201105151926340.Nexant Industry Report 2011

Industry Report 38208.001.01

Independent Market Report on the Global and Indonesian Petrochemicals Industry April 2011 Prepared For:

Board of PT. Chandra Asri Petrochemical Tbk.

Industry Report

Independent Market Report on the Global and Indonesian Petrochemicals Industry April 2011 Prepared For:

Board of PT. Chandra Asri Petrochemical Tbk.

22nd Floor, Rasa Tower I, 555 Phaholyothin Road, Kwaeng Chatuchak, Khet Chatuchak, Bangkok 10900 Thailand Tel: +662 793 4600 Fax: + 662 937 0144

Contents Section

Page

1. INTRODUCTION ............................................. .................................................................... .............................................. ...................................... ...............

1-1

2. OVERVIEW OF INDUSTRY............................................... ....................................................................... ......................................... .................

1-1

2.1 Industry Outlook ............................................ .................................................................... ................................................ ....................................... ...............

1-1

2.2 Pricing & Profitability ............................................... ....................................................................... ................................................ ........................... ...

1-2

3. PETROCHEMICALS KEY DRIVERS & TRENDS..................................... TRENDS..................................................... ................

1-5

3.1 Demand Side Fundamentals ................................................ ........................................................................ ......................................... .................

1-5

3.2 Supply Side Fundamentals ............................................... ....................................................................... ............................................ ....................

1-7

4. INDONESIAN PETROCHEMICAL INDUSTRY ................................................ ........................................................ ........

1-8

4.1 Prevailing Laws and Regulations .............................................. ..................................................................... ................................... ............

1-10

5. OLEFINS & DERIVATIVES KEY DRIVERS & TRENDS ........................................ ........................................

1-11

5.1 Global Overview .............................................. ...................................................................... ............................................... ..................................... ..............

1-11

5.2 Indonesian Market .............................................. ...................................................................... ............................................... .................................. ...........

1-14

5.3 Competitive Positioning ............................................. ..................................................................... ................................................ .......................... ..

1-15

5.4 Polyolefins…….. ............................................. .................................................................... .............................................. ...................................... ...............

1-15

5.4.1 Global Overview…….. ............................................... ...................................................................... .............................................. .........................

1-15

5.4.2 Indonesian Market…….. ............................................ ................................................................... .............................................. .........................

1-158

5.4.3 Competitive Positioning…….. ............................................... ....................................................................... ................................... ...........

1-159

5.5 Mixed C4s/Butadiene ............................................ ................................................................... .............................................. ................................ .........

1-24


1-1527

5.6 Styrene Monomer .............................................. ...................................................................... ................................................ ................................... ...........

1-27

5.6.1 Global Global Overview……................................................. ...................................................................... .............................................. .........................

1-1527


1-1530

5.6.3 Competitive Positioning…. …….. ............................................ .................................................................... ................................ ........

1-1531

6. GLOSSARY ............................................. .................................................................... .............................................. .............................................. .........................

1-33

Figure

Page

1.1

Petrochemical Industry Cyclicality ............................................. ..................................................................... ............................... .......

1-3

1.2

Ethylene Price Spreads over Naphtha.............................................. ...................................................................... .......................... ..

1-4

1.3

Polyolefins Consumption per Capita ............................................... ........................................................................ ...........................

1-5

Independent Market Report on the Global and Indonesian Petrochemicals Industry 38208.001.01

i

Contents

1.4

Polyolefins Consumption by Region .................................................. ......................................................................... .......................

1-6

1.5

Olefins Forecasted Capacity Changes ............................................. ..................................................................... .......................... ..

1-8

1.6

Overview of Domestic Polyolefins Net Trade............................................... ........................................................... ............

1-9

1.7

Global Olefins Consumption by End Use .............................................. ................................................................. ...................

1-12

1.8

Global Olefins Supply and Demand Balance ........................................... ............................................................ .................

1-12

1.9

Overview of Olefins Consumption by Region .............................................. .......................................................... ............

1-14

1.10 Ethylene Domestic Market Share ............................................. .................................................................... ................................. ..........

1-15

1.11 Polyolefins Consumption by Region .................................................. ......................................................................... .......................

1-16

1.12 Polyolefins Global Supply and Demand Balance .............................................. ...................................................... ........

1-17

1.13 Polyolefins Price Spread ............................................... ....................................................................... ............................................. .....................

1-17

1.14 Polyolefins Supply, Demand and Trade – Indonesia ............................................ ................................................. .....

1-18

1.15 Domestic Market Share ............................................ ................................................................... .............................................. .......................... ...

1-19

1.16 Polyolefins Top Ten South East Asia Producers .............................................. ....................................................... .........

1-20

1.17 Comparison of Naphtha-Based HDPE/LLDPE Production Cash Costs ...................

1-21

1.18 Comparison of Polypropylene Production Cash Costs ............................................ .............................................. ..

1-23

1.19 Butadiene Global Consumption .............................................. ...................................................................... ................................... ...........

1-25

1.20 Butadiene Price Spread ................................................ ........................................................................ .............................................. ......................

1-26

1.21 Overview of Butadiene Consumption by Region .................................................. ...................................................... ....

1-26

1.22 Butadiene Supply, Demand and Trade - Indonesia ........................................... ................................................... ........

1-27

1.23 Styrene Global Consumption by Application .............................................. ............................................................ ..............

1-28

1.24 Styrene Global Supply, Demand and Balance .............................................. ........................................................... .............

1-28

1.25 Styrene Price Spread ............................................ ................................................................... .............................................. ............................... ........

1-29

1.26 Overview of Styrene Consumption by Region ............................................... .......................................................... ...........

1-30

1.27 Styrene Supply, Demand and Trade - Indonesia ................................................ ....................................................... .......

1-31

1.28 Styrene South East Asia Producers........................................... .................................................................. ................................. ..........

1-32

Table

Page

1.1

Overview of Major Petrochemicals and Polymers Covered within this Review ......

1-1

1.2

Overview of Indonesian Petrochemical Industry ............................................ ...................................................... ..........

1-9

1.3

Overview of Indonesian Petrochemical Production Capacity ................................... ...................................

1-10

1.4

HDPE/LLDPE Naphtha-Based Plants Modelled, 2017............................................. .............................................

1-21

1.5

Polypropylene Plants Modelled, 2017 ................................................ ....................................................................... .......................

1-23


ii

Contents

Nexant Asia Limited Rasa Tower I, 555 Phahonyothin Road Kwaeng Chatuchak Bangkok 10900 Thailand Tel +662 793 4600 Fax +662 937 0144

Andrew Spiers Senior Vice President

23April, 2011 PT. Chandra Asri Petrochemical Tbk. Wisma Barito Pacific Tower Kav. 62-63, Jakarta 11410, Indonesia Dear Sirs,

INDEPENDENT MARKET REPORT ON THE GLOBAL & INDONESIAN PETROCHEMICALS INDUSTRY PREPARED FOR PT. CHANDRA ASRI PETROCHEMICAL TBK (“CAP”) FOR THE PURPOSE OF RIGHTS ISSUE. We, Nexant Asia Ltd, have prepared the Industry Report for inclusion in the CAP Prospectus in relation to the forthcoming rights issue. We are aware that the contents of this report will be included in the prospectus and confirm that the report has been written in an objective and independent manner. Further, we are aware of our responsibilities under section 214 of the Capital Markets and Services Act, 2007. This research is undertaken with the purpose of providing an overview of the global and Indonesian petrochemicals industry. Except as otherwise indicated, statistical and certain other information contained in the following report is based on or derived from data prepared by Nexant. We believe that this report is based on best estimates and presents a true and fair view of the industry within limitations of, amongst others, our primary and secondary research. We acknowledge that if we are aware of any significant changes affecting any of contents of this Report between the date hereof and the issue date of the Prospectus, we have an on-going obligation to cause this Report to be updated for changes and, where applicable, cause CAP to issue a supplementary prospectus, or withdraw our consent to the inclusion of this Report in the Prospectus.

