Key Market Drivers and the Outlook for 2019by Mark Kallman, VP of Engineered Resins

September 12, 2018

2

Agenda

• Harvey to Helene?

• Resin Drivers: Oil & Gas, Currency, GDP, Tariffs & Feedstock/Resin Supply

• Polyethylene

• Polypropylene

• ABS

• Polycarbonate

• Nylon

33

Quiet Hurricane Season Heating Up

• Atmospheric conditions limiting formation are changing

• Hot gulf waters a threat

• Sept is peak month for a season that ends in Nov

44

Lasting Effects/Lessons of Harvey

• Demonstrated capability of most USGC mfg to deal with storm events

• Important reminder, prompting further improvements focused on rain events

• Escalation of PE pricing for a sustained period.

• Increased attention to hurricane stocking in 2018

Resin Price Drivers

66

Oil/Gas, Geopolitical & Economic Drivers

Supply• US supply from shale continues to grow• Permian Basin output restricted by

infrastructure• OPEC production cap removed• Iranian sanctions reinstated

Demand• Global and US GDP continued higher in 2018 • Energy efficiency, fossil fuel alternatives• Increasing US exports

Price• Averaging $66 YTD (as high as $71) vs $51 in

2017, up 29% • Nat Gas averaging $2.83 vs $3.03 in 2017. • Strength of US$, Tariff Threat

7

Oil Up in 2018

8

US$ Strengthening H2 2018

9

US GDP Strengthening

10

Tariff Update with China

• YTD Tariffs raised on PE, PP, EDC, PBT, & PET

• Aug 23rd accounted for roughly $2B in each direction for Chemicals/Plastics

• Next round tariffs could be raised on PC, Nylon, ABS

• Expected to impact $16B Chemicals/Plastics imports and half that in exports to China

11

Feedstock & Resin Update

• Nat gas/Ethane/Ethylene provides low cost ethylene for PE, PVC & PS

• Propylene for PP, ABS, PC & some PA66 has more on-purpose production from propane, but increasing exports as well.

• Butadiene for PA66, ABS & HIPS has been a tighter market globally.

• Benzene for PC, PA6, PA66, & ABS is in good supply from a combination of refineries, on-purpose production, crackers & styrene outages.

• Oil/Naphtha as the primary/higher cost feed overseas is subject to geopolitical volatility and global growth as the US output continues to rise.

• Supply and demand as they relate to imports and exports on top of domestic demand has been impacted by outages, GDP growth and trade disruptions.

Polyethylene

13

Polyethylene 2018

• Capacity: New PE capacity included four new plants since August

and exceeded 3 billion pounds or approximately an 8% increase in

resin production. New ethylene capacity preceded PE capacity.

• Prices: Index pricing increased $.08-$.11 since May 2017.

o Four price increases and 1 unlikely increase pending.

o Q3 Prices are expected to retreat $.03-$.05

• Market Prices: The PE “market price” has increased $.06-$.08lb

since last September.

• Events: Hurricane Harvey’s impact may have been underestimated

and lasted into 2018 most notably for HDPE products.

14

Ethylene Prices Lower

15

PE Days of Inventory Increasing

16

Polyethylene, Oil and Naphtha

• Oil will continue to drive the price for 65% of the PE produced and be the force behind the strength of the NA export market.

Until global over supply

decouples resin from oil.

This dynamic has just begun to happen!

• Events will change the supply dynamics for a period of time. New North America capacity will reduce the impact of events.

17

PE Exports as % of Production

18

Polyethylene 2019 Outlook

• The 2019 polyethylene outlook appears to be a resin market in which processors will have the advantage.

• Processors should expect similar resin cost to the Q3 2018 prices and ample inventory as more resin is produced through the end of the year 2019.

• Unforeseen events in 2019 will drive the direction of the price.

• Oil will create a floor and ceiling by the cost to produce a pellet from oil overseas.

• The new capacity and higher inventory should reduce the sudden impact of events and the duration of an implemented price increase.

• Tariff issues will build short term export inventory, but should self correct as exports ship to regions other than China.

Polypropylene

20

Propylene 2018 & Forward

• Q4 Oil prices move from $50/bbl to $60, then $66 in 2018.

• This raises prices for heavier based feeds into the Steam Cracker, particularly propane and butane, favoring ethane.

• Ethane feed reduces propylene yields by a PDH equivalent.

• We gained a PDH unit this year, Enterprise.

• Exports of propylene continue to soar, 115 million/lb per month in 2018.

• We have lost significant supply via crackers and added demand via exports plus unplanned outages.

• No new PDH capacity until 2020 at earliest, likely 2021.

• Shortages have US carrying as premium.

21

Propylene

22

Propylene Export Growing

23

Polypropylene 2018

• Producers added $0.03/lb of margin expansion in 2018.

• No margin since due in part to PGP escalation. Hard to forecast new margin while US PGP prices carry a premium.

• NA PP production down 3.3% in 2018.o OP rates 87.8% to 88.8%. lowest since 2014.

o Market has been generally tight in 2018.

o Because of propylene bottleneck.

