asian cost competitiveness: the rise of china · asian cost competitiveness: the rise of china...

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Prospectus

Asian Cost Competitiveness:The Rise of China

Prospectus

Asian Cost Competitiveness: The Rise of China

August 2005

44 South Broadway, 5th Floor, White Plains, New York 10601-4425 Phone: 1 914 609 0300 Facsimile: 1 914 609 0399

Copyright© by Nexant, Inc. 2005

Asian Cost Competitiveness: The Rise of China Prospectus

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Contents Section Page

1 Introduction.............................................................................................................. 1

2 Scope of Work .......................................................................................................... 2

3 Approach .................................................................................................................. 7

4 Table of Contents ..................................................................................................... 8

5 Contact Information ................................................................................................ 34

6 Authorization Form................................................................................................. 35

7 Qualifications............................................................................................................ 37


Prospectus 1

Q304_00619.001.11

Section 1 Introduction

The petrochemical industry is entering a growth phase. The long recession triggered by the 1997 Asian financial crisis, then deepened by recession in developed countries, has finally come to an end and companies are considering growth alternatives. Considerable new petrochemical capacity is planned for the Middle East. Although ethane is the preferred feedstock for polyolefin production, ethane production in the Middle East is associated with oil production, and there appears to be limited additional ethane available. Therefore, it would appear that there are many opportunities for new capacity additions in Asia over the next few years.

However, new petrochemical facilities in Asia have frequently fared poorly as their owners often rushed to build facilities ahead of demand so as to establish a market position, but with few competitive advantages. This strategy appears to have failed, as witnessed by the Korean petrochemical industry. Therefore, companies considering expansion must understand their current and proposed competitive position, by comparing their projects against existing as well as proposed petrochemical facilities. Existing producers also need to be cognizant of the potential for erosion in their position as new, low-cost capacity is added in Asia and the Middle East.

This study highlights the cost competitiveness of a wide range of petrochemical facilities in China and other Asian countries. Forecasts were made on future competitiveness based on Nexant’s economic and pricing outlook; cost comparisons are provided for the years 2004 and 2008.


Prospectus 2

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Section 2 Scope of Work

After recovering from the crisis of the late nineties, Asian economies, and specially China, have experienced continued growth and development. In some instances, substantial economic and fiscal reforms have taken place, with the objective of eliminating or reducing the structural imbalances that contributed to the region’s economic problems in 1997.

The North Asia countries (Japan, South China and Taiwan) dominate the petrochemical industry, and together represent about 70 percent of the installed capacity (Figure 2.1). In this chart, the industry size has been approximated as the sum of the ethylene, polyethylene and PVC capacities. Over the last five years, China has increased its relative importance, and now represents 25.3 percent of the installed capacity of the above-mentioned products.

Figure 2.1 Relative Size of the Asian Chemical Industry (Percent)

South Korea 16.7%

Japan21.4%

Indonesia 2.5% Malaysia

4.5%

Singapore4.9%

India6.7%

Taiwan9.0%

Thailand6.8%

Australia1.6%

China25.3%

Philippines0.4%Vietnam

0.3%

Section 1-Q305_00619.001.11_ACCCharts.xls/fig 1.1

After the profound margin trough the petrochemical industry experienced in the last few years, 2004 saw companies starting to recover from some of their losses. True to the industry’s historical practices, this new abundance of cash has prompted increased interest in investments throughout the region. There are many projects planned, with different degrees of status in the decision process.

China has been and continues to be a preferred destination for investments. The improvement in the quality of life for many Chinese, prompted by the extraordinary economic reforms the country has experienced in the last two decades, promises huge potential in demand for all types of petrochemical products. In the meantime, the accommodative policies of the Chinese government to attract foreign investment together with low wages have transformed China to become the manufacturing capital of the world. Deficits in petrochemical products in the



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country, in spite of the projects currently underway and the many others being considered, are expected to continue. As can be seen in Figure 2.2, China has the largest petrochemical deficit in the region.

Figure 2.2 Profile of Asian Petrochemical Net Trade Net Deficits of Ethylene, Polyethylene and PVC

(10,000)(8,000)(6,000)(4,000)(2,000)

02,0004,000

Sout

hKo

rea

Japa

n

Sing

apor

e

Thai

land

Taiw

an

Mal

aysia

Viet

nam

Austr

alia

Philip

pine

s

Indi

a

Indo

nesia

Chin

aThou

sand

Met

ric T

ons p

er Y

ear

Q305_00619.001.11_Section 1_Figures.xls/F1.1

This study brings some clarity as to the relative cost position of the production of several petrochemical intermediate and polymer products in China and different Asian locations. Economics for the U. S. Gulf Coast, Western Europe, and the Middle East have also been developed in order to provide a frame of reference over the global competitive position. For each Asian country, the situation of the petrochemical industry, business philosophy and accounting practices, and government incentives for business were also analyzed and presented.

To develop the cost of production estimates, Nexant began by developing estimates of local costs and factors for a variety of inputs including exchange rates, interest rates, corporate tax rates, labor (illustrated in Figure 2.3), power, fuel, capital location factors, labor overhead cost factors, and labor efficiency estimates. These factors were developed starting with Nexant’s internal database, then updating and extending this information through selected fieldwork.



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Figure 2.3 Labor Rates – Shift Operator, 2004 Thousand U.S., $ per year

VietnamIndonesia

ChinaIndia

ThailandPhilippines

MalaysiaSingapore

TaiwanMiddle East

South KoreaUnited

EuropeAustralia

Japan

O:\Q305_00619.001.11_Pros_Charts.xls/F1.3

Manufacturing costs have been estimated for “Leader” plants in each country that, in most instances, represent new build, world scale plants incorporating the most efficient, current process technologies and economies of scale. The products profiled are ethylene, HDPE, LLDPE, LDPE, PP, VCM, PVC, MEG, benzene, styrene, PX and PTA for those countries that currently have production of the products, or that have firm plans to start production by 2008. Economics were developed for 2004 and 2008.

A key emphasis of this study is to highlight the capital cost differences observed in China. Surprisingly, the capital cost locations factor for China fell rather substantially as compared to only a few years ago, which is in contrast to the location factors for other regions that remained similar to those for previous years. The explanation is that in previous years, Western companies building in China relied heavily on more costly imported technology, equipment and EPC services, offset only by construction labor savings when compared to investments in the West.

Capital cost is now the key item in differentiating plants built in the past in China with a high degree of imported services and content, and the plants currently being built in China by both local companies and joint ventures, e.g., with Sinopec, which maximize local content. The local resources utilized range from engineering, procurement, and construction (EPC) services, to locally developed technology and even key process equipment.

To highlight these differences in capital requirements, two different scenarios were developed for China. One of the scenarios, identified as “Maximizing Local Content”, reflects the current practice of maximizing the use of local resources and services offered by Chinese companies and suppliers. This practice allows for sizable savings in capital costs, thus providing a competitive cost advantage to those plants built from locally based materials and services. The alternative scenario - “Minimizing Local Content” - is reflective of past practices that relied heavily on imported resources for petrochemical plant construction, with the sole cost saving benefit of low construction wages.



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The cost of production models were selected to represent “Leader” facilities in each region, based on Nexant’s understanding of these processes, with selected updates performed as necessary. Processes considered not competitive in other regions, such as the acetylene route to VCM which is widely used in China, were also modeled as required. Actual 2004 prices for raw materials and by-products were used; Nexant’s price forecasts were used for 2008. The individual cost of production estimates for each country and each process are provided in the country sections of the report.

The results of the cost of production analyses were compiled, and comparisons prepared so as to illustrate the competitiveness of plants in each country covered in the report (provided such facilities existed in 2004 or were highly likely to be completed by 2008), as well as leader facilities in USGC, Western Europe and the Middle East. A comparison for ethylene in 2008 is illustrated in Figure 2.4. This figure shows that Middle East plants employing ethane and condensate feeds will remain the overall low cost producers. The USGC naphtha cracker is projected to become more competitive relative to Asian naphtha crackers, as USGC naphtha prices are not expected to exhibit significant premiums to Asian naphtha prices in 2008 as was observed in 2004. The cracker in Malaysia is expected to remain highly competitive, due to favorable ethane prices. Ethylene crackers in China are higher cost, due to the higher cost of naphtha, while crackers in Japan suffer from high utility rates, and high direct and allocated fixed costs.

Figure 2.4 Ethylene Cost of Production Current U.S. Dollars, 2008

Mid

. Eas

t - E

Mid

. Eas

t - C

Mal

aysia

- E

Austr

alia

- E

Sing

apor

e - N

USG

C - N

Euro

pe -

N

Taiw

an -

N

S. K

orea

- N

USG

C - E

Thai

land

- N

Indi

a - N

Indo

nesia

- N

Chin

a (M

ax L

) -N/

GO

Chin

a (M

in L

) - N

/GO

Japa

n - N

Net Raw Materials Total Allocated Fixed Costs Total Direct Fixed Costs Total Utilities

O:\Q305_00619.001.11_Pros_Charts.xls/F1.4



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Similar comparisons were made for each product under study, for both 2004 and 2008.

