What is the Future
of the
Gulf Coast Petrochemical Industry?
Presentation at a Conference Sponsored by
Global Energy Management Institute,
University of Houston
April 29, 2005
Avi Nash
6/28/2016
Avi Nash LLC
1
This information is proprietary and not
to be copied, or redistributed in any
form, without the permission of Avi
Nash LLC
6/28/2016
Avi Nash LLC
2
Future of the Gulf Petrochemical Industry
• Yes, There IS a Future!
• It Will be Different…but for Reasons Different
From Just the “Feedstock Issue”
• Key Differences Beyond Feedstock Mix.
– Product Mix
– Players
– Profitability
6/28/2016
Avi Nash LLC
3
• Setting the Stage
• The Issues
•
•
•
•
6/28/2016
Feedstock Shifts
Product Mix Shifts
Ownership Shifts
Putting it All Together
Avi Nash LLC
4
• Geo-Political Factors
• Government Policy:
US; Foreign
Product
Mix
Competitive
Dynamics
Innovation
Future of the
Gulf Coast
Petrochemical
Industry
Profitability,
Ownership
“Center of Gravity”
Of Supply
DEMAND
6/28/2016
Avi Nash LLC
5
• Setting the Stage
• The Issues
• Feed-stock Shifts
• Product Mix Shifts
• Ownership Shifts
• Putting it All Together
6/28/2016
Avi Nash LLC
6
Conventional Wisdom: Since 2000, the Cost of Energy,
Particularly Gas, Has Crippled USGC Competitiveness
Reality: (1) The Trend is Not New
55-Yr Oil-To-Gas Ratio History
Oil-to-Gas Ratio, 5-Yr Avg
40.0
35.0
30.0
25.0
20.0
15.0
10.0
5.0
Source: Avi nash LLC
6/28/2016
2005
2001
1997
1993
1989
1985
1981
1977
1973
1969
1965
1961
1957
1953
0.0
Year
Avi Nash LLC
7
Conventional Wisdom: Since 2000, the cost of Energy, particularly Gas, Has Crippled
USGC Competitiveness (cont..)
Reality: (2)Decline in Competitiveness is Far from Across-The-Board
12.0
North America North America Gas-Based
Gas based
Oil/Gas ratio
11.0
'91
10.0
'79-'83
9.0
Who Likes to Be Where?
8.0
7.0
'00
Rest of World,
incl
Rest of World
NAM Liq crackers
6.0
'07E
'04
Middle East
Middle
East
5.0
15
25
35
45
55
Oil, '03$/bbl, 5-yr. Avg in 2005 Dollars
6/28/2016
Avi Nash LLC
8
Reality: 3) Recent Energy Prices Mask Deeper Issues
Facing US Gulf Coast Producers: Others are Catching
up!
Mid-1980s
China
North America
∆ China to N.Am
Europe
Middle East
Japan
Rest of World
Feed
Tech- Capital Market
Position nology
4.0
1.0
1.0
1.0
4.0
5.0
5.0
5.0
(4.0)
(4.0)
(4.0)
3.0
4.5
5.0
5.0
5.0
1.0
1.0
1.0
3.0
3.5
5.0
4.0
3.0
1.0
3.0
1.0
Avg.
1.8
4.8
(3.0)
4.4
2.0
3.9
2.0
5 = Favorable; 1= Unfavorable
6/28/2016
Avi Nash LLC
9
Reality: 3) Recent Energy Prices Mask Deeper Issues Facing US
Gulf Coast Producers: Others are Catching up! (Cont’d)
2005
China
North America
∆ China to N.Am
Europe
Middle East
Japan
Rest of World
Feed
Tech- Capital Market
Position nology
2.0
2.5
4.0
5.0
2.0
5.0
5.0
5.0
(2.5)
(1.0)
1.0
4.0
4.0
4.0
5.0
2.0
4.0
1.0
1.0
4.0
3.0
2.0
2.0
2.0
3.5
3.5
Avg.
3.4
4.3
(0.9)
3.3
3.0
2.5
2.8
5 = Favorable; 1= Unfavorable
6/28/2016
Avi Nash LLC
10
Reality: 3) Recent Energy Prices Mask Deeper Issues Facing
US Gulf Coast Producers: Others are Catching up! (Cont’d)
2015E
China
North America
∆ China to N.Am
Europe
Middle East
Japan
Rest of World
Feed
Tech- Capital Market
Position nology
1.0
3.5
4.0
5.0
1.0
5.0
5.0
4.0
(1.5)
(1.0)
1.0
1.0
3.0
4.0
4.0
5.0
3.0
5.0
1.0
1.0
4.0
3.0
2.0
2.0
3.0
4.0
4.0
Avg.
