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Argus Petrochemicals A review of the PX/PTA market and a glimpse into the future Prepared for

India Petrochem 2018

2 November 2018, Mumbai

The Argus Asia PX cfr Taiwan/China price & a basket-style pricing approach


• The Argus PX cfr China/Taiwan prices are published daily with 6 half-month forward laycans which are rolled over on the 1st business day and the 1st business day following the 15th of each month

• For example; on 1 July, Argus publishes: ◦ 2H July

◦ 1H August*

◦ 2H August*

◦ 1H September*

◦ 2H September

◦ 1H October

• Argus uses the 2nd, 3rd and 4th laycans to calculate its daily cfr Taiwan/China marker which the market uses as the benchmark

• Assessment timeframe: 4-4.30pm Singapore time daily

The Argus PX cfr China/Taiwan

Copyright © 2018 Argus Media Ltd. All rights reserved.


• Argus price markers uses prompter valuations

• Argus price markers reflects physical market more accurately

◦ Producer/end-user business remains mostly in the prompt market

◦ More pricing focus on producers/end-users rather than on traders who punt the forward

market without eventual physical delivery

• Argus price marker maintain a relevance to the monthly PX Asia Contract

Price negotiations

◦ ACP negotiations are done on the last business day of each calendar month. For example;

on 31 May, June PX ACP will be settled.

◦ Between 16-31 May, Argus still have a 2H June pricing component in its daily cfr

Taiwan/China markers

So what does this mean?



• In the PX market, there has been a market shift to benchmark against more than

one index:

◦ Japanese producers have implemented a formula that makes references to three indexes.

◦ South Korea producers are increasingly also looking towards a multi-index pricing approach

◦ Pricing against two or more indexes with fundamentally different methodology approaches is in

itself, a natural pricing hedge

• Reduce dependency on one index which may have methodology guidelines which are

inflexible to changes in the market

◦ On 12 October, Sinopec announced that it would be exploring options to price PX for 2019 contracts

due to an inflexible methodology approach, by an existing index provider, that did not exclude US

origin PX despite the ongoing China-US trade war.

• Pricing index providers are constantly kept on their toes

◦ In markets where a single index provider is dominant, there is a general sense of “nonchalance”

Basket style pricing



• A portion of the Cfr Indonesia market is priced basis Argus wef 2018

• Domestic Indonesia market has always been priced basis Argus. Argus is also used

as the basis for fob Indonesia exports with the restart of TPPI in Tuban.

• Japan origin is priced basis a basket including Argus cfr Taiwan/China. 50pc

Platts; 25pc Argus; 25pc ICIS wef 2014.

• Vietnam origin is priced basis Argus PX ACP

• PetroRabigh origin is priced basis a basket including Argus. 50pc Platts; 50pc

Argus

Where are the Argus cfr China/Taiwan prices used?


Asia PX/PTA – The impending doom of the PX

market ?

Lucrative year for PX/PTA makers

Copyright © 2017Argus Media group. All rights reserved.

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Lucrative margins for both PX and PTA makers

Year Spread($/t)

2014 81

2015 72

2016 76

2017 88

2018 (Jan-Aug)

155

PTA margins at levels not seen in years


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PX-PTA SPREAD(2014-2018)

PX cfr China PTA cfr China PX-PTA Spread

Supply tightness peaked in September’18


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January February March April May June July August September October November December

Supply

Demand

Balance

in '000tonnes January February March April May June July August September October November December

Supply 3438 3438 3420 3431 3036 3235 3484 3408 3288 3445 3471 3587

Demand 3414 3441 3456 3419 3250 3346 3491 3470 3522 3276 3482 3668

Inventory 700 724 721 685 697 483 168 157

Balance 724 721 685 697 483 371 -7 -62 -234 168 157 76

What happened in September?


• There was a series of unscheduled maintenances at large PX units that includes: 1. Hanwha Total Daesan No2 2. JXTG Nippon Oil & Energy Wakayama and Sakai PX units

• Ramp-up of production at new PX start-ups were slow. These includes: 1. PetroRabigh 2. Nghi Son Refinery & Petrochemicals

• Typhoon season in China/Japan which cause delays in deliveries. Consumers

were scrambling to secure feedstock PX as margins soared.