Andrew Spiers


iii

Section 1

Industry Report

Section 1

Industry Report

The following report covers key aspects of the global petrochemical sector. The reports focus is on the major petrochemical products being produced today which include the following: 

Olefins (ethylene, propylene and butadiene)



Olefin derivatives (polyethylene and polypropylene)



Styrene Monomer

The report includes product analysis covering details of market demand, market supply, net trade and pricing.

1. INTRODUCTION Petrochemicals are chemical products derived from petroleum and other hydrocarbon sources. In 2010, total global industry revenues for the sector were estimated at close to $3 trillion. They are used principally as building blocks for a wide variety of materials and applications. Given the wide diversity of uses, the petrochemical industry plays an integral role in both the manufacturing and consumer sectors, and due to limitations of feasible and economic substitutes, an essential component of the global economy. Key market end-use sectors include transportation, packaging, construction, agriculture, textiles, consumer goods and electronics.

Table 1.1

Overview of Major Petrochemicals and Polymers Covered within this Review Global

South East Asia

Indonesia

Demand 2010 CAGR (Thousand Tons) (2011-2017)F



B ui ld in g Bl oc k D eri vat ive

K ey Ap pli ca tio ns

Ethylene

Polyethylene EG Styrene PVC

Packaging, agriculture, automotive, construction Textiles, packaging & automotive Packaging, electronics, automotive, construction Construction, packaging

69,457 18,923 25,100 35,436

4.8 4.6 2.7 5.0

4,826 1,436 1,306 1,605

4.4 3.2 2.5 3.3

829 500 139 373

4.9 1.1 2.4 4.9

Propylene

Polypropylene Acrylic Acid

Packaging, textiles, automotive, construction Personal care, automotive, construction

46,098 4,169

4.9 5.3

3,759 193

4.8 7.3

952 30

5.5 13.4

Butadiene

SB Rubber Butadiene Rubber ABS

Tyres, hosing & tube, seals, footwear Tyres, automotive appplications, an impact modifier Appliances, electronics (TVs), automotive pipe & fittings

4,442 2,678 6,823

3.4 3.5 3.4

261 190 340

3.3 3.3 2.6

98 49 57

2.5 4.3 6.2

Note: F = Forecast Source: Nex ant

2. OVERVIEW OF INDUSTRY 2.1 Industry Outlook Petrochemical industry profitability has historically been cyclical. Changes in supply and demand and resulting industry utilisation levels are key factors that influence the cycle and profitability of the sector. Additionally, the sector is highly capital intensive, which further contributes to the cyclicality. Capital spending cycles typically follow periods of sustained high profitability and as a consequence new investments in capacity tend to be executed over the same period, resulting in over supply and a period of lower profitability. The industry exhibited an improvement in 2010 after a dramatic slump in demand in 2009, following the onset of the global economic slowdown. This improvement was driven by a faster


1-1

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Industry Report

pace of recovery in the Asia Pacific markets. Additionally, a level of inventory restocking has also been taking place as buyers look to replenish previously depleted stock levels. The short term outlook of the industry remains under pressure as further capacity additions are expected in the short-term. However, we expect a gradual recovery in utilisation rates and industry margins to continue throughout 2011. Industry margins are forecasted to climb to a new cyclical peak in around 2015, with returns comparable to those seen in the last major peak in 2006/7. Within this context, Asia Pacific will represent the most attractive market in terms of growth and profitability and will be a key driver for profitability of the global petrochemical sector . Global demand for olefins, regarded as key industry building blocks, was estimated at 205 million tons in 2010 and is forecasted to grow at approximately 4% over the period 2011-2017. Demand in the Asia Pacific region accounts for around 40% of global demand and is projected to grow at 4.1% over the period 2011-2017. Rising living standards and the continuing trend of substitution of basic materials with plastics are key drivers across many Asia Pacific countries. Global demand for polyolefins was estimated at approximately 116 million tons in 2010 and is forecasted to grow at approximately 5% CAGR over the period 2011-2017. Key demand drivers are the packaging and construction sectors and further product substitution of basic materials. Asia Pacific is a key demand driver with forecasted growth of over 5.5% CAGR over the period 2011-2017. Global demand for styrene monomer (“SM”) in 2010 a major ethylene derivative, was estimated at approximately 25 million tons and forecasted to grow at 2.7% CAGR over the period 20112017. Key drivers for consumption growth of SM are tied to packaging, construction and electrical/electronic markets. Asia Pacific is the major growth region with its growth derived from both self-consumption and derivative production for exports.

2.2 Pricing & Profitability Industry pricing and profitability are cyclical and sensitive to industry supply and demand dynamics and resulting utilisation rates. Industry demand is primarily influenced by the pace of the economy and the impact of substitution of basic materials. The supply side of the industry is affected by investments in new capacity additions or closures of older/higher cost plants. Industry oversupply results when large increments of new capacity are brought on-stream over the same time period. This usually precedes a period of good profitability that initiates the capital spending cycle. The result is lower operating rates and depressed margins for sustained periods until excess supply can be absorbed. The rate of recovery is partly determined by the overall performance of the global economy. Industry cyclicality also promotes restructuring, mergers, demergers and acquisitions. These issues often result in capacity rationalisation whereby older, smaller scale, higher cost production units are closed thus helping the recovery process. The duration of cycles varies in length. We estimate recent cycle lengths were between 6-11 years in duration, measuring peak to peak. Due to the global nature of the industry, the profitability of all commodity petrochemicals tends to follow the same cycle so that most


1-2

Section 1

Industry Report

products typically demonstrate peak or trough levels of profitability in similar years. Occasionally, structural changes in a given market can cause profitability of one sector to diverge from the overall industry cycle. Figure 1.1 provides an overview of petrochemical industry profitability and highlights the cyclicality of the sector. Profitability is represented as a cash margin index which measures aggregate cash flows per ton of petrochemical for leader plants on a production weighted average basis, and is expressed as a per unit of output. This gives an estimated weighted average cash margin for the industry.

Recent Industry Performance The industry experienced a sustained period of profitability over the 2004-2008 timeframe. This was supported by good levels of economic growth and limited supply additions. Average industry operating levels were further sustained at higher levels due to delays in some new capacity start-ups. The economic recession which started in the second half of 2008 resulted in reduced demand for petrochemical products across most end use sectors. This led to a sharp decline in average operating rates and petrochemical profitability. The situation was worsened by the start-up of new production capacity over the same period.

Figure 1.1

Petrochemical Industry Cyclicality

(Cash margin index –commodity chemicals & polymers) 400

140 6 yrs peak-to-peak

11 yrs peak-to -peak

10 yrs peak-to-peak?

350

120 Illustrative

300 s i s a b n o t r e p s r a l l o D

250

100 80

200 60

150

40

100

20

50 0

l b b r e p $ S U

1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011F 2 013F 2 015F 2017F

Cash Margin Index Source: Nexant

0

Crude Oil* Note: *Base case at $70 per barrel

Profitability levels for most producers appeared to bottom out in 2009 and showed a significant improvement in 2010. A recovery in demand was initiated by various government stimulus packages and supported by a recovery in manufacturing across Asia and a level of industry restocking. Lower crude oil prices combined with various production outages also supported increased product margins in key sectors such as olefins and polyolefins.


