments in joint ventures in Iran

Oil and Natural Gas Corporation Limited/Mangalore Refinery and Petrochemicals Limited

Naphtha cracker at either Dahej (Gujarat) or Mangalore

(Karnataka)

Indian Olefins Demand Supply

Source: Indian-chemical news

Few Plants under Expansion

Ethylene Capacity Growth in the Middle East

Cracking Capacity of Several Projects in Middle East

By the end of 2004:

• Chinas primary crude distillation capacity had reached 315 million metric ton per year (mmtpa) (second worldwide)
• Ethylene production had reached 6.085 mmtpa (third worldwide)
• Ethylene production in 2004 was 6.27 million ton.

ETHYLENE CRACKER AND DERIVATIVES PLANT CHINA 2005 / 2006.

• Lanzhou's total ethylene capacity to 700,000 ton/ year, which includes an existing 240,000-ton/year cracker.
  
  
• The Chinese government's State Development and Planning Commission approved the raising of capacity from 650,000 ton/year to 900,000 ton/year of naphtha-fed ethylene cracker. The downstream plants have a capacity of 600,000 ton/year polyethylene; 590,000ton/year propylene;
  
  
• Shanghai Secco Petrochemical Company, joint venture between BP (50%), Sinopec (30%) and SPC (20%), Capacity Ethylene 900,000ton/year, total derivative output 2.3 million ton/year.
  
  
• BASF-YPC (50:50 joint venture) Q3 2005, 600,00tpa ethylene.
• Formosa's Mai Liao complex has units to produce 450,000t/yr ethylene and 250,000t/yr propylene.
• Formosa's Mai Liao complex includes units to produce 1.5million ton/year ethylene in 2002.
• Yanshan Petrochemical Group : ethylene production capacity 710,000 tons/year.
• MAOMING PETROCHEMICAL, on the other hand, will expand its ethylene cracking capacity to 800,000 million ton/year.

  By end 2006, the capacity, output and market share of the Companys major chemical products are as follows:

  Sinopec has 10 ethylene plants (including 2 joint venture companies) with a total capacity of 6.095 milion ton/year by end 2006 and real production of 6.163 million tons. The utilization rate of ethylene plants reached 112.05%. Seven sets of ethylene crackers have a capacity over 600,000 ton/year each, including Sinopec Shanghai Petrochemical Co., Ltd., Sinopec Beijing Yanshan Company, Sinopec Qilu Petrochemical Co., Ltd., Sinopec Yangzi Petrochemical Co., Ltd., BASF-YPC Co., Ltd., Shanghai Secco Petrochemical Co., Ltd. and Sinopec Maoming Company. Seccos capacity is 900,000 ton / year.

  
  

  Ethylene Capacity - CHINA (KT/Annum)
  Company	CapacityKT/Annum
  Beijing Yanshan Petrochemical Corp	450
  Yangzi Petrochemical Co.,Ltd.	650
  Shanghai Petrochemical Company	700*
  Qilu Petrochemical Co., Ltd.	450*
  Maoming Petrochemical Co	900
  Fujian Petrochemical Company Limited (FPCL)	800*
  Daquing Petrochemical Company	430*
  Jilin Chemicals Ind. Corp.	300
  BASF-YPC Company Limited	600
  Sinopec Guangzhou Company	150
  Shanghai Secco Petrochemical Co., Ltd	900
  Lanzhou Chemical Inds. Corp.	160
  Panjin Ethylene Inds. Corp.	160
  Fushan Petrochemical Inds. Ltd.	144
  Beijing Dongfang Chemical Inds. Ltd.	150
  Guangzhou Ethylene Co. Ltd.	150
  Tianjin United Chemicals Co. Ltd.	140
  Xinjiang Dushanzi Petrochemical General Factory	140
  Zhongyuan Petrochemicals Co. Ltd.	140

  ( * ) Expansion is continue