The study covered the following countries:

Japan Philippines Taiwan South Korea Malaysia India Thailand Singapore Indonesia China (Maximizing Local Content) Vietnam Australia China (Minimizing Local Content)

Costs of production comparisons were developed for the following key petrochemicals:

Ethylene

Polyethylene (LDPE, HDPE, LLDPE)

Ethylene Glycol

VCM

PVC

Polypropylene

Benzene

Styrene

para-Xylene

Terephthalic Acid (PTA)


Prospectus 7

Q304_00619.001.11

Section 3 Approach

Nexant started this work by utilizing its in-house database of production costs and location factors for the various countries to develop initial cost estimates. These estimates were then reviewed with Asian producers, contractors, and others knowledgeable on country-specific capital and other input costs.

The individual country reviews were conducted by Nexant’s experienced team of consultants and associates based in Asia. Nexant has personnel and associates located in Japan, Korea, China, Singapore and Thailand who assisted in this work.

The cost of the study is US$19,000.00 (nineteen thousand U.S. dollars). The study was completed in July 2005. Subscribers will receive three bound copies of the report and online access through a password-protected area of our web site, www.nexant.com.


Prospectus 8

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Section 4 Table of Contents

Section Page 1 Executive Summary ................................................................................................. 1-1

1.1 BACKGROUND ........................................................................................... 1-1

1.2 SUMMARY OF KEY COST FACTORS ..................................................... 1-3

1.2.1 Exchange Rates.................................................................................. 1-3

1.2.2 Prime Interest Rates ........................................................................... 1-5

1.2.3 Corporate Tax Rates .......................................................................... 1-5

1.2.4 Location Factors for Capital Cost ...................................................... 1-6

1.2.5 Labor Rates ........................................................................................ 1-7

1.2.6 Power Costs ....................................................................................... 1-8

1.2.7 Fuel Costs........................................................................................... 1-9

1.3 SUMMARY OF STUDY FINDINGS........................................................... 1-9

1.3.1 Ethylene ............................................................................................. 1-9

1.3.2 Low Density Polyethylene (LDPE) ................................................... 1-12

1.3.3 Linear Low Density Polyethylene (LLDPE) ..................................... 1-13

1.3.4 High Density Polyethylene (HDPE) .................................................. 1-14

1.3.5 Vinyl Chloride Monomer (VCM)...................................................... 1-15

1.3.6 Polyvinyl Chloride (PVC).................................................................. 1-16

1.3.7 Ethylene Oxide / Ethylene Glycol (EO/EG)...................................... 1-17

1.3.8 Polypropylene .................................................................................... 1-18

1.3.9 Benzene.............................................................................................. 1-19

1.3.10 Styrene ............................................................................................... 1-20

1.3.11 para-Xylene ....................................................................................... 1-21

1.3.12 Terephthalic Acid (PTA) ................................................................... 1-22

2 Introduction.............................................................................................................. 2-1

2.1 BACKGROUND ........................................................................................... 2-1

2.2 BASIS FOR ANALYSIS............................................................................... 2-2

2.2.1 Exchange Rates.................................................................................. 2-2

2.2.2 Inflation.............................................................................................. 2-3

2.2.3 Crude Oil Price Forecast.................................................................... 2-3



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2.3 U.S. GULF COAST ECONOMICS .............................................................. 2-3

2.3.1 Ethylene ............................................................................................. 2-4




2.3.5 Vinyl Chloride Monomer................................................................... 2-14


2.3.7 Ethylene Oxide/Ethylene Glycol ....................................................... 2-18

2.3.8 Polypropylene .................................................................................... 2-20

2.3.9 Benzene.............................................................................................. 2-22

2.3.10 Styrene ............................................................................................... 2-24

2.3.11 para-Xylene ....................................................................................... 2-26

2.3.12 Terephthalic Acid............................................................................... 2-28

2.4 WESTERN EUROPE .................................................................................... 2-30

2.4.1 Ethylene ............................................................................................. 2-31







2.4.8 Polypropylene .................................................................................... 2-45

2.4.9 Benzene.............................................................................................. 2-47

2.4.10 Styrene ............................................................................................... 2-49

2.4.11 para-Xylene ....................................................................................... 2-51


2.5 MIDDLE EAST............................................................................................. 2-55

2.5.1 Ethylene ............................................................................................. 2-56






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2.5.8 Polypropylene .................................................................................... 2-72

2.5.9 Benzene.............................................................................................. 2-74

2.5.10 Styrene ............................................................................................... 2-76

2.5.11 para-Xylene ....................................................................................... 2-78


3 Japan ......................................................................................................................... 3-1

3.1 A REVIEW OF COST COMPONENTS....................................................... 3-1

3.1.1 Introduction, Business Philosophy, and Accounting Principles ........ 3-1

3.1.2 Government Incentives ...................................................................... 3-3

3.1.3 Capital Cost Factor ............................................................................ 3-4

3.1.4 Variable Cost Factors......................................................................... 3-4

3.1.5 Fixed Costs......................................................................................... 3-5

3.2 COST ANALYSIS......................................................................................... 3-6

3.2.1 Ethylene ............................................................................................. 3-6

3.2.2 LDPE.................................................................................................. 3-8

3.2.3 LLDPE ............................................................................................... 3-10

3.2.4 HDPE ................................................................................................. 3-12


3.2.6 PVC.................................................................................................... 3-16


3.2.8 Polypropylene .................................................................................... 3-20

3.2.9 Benzene.............................................................................................. 3-22

3.2.10 Styrene ............................................................................................... 3-24

3.2.11 para-Xylene ....................................................................................... 3-26

3.2.12 Terephthalic Acid (PTA) ................................................................... 3-28

4 South Korea .............................................................................................................. 4-1

4.1 REVIEW OF COST COMPONENTS........................................................... 4-1




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4.1.5 Fixed Costs......................................................................................... 4-4

4.2 COST ANALYSIS......................................................................................... 4-4

4.2.1 Ethylene ............................................................................................. 4-5







4.2.8 Polypropylene .................................................................................... 4-19

4.2.9 Benzene.............................................................................................. 4-21

4.2.10 Styrene ............................................................................................... 4-23

4.2.11 para-Xylene ....................................................................................... 4-25


5 Taiwan....................................................................................................................... 5-1






5.1.5 Fixed Costs......................................................................................... 5-3

5.2 MANUFACTURING COST ANALYSIS .................................................... 5-4

5.2.1 Ethylene ............................................................................................. 5-5








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5.2.8 Polypropylene .................................................................................... 5-19

5.2.9 Benzene.............................................................................................. 5-21

5.2.10 Styrene ............................................................................................... 5-23

5.2.11 para-Xylene ....................................................................................... 5-25


6 China ......................................................................................................................... 6-1




6.1.3 Capital Factors ................................................................................... 6-6


6.1.5 Fixed Cost Factors ............................................................................. 6-7

6.1.6 Marketing Factors .............................................................................. 6-8

6.2 COST ANALYSIS......................................................................................... 6-16

6.2.1 Ethylene ............................................................................................. 6-17




6.2.5 Vinyl Chloride Monomer (VCM)...................................................... 6-33



6.2.8 Polypropylene .................................................................................... 6-47

6.2.9 Benzene.............................................................................................. 6-51

6.2.10 Styrene ............................................................................................... 6-55

6.2.11 para-Xylene ....................................................................................... 6-59


7 Singapore .................................................................................................................. 7-1



7.1.2 Government Incentives and Subsidies ............................................... 7-2



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7.2 COST ANALYSIS......................................................................................... 7-5

7.2.1 Ethylene ............................................................................................. 7-6





7.2.6 Polypropylene .................................................................................... 7-16

7.2.7 Benzene.............................................................................................. 7-18

7.2.8 Styrene ............................................................................................... 7-20

7.2.9 para-Xylene ....................................................................................... 7-22

8 Indonesia ................................................................................................................... 8-1






8.1.5 Fixed Costs......................................................................................... 8-5

8.2 COST OF PRODUCTION ............................................................................ 8-5

8.2.1 Ethylene ............................................................................................. 8-6






8.2.7 Polypropylene .................................................................................... 8-18

8.2.8 Benzene.............................................................................................. 8-20

8.2.9 Styrene ............................................................................................... 8-22

8.2.10 para-Xylene ....................................................................................... 8-24



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9 Malaysia .................................................................................................................... 9-1



