© 2015 Platts, McGraw Hill Financial. All rights reserved.

Will India and China continue to enjoy healthy PP margins? Will demand continue to outstrip supply and maintain margins

Yi-Jeng Huang

June 23, 2015

1

• Introduction to Polypropylene

• Price Review 2014 to June-2015 – China (Integrated vs Non integrated)

– India (Integrated)

• Polypropylene Fundamentals, short outlook – China Import, Upcoming Cap, Supply/Demand

– India Export, Upcoming Cap, Supply/Demand

2

Contents

Polypropylene – the versatile plastic

3

• Polypropylene (PP) is a type of thermoplastic polymer made from monomer propylene. PP is rugged and unusual resistance to chemical solvents, bases, and acids.

• PP is used to in the manufacturing of toys, automobiles, carpeting, reusable containers, packaging, paper, laboratory equipment and polymer banknotes to name just a few.

4

India and China PP Demand per Capita

India PP consumption at 3kg/person, will grow in the future

5

China Integrated spread healthy

Current China PP-naphtha spread ~$630/mt Source: Platts

PP hit 5

year lows

2

1

3

4

Naphtha, multi-year lows

PP hit $1,300/mt

Poor demand

spread falls

6

China Integrated spread healthy

• On Jan 13 –Japan Benchmark Naphtha touched multi-year lows at 398$/mt on poor demand, but rebounded sharply in early Feb.

• CFR China PP hit 965$/mt on Feb 3, it’s lowest since 2011, due to weak sentiment and CNY seasonal lows. PP-naphtha spread narrowed to 450$/mt, touching notional breakeven.

• CFR China PP hit high of 1300$/mt on April 30 on propylene plant turnarounds. Spread hit highs of 730 $/mt a week earlier.

• Recently PP price has dropped due to poor demand from end-users, and aggressive price cutting from India and ME importers. PP-naphtha spreads narrowed to 630$/mt – down $100 in a Mo.

7

China non-integrated, volatile spreads

1

2

Source: Platts

3

Current China PP-propylene spread ~$200/mt

PDH

oversupply,

LCY shutdown

Korea proplyene

turnaround.

Spread <$50/mt

Spread

at $200/mt

8

China non-integrated, volatile spreads

Propylene CFR China follows a similar but more volatile trend compared with Naphtha. Margins are not as good as an integrated PP-naphtha plant would see.

• A confluence of events happened in Q4 of last year to depress feedstock propylene prices.

– 5 propane-dehydrogenation (or PDH) plants in China, including Oriental Energy’s unit which started last May, pressured propylene, causing prices to plummet.

– The on purpose-LCY’s PP plant, which should have used some of that propylene, had a plant explosion in December and was out for an extended period.

– Crude also dropped 7.2% during mid-December.

– So CFR China propylene prices dropped to 590$/mt on Dec 18, that’s a 155$/mt on the week. If a plant took on propylene that week, it would have been a massive 500$/mt spread.

• Korea’s propylene plant turnaround season started with LG shutting down 450k/yr. – On March 6: Japan’s Maruzen propylene unit shut down shut down unexpectedly taking out 230k/yr

capacity from the market. China Satellite PDH shutdown.

• Earlier this month, the China PP-propylene spread was good hitting almost 300$/mt, but as of mid-June, the spread is narrowing, below 200$/mt now.

– Propylene Up: Ningbo Haiyue 600k PDH down

– PP down: Reliance, ME APC, and Braskem offer wars in last 3 weeks.

9

India Integrated spread even better!

1

3

Source: Platts

2

Current India PP-naphtha spread ~$734/mt

China demand

poor

Reliance

Jamnagar

turnaround

India spread

good ~$800/mt

10

India Integrated spread even better!

• January, PP prices in India plunged on poor sentiment in China. Typically India still follow China.

• Reliance Jamnagar begins plant turnaround early late Feb to mid-April, India end-users caught with low inventory. China starts to follow India for PP price trends.

• PP-naphtha spreads for CFR India has been very good, hitting 800$/mt in Apr and May on cheap naphtha.

• Mid-June, China PP sentiment dropped, India sentiment followed, India producers began price protection, but buyers taking a wait-and-see approach, spread narrowed to 734$/mt on June 17.

11

China-India Price Comparison

Source: Platts

India vs China PP spread is $84/mt (6mo ave.)

China imports 10x more PP than India, giving it

the economy of scale to command cheaper

CFR prices. So unless there were unusual

supply constraints, PP CFR S Asia (India) is

always higher than CFR FE Asia (China).