1-3

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Industry Report

Forecast Industry Performance 2011-2017 Margins in the first quarter of 2011 were marginally higher than expected due to some unplanned production outages and delays in new project start-ups. Furthermore, the recent earthquake disaster in Japan resulted in unplanned outages at major olefin facilities in Japan. We believe that demand fundamentals remain good for the remainder of the year but are ultimately tied to the overall global economic recovery. We forecast petrochemical industry profitability to continue to exhibit a gradual sustainable recovery in 2011 as fewer capacity start-ups are scheduled. We estimate total new ethylene additions in 2011 of approximately 7 million tons compared with approximately 12 million tons in 2010. We expect the rate of new capacity additions to decline from a peak of 18 million tons (combined ethylene and propylene) in 2010 to approximately 8 million tons in 2014. We forecast industry margins to climb to a new peak around 2015, with returns comparable to those seen in the last major peak in 2006/7. This forecast is based on the assumption that a stable improvement in the global economy is sustained.

Figure 1.2 Ethylene Price Spreads over Naphtha (Basis: South East Asia Market Pricing)

) n o T r e p s r a l l o D ( a h t h p a N r e v o p a G

700

100%

600

95% 90%

500

85% 400 80% 300 75% 200

70%

100 0

s e t a r n o i t a s i l i t U %

65%

2004 2005 2006 2007 2008 2009 2010 2011F 2012F 2013F 2014F 2015F 2016F 2017F Ethylene Delta Over Net Raw Material Cost

60%

Global utilisation rates Note: - 2011F is forcasted on year to date basis - Forecast price is based on Brent Crude at $70 per barrel

Source:Nexant

NB. Utilisation is total production expressed as a percentage of nameplate capacity excluding mothballed facilities.

We note that the actual timing of peaks and troughs of the cycles are highly speculative, since these depend on economic developments, possible plant closures and decisions yet to be made about investments due to come on-stream over the medium and longer term.


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Industry Report

3. PETROCHEMICALS KEY DRIVERS & TRENDS 3.1 Demand Side Fundamentals Consumption growth of petrochemicals can be measured by total olefins (ethylene and propylene) demand. However, most olefins are used for captive consumption to produce other olefin derivatives onsite. Therefore, actual consumption growth of olefins by region does not provide a clear overview of end-user demand. We believe that the consumption of polyolefins provides a more accurate representation of petrochemicals demand by region as they are consumed directly by end users in a wide variety of key end uses such as construction, automotive, packaging, agricultural products, textiles and various consumer goods. Emerging economies represent the key demand driver for petrochemicals demand growth, which is broadly associated with wider scale investments in manufacturing industries, large populations and rising income levels. This is evident in key developing markets such as China, India and Indonesia which still have a relatively low consumption per capita for polyolefins, compared to more developed markets. The current level of market penetration of material substitutes in emerging markets also tends to be lower compared to more developed economies, thus providing a further demand driver for petrochemicals. Petrochemical products are substituting basic materials such as wood, glass, metals, paper and card in packaging, automotive and construction industries. This substitution takes place as plastics tend to offer higher performance at a lower cost.

Figure 1.3

Polyolefins Consumption per Capita

12% India F 7 1 0 2 1 1 0 2 R G A C d e t c e j o r P

Former Soviet Union

Brazil

8% China US WE

Indonesia

4%

South East Asia*

Japan

0% 0

10

20

30

40

50

60

70

Consumption per capita (2010) kilogram/capita Note: *Include Indonesia

Source: Nexant

In terms of consumption of polyolefins, the market is increasingly being driven by Asia Pacific, principally China. We forecast consumption in Asia and China to grow at a CAGR of 5.5% and 6.3%, respectively, over the period 2011-2017. We also forecast higher consumption growth from other developing regions such as the Middle East with a CAGR forecast of 6.9% over the


1-5

Section 1

Industry Report

period 2011-2017, albeit from a lower base. We forecast consumption growth in Americas and Europe for the period 2011-2017, to be lower, at approximately 4.3% and 3.1% CAGR basis as we believe that both of these markets have largely reached maturity.

Figure 1.4

Polyolefins Consumption by Region CAGR 2011-2017 %

180,000 Global CAGR 2.2%

Global CAGR 4.8%

160,000 4.5

140,000

5.2 120,000

6.3

s n o t d 100,000 n a s u 80,000 o h T

6.9

60,000

3.1

40,000 20,000 ,000 0

4.3 2004 2005 2006 2007 2008 2009 2010 2011F 2012F 2013F 2014F 2015F 2016F 2017F Americas

Europe

Middle East/Africa

Source: Nexant

China

Indonesia

Asia * Asia *: Asia excludes China and Indonesia

Asia Pacific has become a major consuming region for petrochemicals over the past decade. According to our analysis, demand growth for polyolefins has been growing at approximately 4% CAGR over the period 2005-2010 and is set to continue at around 5.5% over the forecasted period 2011-2017. This development has occurred largely in support of the region’s rapidly expanding manufacturing sectors. A large proportion of this manufacturing is for exportoriented goods. However, domestic consumption levels for finished goods are also increasing, thus providing further demand growth potential for chemical-related products throughout the region. We forecast demand growth for petrochemicals in Asia Pacific during 2011-2017 to continue to outpace the rate of new supply additions in the region. As a result, we believe that Asia Pacific will remain a significant importer of various chemical intermediates and polymers for the foreseeable future. China is a significant contributor to overall Asia Pacific industrial growth. We forecast that domestic demand for polyolefins alone will grow at approximately 6.3% CAGR basis over the period 2011-2017. However, other markets, including Malaysia and Thailand have also undergone rapid expansions over the last decade. Furthermore significant growth potential exists in population rich countries such as Indonesia and Vietnam. We forecast demand growth for polyolefins in South East Asia to grow at approximately 4.6% CAGR basis over the period 20112017.


1-6

Section 1

Industry Report

Key drivers and trends for global petrochemicals’ demand (during the forecasted period 20112017) include the following: 





Olefins/polyolefins markets are forecasted to exhibit growth in-line with global GDP but remain relatively sensitive to changing economic climate – Consumption primarily driven by packaging, automotive and building and construction industries. Consumer spending and confidence tends to promote market consumption. Demand also benefits from the substitution of basic materials such as glass, metals, paper and card etc., which is more prevalent in emerging markets. Butadiene markets are forecasted to remain tight and continue to exhibit good margins. Global market demand is driven by the auto sector and the production of tyres. High levels of demand are forecasted in emerging markets as car ownership continues to rise. The switch to lighter feed ethylene cracker investments in the Middle East has resulted in a shortage of C4 streams available from ethylene production. Styrene monomer demand will be primarily driven by Expandable Polystyrene (EPS) and Acrylonitrile Butadiene Styrene (ABS). Consumption growth driven primarily by demand from packaging, automotive, construction and consumer goods (electrical/electronic) sectors. Material substitution in the polystyrene sector has resulted in lower demand growth. However, this has been partially off-set by strong growth for expandable polystyrene (EPS) and acrylonitrile butadiene styrene (ABS). Demand growth is highly focused in China, Taiwan and other parts of South East Asia.