3.4
3.8
(0.4)
3.0
3.5
2.5
3.3
5 = Favorable; 1= Unfavorable
6/28/2016
Avi Nash LLC
11
Why the Marginalization of US Competitiveness?
Reasons are Partly Structural; Partly Self-Inflicted
Structural
Self-Inflicted
• We’ve used up Most of
Stranded Gas (Others
Haven’t).
• Have we Done The Best We Can
…to Replace More of What We
Use?
• Globalization (via Capitalism!!)
Has Shifted the Playing Field
for Demand..and Supply.
• …To Cut Costs More
Aggressively?...More
Proactively?
• Periodic Cyclical Peaks
Encourage Complacency
• …And Consistently, Instead of
Periodically?
• Commoditization, With
Increasing Maturity
• Innovation Has Lagged: “The
R&D Productivity Issue”
– What you Spend vs. What you
Get For It.
6/28/2016
Avi Nash LLC
12
• Setting the Stage
• The Issues
• Feedstock Shifts
• Product Mix Shifts
• Ownership Shifts
• Putting it All Together
6/28/2016
Avi Nash LLC
13
Of Course, The Gas Hit is Real…With the Most Direct
Hit Being to Methanol and Ammonia (No Surprise !)
U.S. Methanol Capacity, Millions of Gallons/Year
5000
• Regulation shrinks Demand (MTBE)
4000
•Gas Hit Shuts Celanese Methanol
(Acetic Acid)
3000
2000
1000
0
1990
1995
2000
2005E
2007E
Chemdata Inc.
6/28/2016
Avi Nash LLC
14
The “Oil & Gas Story” is more Complex for Other
Products. In case of Ethylene, consider 3 Scenarios for
Oil and Gas
12.0
'91
North America Gas based
11.0
Oil/Gas ratio
10.0
'79-'83
SOil $27/bbl
9.0
Gas $3/Mmbtu
Oil-to-Gas: 9x
8.0
7.0
SOil $42/bbl
'00
6.0
Rest of World,
incl
NAM Liq crackers
5.0
15
25
S4/28/05
Gas $6/Mmbtu
Oil-to-Gas: 7x
'04
SOil $60/bbl
Gas $10/Mmbtu
Oil-to-Gas: 6x
Middle East
35
45
4.26.05
WTI C
HENRY
OIL-GA
55
65
Oil, '03$/bbl, 5-yr. Avg in 2005 Dollars
6/28/2016
Note: WSJ (4/28): WTI $51.62/bbl; Henry Hub $7.09/mmbtu
Avi Nash LLC
15
Reality: The North American “Hit” is Real…But varies
by Producer, Oil/Gas Prices and position in the Cycle.
Delivered Cash Cost Comparison For HDPE, cents/lb
To China Market
To U.S. Market
Oil ($/Bbl)
Gas ($/mmbtu)
Oil-To-Gas
27
3
9
42
6
7
60
10
6
27
3
9
42
6
7
60
10
6
Mid East (E)
22.7
27.7
34.0
24.8
29.9
36.4
Alberta - Ethane
24.2
37.2
54.6
21.2
33.5
49.9
USGC - Ethane
29.1
42.1
59.5
25.6
37.9
54.3
USGC - Naptha
29.5
39.8
52.6
26.0
35.7
47.8
Korea (N)
32.0
42.0
55.0
34.9
45.0
58.0
6/28/2016
Avi Nash LLC
16
This is Borne Out by Recent Profitability & Share Prices
Uniform Stock Performance
Needed to Justify the
Higher Cost of Capital of
Naphtha Crackers
60
3
1.5
0
1998
2000
2002
2004
-1.5
2006E
Share Price (USD Monthly)
4.5
¢/Lb
Naptha Cracking Margins Less Ethane Cracking Margins
Naphtha Margins less Ethane Margins
Nova Chem.
(Alberta+flexi)
50
40
Westlake
(Ethane)
30
20
10
Lyondell
(Flexi)
-3
0
Dec99
-4.5
Dec00
Dec
01
Dec
02
Dec
03
Dec
04
CMAI Global Inc; Compustat Inc.
6/28/2016
Avi Nash LLC
17
Perception of the Hit May Exceed Reality in Some Cases
• Oil-to-Gas Ratio Has Limited Room to Fall
Further.
• Self-Correcting Actions Get Triggered
– Debottlenecking of Liquid Crackers; Shutdown of
Old Gas Crackers
– Increase in Capacity in Canada (Ethylene),
Trinidad (Methanol, Ammonia)
– LNG Importation Projects
6/28/2016
Avi Nash LLC
18
Need: Practical Ways of Reducing “Gas-Feed” Cost and
its Volatility
US Challenge( For Industry and Regulators):
“Why Should a 6.0x Oil-to-Gas Ratio be the New Level? Why Not Higher?”