Looking at the past 6 months, India vs

China spread is 84$/mt.

S Korea is Top PP exporter to China!

(Source: China Customs Statistical Information Center)

Context: Total China PP imports

4.9M mt in 2014

Q1 Top PP exporters to China:

1. S. Korea

2. Saudi Arabia

3. Singapore

4. Taiwan

5. UAE/Thailand

6. India (5% of China PP Imp)

• China imports more Copol

• Some CTOs can switch Raffia/Copol

Saudi Arabia is Top PP homo exporter to China

(Source: China Customs Statistical Information Center)

Context: Total China PP homo

imports 3.6M mt in 2014

India = 7% of China PP homo

Imports

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Upcoming PP Capacity 2015/2016 - China

Company Name CTO/MTO Location Propylene Capacity

MTO/MTP Technology

PP Capacity k tons/y

Commissioning Date

Sinopec (Zhijin) MTO Guizhou 300 SMTO 300 2016

Jiutai Energy Co., Ltd CTO Inner Mongolia 300 MTO/OCP 300 2015

Fund (Changzhou) Energy Chemical Development Co., Ltd MTO Jiangsu 350 DMTO 350 2015 Shanxi Coking Group Co., Ltd CTO Shaanxi 300 DMTO 300 2015 Shenhua (Yulin) Chemical Co MTO Shaanxi 300 DMTO 300 2015 Xingxing New Energy Co., Ltd MTO Zhejiang 390 DMTO 390 2015 Qinghai Salt Lake Industry Co, Ltd CTO Qinghai 165 DMTO 165 2015 Datong Coal Group Co CTO Shanxi 300 DMTO 300 2015 Dongming Plastics Co CTO Xinjiang 300 DMTO 300 2015 Sailboat Petrochemical Co MTO Jiangsu 450 MTO/OCP N/A 2015 Damei Coal Co., Ltd CTO Qinghai 300 DMTO 300 2015

Mengda New Energy Chemical Co CTO Inner Morgolia 300 DMTO 300 2015

China Coal (Yili) Energy Chemical Co CTO Xinjiang 300 DMTO 300 2016

TOTAL 4,055 3,605

Total: 3,605,000 mt/year new capacity (CTO/MTO)

+750,000 mt/yr Yantai Wanhua (PDH)

15

China PP deficit narrow in 2017

• China PP balance narrows to -2.7M mt in 2017 because of CTO/MTO/PDH down from -4.9M mt in 2014

China 2017 Demand 23.0M mt Production 22.3M mt Balance -2.7M mt

Source: Platts Analytics

Substantial decrease. Copol is showing up

more because of the demand increase of

household appliances and cars in China.

16

Largest PP Export Partners - India

Context:

Total India PP export:

490,000 mt/year

50% of India’s PP export

goes to China

This is only 5% of China’s PP

import.

Source: Gov of India

17

Upcoming PP Capacity 2015 - India

Source: PlasIndia & India Gov.

(OPAL)

450k June 2015, Started

340k 2015-2016?

60k End of 2015

680k 2017

Total: 850,000 mt/year new capacity in 2015

PP Outlook - Global Net Trade (Outlook 2017)

18

(-) (+)

(+)

Latin American Deficits in Argentina,

Chile, Colombia, Mexico and Peru

19

India to have PP deficit in 2019

• India PP demand to exceed production in 2019 (or earlier) (Balance -91 mt)

India 2019 Demand 5.17M mt Production 5.16M mt Balance -91 mt

Source: Platts Analytics

India will continue to export, especially for those in

special economic zones (Jamanagar). India domestic

demand will increase and India may turn into a net

importer.

20

Conclusions

• Will India and China continue to enjoy healthy PP margins?

– Integrated PP producers (India + China): Margin likely to remain good, and less volatile.

– Non-Integrated PP producers (China): Feedstock propylene volatility may cause margins to dip below breakeven. Many PDH plants, 2.7M mt cap currently

• Will demand continue to outstrip supply and maintain margins?

– China: Supply deficit to continue. Buying activity affected by shrinking GDP growth

– India: Demand to exceed production in 2019 (or earlier). Production issues this year may constrain supply

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© 2015 Platts, McGraw Hill Financial. All rights reserved.

Thank you!

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Yi Jeng Huang, Editor, Petrochemicals

Tel: +65 65306461

yi.jeng.huang@platts.com