3.2 Supply Side Fundamentals Current and future investments in new petrochemical capacity are taking place predominantly in the Middle East and throughout Asia Pacific. Capacity expansions in other markets are relatively minor in comparison. Investments in olefins capacity in the Middle East are primarily driven by the availability of low cost gas (advantaged feedstocks) in the region. However, longer-term developments in the region will primarily depend on future availability of advantaged feedstocks, specifically ethane and other natural gas liquids (“NGLs”) extracted from associated (from crude oil production) and non-associated gas sources. We expect the pace of development in the region to slowdown as future availability of low cost gas in the region will not be widely available beyond the current investment wave taking place over the period 2011-2014. The majority of new capacity investments in Asia Pacific are taking place in China. We forecast that China alone will add approximately 2-3 million tons per annum of olefins capacity over the period 2011-2017. These projects are supported primarily by excellent domestic demand fundamentals and available feedstock from local coal reserves and new refinery investments (providing a source of naphtha). Coal based projects are also being promoted by the Chinese government to reduce dependency on oil-based products. This is the principal driver for new capacity developments in the region. Despite the level of investment taking place, we believe China will continue to rely heavily on imports of key materials including polyolefins and styrene over the period 2011-2017 and beyond.


1-7

Section 1

Industry Report

Figure 1.5

Olefins Forecasted Capacity Changes (Million tons, 2011 vs 2017F)

Europe (EU)

90

s n o75 T n60 o i l l i M45 , y 30 t i c a p15 a C 0

Americas (AM)

90 s n75 o T n60 o i l l i 45 M , y30 t i c a15 p a C 0

Capacity Share 2010 Other

3 21 39 2011

AM

Asia

26%

25%

CAGR 1.3% 3

4

20

22

31

34

2011

2017

China

90

s n o75 T n60 o i l l i M45 , y 30 t i c a p15 a C 0

CAGR 6.3% 3

CAGR 2.0% 3

2 17

24

16

24

2011

2017

24 44 2017

Middle East/ Africa (ME/AF)

90

s n o75 T n60 o i l l i M45 , y30 t i c a p15 a C 0

0.4 11 29 2011

China

CAGR 7.1% 1 16 44 2017

Other Asia

90

s n o75 T n60 o i l l i M45 , y30 t i c a p15 a C 0

4 28

CAGR 2.0% 4 31

35

40

2011

2017

EU

13%

22% ME/AF 16%

Ethylene

Total Capacity = 247 million tons

Propylene

Butadiene

Source: Nexant

Outside of China, major new investments are also taking place in India, Thailand and Singapore. Olefins capacity growth in South East Asia is forecasted at over 3.1% CAGR basis over the forecasted period 2011-2017, representing an addition of approximately 0.6 million tons capacity per annum. In Europe and the US, rationalisation of older, higher cost plants has been taking place. This trend is expected to continue in the near-term as lower cost capacity from other regions start production.

4. INDONESIAN PETROCHEMICAL INDUSTRY The petrochemical industry continues to play an important role in Indonesia’s rapidly expanding economy. Initially domestic industry developments were primarily focused in methanol, fertilizer and agricultural sectors. Investment in these sectors has been facilitated by domestic availability of natural gas. However, over the last decade, the Indonesian petrochemical sector has developed further and has expanded into olefins and olefin derivatives production including polyolefins and styrene monomer production. These products are being consumed locally for packaging, construction and the wider manufacturing sectors. Government stimulus packages designed to improve basic infrastructure are also further driving domestic demand for chemicals, primarily for construction materials. With a burgeoning population approaching 240 million and a wider scope for material substitution of basic materials, potential demand growth of basic chemicals and polymers remains very positive over the medium and longer-term. Current levels of consumption per capita are low compared to other Asian countries.


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Industry Report

Table 1.2

Overview of Indonesian Petrochemical Industry

Capacity 2010 Demand 2010 Net Import 2010 (Thousand Tons) (Thousand Tons) (Thousand Tons)

Products

Ethylene Propylene Butadiene Polyethylene

600 608 0 770 419 351 0 635 340 525

HDPE LLDPE LDPE Polypropylene Styrene Benzene

1,038 677 50 829 389 298 142 952 139 238

538 140 50 294 99 53 142 507 56 (export) 148 (export)

Demand Growth CAGR CAGR (2005-2010) (2011-2017)F

6.0 0.2 3.5 4.6 4.9 5.1 2.6 2.7 -0.6 -4.4

0.6 7.3 10.8 4.9 5.5 4.3 4.5 5.5 2.4 1.1

Source: Nexant

Indonesia is structurally deficient in many petrochemicals and polymers and relies heavily on product imports from other countries. Total imports of polyolefins in 2010 were around 800,000 tons, the equivalent of two world scale plants. The majority of these imports come from Malaysia, Thailand and Singapore. Longer-term, the total import requirement for these materials is forecasted to continue to grow further. This is despite new investments in domestic capacity coming on-stream in the near-term. Total polyolefin imports are set to exceed one million tons in 2014.

Figure 1.6

Overview of Domestic Polyolefins Net Trade

1,400 1,200 ) s n o t d n a s u o h T ( t r o p m I t e N

1,000 ,800 800 ,600 600 ,400 400 ,200 200 0 ,000

2008

2009

2010 HDPE

2011F

2012F LLDPE

2013F

2014F LDPE

2015F

2016F

2017F

PP

Source: Nexant

Currently, Indonesia has two major producers of olefins; PT Chandra Asri Petrochemical Tbk.(“CAP”) and national oil company PT Pertamina. CAP is currently the sole domestic producer of ethylene and operates a world scale fully integrated steam cracking facility. Pertimina produces propylene from its refineries. Both companies have integration into polypropylene. However CAP also has further downstream integration into polyethylene and is


1-9

Section 1

Industry Report

the sole domestic producer of styrene monomer. Other domestic producers of polyolefins include Malaysian producer Honam/Titan, a wholly owned subsidiary of Honam Petrochemical Corp., and polypropylene producer Polytama. Neither Titan nor Polytama have domestic integration into olefins and rely on merchant purchases. Total polymer production capacity is set to increase over the period 2011-2013. Major contributions to this include polyolefin expansions by CAP and Petramina. Additionally CAP will also develop the countries first butadiene plant in 2013 by upgrading existing feedstock streams available from its steam cracker. The capacity of the butadiene unit is expected to be 100,000 tons per year. Furthermore, CAP also plans to expand its ethylene cracker up to around one million tons per annum before 2017.

Table 1.3

Overview of Indonesian Petrochemical Production Capacity

Ethylene Capacity 1000

Propylene Capacity

1200

1200 C AP

r 800 a e y r e p 600 s n o t d 400 n a s u o h 200 T

P ert ami na

80

1000 600

0 % CAP share

2010 100%

2017 93%

CAP

Pertami na

CAP

1000

% CAP share

Honam/Ti tan

1000

r a e800 y r e p s600 n o t d n a400 s u o h T200

0

Polyethylene Capacity

1200

618

288 533 320 2010 53%

2017 46%

r a e800 y r e p s n600 o t d n a s 400 u o h T

450 450 536

200

320

0

2010 42%

% CAP share

2017 54%

Source:Nexant

Polypropylene Capacity CAP

Pertamina

0 % CAP share

230 295 230 45 360 2010 57%

1200 CAP

CAP

Polytama

1000 r a 800 e y r e p s 600 n o t d n 400 a s u o h 200 T

Butadiene Capacity

Styrene Capacity

1200

1200

480

2017 48%

1000

1000

r a 800 e y r e p 600 s n o t d n 400 a s u o h 200 T

r a800 e y r e p600 s n o t d400 n a s u o h200 T

0 % CAP share

340

340

2010 100%

2017 100%

0 % CAP share

100 2010 -

2017 100%

Source:Nexant

Note: CAP is expected to start up its butadiene plant with the capacity of 100 thousand tons per year in 2013

Following the conclusion of the ASEAN Free Trade Area (“AFTA”), petrochemical producers in Indonesia now benefit from tariff free access to other South-East Asian markets. Additionally, the ASEAN-China agreement, concluded in 2010, provides free trade access to China for many petrochemical products. Additionally, Indonesian government policies on import duties provide some protection to domestic producers from product imports from non-ASEAN countries. These include 15% on polyethylene and polypropylene and 5% on ethylene, propylene and styrene monomer.