1. Creative Ways to Accelerate Regional
Production?
…Alaska; Canada; Mexico; Trinidad.
2. Facilitating Infrastructure For Getting the Gas
Where it is Needed.
3. Addressing and Resolving Objections to LNG
Terminals?
6/28/2016
Avi Nash LLC
19
Perception of the Hit May Exceed Reality in Some Cases
• Oil-to-Gas Ratio Has Limited Room to Fall Further
• Self-Correcting Actions Get Triggered
• Product Mix Shifts
Bottom Line: Gas Hit is Real but,
A. No Longer Asymmetric with Oil (as it was from ’50-’00)…
and so unlikely to further worsen Competitive Position
B. Disproportionately Relevant for Products Such as PE and
EG.
6/28/2016
Avi Nash LLC
20
• Setting the Stage
• The Issues
• Feedstock Action…and the Reaction
• Product Mix Shifts
• Ownership Shifts
• Putting it All Together
6/28/2016
Avi Nash LLC
21
“What Will the Gulf Coast (Be Allowed to) Make?”
This Has Been Changing Meaningfully…and Will
Continue To do so
C3/C2 Ratio Rising...
...Partly From Less Gas Cracking
100%
% Total U.S. C2 Ethylene Capacity
Ratio of U.S. C3/C2 Capacity
70%
68%
66%
64%
62%
60%
1991
6/28/2016
1994
1997
2000
2003 2006E
80%
Gas-Based Crackers
60%
40%
Flexi-Based Crackers
20%
0%
1991
1995
2000
2005E
Avi Nash LLC
2007E
22
Competitive Advantage is Still Decent in Some Areas.
Relative to, Say, Polyethylene
•
Propylene Chain
Vinyl-Chain:
(Acrylic Acid, Propylene Oxide,
Oxo-Alcohols, Phenol-Acetone)
VCM, PVC, Rigid PVC Fabrication
End-Markets still driven by higher
per-capita GDP
– Exterior Paint
•
End Markets Driven by US Housing
Market and Substitution.
•
Structural Issues Discourage Mid-East
Investment
– Disposable Hygiene Products
– China’s PVC Advantage Limits
Export Opportunity.
– Furniture, Housing, Appliances
– Engineered Plastics
– Freight Cost for Caustic.
•
U.S. Growth Will Trail Overseas…
•
But Imports Unlikely in the
Intermediate Term
•
U.S. Sheltered from Imports in Rigid
Applications, eg: Pipe, for Freight Cost
Reasons.
•
BOTTOM LINE: Competitive
Advantage on the Gulf Coast for
BASF, ROH, Lyondell (PO) etc.
•
BOTTOM LINE: Shin-etsu Investing
Heavily in N.Am. Gulf Coast.
6/28/2016
Avi Nash LLC
23
Competitive Advantage Varies by Product…and Affects
Product Mix
’88
PE
C2
29%
30%
VCM 28%
’95
29%
28%
29%
’00
26%
29%
25%
’05E
20%
23%
23%
’07E
19%
22%
23%
Ethylene & PE share declines
have accelerated; VCM
Decline stays steady
US Share of Global Capacity
U.S. Share of Global VCM,
Ethylene(C2) &
Polyethylene Market
8.0%
6.0%
4.0%
Polyethylene
C2
2.0%
0.0%
1988 to 00
6/28/2016
VCM
2000 to 07E
Avi Nash LLC
24
One Likely Result: Integration Importance Should
Rise
• Attempt by Many to Emulate Best Practices in RefineryCracker Integration.
- “How Much of the 5¢/Lb Potential Are WE Capturing?”
• Greater Upgrading of By-Product Streams
• Reinvestment in Mega Sites (Similar to Ludwigshafen)
– Disproportionately Higher vs. Industry and Company averages
– Enough to Maintain al least Acceptable Competitiveness
6/28/2016
Avi Nash LLC
25
US Challenge (Industry and Regulators):
How Best Can the Gulf Coast Improve Competitiveness..
…. in Chains Where it has Advantage,
…. Such that the Competitiveness Can be Defended?
Example: Propylene
1.
How much more Propylene can be squeezed out?
2.
At What Cost… Under Different Scenarios?
3.
Directed into Which Products and Markets?
4.
“Captively”, or Left to Others to Upgrade?
Example: Refinery-Cracker Integration
1.
How Best to Leverage Scale & Infrastructure on Gulf Coast?
2.
How to Accelerate Incorporation of Best Practices Involving Process
Technology, Process Control, ERP, Software, Logistics, Outsourcing?