9.1.2 Government Incentives and Subsides ................................................ 9-2



9.1.5 Fixed Costs Issues.............................................................................. 9-4

9.2 PRODUCTION COSTS ................................................................................ 9-5

9.2.1 Ethylene ............................................................................................. 9-6






9.2.7 Ethylene Glycol (MEG)..................................................................... 9-18

9.2.8 Polypropylene .................................................................................... 9-20

9.2.9 Benzene.............................................................................................. 9-22

9.2.10 Styrene ............................................................................................... 9-24

9.2.11 para-Xylene ....................................................................................... 9-26

9.2.12 Terephthalic Acid (TPA) ................................................................... 9-28

10 Thailand .................................................................................................................... 10-1






10.1.5 Fixed Costs......................................................................................... 10-4


10.2.1 Ethylene ............................................................................................. 10-6




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10.2.8 Polypropylene .................................................................................... 10-19

10.2.9 Benzene.............................................................................................. 10-21

10.2.10 Styrene .............................................................................................. 10-23

10.2.11 para-Xylene ...................................................................................... 10-25

10.2.12 Terephthalic Acid.............................................................................. 10-27

11 Philippines ................................................................................................................ 11-1






11.1.5 Fixed Costs......................................................................................... 11-3




11.2.3 Polypropylene .................................................................................... 11-9

12 Vietnam ..................................................................................................................... 12-1






12.1.5 Fixed Costs......................................................................................... 12-3

12.2 COST ANALYSIS......................................................................................... 12-5

13 Australia.................................................................................................................... 13-1




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13.1.5 Fixed Costs......................................................................................... 13-4


13.2.1 Ethylene ............................................................................................. 13-6




13.2.5 PVC.................................................................................................... 13-14

13.2.6 Polypropylene .................................................................................... 13-16

13.2.7 Styrene ............................................................................................... 13-18

14 India .......................................................................................................................... 14-1




14.1.3 Capital Cost Factors........................................................................... 14-5



14.1.6 Distribution Factors ........................................................................... 14-7

14.2 COST ANALYSIS......................................................................................... 14-7

14.2.1 Ethylene ............................................................................................. 14-8







14.2.8 Polypropylene .................................................................................... 14-22

14.2.9 Benzene.............................................................................................. 14-24



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14.2.10 Styrene .............................................................................................. 14-26

14.2.11 para-Xylene ...................................................................................... 14-27

14.2.12 Terephthalic Acid.............................................................................. 14-29

15 Summary of Key Cost Factors................................................................................ 15-1

15.1 EXCHANGE RATES.................................................................................... 15-1

15.2 PRIME INTEREST RATES.......................................................................... 15-3

15.3 CORPORATE TAX RATES......................................................................... 15-4

15.4 LOCATION FACTORS FOR CAPITAL COST .......................................... 15-5

15.5 LABOR RATES ............................................................................................ 15-7

15.6 POWER COSTS ............................................................................................ 15-9

15.7 FUEL COSTS ................................................................................................ 15-10

16 Cost Comparisons .................................................................................................... 16-1

16.1 COST OF PRODUCTION METHODOLOGY ............................................ 16-1

16.1.1 Cost of Production Definition and Basis ........................................... 16-1

16.1.2 Operating Costs.................................................................................. 16-1

16.1.3 Capital Costs ...................................................................................... 16-2

16.1.4 Capital Costs in China ....................................................................... 16-5

16.2 PRICING ASSUMPTIONS AND METHODOLOGY................................. 16-6

16.2.1 Scenario Definition ............................................................................ 16-6

16.2.2 Crude Oil Price Scenario ................................................................... 16-6

16.2.3 Price Forecasting Methodology ......................................................... 16-7

16.3 ETHYLENE................................................................................................... 16-9

16.4 LOW DENSITY POLYETHYLENE (LDPE) .............................................. 16-16

16.5 LINEAR LOW DENSITY POLYETHYLENE (LLDPE) ............................ 16-21

16.6 HIGH DENSITY POLYETHYLENE (HDPE) ............................................. 16-25

16.7 VINYL CHLORIDE MONOMER (VCM) ................................................... 16-29

16.8 POLYVINYL CHLORIDE (PVC) ................................................................ 16-34

16.9 ETHYLENE GLYCOL (EG) ........................................................................ 16-39

16.10 POLYPROPYLENE...................................................................................... 16-43

16.11 BENZENE ..................................................................................................... 16-47

16.12 STYRENE...................................................................................................... 16-52



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16.13 para-XYLENE............................................................................................... 16-57

16.14 TEREPHTHALIC ACID (PTA).................................................................... 16-62

Figure Page 1.1 Relative Size of the Asian Chemical Industry ........................................................... 1-1

1.2 Profile of Asian Petrochemical Net Trade ................................................................. 1-2

1.3 Exchange Rates.......................................................................................................... 1-4

1.4 Prime Interest Rates, 2004 Averages ......................................................................... 1-5

1.5 Corporate Tax Rates, Percent, 2004 Averages .......................................................... 1-6

1.6 Capital Cost Factors vs. U.S. Gulf Coast, 2004......................................................... 1-7

1.7 Labor Rates – Shift Operator, 2004 ........................................................................... 1-8

1.8 Power Costs, 2004 ..................................................................................................... 1-8

1.9 Fuel, 2004 .................................................................................................................. 1-9

1.10 Ethylene Cost of Production ...................................................................................... 1-10


1.12 Ethylene Transfer Prices ............................................................................................ 1-11

1.13 LDPE Cost of Production .......................................................................................... 1-12


1.15 LLDPE Cost of Production........................................................................................ 1-13


1.17 HDPE Cost of Production.......................................................................................... 1-14

1.18 HDPE Cost of Production.......................................................................................... 1-14

1.19 VCM Cost of Production ........................................................................................... 1-15

1.20 VCM Cost of Production ........................................................................................... 1-15

1.21 PVC Cost of Production............................................................................................. 1-16

1.22 PVC Cost of Production............................................................................................. 1-16

1.23 Ethylene Glycol Cost of Production .......................................................................... 1-17

1.24 Ethylene Glycol Cost of Production .......................................................................... 1-17

1.25 Polypropylene Cost of Production ............................................................................. 1-18

1.26 Polypropylene Cost of Production ............................................................................. 1-18

1.27 Benzene Cost of Production....................................................................................... 1-19



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1.28 Benzene Cost of Production....................................................................................... 1-19

1.29 Styrene Cost of Production ........................................................................................ 1-20

1.30 Styrene Cost of Production ........................................................................................ 1-20

1.31 PX Cost of Production ............................................................................................... 1-21

1.32 PX Cost of Production ............................................................................................... 1-21

1.33 PTA Cost of Production............................................................................................. 1-22

1.34 PTA Cost of Production............................................................................................. 1-22

2.1 Exchange Rates, 2004 Averages................................................................................ 2-2

6.1 China Sales and Distribution Network ...................................................................... 6-11

15.1 Exchange Rates.......................................................................................................... 15-2

15.2 Prime Interest Rates, 2004 ......................................................................................... 15-3

15.3 Corporate Tax Rates, 2004 ........................................................................................ 15-4

15.4 Capital Cost Factors Relative to the U.S. Gulf Coast, 2004 ...................................... 15-6

15.5 Labor Rates – Shift Operator, 2004 ........................................................................... 15-8

15.6 Power Costs, 2004 ..................................................................................................... 15-9

15.7 Asian Fuel Costs, 2004 .............................................................................................. 15-10

16.1 Data Flow Within ChemSystems Online® Simulator ............................................... 16-7

16.2 Ethylene Feedstock Costs .......................................................................................... 16-10



16.5 Ethylene Transfer Prices ............................................................................................ 16-15





16.10 HDPE Cost of Production......................................................................................... 16-25


16.12 Chlorine Prices.......................................................................................................... 16-30

16.13 VCM Cost of Production .......................................................................................... 16-30

16.14 VCM Cost of Production .......................................................................................... 16-32

16.15 VCM Market Pricing ................................................................................................ 16-35



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16.16 PVC Cost of Production............................................................................................ 16-37

16.17 PVC Cost of Production............................................................................................ 16-37

16.18 Ethylene Glycol Cost of Production ......................................................................... 16-39

16.19 Ethylene Glycol Cost of Production ......................................................................... 16-41

16.20 Asian Propylene Prices (Polymer Grade) ................................................................. 16-44

16.21 Polypropylene Cost of Production ............................................................................ 16-44

16.22 Polypropylene Cost of Production ............................................................................ 16-47

16.23 Benzene Cost of Production...................................................................................... 16-48

16.24 Benzene Cost of Production...................................................................................... 16-50

16.25 Benzene Prices .......................................................................................................... 16-53

16.26 Styrene Cost of Production ....................................................................................... 16-53