4.1 Prevailing Laws and Regulations The petrochemical industry is highly regulated. Associated regulations are intended to protect and improve the worker’s and the nation’s health, safety and environment. Regulations cover


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every step of a chemical products life cycle, from the manufacturing process through to its final disposal. The regulatory environment of the industry is subdivided in a number of ways and monitored by various government departments and agencies. Examples of the principal monitoring agencies include the following: 







Environmental Protection Agency – clean air act and the control of pollutants. Also covers site clean-up and clean water act. Food and Drug Administration (“FDA”) – sets standards for and evaluates tests of food, drugs and cosmetics Department of Labour – Defines hazards and permissible exposure limits to prevent industrial accidents Department of Transportation – Defines regulations for hazardous materials transportation.

5. OLEFINS & DERIVATIVES KEY DRIVERS & TRENDS 5.1 Global Overview We regard base olefins (ethylene, propylene and butadiene) to be the most commercially important components of the petrochemical industry and the primary building blocks for various chemical intermediates, polymers and rubbers. We estimate that the combined consumption of base olefins was approximately 205 million tons in 2010 and we forecast this to grow at a CAGR of 4% over the period 2011-2017. The main consumption drivers are tied to emerging market through further growth in packaging, automotive, textiles and construction sectors. We estimate that approximately 59% of base olefins are consumed directly to make polyolefins. Chemical intermediates, such as ethylene dichloride, styrene and cumene account for approximately 20% of consumption and oxides (ethylene oxide/propylene oxide) approximately 11%. Other products include synthetic rubbers and other miscellaneous applications represent approximately 10% of demand.


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Figure 1.7

Global Olefins Consumption by End Use (Basis 2010) Others 10%

Intermediate 20%

Polyethylene 35%

Oxides 11% Polypropylene 24% Total Demand = 205 million tons Source:Nexant

Figure 1.8

Global Olefins Supply and Demand Balance

350,000

100%

300,000 80% 250,000 s n o 200,000 t d n a s u 150,000 o h T

60%

40%

s e t a R n o i t a s i l i t U

100,000 20% 50,000 ,000 0

2004 2005 2006 2007 2008 2009 2010 2011F 2012F 2013F 2014F 2015F 2016F 2017F Ethylene Consumption

Propylene Consumption

Total Capacity

Utilisation Rates

0%

Butadiene Consumption

Source: Nexant


Market consumption is predominantly for ethylene which in 2010 accounted for approximately 58% of the total. Propylene and butadiene account for 37% and 5% respectively. However, we forecast both ethylene and propylene to exhibit similar demand growth of 4.1% CAGR over the


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forecasted period 2011-2017. Butadiene demand growth is forecasted to be marginally lower at 3.4% CAGR. The majority of olefins produced tend to be for captive consumption whereby production is consumed on site. This trend is predominantly driven by the high cost of transportation associated with olefins, which are in gas form at standard temperature and pressure. As a result, merchant market end-users of olefins only represent a very small percentage of the total market. Global utilisation rates remained high throughout the period 2004-2007 as markets exhibited firm demand growth with limited incremental capacity being added to the market. However, utilisation rates declined in the second half of 2008 with the onset of the global economic slowdown. Average utilisation rates remained low through 2009 and 2010 largely due to the start-up of new production capacity. The majority of this new capacity is being built in the Middle East and throughout Asia Pacific, principally in China. However, the impact of new supply was partly off-set by plant closures in Europe and the US and short-term production outages at other locations. We forecast average utilisation levels to remain flat in 2011 as further capacity additions come on-stream. Demand for key derivatives displayed signs of improvement in 2010 as Asian markets started to emerge from the recent economic downturn. This trend has been sustained at the start of 2011 due to higher levels of demand across Asia Pacific. The pace of recovery has been slower in the US and Europe and remains more fragile relative to Asia. The outlook is for a steady sustainable recovery in consumption levels, resulting in improved utilisation rates as excess capacity is gradually utilised. We expect average utilisation rates to begin to recover gradually from 2011 onwards as excess supply is gradually utilised. A new operating peak is forecasted in 2015 when we expect average utilisation levels to be at approximately 90%. Further incremental supply additions over the period 2012-2015 are expected to be modest in comparison to period 2010-2011. The devastating earthquake and tsunami in Japan slowed domestic olefins demand in March as a number of derivative units in Japan were severely disrupted by structural damage and power supply shortages. Overall, olefins production in the region was lifted to counter the anticipated loss of supply over the interim period in Japan. The disaster in Japan has caused a strong impact on the regional olefins supply as around 23% of ethylene and 37% propylene capacity is currently shutdown in Japan with no clear re-start date scheduled. These outages have contributed to higher ethylene naphtha price spreads in the first quarter.


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Figure 1.9

Overview of Olefins Consumption by Region (Thousand tons per year) Consumption (Thousand tons)

CAGR 2011-2017 % Global CAGR 4.1%

Indonesia

3.8

Middle East/Africa

8.8

China

5.7

Europe

1.9

Asia *

3.0

Americas

2.6

,000 0

10,000

20,000 2006

30,000 2008

Source: Nexant

40,000

50,000

60,000

2010 Asia *: Asia excludes China and Indonesia

Higher growth levels for olefins are tied to Asia Pacific, the Middle East and other developing markets. It is within these markets where the majority of new olefin derivative capacity investments are being made. However underlying demand drivers for olefins’ derivatives consumption is more closely linked to developing regions where there are higher levels of manufacturing and construction taking place. We forecast demand growth levels of olefins in China and Asia Pacific at a CAGR of 5.7% and 4.1% respectively over the period 2011-2017. In contrast, demand growths in Europe and the Americas are forecasted at 1.9% and 2.6% respectively.

5.2 Indonesian Market Olefins demand is largely determined by investments in derivatives capacity. We forecast ethylene demand growth in Indonesia to remain relatively flat over the period 2011-2017 as there are no new derivative capacity investments expected. However, propylene demand is forecasted to grow at a CAGR of 7.3% over the same period 2011-2017. This growth is attributed to new investments in polypropylene capacity by CAP and Pertamina. Total olefins capacity is approximately 1.2 million tons in Indonesia. The market is supplied by two companies; CAP and Pertamina. CAP holds a majority capacity share with an estimated 55% of the domestic olefins market in 2010 and is the sole producer of ethylene in Indonesia. CAP’s current ethylene capacity is around 600 thousand tons per annum. However, the company has plans to expand this up to one million tons per annum over the medium term forecast. CAP’s olefins production is consumed onsite to produce polyethylene, polypropylene and styrene monomer.


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Figure 1.10

Ethylene Domestic Market Share (Basis 2010)

Import 45% CAP 55%

Total 1,038 KTPA Source: Nexant

5.3 Competitive Positioning Olefins supply in South East Asia primarily consists of regional companies operating from a domestic base. However, international players, including Shell Chemicals, ExxonMobil and Sumitomo, also have olefins capacity in the region. All major olefins producing companies have forward integration into polyolefins. A number of producers, including Petroleum Authority of Thailand (“PTT”), PCG and Shell Chemicals, also have integration into other derivatives including styrene monomer, ethylene oxide and ethylene glycol.