• Demand is flat to up 1%.

• Imports are up 30%, 5.2% of demand, supplying growth.

• Debottleneck 600 million pounds plus over the past 3 yearso Helped to keep resin inventories balanced

24

NA PP Domestic Demand

25

Polypropylene into 2019

• Prices following PGP since early year margin expansion.

• No new capacity until late 2019, likely 2020.

• With oil above $65/bbl, propylene monomer will continue to drive market prices.

• Exports of propylene leave no cushion for unplanned outages.

• Vulnerable to volatility 2018 thru 2019 from supply constraint.

ABS

27

ABS 2018

• ABS demand continued strong globally with GDP

o Spike in feeds drove prices higher early in the year

o Recent maintenance, higher Asian feedstock & demand helped domestic producers retain margin as feeds fell in Q2.

o Asian imports are a key factor in US market.

• Asian demand is meeting supply

o Asian demand has been absorbing excess capacity

o Tariffs have added level of uncertainty

o Demand has been negatively impacted

o Prices are lower

28

ABS Raw Material Cost

29

Benzene Outlook in 2019

30

ABS 2019 Outlook

• ABS pricing will see pressure from lower Asian pricing offset by operating rates. Feedstocks could contribute.

• Q4/Q1 easing following softness in Asian demand as tariffs continue.

• Prices will stabilize thereafter as demand is re-established along with feeds.

• Oil expected to average between $65-70 in 2019 supporting feedstock levels.

Polycarbonate

32

Polycarbonate 2018

• PC has seen strong demand with improving supply

o Strong auto along with improving construction and GDP.

o ERP implementation complete, now significant maintenance

• Feedstock spike in Q4 led to PC increases in Q1 2018

• Lower feedstocks in Q2 did not translate to lower prices due to tight supply from outages and delayed capacity.

• Feedstock is increasing in Q3, flattening in Q4 as PC pricing has fallen in Asia due to higher production levels.

• Imports are expected to increase as prices fall, but Tariffs?

33

Polycarbonate Raw Material Cost

34

Polycarbonate 2019 Outlook

• PC Supplies to Improve Significantly as demand growth eases.

o Operating rates will regain higher levels

o Demand will be well supplied.

o Inventory building and production stabilization important.

• Expect increasing market share competition

• Imports will continue to grow as a competitive forces, subject to expansion and a strong US$

• Feedstocks will remain at comparable levels with 2018.

• Focus on specialties continues.

Nylon 66

36

PA 66 2018

• Nylon 66 tight to short due key supply chain outageso ADN & HMD outages in Europe led to double digit FM

o Recovery slowed by strikes, droughts and a repeat outage

o US PA66 outage in Q3 is resolved

o Strong PA66 demand globally from auto + GDP growth.

• Expected to sustain a tight market into 2019

• Pricing increases of 10-20% YTD

• BASF to buy Solvay PA66 (formerly Rhodia)

• Product substitution underway in compounds

37

PA66 RMC Movement

38

PA 66 2019 Outlook

• Engineering compounds continue strong demand from auto and GDP

o Light weighting, mechanical strength and temperature performance key

o Larger vehicles using more compounds per unit

o Demand destruction for PA66 from PA6 & PP compounds

• Price momentum likely to reach peak by early in 2019

o PA66 increases will be contested as substitution gains momentum.

o Easing of demand pressure likely to play a role in H2 2019.

o Supply chain operating rates substantially improved in 2019

o Pricing is expected to experience reversals later in 2019 along with supply improvement by 2020.

Nylon 6

40

PA 6 2018

• Since January, PA producers have been pursuing increases from $0.08-0.10/lb.

• During this time period, RMC (raw material cost) declined $0.04/lb.

• Producers anticipated a benzene price spike that did not occur.

• Focus then shifted to the PA66 supply shortage, citing a switch from PA 66 to PA6.

• PA6 producers did have some increase success for freight and are pressing for more based on caprolactam.

41

PA6 Raw Material Cost

• Early 2018 Caprolactam (CPL) prices moved higher due to supply shortage, from unplanned outages, capacity closure and reduced run rates in China.

• 2H 2018, CPL supplies are improving as run rates increase and new capacity comes online. However, AdvanSix experienced an outage.

• HighSun of China recently purchased all of Fibrants CPL assets, this coupled with better CPL supply is generating expectations of a “price war” down the road.

-20%

0%

20%

40%

60%

80%

100%

2015 2016 2017 2018 2019 2022

CPL Capacity Cumulative % Growth ROW India

4242

PA6 2019 Outlook

• CPL supply is expected to exceed demand

• Conversions from PA66 will drive additional demand along with

• Auto weight reduction for mileage

• Larger vehicles using more plastic per unit

• Electric cars globally could offset some lost combustion engine business

• Nylons are potentially included in the next round of tariffs with China, creating uncertainty.

• All factors considered, pricing looks to be flat to down for 2019 unless we see multiple plant events in the supply chain.

4343

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