16.27 Styrene Cost of Production ....................................................................................... 16-54

16.28 Mixed Xylenes Prices ............................................................................................... 16-58

16.29 para-Xylene Cost of Production............................................................................... 16-58

16.30 para-Xylene Cost of Production............................................................................... 16-59

16.31 para-Xylene Prices ................................................................................................... 16-63

16.32 PTA Cost of Production............................................................................................ 16-63

16.33 PTA Cost of Production............................................................................................ 16-64

Table Page 1.1 Exchange Rates.......................................................................................................... 1-4

2.1 U.S. Petrochemical Prices Utilized for Analysis ....................................................... 2-3

2.2 Cost of Production Estimate for Ethylene ................................................................. 2-4




2.6 Cost of Production Estimate for LDPE...................................................................... 2-8


2.8 Cost of Production Estimate for LLDPE (Pellets)..................................................... 2-10




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2.10 Cost of Production Estimate for HDPE ..................................................................... 2-12


2.12 Cost of Production Estimate for Vinyl Chloride........................................................ 2-14


2.14 Cost of Production Estimate for PVC Pipe Grade Resin........................................... 2-16


2.16 Cost of Production Estimate for Ethylene Glycol...................................................... 2-18


2.18 Cost of Production Estimate for PP Homopolymer................................................... 2-20


2.20 Cost of Production Estimate for Benzene.................................................................. 2-22


2.22 Cost of Production Estimate for Styrene ................................................................... 2-24


2.24 Cost of Production for para-Xylene .......................................................................... 2-26

2.25 Cost of Production for para-Xylene .......................................................................... 2-27

2.26 Cost of Production for Purified Terephthalic Acid.................................................... 2-28

2.27 Cost of Production for Terephthalic Acid.................................................................. 2-29

2.28 Western Europe Petrochemical Prices Used for Analysis ......................................... 2-30







2.35 Cost of Production Estimate for HDPE (Injection Molding)..................................... 2-37








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2.49 Cost of Production Estimate for para-Xylene ........................................................... 2-51


2.51 Cost of Production Estimate for Purified Terephthalic Acid..................................... 2-53


2.53 Middle East Petrochemical Prices Used for Analysis................................................ 2-55





















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3.1 Japanese Tariff ........................................................................................................... 3-4

3.2 Japanese Utility Rates ................................................................................................ 3-5

3.3 Japanese Labor Rates................................................................................................. 3-5























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4.1 South Korean M&A Transactions ............................................................................. 4-2

4.2 South Korean Tariff Schedule ................................................................................... 4-3

4.3 South Korean Utility Rates ........................................................................................ 4-4

4.4 South Korean Labor Rates ......................................................................................... 4-4


























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5.1 Taiwan Tariff Rates ................................................................................................... 5-2

5.2 Utility Rates in Taiwan .............................................................................................. 5-3

5.3 Labor Costs in Taiwan ............................................................................................... 5-4

5.4 Cost of Production Estimate for Ethylene Steam Cracking of LT Naphtha, 2004 ... 5-5


5.6 Cost of Production Estimate for LDPE Tubular, 2004 ............................................. 5-7


5.8 Cost of Production Estimate for LLDPE (Pellets) Unipol Gas Phase, 2004 ............. 5-9


5.10 Cost of Production Estimate for HDPE (Injection Molding) Slurry Loop, 2004 ...... 5-11


5.12 Cost of Production Estimate for Vinyl Chloride Balanced Oxychlorination, 2004 .. 5-13


5.14 Cost of Production Estimate for PVC Pipe Grade Resin Suspension Process, 2004 5-15

5.15 Cost of Production Estimate for PVC Pipe Grade Resin Suspension Process, 2008 5-16

5.16 Cost of Production Estimate for Ethylene Glycol Ethylene Oxidation/Hydration, 2008 5-17

5.17 Cost of Production Estimate for PP Homopolymer SPHERIPOL, 2004................... 5-18



5.20 Cost of Production Estimate for Benzene Reforming/Extraction, 2004.................... 5-21


5.22 Cost of Production Estimate for Styrene Liquid Phase Alkylation, 2004 ................ 5-23

5.23 Cost of Production Estimate for Styrene Liquid Phase Alkylation, 2008 ................ 5-24

5.24 Cost of Production Estimate for para-Xylene Adsorption/Isomerization ................. 5-25

5.25 Cost of Production Estimate for para-Xylene Adsorption/Isomerization, 2008 ....... 5-26

5.26 Cost of Production Estimate for Purified Terephthalic Acid Amoco, 2004 .............. 5-27

5.27 Cost of Production Estimate for Purified Terephthalic Acid Amoco, 2008 .............. 5-28

6.1 China’s Share of the Asian Petrochemical Capacity ................................................. 6-2

6.2 Ethylene Expansions in China ................................................................................... 6-3

6.3 Ethylene Supply/Demand and Trade in China........................................................... 6-3



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6.4 Largest Petrochemical Companies in China .............................................................. 6-4

6.5 Tariffs in China .......................................................................................................... 6-5

6.6 Utility Costs in China................................................................................................. 6-7

6.7 Petrochemical Wages in China .................................................................................. 6-8






























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7.1 Singapore Utility Rates .............................................................................................. 7-5

7.2 Singapore Labor Rates............................................................................................... 7-5





7.7 Cost of Production Estimate for LLDPE (Pellets) Gas Phase, 2004 ......................... 7-10

7.8 Cost of Production Estimate for LLDPE (Pellets) Gas Phase, 2008 ......................... 7-11



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7.10 Cost of Production Estimate for HDPE Slurry Loop, 2008...................................... 7-13

7.11 Cost of Production Estimate for Ethylene Glycol Ethylene Oxidation/Hydration, 2004............................................................................................................................ 7-14

7.12 Cost of Production Estimate for Ethylene Glycol Ethylene Oxidation/Hydration, 2008............................................................................................................................ 7-15





7.17 Cost of Production Estimate for Styrene POSM, 2004.............................................. 7-20

7.18 Cost of Production Estimate for Styrene POSM, 2004.............................................. 7-21



8.1 Indonesia Tariffs ........................................................................................................ 8-2

8.2 Indonesia Utility Rates............................................................................................... 8-4

8.3 Indonesia Labor Rates................................................................................................ 8-5

8.4 Cost of Production Estimate for Ethylene Steam Cracking of LT Naphtha, 2004 .... 8-6

8.5 Cost of Production Estimate for Ethylene Steam Cracking of LT Naphtha, 2008 .... 8-7



8.8 Cost of Production Estimate for HDPE Slurry Loop, 2004...................................... 8-10




8.12 Cost of Production Estimate for PVC Pipe Grade Resin Suspension, 2004.............. 8-14

8.13 Cost of Production Estimate for PVC Pipe Grade Resin Suspension, 2008.............. 8-15



8.16 Cost of Production Estimate for PP Homopolymer UNIPOL, 2004 ......................... 8-18

8.17 Cost of Production Estimate for PP Homopolymer UNIPOL, 2008 ......................... 8-19




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8.20 Cost of Production Estimate for Styrene Liquid Phase Alkylation, 2004 ................. 8-22

8.21 Cost of Production Estimate for Styrene Liquid Phase Alkylation, 2008 ................. 8-23




8.25 Cost of Production Estimate for Purified Terephthalic Acid Conventional Oxidation/Hydrogenation .......................................................................................... 8-27

9.1 Malaysia Tariffs ......................................................................................................... 9-3

9.2 Malaysian Utility Rates.............................................................................................. 9-4

9.3 Malaysian Labor Rates .............................................................................................. 9-5















-9.18 Cost of Production Estimate for PP Homopolymer................................................... 9-20









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10.1 Thai Utility Rates....................................................................................................... 10-4

10.2 Thai Labor Rates........................................................................................................ 10-5








10.10 Cost of Production Estimate for HDPE (Injection Molding).................................... 10-13

10.11 Cost of Production Estimate for Vinyl Chloride....................................................... 10-14


10.13 Cost of Production Estimate for PVC Pipe Grade Resin.......................................... 10-16


10.15 Cost of Production Estimate for Ethylene Glycol..................................................... 10-18

10.16 Cost of Production Estimate for PP Homopolymer.................................................. 10-19


10.18 Cost of Production Estimate for Benzene................................................................. 10-21


10.20 Cost of Production Estimate for Styrene .................................................................. 10-23


10.22 Cost of Production Estimate for para-Xylene .......................................................... 10-25


10.24 Cost of Production Estimate for Purified Terephthalic Acid.................................... 10-27


11.1 Philippines Utility Rates ........................................................................................... 11-3

11.2 Philippines Labor Rates ............................................................................................. 11-4




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12.1 Vietnam Utility Rates ................................................................................................ 12-3