5.4 Polyolefins 5.4.1 Global Overview Polyolefins are commodity thermoplastic polymers consisting of long chains of the monomer ethylene or propylene. These plastics are used in a wide range of market segments including consumer, automotive, construction, packaging and general industrial and agriculture. Global demand for polyolefins was approximately 116 million tons in 2010 and we forecast this to grow at a CAGR of 4.8% over the period 2011-2017. We forecast the demand split between the different products will be as follows: PP 40%, HDPE 27%, LLDPE 17% and LDPE 16%. Asia is a major driver for global polyolefins consumption growth. We forecast total consumption growth in the region (excluding China and Indonesia) at approximately 4.5% CAGR over the period 2011-2017. China is also a key driver for global consumption with forecasted demand growth of over 6.3% over the period 2011-2017. Domestic consumption is being driven by the rapid development of the Chinese economy, resulting in increasing investments in manufacturing and rising disposable income levels leading to higher domestic consumption. Demand growth is also highest in developing regions such as the Middle East & Africa which we forecast to grow at close to 6.9% CAGR over the period 2011-2017. Europe is a large market for polyolefins, but growth rates have been relatively low in recent years due to application maturity and low population growth. We forecast European growth at approximately 3.1%


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Industry Report

CAGR over the period 2011-2017. Demand in the Americas is supported largely by the rapid development of the Latin American economy. We forecast total consumption for the Americas region at approximately 4.3% over the period 2011-2017.

Figure 1.11

Polyolefins Consumption by Region (Thousand tons per year)

Consumption (Thousand tons)

CAGR 2011-2017 % Global CAGR 4.8%

Indonesia

5.2

Middle East/Africa

6.9

Asia *

4.5

China

6.3

Europe

3.1

Americas

4.3

0 ,000

5,000

10,000 2006

15,000 2008

Source: Nexant

20,000

25,000

30,000

35,000


From 2004 to 2007, utilisation rates for polyolefins remained consistently high at close to 90% levels on average. This was mainly driven by strong consumption growth and a relatively tight supply situation which was sustained partly due delays in new project start-ups. This resulted in price spreads over naphtha approaching US$700 per ton. Despite limited capacity additions in 2008, global utilisation rates declined as consumption contracted as a result of the global economic slowdown. This impacted all end use sectors, although demand for packaging applications was less badly affected. Average price spreads declined to a low point of around US$585 per ton. Consumption levels improved in 2010; however, average utilisation rates declined further as new capacity came on-stream predominantly from Middle East and China. Despite this, price spreads increased marginally up to US$615 per ton, following a series of unplanned production outages. Increased demand resulted from improving levels of manufacturing throughout Asia Pacific and this was further substantiated by a level of global inventory restocking.


1-16

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Industry Report

Figure 1.12

Polyolefins Global Supply and Demand Balance

250,000

100%

200,000

80%

s 150,000 n o t d n a s u o h 100,000 T

60%

50,000

20%

,0000

40%

2004 2005 2006 2007 2008 2009 2010 2011F 2012F 2013F 2014F 2015F 2016F 2017F HDPE Consumption

LLDPE Consumption

LDPE Consumption

PP Consumption

Total Capacity

Utilisation Rates


0%

Source: Nexant

Figure 1.13 Polyolefins Price Spread (Price spreads are in current US$) 1000 1,000

) n o T r e p s r a l l o D ( a h t h p a N r e v o p a G

100%

900

90%

800

80%

700

70%

600

60%

500

50%

400

40%

300

30%

200

20%

100

10%

0

2004 2005 2006 2007 2008 2009 2010 2011F 2012F 2013F 2014F 2015F 2016F 2017F Polyolefins Delta Over Net Raw Material Cost


0%

Global polyolefins utilisation rates Note: - 2011F is forcasted on year to date basis - Forecast price is based on Brent Crude at $70 per barrel

Source:Nexant


We expect further capacity increments by the end of 2011 and this would result in global utilisation rates remaining low at approximately 80%, which we expect will mark a low point in the cycle. We expect that margins will recover post 2011 as surplus capacity is gradually used


1-17

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Industry Report

up, with 2012 representing the first increase in margins that is structurally sustainable and expected to continue towards a new peak in 2015. This forecast is based on a gradual improvement in demand resulting from a continued recovery in the global economic environment.

5.4.2 Indonesian Market Indonesia consumes plastics across a variety of different applications including packaging, construction materials, agricultural products, household products and automotive components. The majority of these products are consumed in the domestic market. The market has excellent growth fundamentals tied to strong GDP growth, large population, rising income levels and materials substitution of basic materials. Indonesia consumed approximately 1.7 million tons of polyolefins in 2010 with the majority of this material produced from domestic sources. We forecast demand growth at a 5.2% CAGR over the period 2011-2017. Indonesia is currently structurally deficient in both polyethylene and polypropylene. In 2010, total net imports of polyethylene and polypropylene were approximately 300 and 500 thousand tons. The majority of these imports originate from Malaysia, Singapore and Thailand. We expect approximately 355 thousand of new domestic polyolefins capacity to come on-stream by 2012. Despite this, Indonesia will continue to rely on imports of polyolefins over the period 2011-2017.

Figure 1.14

Polyolefins Supply, Demand and Trade – Indonesia

4,000

100%

3,500 80% 3,000 s n o t d n a s u o h T

2,500

60%

2,000 40%

1,500


1,000 20% ,500 500 ,0000 2004

2005

2006

2007

2008

2009

0% 2010 2011F 2012F 2013F 2014F 2015F 2016F 2017F

Net Export

Net Import

Total Capacity

Production

Consumption

Utilisation Rates

Source: Nexant


1-18

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Figure 1.15

Domestic Market Share (Basis 2010)

Polyethylene

Polypropylene Others 7%

Others 25% CAP 40%

CAP 40%

Import 53%

Import 35%

Source: Nexant

Total 829 KTPA

Total 952 KTPA


Indonesia has four producers of polyolefins, CAP, Titan, Pertamina and Polytama. CAP has the largest capacity share which is estimated at approximately 40% for both polyethylene and polypropylene. In April 2011, CAP completed the expansion of the polypropylene capacity by 120,000 tons per year. In 2012 Pertamina is expected to bring on-stream a new polypropylene plant with an annual capacity of 250,000 tons.

5.4.3 Competitive Positioning Polyolefins supply in South East Asia largely consists of regional players operating from a domestic base. In terms of regional market share, the market is dominated by three companies; PTT, Titan and Siam Cement Group (“SCG”) (Thailand). Combined, these companies account for approximately 50% of regional polyolefins capacity. Additionally, major international players such as ExxonMobil, Sumitomo and Chevron Philips also have an operational presence in the region. Leading polyolefin players typically produce most product grades (HDPE, LDPE, LLDPE and PP).


1-19

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Industry Report

Figure 1.16

Polyolefins Top Ten South East Asia Producers (Capacity basis 2010)

3,000 HDPE

LDPE

LLDPE

PP

2,500 ) r a 2,000 e y r e p s 1,500 n o t d n a s 1,000 u o h T ( y t i ,500 500 c a p a C

0 ,000

Source: Nexant

p u o r G T T P

p u o r G G C S

s l a c i m e h C n a t i T

l i b o M n o x x E

l l e h S / o m o t i m u S

i r s A a r d n a h C

G C P

s p i l l i h P n o r v e h C

l t a i c i m m m e u h S c o r t G J e P

o d n i p o r P a m a t y l o P

Polypropylene capacity expanded by 120 thousand tons in April 2011

Competitiveness of polyolefin’s production is primarily determined by the cost of olefin supply. The majority of production operational today has upstream integration into an olefin production source, usually on the same site. For polyethylene competitiveness, cash cost of ethylene is the key determinant. Key assumptions for polyolefin competitiveness include the following: 





All polyethylene producers have been evaluated on an integrated ethylene basis with ethylene cost being transferred at a cash cost value. All propylene producers have been evaluated on a propylene market price basis specific to each location. Polyolefin costs have been compared on a cash cost basis and on a delivered market basis to China and Indonesia.



