The future of plastics: trends and disruptions shaping

this cornerstone of the ME petrochemicals industry

Theo Jan Simons, Partner McKinsey & Company

The future of plastics – proposed agenda

FuturePast Present

6.1

35

213

Plastics versatility has made them the cornerstone of modern society

951965 70 75 80 0585 200090 10 15 2018

Plastic production

volumes MTA

World population

Bn

Consumption

kg per capita

CAGR

1965-2018

6.3%

4.6%

1.6%

58

450

7.7

Source: Geyer et al 2017, Worldometers, Plastics Europe

Global plastic volumeIndexed to 1965

3.3

5

17

Plastic consumption per industry

MTA, CAGR

Source: McKinsey analysis

Construction Transportation Packaging Electronics

5% 4% 14% 8%

xx% CAGR

13

41

20151990

3x

6

18

1990 2015

3x 4

129

20151990

32x

2

16

1990 2015

8x

Plastics have successfully substituted other materials across a range of industries and applications

Growth and margin outlook less promising going forward

PE margin evolution2

in Real (2018) USD/tonGrowth1

GDP multiple

1.0

2011-20 2021-302000-10

1.5

1.3

350

300

240

2000-10 2011-20 2021-30

1 Based on the growth in the base chemical demand (methanol, ethylene and propylene) and the real GDP (2018)

2 Using the steam cracking margin in Asia as the representative for the industry, the inflation rate for 2021-30 is assumed at 2.1%

SOURCE: IHS Markit, World bank, McKinsey analysis

10

Factors affecting growth and margin outlook

• Many products and applications maturing

• Mature technologies reaching end of learning curve

• Demand side disruptions

• Supply side disruptions

EBITDA from using ethane as

feedstock instead of in power plants

Share in value pools created

between 2008 and 2018

Value creation from use of

advantaged feedstock

Share of advantaged

feedstock in value creation

~50%

3x

Reduction of CO2 emission using

Ethane relative to other feedstocks

Impact on CO2 emission

(40-60)%

Advantaged feedstock has created significant value for petrochemicals and upstream/midstream companies

Source: McKinsey Chemicals Insights, IHSM, EIA, IPCC

1998Advantaged share

Volume

Value pool

USD bn

Source: McKinsey Chemicals Insights, IHS

18

7%

140 160 180

1,000

040

1,500

20 120600 80 100

500

ROA1EU ChinaME ROWNA

Over the past 2 decades, advantaged feedstock grew significantly

1 Rest of Asia 2 Oil price $ 13

Ethylene Cash Cost

USD per ton

Advantaged feedstock

Non-advantaged feedstock

Demand

Source: McKinsey chemicals Insights, IHS

42

9%

1400 1200

160100

500

80 18040

1,500

60

1,000

20

ROA1ROWEU NA ChinaME

Advantaged share

Volume

2008

Value pool

USD bn

Over the past 2 decades, advantaged feedstock grew significantly

1 Rest of Asia 2 Oil price $ 97

Ethylene Cash Cost

USD per ton

Advantaged feedstock

Non-advantaged feedstock

Demand

42%

88160 180

1,000

0

500

60 800

1,500

20 40 120100 140

EUNA ROWME China ROA1

Advantaged share

Volume

Advantaged feedstock

Non-advantaged feedstock

Demand

2018

Value pool

USD bn

Over the past 2 decades, advantaged feedstock grew significantly

Source: McKinsey chemicals Insights, IHS

1 Rest of Asia 2 Oil price $ 70

Ethylene Cash Cost

USD per ton

Wave coming to an end with uncertainties on the future of advantaged feedstock supply

Feedstock choice of future

driven by 3 uncertainties

• NA NGL – Long term shale

gas linked volumes

• ME NGL – Ethane supply

upside from NOC push

• Competitiveness of C2C –

scale, speed of transition

Source: McKinsey Chemicals Insights, HIS, McKinsey analysis

90

0

60

30

15102005 20 2025

11

51

20

64

73

3%

13%

13%

Ethylene production from advantaged feedstock

MTA

Future of growth and value creation in Plastics

Digital and

Analytics

1

Circular

economy

Finding new

growth

Capital

productivity

2

3 4

Digital and Advanced Analytics with demonstrated potential to improve variable costs and margins

Source: McKinsey

Throughput increase – model that

guides the optimal set points for

9 operational furnaces for Feed, Coil

Outlet Temperature and Dilution steam

per hydrocarbon levels

Profit per hour increase – By

optimizing natural gas, steam, air, fuel

and purge gas flow rate through

advance analytics modelling

Demand forecasting accuracy

improvement – using over 2000

internal and external data sources,

improving demand forecasting,

providing 3 and 6 months outlook and

predicting market turning points

Predictive maintenance – model that

analyzes real-time production data

and predicts unplanned shut-downs of

PP extruder. Implemented in daily

operations it reduced annual

shutdowns from 19 to 0

+11% +4%

+20% -100%

1

Capital productivity declining with growing gaps between regions – opportunity to step up