12.2 Vietnam Labor Rates ................................................................................................. 12-4



13.1 Australian Government Levels & Responsibilities.................................................... 13-3

13.2 Australian Petrochemical Tariffs ............................................................................... 13-3

13.3 Australian Utility Rates.............................................................................................. 13-4

13.4 Australian Labor Rates .............................................................................................. 13-5






13.10 Cost of Production Estimate for LLDPE .................................................................. 13-11

13.11 Cost of Production Estimate for HDPE .................................................................... 13-12








14.1 Indian Major Petrochemical Producers...................................................................... 14-2

14.2 Indian Tariffs ............................................................................................................. 14-5

14.3 Utility Rates in India.................................................................................................. 14-6

14.4 Labor Rates in India................................................................................................... 14-6



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14.10 Cost of Production Estimate for LLDPE (Pellets).................................................... 14-13


















15.1 Exchange Rates.......................................................................................................... 15-1

15.2 Asian Prime Lending Rates ....................................................................................... 15-3

15.3 Corporate Tax Rates, % ............................................................................................. 15-4

15.4 Capital Cost Location Factors Relative to the U.S. Gulf Coast, 2004....................... 15-6

15.5 Asian Labor Rates – Shift Operator........................................................................... 15-7

15.6 Asian Power Costs, 2004 ........................................................................................... 15-9

15.7 Asian Fuel Costs, 2004 .............................................................................................. 15-10

16.1 Ethylene Feedstock Costs .......................................................................................... 16-10



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16.2 Ethylene Cost of Production Comparison, 2004........................................................ 16-11

16.3 Ethylene Cost of Production Comparison, 2008........................................................ 16-14

16.4 Ethylene Cash Cost Market and Transfer Pricing...................................................... 16-16

16.5 LDPE Cost of Production Comparison, 2004............................................................ 16-18

16.6 LDPE Cost of Production Comparison, 2008............................................................ 16-20

16.7 LLDPE Cost of Production Comparison, 2004 ......................................................... 16-22

16.8 LLDPE Cost of Production Comparison, 2008 ......................................................... 16-24

16.9 HDPE Cost of Production Comparison, 2004 ........................................................... 16-26


16.11 Chlorine Prices.......................................................................................................... 16-29

16.12 VCM Cost of Production, 2004 ................................................................................ 16-31

16.13 VCM Cost of Production Comparison, 2008............................................................ 16-33

16.14 VCM Prices............................................................................................................... 16-34

16.15 PVC Cost of Production Comparison, 2004............................................................. 16-36

16.16 PVC Cost of Production Comparison, 2008............................................................. 16-38

16.17 Ethylene Glycol Cost of Production, 2004 ............................................................... 16-40

16.18 Ethylene Glycol Cost of Production Comparison, 2008........................................... 16-42

16.19 Propylene Prices (Polymer Grade)............................................................................ 16-43

16.20 Polypropylene Cost of Production Comparison, 2004 ............................................. 16-45

16.21 Polypropylene Cost of Production Comparison, 2008 ............................................. 16-46

16.22 Benzene Cost of Production Comparison, 2004 ....................................................... 16-49

16.23 Benzene Cost of Production Comparison, 2008 ....................................................... 16-51

16.24 Benzene Prices .......................................................................................................... 16-52

16.25 Styrene Cost of Production Comparison, 2004......................................................... 16-55

16.26 Styrene Cost of Production Comparison, 2008......................................................... 16-56

16.27 Mixed Xylenes Prices ............................................................................................... 16-57

16.28 para-Xylene Cost of Production Comparison, 2004 ................................................ 16-60

16.29 para-Xylene Cost of Production Comparison, 2008 ................................................ 16-61

16.30 para-Xylene Prices ................................................................................................... 16-62

16.31 Terephthalic Acid Cost of Production Comparison, 2004........................................ 16-65

16.32 Terephthalic Acid Cost of Production Comparison, 2008........................................ 16-66


Prospectus 34

Q304_00619.001.11

Section 5 Contact Information

Please visit www.nexant.com to authorize engagement of the study, or return the following authorization form to one of Nexant’s offices.

Mr. James D. Virosco Mr. John W. King Nexant, Inc. 20th Floor, Zone B 44 S. Broadway, 5th Floor SCB Park Plaza, West Tower 2 White Plains, NY 10601 18 Ratchadapisek Road USA Kwaeng Chatuchak, Khet Chatuchak Tel: 1-914-609-0318 Thailand Fax: 1-914-609-0399 Tel: 66-2-937-5150 E-mail: [email protected] Fax: 66-2-937-5145 E-mail: [email protected]

Mr. Ko Matsushita Dr. Andrew Spiers Nexant, Inc. – Japan Nexant Limited Yoshida Building 7F Griffin House 1-2-2 Hirakawa-cho, Chiyoda-ku 1st Floor South Tokyo 102-0093 161 Hammersmith Road Japan London, W6 8BS Tel: 81-3-3237-3383 United Kingdom Fax: 81-3-5212-1708 Tel: 44-20-7950-1600 E-mail: [email protected] Fax: 44-20-7950-1550 E-mail: [email protected]

Mr. Esteban Sagel Nexant, Inc. 909 Fannin Street, Suite 1275 Houston, TX 77010-1038 USA Tel: 1-713-982-5556 Fax: 1-713-739-0741 E-mail: [email protected]


Prospectus 35

Q304_00619.001.11

Section 6 Authorization Form

1. The undersigned (hereafter "Client") hereby subscribes to purchase from Nexant, Inc. (“Nexant”), Nexant’s study, Asian Cost Competitiveness: the Rise of China, in accordance with the following terms and conditions.

Nexant will provide to Client the following information and services: (a) Three (3) bound copies of the report

(b) Access to electronic downloads of the report via a password-protected area from www.nexant.com 2. While the information supplied by Nexant to Client will represent an original effort by Nexant, based on its

own research, it is understood that portions of the report will involve the collection of information available from third parties, both published and unpublished. Nexant does not believe that such information will contain any confidential technical information of third parties but cannot provide any assurance that any third party may, from time to time, claim a confidential obligation to such information.

3. The information disclosed in this report will be retained by Client for the sole and confidential use of Client

and its 51 percent or greater owned affiliates in their own research and commercial activities, including loaning the reports on a confidential basis to third parties for temporary and specific use for the sole benefit of Client.

4. Client further agrees that it will use reasonable efforts to keep the information in the reports for its sole use;

however, this restriction shall not apply to information which is or becomes generally available to the public in a printed publication, which is already in the possession of Client, or which is received by Client in good faith from a third party without an obligation of confidentiality.

5. Client shall not republish any of the report except within its own organization or that of its 51 percent or

greater owned affiliates. Client further agrees to refrain from any general publication of the reports, either directly or through its affiliates, so as to constitute passage of title into the public domain or otherwise jeopardize common law or statutory copyright in said report.

6. Client will be billed by and shall pay Nexant a total of US$19,000 (nineteen thousand U.S. dollars).

Amounts are due upon receipt of invoice and payable within thirty (30) days. Late payments shall accrue interest at the rate of 1.5 percent per month. Fees quoted do not include any applicable sales tax, or use or value added tax, all of which are for the account of Client.

7. Additional copies of the report are available at US$500 each. The complete report will also be available

electronically on CD-ROM at a cost of US$1,000. 8. The obligations of paragraphs 3 and 4 shall terminate five (5) years from receipt of reports. 9. Unless specified otherwise, there are no warranties of any kind for reports and consulting services provided

under this Agreement. Nexant’s total liability under this Agreement is limited to the total amount paid to Nexant for the reports.

10. This Agreement will be governed by the laws of the State of New York.

Section 6 Authorization Form


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AUTHORIZATION FORM AGREED TO AND ACCEPTED BY: AGREED TO AND ACCEPTED BY:

CLIENT: NEXANT, INC. Name: Name: Signature: ___________________________ Signature: ___________________________ Title: Title: ___________________________ Date: Date: ___________________________ Reports to be sent to:

_____________________________________________________________________________

_____________________________________________________________________________

_____________________________________________________________________________

_____________________________________________________________________________

_____________________________________________________________________________ Phone: Fax: __________________________________ E-mail address: _______________________________________________________________ Number of Hard Copies: ____________ Number of CD ROM copies: _________________ Total Cost:_______________________ If purchase order is required, please provide the purchase order number below: Purchase Order Number: _____________________________

NEXANT, INC. 44 South Broadway, 5th Floor

White Plains, NY 10601-4425, U.S.A. Fax: 1-914-609-0399

Web: www.nexant.com


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Section 7 Qualifications

7.1 NEXANT/CHEMSYSTEMS’ BACKGROUND

7.1.1 Overview

Nexant began operations in January 2000 as a management consulting company spun out of the Bechtel organization and specialized in the energy and chemical industries. Prior to this it traded as Bechtel Consulting. Nexant provides technology and consulting services to government and commercial customers in the power, gas, oil and chemical industries. Building on Bechtel’s more than 100-year success story and global presence, Nexant has the technical resources and hands-on experience to deliver timely, cost effective consulting. It is well positioned to leverage its core expertise in energy and chemical strategy, operations, and technology to meet the growing demand for practical industry specialization across these areas.