Indonesia represents cost position post butadiene extraction project.



Other Indonesia represents operation based on imported ethylene.


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Table 1.4

HDPE/LLDPE Naphtha-Based Plants Modelled, 2017 (Thousand tons per year)

Location Singapore Thailand China Indonesia - CAP Indonesia ex-CAP Malaysia

Figure 1.17

Raw Material Basis Ethylene (from Naphtha) at Cash Cost Ethylene (from Naphtha) at Cash Cost Ethylene (from Naphtha and Gas Oil) at Cash Cost Ethylene (from Naphtha) at Cash Cost Ethylene at Market Price Ethylene (from Naphtha) at Cash Cost

Capacity 215 400 350 400 250 205

Comparison of Naphtha-Based HDPE/LLDPE Production Cash Costs (Basis 2017) HDPE/LLDPE Naphtha-Based Cash Costs

1,600

n o t r e p s r a l l o D S U

1,200

800 ,800

,400 400

,000 0

Thailand

Indonesia - CAP

Malaysia

Net Raw Material Cost

Singapore Utility Cost

China

Indonesia ex-CAP

Fixed Cost

Source: Nexant


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HDPE/LLDPE Naphtha-Based Delivered Costs to Indonesia 1,600 Market Price = 1,401 US Dollars per ton

1,200 n o t r e p s r a l l o D S U

800 ,800

400 ,400

0 ,000

Indonesia - CAP

Thailand

Malaysia

Singapore

Indonesia ex-CAP


Utility Cost

Fixed Cost

Freight & Packaging

Tariff

Market Price

China

Source: Nexant

On a cash cost basis leading producers in Malaysia, Indonesia and Singapore have comparable cost positions. Each of these facilities has similar plant scale and feedstock cost and utilizes comparable process technologies. Indonesia’s cost position is marginally higher due to higher ethylene production costs. This disadvantage is eliminated by C4 upgrading and resulting butadiene sales.


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Table 1.5

Polypropylene Plants Modelled, 2017 (Thousand tons per year)

Location Singapore Thailand China Indonesia Malaysia

Figure 1.18

Raw Material Basis Propylene at Market Price Propylene at Market Price Propylene at Market Price Propylene at Market Price Propylene at Market Price

Capacity 405 240 450 480 280

Comparison of Polypropylene Production Cash Costs (Basis 2017) Polypropylene Cash Costs

1,600


1,200

,800 800

400 ,400

,000 0

Thailand

China

Malaysia


Utility Cost

Indonesia

Singapore

Fixed Cost

Source: Nexant

On a cash cost basis, polypropylene producers have comparable production costs. Overall production costs are linked closely to the prevailing propylene, which is estimated at a similar level throughout South East Asia. However, on a delivered Indonesian market basis, domestic producers have a small advantage associated with transportation costs.


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Polypropylene Delivered Costs to Indonesia 1,600 Market Price = 1,402 US Dollars per ton


1,200

800 ,800

400 ,400

,000 0

Indonesia

Malaysia

Thailand

Singapore


Utility Cost

Fixed Cost

Freight & Packaging

Tariff

Market Price

China

Source: Nexant

5.5 Mixed C4s/Butadiene The mixed C4 stream is produced as a co-product from steam cracking of heavier feedstocks, principally naphtha. The stream consists of various molecule components that can be converted further into high value derivatives. The majority of producers extract butadiene from the C4 stream and hydrogenate and co-crack the remaining components to produce more ethylene. This is a standard approach which is supported by a relatively large scale demand for butadiene and its various derivatives. Conversely, actual trade in mixed C4 streams is relatively small. Butadiene is a feedstock for the production of a wide variety of synthetic rubbers and polymer resins. Synthetic rubbers produced include: styrene butadiene rubber and polybutadiene rubber both of which are major components of tyres. Butadiene is also consumed in the production of engineering resins, notably ABS and polyamide intermediates used in the production of nylon resins and fibres.


1-24

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Industry Report

Figure 1.19

Butadiene Global Consumption (2010) Others 19% SB Rubber 31%

SB Latex 11%

ABS 11%

Source: Nexant

Butadiene Rubber 28% Total Demand = 10 million tons

Butadiene demand is tied largely to the auto industry and tyre markets. Rising living standards in emerging markets is a key driver for the sector overall. This is noticeable in Asia where car ownership is increasing rapidly relative to other regions. We forecast butadiene demand in Asia to grow at approximately 2.6% CAGR over the period 2011-2017. However, demand in China is forecasted to grow at a CAGR of 6.8% over the same period. Butadiene demand in the Americas and Europe has declined in recent years due to reduced levels of automotive sales. We forecast demand growth of approximately 0.6% and 2.1% CAGR respectively over the period 2011-2017 in these regions. Average butadiene price spreads spiked in 2008 to over US$1,200 per ton due to a tighter supply and demand balance. This situation was alleviated in 2009 as demand declined following the onset of the global economic recession. However, price spreads increased again in 2010 to similar levels experienced in 2008. Tighter butadiene supply resulted from a combination of plant outages and structural supply issues. These structural issues relate to increased ethylene capacity based on light gas cracking predominantly in the Middle East that do not produce butadiene as a co-product. Average price spreads are forecasted to decline from current highs as new capacity comes on-stream over the period 2011-2017.


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Industry Report

Figure 1.20 Butadiene Price Spread (Price spreads are in current US$) 1400 1,400

100% 90%

1200 1,200

80% 1,000 1000 ) n o T r e p s r a l l o D ( a h t h p a N r e v o p a G

70% 60%

800

50% 600

40%


30%

400

20% 200

10%

0

2004 2005 2006 2007 2008 2009 2010 2011F 2012F 2013F 2014F 2015F 2016F 2017F Butadie ne Delt a Over Net Raw Material Cost

0%

Global utilisation rates Note: - 2011F is forcasted on year to date basis - Forecast price is based on Brent Crude at $70 per barrel

Source:Nexant

Figure 1.21

Overview of Butadiene Consumption by Region (Thousand tons per year) Consumption (Thousand tons)

CAGR 2011-2017 %

Global CAGR 3.4%

Indonesia

10.8 16.3

Middle East/Africa China

6.8

Americas

0.6

Europe

2.1

Asia *

2.6

,000 0

500 ,500

1,000 2006

1,500 2008

Source: Nexant

2,000

2,500

3,000

3,500



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5.5.1 Indonesian Market Indonesia consumes around 50,000 tons per year of butadiene for the production of ABS, SBR and PBR. Current demand is met by product imports from neighbouring Asian countries. We forecast demand growth at a CAGR of 10.8% over the period 2011-2017. This growth estimate is supported by expansions of domestic butadiene derivative capacity. There is currently no butadiene capacity in Indonesia. CAP produces and sells mixed C4 streams; however, the company is planning to construct a new butadiene extraction plant in 2013. Once the CAP plant comes on-stream, Indonesia will revert to a small net export position. Butadiene demand growth in Indonesia is being driven by a speculative addition of a new PBR (polybutadiene rubber facility being constructed). This will not impact styrene demand in the region.

