monetizing the c4/c5 streams (emerging trend across to...

Monetizing the C4/C5 streams (Emerging trend across to increase margins)

Indian Petrochem -2018

Strictly Private and Confidential

2 November 2018

www.pwc.com

PwC

2 November 2018

PwC is over 223,468 staff strong Company, present in 157 countries and generated revenue of ~36 billion USD during FY’17


Energy & ChemicalsStrategic business unit at PwC

providing advisory services to all private sector and Government energy and

chemicals companies

Presence in

743 cities

across the globe in

157 countriesOver

223,468 staffUS $35.9 billion

revenue

6500+ strong staff

Operating out of 9 Offices in India

Over

130 yearsin India – the oldest and the largest professional services firm

on market and industry analysis, policy, regulation,

strategy formulation , reforms &

restructuring, operational

excellence and performance

improvement

1

PwC

2 November 2018

Strategy& and PwC offer complementary services and together, we bring industry-leading foresight and functional depth that connects strategy to impact


• Strategy Consulting• Operations• Digital Business &

Technology• Organization, Change &

Leadership

• Offices : 50• Staff : 3000+

• Business Consulting• Operations Consulting• Finance Function Effectiveness• Tax, Legal & Risk Management• People & Change• Technology

Offices : 158Staff : 184,000

Strategic agendas

Industry expertise

Functional expertise

Execution capability

2

PwC

2 November 2018

C4 stream

Indian Petrochem -2018 • Monetizing the C4/C5 streams (Emerging trend across to increase margins)

3

PwC

2 November 2018

Management of C4 value chains is driven by the optimization of different C4 product margins and ethylene margins

Section 1 – C4 stream

4

Indian Petrochem -2018 • Monetizing the C4/C5 streams (Emerging trend across to

increase margins)

C4 Crude Streamsfrom Olefin Cracking

Butadiene

Raffinate 2

Butene-2 /Butanes

Isobutene Butene-1

Co-Cracking of C4 Streams for Ethylene ProductionButanes

Ethylene

~40 % ~25 %

C4 Crude Streamsfrom Refineries

(FCC) ~15 %

~10 %

~10 %

Overview of C4 Value Chains SIMPLIFIED

Management of C4 value chain requires trade-off decisions between C4 chemicals production andethylene production based on regional margin levels

Raffinate 1

On-Purpose Production

PwC

2 November 2018

In terms of volume, the global C4 chemicals market amounts to approx. 30 MTA, with Asia accounting for more than 30%


5


increase margins)

14.7(50%)

Butene-1

2.1(7%)

Butadiene

11.2(38%)

Butene-2

Isobutene

1.3(4%)

Global C4 ChemicalMarket by Product

- in MTA -

Market Volume of C4 Products

Asia C4 Chemical Market- in MTA -

Butene-2(~0.9 MTA)

Isobutene(~3.2 MTA)

Butene-1(~0.4 MTA)

Butadiene(~4.5 MTA)

Total C430

Global C4 ChemicalMarket by Region

- in MTA -

Asia9.1

(31%)

3.4(12%)

Americas

Middle EastAfrica

Europe

7.2(25%)

9.6(33%)

Total C4:30

PwC

2 November 2018

C4 demand is primarily driven by fuel additives, rubbers, engineering polymers and polyethylene production


6


increase margins)

C4 Chemical Demand by End Product / Application in Asia

Key IndustriesC4 Products C4 End Products / Applications

Butene-2(~0.9 MTA)

Isobutene(~3.2 MTA)

Butene-1(~0.4 MTA)

PE Co-Monomers (~0.4 MTA)

Polybutene(<0.1 MTA)

Fuel Additives(~2.7 MTA)

Other Specialty Chemicals(~0.5 MTA)

Engineering Polymers(~2.6 MTA)

Automotive

Packaging

Rubbers(~2.4 MTA)

Propylene (via Metathese)(~0.4 MTA)

Butadiene(~4.5 MTA)

Construction

Chemicals

Fuel

PwC

2 November 2018

We expect C4 crude supply in Asia to grow below Ethylene cracking capacity due to a shift to lighter feedstocks for crackers


7


increase margins)

24.629.8

37.6

12.8

20.5

36.14.7

7.1

3.6

2014

41.0

2017

55.0

80.9

6.4%p.a.

2020

Asian Ethylene Cracking - Production- in MTA -

9.9

12.5

16.8

17.6

13.1

2014

5.0%p.a.