• More demand for PX after Jialong said it would restart PTA production. Other end-users were postponing maintenance to take advantage of solid margins.

So what to expect for 2019


• The 2018 PX market appears set to end with a small surplus. Preliminary checks on 2019 maintenances suggests a comparatively lighter schedule.

• There will be a series of new PX capacities that include the mega projects in

China:

Asia PX Capacity Expansion kt Country Company Location 2018 2019 2020 2021 2022 2023

H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2

China Tenglong Aromatics (Dragon) restart Zhangzhou, Gulei 800 800

Zhejiang Petrochemicals Zhoushan, Ningbo 500 1500 2000 2000 2000

Sinopec Hainan Petrochemical Hainan 250 750

Hengli Petrochemicals Changxing, Dalian 500 1500 2500

Shenghong Petrochemicals Lianyungang, Jiangsu 1250 1250

Sinochem Hongrun Petrochemicals Shandong 1000

Zhongjin Petrochemicals phase 2 Ningbo 800 800

Middle East PetroRabigh (Armaco/Sumitomo) Rabigh 325 325 650

Aramco Jazan 400 400

ADNOC Ruwais 500 500

Southeast Asia Nghi Son Refinery Vietnam 350 350

Hengyi Industries Brunei 750 750

Total 1350 8000 6050 1000 6250 2850

• On paper, the market looks like it is able to enter a phase of severe oversupply • There are no new PTA units (except JBF) expected to be brought into production in 2019

Reverse integration – A quick history

Copyright © 2017 Argus Media group. All rights reserved.

• There has been a rush by Chinese private polyester companies into the oil & refining industry since 2015 when the government partially liberalised crude trading.

• Prior to this, the market has only witnessed two other polyester companies that has ventured into the upstream sector to secure their own feedstock – Reliance & Formosa

• All these cases of reverse integration has been spurred by one similar factor – A clear shortfall in domestic supply:

1. Reliance – Distillates coupled with petrochemicals

2. Formosa – Petrochemicals coupled with gasoline

3. China – Petrochemicals (PX, Benzene, Styrene and MEG)

Reverse integration – Highlights, key differences


Reliance Formosa Zhejiang PC (Zhoushan project)

• 180k bpd CDU x 2. Start-up in mid-1999 with more expansions to 540k bpd in 2008 and further to 660k bpd

• The drive to refineries was spurred by a shortfall in domestic distillate supplies as well as feedstock naphtha for petchems

• Output was geared towards distillate production followed by naphtha/reformate for petchems

• 150k bpd CDU refineries in 3 phases. Start-up was in Q1’2000 and full operating rates was achieved in end-2002

• The foray into refineries was spurred by an acute shortage in ethylene supplies and a heavy reliance on naphtha imports

• There was also a domestic gasoline market which CPC dominated prior to this project which introduced more competition

• 400k bpd CDU in 2 phases. Official start-up as soon as end-2018 with phase 2 coming by end-2020

• Output geared heavily towards petchems with conversions ratios estimated as high as 65pc.

• Drive into oil on Yisheng’s heavy reliance on PX imports; broader shortfalls in BZ, Styrene and MEG domestic supplies

Reverse integration – And what happened after?


Reliance Formosa Zhejiang PC (Zhoushan project)

• Singapore and Mideast Gulf producers were hit with reduced Indian gasoil imports

• Singapore weathered the emergence of RIL comparatively better on stronger ability to meet gasoil/gasoline specifications

• Singapore turned to Indonesia and Vietnam

• Mideast Gulf producers slower to react but eventually realigned sulphur content and found markets in Europe/South America

• Refinery project was conceived with the main purpose of securing naphtha for petchems but by-products LPG/distillates and gasoline went into oversupply as a result

• Delayed start-up of phase 3 150k bpd CDU. Completed Jul’01, start-up in in end-02 because of weak margins

• Turned towards 3rd party processing agreements to guarantee margins amid products supply glut

• Phase 1 1. 4mn t/yr PX 2. 1.5mn t/yr benzene (captive) 3. 1.2mn t/yr styrene 4. 740kta MEG

• Phase 2 1. 4mn t/yr PX 2. 600kta PO/SM 3. 640kta MEG 4. 1.3mn t/yr benzene (captive) What happens???