3.
What Limiting Steps need to be overcome for the next level of Benefits?
6/28/2016
Avi Nash LLC
26
Mix Shift: End Markets
• Stating the Obvious:
• Fewer Exports of Certain Commodities, eg
ethylene-chain derivatives
• More Volatile Exports of these as US
increasingly becomes the swing producer
• Greater Exports of specialized Derivatives,
Materials
6/28/2016
Avi Nash LLC
27
Secular Product Mix Shift: Less MaterialIntensive, More Knowledge-Intensive
• European Case History
Ciba-Geigy, Sandoz, Rhone-Poulenc, Hoechst, ICI,
and, to a lesser extent, Bayer, Akzo, Solvay
• US Transformations: Pharma or Ag Biotech
Monsanto, American Cyanamid, and, to a lesser
extent, Du Pont
• US Transformations: More Downstream
Rohm and Haas, 3M
• Bottom-Line: Disproportionate Growth in Value of “Users”
Formulators: eg Sherwin-Williams
Distributors/Service Providers: eg Gases, Sigma-Aldrich, Ecolab
Materials: eg 3M,ITW(Adhesives), Toray, Fiberite
6/28/2016
Avi Nash LLC
28
Industry Challenge:
How to Increase the Productivity of R&D?
 What to Spend on?
 How Much to Spend?
 Equally Importantly,
Reducing “False Positives”, and
Reducing “False Negatives” in the R&D Process.
 The Role of Fresh Approaches
High Thru-Put Experimentation
Informatics
6/28/2016
Avi Nash LLC
29
•
•
•
•
Setting the Stage
The Issues
Feedstock Action…and the Reaction
Product Mix Shifts
• Ownership Shifts
• Putting it All Together
6/28/2016
Avi Nash LLC
30
Ownership Changes
Sellers
• Division of Companies.
– PTA, EG (Dow Chemical)
– Polyester, Spandex (Dupont)
– Polyethylene, Olefins (BP)
• Small, or Mid-Sized Players
• “Private Equity” Firms.
– Not Strategic Owners.
• Focused Industry Players.
– Relatively New Entrants, e.g: Koch, Sun
– Consolidators, e.g: Lyondell.
– Millenium
• Foreign Competitors.
– Celanese
• Drivers:
– Size, Share
– Market Access
– “Synergy”
– “Make a Quick Buck”
– Semi-Commodity Companies
eg: Great Lakes, Noveon.
• Drivers:
– Move Down Stream
– Cash Out
6/28/2016
Buyers
Avi Nash LLC
31
Ownership Changes: Changes Little in Most Cases. Most Products Continue to
Have too Many Players to Allow Pricing Power.
Acquisitions Driven by Size or Share Alone Fail to Deliver
US Ethylene Industry Structure is Way Too Fragmented
0.15
0.12
60%
0.09
40%
0.06
20%
0.03
2002
1998
1994
Herfindahl Index
2006E
Top 5 share
1990
1986
1982
1978
0.00
1974
0%
Herfindahl index
Top 5 share, %
80%
• Question:
– What is the Franchise Quality of the Purchased Assets?
– What is the Acquirer's confidence in Adding Value to Acquired Assets?
– What is the price paid relative to “Cycle-Average” Earnings?
6/28/2016
Avi Nash LLC
32
•
•
•
•
•
Setting the Stage
The Issues
Feedstock Action…and the Reaction
Product Mix Shifts
Ownership Shifts
• Putting it All Together
6/28/2016
Avi Nash LLC
33
Putting it all Together
• Why the Gulf Coast Industry Won’t Go Away
. Infrastructure, Integration, Logistics Advantages
. People & Productivity Advantages +
Proximity to the #1 Market
. “Delivered-Cost” Advantage in Local market
for Many Products
6/28/2016
Avi Nash LLC
34
Putting it all Together
• Why the Gulf Coast Industry Won’t Go Away
• Why the Gulf Coast Industry Will Slow/Shrink
. Local market Growth Slowing
. “Delivered-Cost” Advantage into Export Markets
Disappearing in some cases
. “Delivered-Cost” Advantage in Local Markets shrinking
. Demise of Old Non-integrated Assets (slowed by Exit
Costs), often without reinvestment in new ones
6/28/2016
Avi Nash LLC
35
Putting it all Together
• Why the Gulf Coast Industry Won’t Go Away
• Why the Gulf Coast Industry Will Slow/Shrink
• Why Disparities will Increase Between Players
. Big Differences in Execution, Focus
. Big Differences in Innovation: R&D, Production, Marketing
. Big Differences in Re-investment: Cap-Ex, R&D
. Big Differences in Profitability
6/28/2016
Avi Nash LLC
36