Nexant’s Petroleum and Chemical Division (P&C Division) provides consulting services to the full range of industry players, major, independent and national oil and gas companies, petrochemical and chemical companies; public and private utilities; government institutions; and financial institutions and funding agencies. We bring to all of our assignments tailored multi-disciplinary teams with the right mix of skills, experience, industry knowledge, best practices and cultural understanding.

Nexant has expanded its technical capabilities and global reach by acquiring ChemSystems. They are both firmly positioned as technology based solutions providers spanning oil & gas, refining, petrochemicals and chemicals sectors with a highly complementary mix. By adding ChemSystems’ petrochemical and market-conduct experience to Nexant’s process technology and economic and strategic planning expertise, we are now a dominant provider of marketing, consulting and technology services to oil and gas companies, international development organizations and national and regional government agencies on a global basis.

7.1.2 China Experience

Nexant was among the first of consultancies to provide analysis on the refining, petrochemical, chemical and related industries in China. During the 1980s, Nexant/ChemSystems developed the necessary relationships and contacts in China to provide value-added, quality consulting activities. We presently assist domestic Chinese companies, global multinationals, and financial institutions with a myriad of consulting assignments. Our local Mandarin speaking consultants based in our Beijing office have extensive Chinese industry experience. Nexant offers expertise, experience and an international reputation to those companies seeking to participate in the Chinese chemical and process industries. The strengths of our international management consultancy reside in a multi-faceted approach that combines commercial, technological and strategic capabilities such as:

Strategic Planning – Nexant has guided its clients in addressing the challenges of the Chinese business environment by evaluating and formulating formal plans and ventures into new areas.



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Process Technology/Economic Evaluation – Nexant has evaluated refinery, chemical and polymer plant technologies and benchmarked selected operations in China and other countries in Asia. These assignments have assisted companies improve their domestic and international competitive position, link economic competitiveness with product compatibility and market needs, and enhance long-term project planning capabilities.

Market and Commercial Forecasting – Nexant’s strong China and Pacific Rim contact and experience base has been applied in formulating parameters and methodologies used to identify opportunities for clients to stimulate growth and enhance competitive position. Studies on market size, growth, intermaterial competition and new product development have been conducted for polymers, intermediates, specialty and fine chemicals, feedstocks, petrochemicals and refinery products.

Financial – Nexant has completed a number of financial projects in China and the Pacific Rim for companies, governments and banks that involved a full range of advisory, valuation and due diligence activities including industry/business analysis, cash flow and margin projections, and model development.

7.1.3 Selected Project Experience in China

7.1.3.1 Strategic Assessment

Business Strategy - A major U.S. chemical producer engaged Nexant to assist them develop a strategy to substantially expand the company's business in Southeast Asia, including China and India. Nexant’s study, while carried out in close cooperation with the clients’ strategy development team, provided an outside viewpoint relative to expansion in Asia. Nexant sought to match the client's capabilities with opportunities to participate in Asia. The issues discussed included: country preferences; site integration; financial attractiveness; value added products; flexibility of strategy.

China Bitumen Market Entry Strategy - For a European oil company who wish to enter the Chinese bitumen market, Nexant carried out a comprehensive bitumen market study. Analyzed the supply and demand of bitumen in the past 10 years, forecast future bitumen demand and market structure. Profiled all key local bitumen producers, bitumen terminals and warehouses. Based on these analysis, advised the company on its entry strategy for Chinese bitumen markets.

Opportunity Analysis - A major U.S. chemical producer interested in developing and producing hydrocarbons in Asia engaged Nexant to ascertain the market opportunities in selected regions in China for the conversion of available methane to petrochemical or related products. We provided the following: a general overview of the Chinese energy market and the role of natural gas in energy, industrial and chemical applications; infrastructure overview in the target regions/locations; focused assessment of natural gas opportunities for chemicals and for energy/industrial applications in the selected regions.

Opportunity Analysis - Nexant was engaged by one of the largest international chemical producers for assistance in scoping chlor-alkali and derivatives opportunities in Asia as a key input to a long-term chlor-alkali growth plan. The work, performed jointly with a special client team, included the analysis of historical market dynamics and pricing in



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chlor-alkali and derivatives and the assessment of alternative growth options related to future supply/demand, pricing and profitability. The 1985-2005 market analysis of chlorine, caustic, soda ash, EDC, VCM and PVC for China, South Korea, Taiwan, Thailand, Indonesia, India and other Asian countries covered market structure and relative pricing, tariff issues, cost of production in Asia, capacity changes, regional differences/summaries. The project team also performed an opportunity analysis that identified opportunities for investment in Asia, to work with other companies, investment in chlor-alkali outside Asia.

TPE Strategy - With the objective of assessing a strategy for styrene block copolymer (SBC) elastomers in China, Nexant evaluated the various markets for SBCs, customers and distribution structures, and partner choices in China. The analysis included detailed discussions with key China suppliers and analyzed the impact Taiwan has on the China shoe market.

Petrochemical Joint Venture Development - Nexant assisted an Asian client to define and formulate a negotiating position for a proposed $2 billion petrochemical joint venture with SINOPEC. The study included a market analysis, feedstock sourcing, capital cost estimation and project profitability and risk assessment for a complex producing a broad range of olefin and aromatic derivatives.

7.1.3.2 Process Technology and Economic Evaluation

Technology Acquisition - Our role was to identify sources of manufacturing technology for the Jiangsu province in targeted chemicals. Nexant arranged for and assisted in face-to-face discussions with potential companies for technology acquisitions and licensing, joint venture, direct sale or combinations thereof.

Glyphosate And Intermediates Cost Of Production Analysis – For a U.S. company, Nexant carried out several cost of production analysis for glyphosate and glyphosate intermediates (monochloroacetic acid, glycine, phosphorous trichloride, etc.) of several leading Chinese producers.

Citric Acid Business Analysis - A South African company interested in understanding citric acid production in China retained Nexant for an overview of production economics. Variable and fixed costs for current producers with leader/laggard differentiation and market/distribution cost information were provided.

7.1.3.3 Competitive Analysis

Olefins and Derivatives Market and Competitive Assessment - On behalf of the owners and financial advisors for a major joint venture olefins and derivatives project under development in Southern China, Nexant completed a comprehensive market and competitive assessment which included analysis/forecast of local markets and price forecasts, analysis of pricing issues and terms of trade, and comparative analysis of delivered cash cost of production for key regional and local producers (derivatives) which are expected to be the key competitors of the project.

Acrylic Acid and Acrylates Market and Competitive Study – A Canadian company is interested in forming a joint venture with a Chinese company to produce acrylic acid and



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acrylates in China. Nexant helped the client in providing feedstock price and supply forecast, China and Asia acrylic acid and acrylates supply demand outlooks, acrylic acid and acrylates price forecasts, domestic and export market analysis, competitive cost of production analysis, and the impact of open market mechanism and China WTO entry, etc.

Ethylene and Polyethylene Cost Benchmarking – Nexant assisted a Korean petrochemical company in comparing the cost of production for ethylene and ethylene derivatives in China and Korea, and advised the company on the strategy in supplying Chinese market in the long term.

Asia and China Polyolefins Benchmarking Analysis - A study was commissioned to benchmark a number of important parameters for polyethylene and polypropylene producers and major importers in the Asian market. This included cost of production (monomer cost, raw material utilization, utilities, manpower, overhead costs, number of people in selected job functions such as sales, shipping costs, etc. This has allowed our client to evaluate their own competitive position and make changes to improve their competitive position.

7.1.3.4 Market and Commercial Analysis

Provincial Analysis of Polyolefins Demand – The demand for polyolefins for each province in China was developed with forecasts made based on key market drivers (e.g., current and future washing machine production, amount of polypropylene used per washing machine by application, key manufacturers, specifications/market structure). Other items included in the study were the resin selection process, distribution channels, data sources and their validity, listing of major fabricators (key contact, address and phone/fax number, polymers used, products made, volume used, number of employees). This was commissioned by a foreign company interested in determining an investment strategy in polyolefins.