2020

0.8

2017

0.6

10.3

0.4

0.35 t C4 Crude

per ton of Ethylene

for Naphtha Cracking

Asian C4 Crude Supply Capacity- in MTA -

0.1 t C4 Crude per ton

of Ethylene for Mixed

Feedstock Cracking

0.05 t C4 Crude

per ton of Ethylene

for Ethane Cracking

On-Purpose Production

C4 Crude from Olefin Cracking

Yield:

Mixed Feedstock

Naphtha Cracking

Gas

PwC

2 November 2018

Thus, we expect supply for C4 crude in Asia to further tighten over the next years due to strong demand for C4 chemicals


8


increase margins)

4.56.3

8.3

3.2

4.3

5.7

1.7

2.5

3.6

5.8%p.a.

17.6

2020

13.0

2014 2017

9.4

Butadiene

Isobutene

Raffinate 2

Asian C4 Chemicals Demand- in MTA -

C4 ProductYear

2014 2017 2020

Butadiene

Supply 4.1 5.2 7.0

Demand 4.5 6.3 8.3

Balance -8% -17% -15%

Raffinate 2(excl. Butanes)

Supply 2.6 3.3 4.4

Demand 1.7 2.5 3.6

Balance 48% 31% 22%

Supply / Demand Balance for Asian C4 Chemicals- in MTA -

Positive outlook for Butadiene and Raffinate-2 margins due to tight supply / demand balance until 2020

PwC

2 November 2018

C4 industry costs model reflecting the specific cost structure in Asia


10


increase margins)

C4 Industry Cost Curve for AsiaKey Assumptions

Raw Materials

RM costs include catalysts &

chemicals and are net of by-

product credits

Constant raw material prices

for 2009-2020

Naphtha price is USD 725

No efficiency gains due to

plant size

Utilities

Costs for utilities include

power, cooling water, and

steam

Total utility costs scaled with

plant size

Fixed Costs

Total labor costs constant for

all plant size

Asian labor cost 50% of

Western economies, except

for Japan, Korea, and

Singapore

Maintenance, Taxes/

Insurance and environmental

charges have been

considered

Modeled

production

costs810

USD/ton

80

USD/ton

60

USD/ton

30

USD/ton

Total Costs: 980 USD/ton (excl. logistic cost)

Investment requirements

scaled with plant size

according to industry

standards

Calculated with 10 years

CAPEX / Depreciation

+ + +

PwC

2 November 2018

Margins for captive substitution contracts will be most impacted by the size the plant, capacity additions and logistic cost


11


increase margins)

Sensitivity Analysis of C4 Margin - Asia

6265

95100

125

95

103

0

30

60

90

120

150

Demand

Change

Change in

Plant Size

Base Case

EBIT Margin

USD / ton

Other

Capacity Additions

High

Case

(+10%)1)

Low

Case

(-10%)1)

Larger

Plant

(+50%)

Smaller

Plant

(-50%)

Larger

Capacity

Additions

(+30%)

1 2 3

Smaller

Capacity

Additions

(-30%)

Demand change leds to a price decrease or increase respectively

Higher production cost per ton of a smaller site would offset price increase

Larger capacity additions will lead to decreasing pricesOpposite effect, i.e. price increase, in case that less capacity will go on-stream

PwC

2 November 2018

Landed cost for C4 from Middle-Eastern producers are similar to local production thus limiting the threat of low cost imports


12


increase margins)

80

150

~1,060~980

~760

10-15%

Landed Cost Asia

80-85%

5-10%

Freight within Asia

75-80%

Production Cost Asia

85-90%

C4 Cost MEProcess 1

~2%

FreightMiddle-

East to Asia

~910-940

C4 Cost MEProcess 2

~790

-20%

Landed CostAsia from

ME

~910-940

-12%

Cost Breakdown Comparison - Asian and Middle East- in USD/ton, 2017 -

• Production cost for C4 in Middle East are approx. 20% below production cost in Asia

• Landed cost of C4 export from Middle East to Asia are comparable to local production limiting the threat of low cost imports

• Large petrochemical expansion plans in the Middle East and heavy dependence on Ethane cracking with low C4 yield is also limiting major exports of C4 from Middle-Eastern companies

Depreciation Raw Material

Utilities

Labor (Fixed Cost)

Other Fixed Cost

Logistics

Landed Cost

Asia Middle-East

PwC

2 November 2018

Four key risks are anticipated to potentially impact the profitability of a C4 investment…


13


increase margins)