Reverse integration – A few thoughts


• The Chinese mega projects are a world’s first. No other refinery has those levels of conversions into petrochemicals.

• It is not simple running an aromatics complex. Some of the companies have no prior experience in operating refineries nor BTX units.

• The ramp up in production is likely to be a lengthy one. The time that PetroRabigh takes to reach full production might provide an idea to how long Hengli will take since they are using the technology provider.

• Adding on to the existing surplus in the gasoline and diesel markets. How this might affect the overall profitability of these mega refineries.

• What happened following the Formosa Mailiao refinery start-up could provide clues to what may happen in the products market after the mega Chinese refineries are brought into production

• Petchem angle: Trade flows are set to change massively following these mega projects but differs from product to product

• From a PX/PTA angle: In the absence of new wave of investments into PTA/Polyester, overcapacity is set to stay and rationalisation may come from Japan followed by Korea

Strong growth seen for Chinese polyester


• In 2016, China polyester output growth was capped by the imposition of US ADD on Chinese PET bottle chip. Growth rates only clocked in at 2-3%

• There was a strong demand recovery seen from 2017 on growing exports, strong domestic demand • The ban on recycled PET imports also spurred even more demand for virgin bottle and fibre chips.

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CHINA POLYESTER OUTPUT

2015 2016 2017 2018

Unit:KT

Indian polyester industry on upward trajectory


65%

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2015 2016 2017 2018 2019

India Polyester Production

Production Capacity O/R

Unit：Kt

• India’s average demand growth rate above 8pc • Set to continue into 2019 more growth expected • Potential lack of raw material PTA as investments into new capacities have been slow

PET fiber margins improved from late-2016


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China PET fiber Production Economy

POY Margin PSF Margin POY Margin(Integrated)

• PET fibre production margins had also gradually improved from late-2016 • Production margins were lucrative in 2017 and 2018 but recent spikes in PTA prices have started to pinch

Company Buyer Capacity(kt) Time

Shaoxing Cifu Rongsheng 560 2015

Taicang Minghui Hengyi 250 2017

Jiaxing Longteng Hengyi 200 2017

Zhejiang Hongjian Hengyi 750 2017

Shaoxing Nanfang Tiansheng 400 2017

Xiangsheng Hengyi, Zhejiang M&I 400 2018

Zhejiang Shuangtu Hengyi 1000 2018

Fujian Jinxing Hengyi(65%) 750 2018

Shaoxing Yuandong Hengyi, Tiansheng, Xinghui 800 2018

Profitability driving acquisitions

• Previously idled polyester capacities were picked up by Hengyi Industries over the past 2 years who are still expecting strong demand growth going into 2019-2020

• Average polyester operating rates moved up from 2017, and high operating rates have been maintained for almost one year


Strong POY demand drains PTA inventory


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JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC

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PTA INVENTORY IN FUTURES

2015 2016 2017 2018

• Strong demand of polyester products pushed up PTA consumption • PTA inventory levels at approved Zhengzhou Commodity Exchange warehouses are still at very low levels

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Copyright notice Copyright © 2018 Argus Media group. All rights reserved. All intellectual property rights in this presentation and the information herein are the exclusive property of Argus and and/or its licensors and may only be used under licence from Argus. Without limiting the foregoing, you will not copy or reproduce any part of its contents (including, but not limited to, single prices or any other individual items of data) in any form or for any purpose whatsoever without the prior written consent of Argus. Trademark notice ARGUS, the ARGUS logo, Argus publication titles, and Argus index names are trademarks of Argus Media Limited. For additional information, including details of our other trademarks, visit argusmedia.com/trademarks.

Bohan Loh Petrochemical Markets Editor

[email protected]

+65 6496 9936

Singapore

www.argusmedia.com

http://blog.argusmedia.com

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