Raw Material Supply and Sourcing Study - A European specialty chemical company is interested in building a plant in East China to supply its customer base in Asia. We helped them in looking into the raw materials supply situation in China for their proposed plant. With success of this practice, they provided a long list of raw materials that they wish to source from China for their production bases in Europe and the U.S. We helped them to identify sources of supply for these raw materials according to their requirements for quality, quantity, expected prices, etc. This enabled them to source several of their major raw materials from China with much lower prices and strengthened their cost position in the market.

Asia Ethanol Market Study - A Korean ethanol producer was re-evaluating its regional strategy in ethanol business and retained Nexant to do a detailed analysis of the Asia ethanol market. China was a key market for the study. We reviewed the historical ethanol supply demand in China and studied the ethanol demand by application. We also forecast the future ethanol supply and demand in China.



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China Market Analysis - Nexant assisted the Asian sector of a major U.S. chemical company interested in reentering the polyolefin packaging market in China to determine the current industry structure, product selection and decision process, growth drivers and market channels. Since the focus was packaging, the study also addressed: resin producers (globally and domestic China); state entities; independent brokers and distributors (China vs. Hong Kong vs. others); fabricators.

Specialty Nylon Application Market Study - For a European company, Nexant completed a comprehensive analysis of markets for specialty nylon application used in packaging and decorative textiles and fabrics and other applications. The market study involved contacting around 85 producers and users of the specialty product and characterizing the market and pricing drivers, producer shares and market breakdown by key application sector.

China Coating Resins Market Study - For a U.S. company considering investment in a local manufacturing facility, Nexant completed a comprehensive market study for amino coatings resins to characterize the market and identify key customers. The study, which involved contacting nearly 150 local customers, validated and extended the company’s own market plan in support of its investment strategy.

Salt Market Analysis - This study of the current and potential market for imported salt in Southeast Asia was conducted for a major Pacific Basin supplier and trader of industrial or chemical grade salt. The demand to 2005 for salt for use in domestic caustic soda and chlorine and synthetic soda ash in China, Indonesia, Malaysia, Philippines, Singapore, Thailand and Vietnam (generally high cost areas for these products) and the cost competitiveness of Southeast Asian caustic and soda ash relative to imported EDC, VCM and natural soda ash were the focus. Analysis of shipping costs was also provided.

Polycarbonate Market Analysis - For the Japanese division of an international chemical company interested in determining the size and structure of the market and developing a positioning strategy, Nexant evaluated the markets (by major applications) for polycarbonate resins in selected Asian countries, including China, and forecasted demand. Applications included: automotive, electrical, electronic and appliance. The positioning strategy was developed via market structure analysis (relationships with OEMs, role of compounders, suppliers market shares, role of distributors, etc.) and producer profiles.

Producers/Pricing Analysis - A French producer concerned about the Asian polystyrene market retained Nexant to assess pricing forces in the region by: establishing regional trend line and cyclical pricing frames of reference for styrene and polystyrene, including the price spread; developing current competitive cost economics; defining and assessing market positioning and pricing strategies. For this study Nexant evaluated 16 companies in 7 Pacific Rim countries, including China, plus the U.S., assessing: degree of integration from olefins, aromatics and styrene; developing costs of production; identifying target markets, and associated costs. Company analyses also included: market share and country share orientation; positioning strategy, use of pricing to acquire/maintain market share.



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Plant Site Selection - Nexant, with considerable assistance from its China staff, identified, evaluated and ranked potential locations for the construction of a major chemical plant by an international chemicals producer wishing to establish production in China. The results provided a detailed screening of over 50 potential sites, culminating in recommendations for the highest ranked sites.

Pricing Analysis - An Asian client involved in a project feasibility assessment requested annual price forecasts thru 2015 for crude oils, refined products (LPG, mogas, diesel, jet fuel, petroleum coke, paraffinic naphtha) and aromatics (benzene, toluene, mixed xylenes, para-xylene) in South China and several other locations.

EPDM and Elastomers - As part of our assessment of new polyolefin elastomers, Nexant analyzed the future structure of the EPDM and associated thermoplastic elastomer markets in China. A key part of the analysis was the investigation of the automobile industry and the influence of local Chinese producers compared to foreign OEM transplants.

Specialty Film Markets - Nexant, in response to a request from a U.S. diversified chemical producer, conducted a market analysis of specialty film products in China. The products covered included: biaxially oriented PP, oriented PET, cast nylon, biaxially oriented nylon and co-extruded nylon-based structures. Nexant provided, on a “best efforts” basis the following information: manufacturers/capacity; production; major end uses; consumption by end use, especially in food packaging; converters; distribution patterns and trade.

SBS Market Analysis - Nexant investigated the markets for SBS in China for a South African company planning to build a plant in China with Chinese technology. Although the aim was to provide SBS products to the under-supplied local markets, the client needed to repatriate revenue/profits to pay off the project. For this project, the local markets in China, as well as other parts of Asia were analyzed - production, end users, markets and market structure, competitive supply, competitive environment and pricing - and forecast to 2000.

Plastic Resin Distribution Network - In an effort to understand dramatic changes in the supply and distribution of polyolefins in China, Nexant analyzed the role of Sinochem, other state agents, independent brokers and distributors and their relationship to plastic fabricators and compounders. The impact of import duties, licensing arrangements, freight/transfer costs and currency restrictions were also assessed.

7.1.3.5 Financial Analysis

New Petrochemical Complexes - Nexant worked on three of the new foreign joint venture petrochemical complexes. The following items were performed for one or more of these assignments:

Detailed market analysis including provincial and regional supply and demand projections

Project feasibility analysis



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Financial modeling

Price forecasts

Market structure

Impact of WTO

Market entry strategy

Competitive Benchmarking on a delivered cost basis

Technical Due Diligence - For a Hong Kong client Nexant carried out a technical due diligence of an EPS plant that included an assessment of technology and a review of technical feasibility.

PET and Polyester Fiber Project - For a client and its lead bank Nexant prepared a technical and market review for purposes of project financing. This included a review of the technology, design, engineering, procurement and implementation plans for the project. The market review provided a forecast for PET and its major raw material PTA, focusing on the Asian region.

PVC and Project Feasibility - Nexant worked with Chinese government and trade representatives and potential investors on a variety of developmental studies, including several feasibility studies for PVC joint ventures in China, several for the Ministry of Foreign Economic Relations and Trade (MOFERT).

Project Development - Conducted a pre-feasibility study for a client with Shenzhen Petrochemical Industry Corporation.

Investment/Technology Review - Based on a request from a Middle East bank, Nexant evaluated and reviewed project feasibility and technology bid documentation and procedures for a plastics polymerization facility in the Guangdong province of Southern China.

Acquisition Feasibility - Conducted a feasibility study for the acquisition of a major liquids terminal in northern China for a U.S. chemicals bulk storage company. The study provided detailed information on the facility, site, and business prospects.

Project Feasibility Study - Nexant conducted a feasibility study and training for two World Bank funded fertilizer projects in the Hubei Province. In separate projects we also worked with several Chinese provincial Chinese Industry Design Institutes on project feasibility study and conducted a pre-feasibility study with Shenzhen Petrochemical Industry Corporation.

7.1.3.6 Selected Topical Reports for China and Asia

An In-Depth Analysis of the Polyolefins Industry in China - This study (published in 2Q 2003) was designed to help companies selling polyolefins into China, or those that wish to enter the market, to better understand and appreciate the market dynamics of the country and better position themselves for the future. Based on the amount of new global capacity planned, particularly in the Middle East, the future will be much more



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competitive. As a result, many companies currently selling to China will lose market share unless they can adapt to the future situation.

The study included the following:

Country Overview

Demand Analysis

Supply Analysis

Purchasing and Distribution (the supply chain)

Supply, Demand and Trade Projections

Domestic Pricing History

Competitive Analysis of countries exporting to China

Chemicals and Plastics in China - A landmark study of the Chinese petrochemical and polymer industries that examined culture, politics, economics and pertinent industry trends, discussed risks and opportunities for foreign investment and offered approaches for strategic entry.

Asian Competitive Cost Issues: The Basis For Regional Decisions - covered Japan, South Korea, China, Taiwan, Malaysia, Thailand, Singapore, Indonesia, the Philippines, Australia and India, and reviewed current factors, analyzed trends and projected the situation through 2000. For reference purposes, U.S. economics had been developed. The products covered were ethylene, propylene, polyethylene (where appropriate), VCM, ethylene glycol, polypropylene, benzene, styrene, PTA and para-xylene. The analysis complements Nexant’s ChemSystems PPE (Petroleum and Petrochemical Economics) Asia Program.

Energy and Refining in East Asia - The study evaluated issues facing Asian and Chinese refiners during the coming decade. Based on a comprehensive review of pertinent legislation, business initiatives, energy use forecasts and future petroleum balances, the study focused on issues related to growth and prospects for refiners from a planning and a strategy perspective.