Figure 1.22

Butadiene Supply, Demand and Trade - Indonesia

300

100%

250

s n o t d n a s u o h T

80%

200 60% 150 40% 100 20%

50 0 2004


2005

2006

2007

2008

2009

0% 2010 2011F 2012F 2013F 2014F 2015F 2016F 2017F

Net Export Total Capacity Consumption

Source: Nexant

Net Import Production Utilisation Rates

5.6 Styrene Monomer 5.6.1 Global Overview Styrene monomer (SM) is an important intermediate product used in production of a variety of plastics and rubbers. Key applications include rigid packaging, electronics & appliances, construction (primarily insulation) and automotive components. It is a true commodity, manufactured in large quantities by similar process technologies with virtually identical specifications. Styrene is relatively inexpensive to move and is widely traded and exchanged between different regions. As a result, regional markets are greatly influenced by events in other markets. In addition, as with all commodities, it is subject to cyclicality.


1-27

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Figure 1.23

Styrene Global Consumption by Application (2010) SB Rubber 4%

Others 8%

UPR 5% Polystyrene 41%

SB Latex 5%

ABS 17%

Polystyrene (Expandable) 20% Total Demand = 25 million tons

Source: Nexant

Figure 1.24

Styrene Global Supply, Demand and Balance

40,000

100%

35,000 80%

30,000 s n o t d n a s u o h T

25,000

60%

20,000 40%

15,000 10,000


20%

5,000 ,0000

2004 2005 2006 2007 2008 2009 2010 2011F 2012F 2013F 2014F 2015F 2016F 2017F Consumption

Total Capacity

0%

Utilisation Rates

Source: Nexant


1-28

Section 1

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Figure 1.25 Styrene Price Spread (Price spreads are in current US$) 350

100% 90%

300 ) n o T r e p s r a l l o D ( a h t h p a N r e v o p a G

80% 250

70% 60%

200

50% 150

40%


30%

100

20% 50 10% 0

2004 2005 2006 2007 2008 2009 2010 2011F 2012F 2013F 2014F 2015F 2016F 2017F Styrene Delta Over Net Raw Material Cost*

Source:Nexant

* Styrene

0%

Global utilisation rates

market price less net raw material prices (benzene *0.78 + ethylene *0.28)


Asia currently accounts for more than half of global styrene demand and is expected to remain the global styrene growth driver. Continued industrial development, population growth and rising income levels are key drivers. Industrial developments in China continue to have a substantial influence on regional styrene demand. We forecast SM demand in China to grow at approximately 5% CAGR over the period 2011-2017. Styrene demand in the Americas and Europe has declined in recent years due to reduced levels of manufacturing activity and material substitution in packaging. We forecast demand growth of approximately 1% and 2% CAGR respectively over the period 2011-2017 in these regions. Average styrene price spreads are expected to recover over the period 2011-2017 as average utilisation levels increase. This situation is supported by limited supply additions coming onstream. We forecast average price spreads to reach a new peak in around 2015 as average utilisation rates reach a new peak.


1-29

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Figure 1.26

Overview of Styrene Consumption by Region (Thousand tons per year) Consumption (Thousand tons)

CAGR 2011-2017 %

Global CAGR 2.7%

Indonesia

2.4

Middle East/Africa

12.4

Americas

0.9

Europe

1.9

China

4.8

Asia *

0.8

,000 0

1,000

2,000

3,000 2006

4,000 2008

Source: Nexant

5,000

6,000

7,000

8,000


5.6.2 Indonesian Market Indonesia is a relatively minor consumer of SM and consumed approximately 139 thousand tons of SM in 2010. This accounts for around 1% of the total Asia Pacific Demand. Domestic SM is primarily consumed for polystyrene and styrene butadiene latex production which account for 33% and 25% of the domestic market respectively. We forecast domestic consumption growth to increase at an average annual rate of approximately 4% CAGR over the period 2011-2017. Indonesia is a net exporter of SM. Total net exports in 2010 were estimated at approximately 60,000 tons. Most of the SM was sold into China and Malaysia. CAP is currently the only producer of SM in Indonesia.


1-30

Section 1

Industry Report

Figure 1.27

Styrene Supply, Demand and Trade - Indonesia

500

100%

450 400

80%

350 s n o t d n a s u o h T

300

60%

250 200

40%


150 100

20%

50 0 2004

2005

2006

2007

2008

2009

0% 2010 2011F 2012F 2013F 2014F 2015F 2016F 2017F

Net Export

Net Import

Total Capacity

Production

Consumption

Utilisation Rates

Source: Nexant


5.6.3 Competitive Positioning Total SM capacity in South East Asia is approximately 2 million tons. The supply base consists of five companies but is led by Ellba Eastern, the Shell/BASF joint venture located in Singapore. Ellba Eastern has an estimated capacity share of around 27%. Shell and CAP make-up the top three players in the South East Asia region with an estimated capacity shares of 19% and 17% respectively. SM is produced using conventional technology via the alkylation of benzene with ethylene. Its production economics are principally driven by the cost of ethylene and plant scale. However, Shell/BASF operates a non-standard technology that produces styrene as a co-product from its propylene oxide plant. This process is often referred to as POSM.


1-31

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Figure 1.28

Styrene South East Asia Producers (Capacity basis 2010)

600 Styrene ) r a e y r e p s n o t d n a s u o h T ( y t i c a p a C

500 400 300 200 100 0

Source: Nexant

n r e t s a E a b l l l E

l l e h S

i r s A a r d n a h C

G C S

G C P


T T P

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Section 1

Industry Report

6. GLOSSARY ABS

:

Acrylonitrile butadiene styrene is commonly used in automotive applications, housings for electrical appliances and various household products

Benzene

:

An aromatic hydrocarbon in the form of a colourless, flammable liquid. It is created by catalytically reforming naphtha, in the thermal cracking process, and is used in the production of other chemicals such as styrene, cumene, cyclohexane and maleic anhydride

CAGR

:

Compounded annual growth rate

Capacity utilisation

:

The total production (including off-specifications products) expressed as a percentage of nameplate capacity

Cracking

:

A refining process which breaks down large molecules of oil into smaller molecules. When the process is achieved by applying heat only, it is known as thermal cracking. Cracking uses molecular decomposition and recombination to produce a range of more useful base chemicals suitable for motor oils or petrochemicals

Butadiene

:

Butadiene is mainly produced by its extraction from the mixed C4 stream. It is a feedstock for the production of a wide variety of synthetic rubbers and polymer resins.

Ethylene

:

An essential organic chemical base derived from the thermal cracking of ethylene and naphtha or from the dehydration of ethanol. It is used to make polyester and many organic chemical intermediates, such as polyethylene, ethylene oxide, ethylene glycol, vinyl chloride, styrene, acetaldehyde and ethanol

Feedstock

:

Major raw materials used in a processing plant, of which naphtha and ethane are the most important for the olefins production

HDPE

:

High density polyethylene, used for tubes, pipes, household containers, grocery bags, water coolers, milk bottles and other products

LDPE

:

Low density polyethylene, used for films, tubes, mechanical parts, toys, electric wire insulation and other products

LLDPE

:

Linear low density polyethylene. LLDPE is commonly used in film applications for packaging and other products.

Monomers

:

Small molecules that may become chemically bonded to other monomers to form a polymer

Nameplate capacity

:

The capacity of a production facility based on technology licences and/or production rates guaranteed by the construction contractor

Naphtha

:

A general term used for low boiling hydrocarbon fractions that are a product of crude oil or condensate refining. Naphtha is used as feedstock for ethylene and propylene production


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201105151926340.Nexant Industry Report 2011

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