PwC

2 November 2018

Key success factors to develop a leading and successful C4 business in Asia


14


increase margins)

C4 Cost

Leadership Position

Develop large scale C4 sites significantly exceeding the size of existing

production facilities to develop a clear Asian cost leadership position

Access to

Stable C4 Crude Supply

Ensure access to stable C4 crude supply based on long-term contracts with

ethylene production sites to ensure supply stability given existing C4 shortages

in Asia and further shifts towards lighter feedstocks

Long-Term

Off-Take Agreements

with Key Customers

Establish long-term supply contracts with regional key customers, with

guaranteed C4 off-takes to provide a base load for the large-scale capacity

addition in Asia

Regional Logistics

Excellence

Develop leadership position for logistics and distribution cost to translate low

production cost of large, central site into leadership positions for landed cost in

trading market and to ensure high profitability (when competing with captive

suppliers)

Key Success Factors

PwC

2 November 2018

C5 stream

Indian Petrochem -2018 • Monetizing the C4/C5 streams (Emerging trend across to increase margins)

15

PwC

2 November 2018

C5 derivatives like DCPD, Piperylene and Isoprene are produced through raw materials like naphtha, gas oil etc via processing of C5 stream through steam cracking


16


increase margins)

C5 Steam Processing

DCPD

Extraction

Selective/Full

Hydrogenation

DCPD

Steam CrackerC5/C6

Separation

Isoprene extraction

Aromatics extraction

Isoprene

Piperylene

PwC

2 November 2018

Over the next decade, DCPD production capacity is expected to increase at a CAGR of 4% with an average utilization of 76% owing to capacity developments through greenfield projects and brownfield expansions in Northeast Asia and China


17


increase margins)

850

1,290

1,4501,630

678

901

1,066

1,286

679

901

1,066

1,286

80%

70% 74%79%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2015 2020 2025 2030

KT

DCPD- Global Supply Demand Forecast (KT),

Total Capacity Production Consumption Utilization

40 40 40

33

31

37

20

32

41

51

(20)

1

(14)

0%

83% 77%93%

-100%

-50%

0%

50%

100%

150%

(30)

(20)

(10)

0

10

20

30

40

50

60

2015 2020 2025 2030

KT

DCPD – India Supply Demand Forecast (KT), 2015-2035

Capacity Production Consumption Net Exports Operating Rate

PwC

2 November 2018

Piperylene production capacity is expected to increase at a CAGR of 2% from 2017-30 with an average utilization of 66% owing to new capacity developments in Northeast Asia and China


18


increase margins)

540

760

870 870

280

405514

632

280

405 514

632

52% 53%

59%

73%

0%

10%

20%

30%

40%

50%

60%

70%

80%

0

100

200

300

400

500

600

700

800

900

1,000

2015 2020 2025 2030

KT

Piperylene- Global Supply Demand Forecast (KT)

Total Capacity Production Consumption Utilization

PwC

2 November 2018

The aggregate consumption for global Isoprene market is expected to increase from 2017-25 at a CAGR of ~3% respectively


18


increase margins)

Global Isoprene Market (MMT)

Polyisoprene (67%)

Applications

SIS/SEP (20%) Others (4%)Speciality Applications (9%)

• Global Isoprene consumption is driven by unsaturated Polyisoprene industry, SIS/SEP followed by speciality applications and other uses

• Global production infrastructure is majorly located in Russia, Japan and China; however isoprene production by feedstock is majorly through cracker route followed isopentane dehydrogenation and isobutylene carbonylation

1.55 1.55 1.55

1.00 1.05

1.25

2017 2020 2025

Capacity Demand

PwC

2 November 2018

DCPD India prices are expected to increase at a CAGR of ~2% from 2017-23


18


increase margins)

DCPD (95% purity) Price NEA DCPD CFR and India CIF (USD/MT)

Average unit cost production of DCPD (USD/MT)

500

700

900

1100

1300

1500

1700

1900

2013 2015 2016 2017 2018 2021 2022 2023

NEA CFR India CIF Price

Piperylene prices also follow the same trend being derivatives of DCPD

1,400

1,150250

Margin Market PriceCost of Production

Thank You!

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GG-July 2018-13730

Contact

Deepak Mahurkar

Partner and Leader, PwC India Oil & Gas

T: +91-124-3306001

M: +91-98186 70797Email: [email protected]

Gaurav Gupta

Principal Consultant, PwC India Oil & Gas

T: +91-124-3306001

M: +91-9899972220Email: [email protected]

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