Asian Cost Competitiveness: After the Crisis - Asia is bouncing back from its financial crisis. Currencies have stabilized, interest rates have declined, stock markets have rebounded and demand at the consumer level has increased. Considerable progress has been made in restructuring the banking systems and refinancing private company debt, although there is still much to do in reducing non-performing loans. The recovery is occurring much quicker than anticipated, fueled by increasing exports partially due to a strong economy in the rest of the world. This study analyzes the following as it impacts petrochemical production cost: government incentives, capital costs, utilities and other variable costs, labor and other fixed costs, sales and distribution costs, and tariffs. The countries covered include: Japan, Philippines, South Korea, Malaysia, Taiwan, Singapore, China, Vietnam, Indonesia, India, Thailand, and Australia. Costs of production comparisons were developed for key petrochemicals, including: ethylene,



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polyethylene (LDPE, HDPE, LLDPE), ethylene glycol, EDC/VCM/PVC, polypropylene, benzene, styrene, para-xylene, and terephthalic acid.

Lubricants and Base Oils in East Asia: Prospects in Recovering Markets - This study, which updates Nexant’s earlier landmark analysis of the Asian lubricant industry, provides a comprehensive analysis of market structures, competition, supply/demand, and trends in quality/specifications as well as the overall business attractiveness for both finished lubricants and base oils in Asia. With the region in the process of a strong economic recovery, this report provides necessary and timely input to key participants in all aspects of the lubricants business. The study profiles the East Asian market for lubricants and base oils within a global perspective, and identifies strategic opportunities for marketers and manufacturers to achieve sustainable competitive advantage. Geographically, the study covers the region as defined by Pakistan to the west, New Zealand to the east and south, and China and Japan to the north. Demand for finished lubricants has been determined for each major end-use sector and application, covering the historical period from 1995-1999 and annual forecasts for 2000-2005, and 2010.

Asian Petrochemical Pricing Issues and Forecasts: Reflecting Industry Developments - Asian prices are affected by production costs, economics of supply from alternative routes, supply/demand balances, and trade/tariffs both regionally and globally. With these factors undergoing changes in the future, the historical relationships within Asia, and between Asia and the United States, is expected to change. This study analyzed the factors impacting export prices and developed petrochemical price forecasts for countries including China, Hong Kong, Taiwan, India, Thailand, Singapore, Indonesia, Malaysia, Philippines, Japan and South Korea. For each chemical (ethylene, polyethylenes, propylene/polypropylene, EDC/VCM/PVC, para-xylene/PTA, styrene/polystyrene, ethylene glycol and benzene), Nexant provided: forecast of U.S. domestic and export price to 2005; historical Asian CIF prices and analyses of price setting mechanisms; future global and Asian supply/demand balances; cost of supply from key exporting countries; projection of Asian CIF prices to 2005; forecast of Asian domestic prices, by country and year to 2005; discussion of tariffs.

Lubricants and Lubricant Additives in East Asia: Strategic Opportunities in a Dynamic Market - assessed demand growth, relative positioning of competitors and business attractiveness. The impacts of economic, legislative/regulatory and technical trends on demand also were examined. Finished lubricant consumption by country and application, coupled with an analysis of local formulation technologies, provided the basis for forecasting additive demand. Profiles of major additive consumers and their purchasing practices offered insight into both "captured" and "accessible" sales potential.

Quarterly Business Analysis: Asia - A quarterly business and economic analysis of the profitability of the Asian oil refining and petrochemical industry. The reports include cost of production, and margin and profitability analysis of a wide range of refined oil products, petrochemicals, polymers, chemicals, and fuels. The reports examine the current issues in the industry and put them into context by providing detailed cost and margin analysis for the individual products and for the industry as a whole. The QBA Supplement provides the techno-economic basis for the Leader and Laggard models used



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in the Quarterly Business Analysis. For each process the report defines: plant capacity and process technology, capital cost, operating rate, raw material consumption factors, by-products yield factors, utility consumption factors, variable production costs, labor costs, maintenance and insurance costs, direct overheads, site allocated overheads and cash costs. The Quarterly Business Analysis, part of Nexant’s ChemSystems PPE (Petroleum and Petrochemical Economics) Program.

Petrochemical Profitability Forecasts: Asia – This report provides long-term forecasts of the prices, costs, margins and returns on investment of petrochemicals and polymers. The price setting mechanism for each product is discussed. In addition to analysis of the cost of production of producers within the region, global trade and the regional competitive position is considered. This report, part of Nexant’s ChemSystems PPE (Petroleum and Petrochemical Economics) Program, is published annually and updated quarterly via the ChemSystems On-Line web site.

Petroleum Profitability Forecasts: Asia – This report provides an analysis of profitability of the refining sector and long term forecast (to 2015) of the prices of refined products. The report, part of Nexant’s ChemSystems PPE (Petroleum and Petrochemical Economics) Program, is published annually.

Global Economic Assumptions and Crude Oil Price Scenarios – This report analyses historic crude oil prices, currency exchange rates and economic growth, and projects the crude oil scenarios and macro-economic assumptions used by Nexant in its profitability and market forecasts. The report, part of Nexant’s ChemSystems PPE (Petroleum and Petrochemical Economics) Program, is published annually.

Petroleum Market Dynamics: Asia – This report examines the oil refining business from end use consumption through production to global trade. It provides the forecast of the supply/demand balances for refined products and petrochemical feedstocks, including LPG. Product quality and refinery investment requirements are described and forecast. The report, part of Nexant’s ChemSystems PPE (Petroleum and Petrochemical Economics) Program, is published annually.

Petrochemical Market Dynamics: Asia – This report examines the petrochemical and polymer business supply and demand dynamics. The report lists all producers, their production, capacity location, etc., and discusses the status of new projects. The consumption and consumption growth of petrochemicals and polymers are analyzed and forecast based on forecasts of end use consumption and economic activity in the region. The report provides historical analysis and forecasts (to 2015) of consumption by derivative or end-use, production, imports/exports, and inventory buildup/decline, capacity and capacity utilization. The report, part of Nexant’s ChemSystems PPE (Petroleum and Petrochemical Economics) Program, is published annually. Capacity, supply/demand, etc. are updated monthly via ChemSystems On-Line.

Engineering Polymer Business in Developing Regions - A situation analysis of the engineering polymer business in eleven countries: South Korea, Taiwan, Hong Kong, Singapore, Indonesia, Malaysia, Thailand, India, Brazil, Mexico and Canada. The study is an overview of the engineering thermoplastic business in each of these countries from



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the prospectus of industry environment, end-use market demand and growth, end-use industry assessment, and assessment of competitors.

Thermoplastic Compounding in Asia: Opportunities in a Growing Market - Demand for thermoplastic compounds in East Asia, currently the most dynamic market in the world, is driven by rapid growth in polymer production and the overseas movement of original equipment manufacturers (OEM) and polymer fabrication transplant companies seeking lower manufacturing costs. Compound demand growth is projected to be two to three times greater in Asia than in the United States and Western Europe. While U.S. and West European markets are maturing, competition is intensifying and opportunities are opening up in Asia. The Asian market structure differs from that of the West in a variety of areas including: fragmentation of the market (many countries and cultures); channels of distribution (may be affected by tariffs, sales method, non-tariff barriers, local culture, shipments of masterbatch compounds); competition (in addition to the multinational ventures, must take into consideration Japanese end-user transplants and supplier networks, ethnic Chinese relationships, and local relationships). Nexant expects this study to be of interest to compound suppliers, resin producers, and additive suppliers who desire a deeper understanding of the driving forces behind the growing business potential and evolving industry structure. This study assesses demand growth, competitor positioning, business attractiveness, distribution channels, and the opportunities to achieve sustainable competitive advantage. The study also analyzed compounds from a broad segment of the polymer market, including polyolefins (polyethylene and polypropylene), styrenics (polystyrene and ABS), PVC resins, engineering plastics, and thermoplastic elastomers.

Nexant, Inc.44 South Broadway, 5th FloorWhite Plains, NY 10601-4425U.S.A.Telephone: +1 914 609 0300Facsimile: +1 914 609 0399

Nexant, Inc.909 Fannin Street, Suite 1275Houston, TX 77010-1038U.S.A.Tel: +1 713 982 5550Fax: +1 713 739 0741

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Nexant, Inc.Yoshida Building 7F1-2-2 Hirakawa-cho, Chiyoda-kuTokyo 102-0093Telephone: +81-3-3237-3383Facsimile: +81-3-5212-1708

Nexant, Inc.Head Office101 Second Street, 11th FloorSan Francisco, CA 94105U.S.A.Telephone: +1 415 369 1000Facsimile: +1 415 369 9700

www.nexant.com

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asian cost competitiveness: the rise of china · asian cost competitiveness: the rise of china...

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