Source: McKinsey

100

China

~200

ME

71

60

100

1990 05 2018

1 Referenced to the capital investment for a cracker in North America 2 Strategic, Financial (value creation), Sensitivities, Alternatives, Risks 3 Integrated optimization of

Scope and CAPEX (Full economics)

Construction DesignEquipment

China – ME comparisonIndexed China=100

CAPEX evolution1

Real (Indexed 2018=100) Improving capital productivitySelected levers

• Portfolio optimization2

• Project Value Improvement3

• Planning & Performance management (PPM)

• Re-use, modularization, Design to Value (Procurement)

• Lean Construction

• Digital Twin

2

Today, the bulk of used plastics is not recovered or processed effectively

Source: UNEP 2018, Boucher & Friot 2017, World Bank 2018, Jambeck et al 2015, Plastics Europe

Macro-plastics entering

marine biosystem 8-13

Unmanaged land-based

waste ~50

Plastics ending in landfill ~85

Plastics with

suboptimal recovery ~80

Plastics effectively

recycled~45

1-3Microplastics entering

marine biosystem

System loss

Recovery and Re-use

Current plastic destination post use, 2018 in MTA

Challenges with

existing waste split

• Consumers not educated on their contribution to effective system

• Lack of general waste management systems (formal or informal)

• Waste has low value hence low incentive to collect

• Lack of infrastructure and recycling technologies

• Recycling economics challenging relative to virgin

3

A range of recovery processes and technologies are available to recover valuable hydrocarbons

Source: McKinsey analysis

Incineration Thermal

(Pyrolysis/

gasification)

Chemical

(hydrolysis/

hydrocracking)

Mechanical

or chemical

(solvent-based)

Dis-assembly /

re-assembly

Refurbish/Re-

manufacture

Monomer

recycle

Feedstock

recovery

Demand

reduction

Energy

recovery

Polymer recycling

Olefins,

MonomersPolymers

Raw

materials

Compoun-

ding

(optional)

Brand

Owners

Consump-

tionEnergy ConvertersProduct chain

Process type

Recovery type

3

Plastics recovery options differ in their impact characteristics – a portfolio of solutions will be needed

1. Alignment with Brand-owner sustainability pledges – Reducing materials and waste (52%); Recyclability of materials (48%); Increasing Recycled content

(44%); Increasing bio/waste based content (21%); 2. Reduction of the amount of CO2 emitted per ton of plastic; 3 Attractiveness compared to virgin

Source: McKinsey analysis

High impactLow impact

Potential uptake

Percent

Attractive

economics3

Improvement of

carbon footprint2

Meeting sustainability

pledges1

<10

~25

Low

<10

Low

~25

Monomer recycle (e.g., PET, PA)

Energy recycle

Bio-polymers

Reduce, Re-furbish, Remanufacture

Polymers based on renewable

feedstocks (drop-in)

Polymer recycle

Feedstock recycle (Pyrolysis) ~25

3

1 000

0

1 500

500

2016 2020 2025 2030 2035 2040 2045 2050

By 2050, the majority of the petrochemical value chain will be affected by an increase in plastics recovery

Global polymer demand 2016-50 from waste recovery

MTA

COALITION FOR CHANGE4

Source: McKinsey plastic waste stream model

1 Actual growth after demand reduction, assuming global GDP growth of 3.1% (IHS);

2 IHS forecast, demand if current IHS projections until 2027 for plastic growth continue through to 2050;

3 Mechanical recycling limited by downcycling and applicable materials, monomerization limited by applicability to condensates only, pyrolysis limited by likely rise in input costs;

4 We modeled 3 different scenarios in addition to BAU, with Coalition for Change (CfC) being the most ambitious one with the most drastic global change in plastics recovery rate and waste mgmt

Polymer to GDP growth1

Share of total

Demand reduction2

205032018

Mechanical recycling 3012

Recycled monomers 7~ 0

Pyrolysis 22<1

Virgin liquid feedstock 4187

Total 100100

1.0x1.2x

3

Source: McKinsey analysis

There is still a significant room for plastics to substitute other materials in many sectors

~6,000

~2%

Plastics Total

~15%

Plastics Total

~400

~20%

Plastics Total

~600

~4%

Plastics Total

~650

Construction & Infra Transportation Packaging Heavy industries

• Polymer concrete

• Plastic tiles

• Composites

• Glass replacement

• Secondary packaging

• Plastic pallets

• Piping and poles

• Turbines

4

Material consumption per industry, 2017 MTA

The future of plastics – changing models for growth

and value creation

FuturePast Present

Compete with

conventional

materials

Compete with

conventional

feedstock

Compete with

conventional

thinking

Suggested management actions

• Double down on targeted innovation areas

• Acquire new talent and capabilities

• Make bold moves in resource allocation

• Create strategic partnerships across value chain

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