Outlook for theOutlook for theInternational PVC MarketInternational PVC Market

June 2005

Stephen Harriman – Harriman Chemsult

• China• In Summary

• The PVC market

0

5

10

15

20

25

30

35

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

AsiaNorth AmericaWest EuropeOthers

PVC production by region, 1995-2005PVC production by region, 1995-2005

World PVC balance, 1990-2004World PVC balance, 1990-2004

0

5

10

15

20

25

30

35

40

199

0

199

1

199

2

199

3

199

4

199

5

199

6

199

7

199

8

199

9

200

0

200

1

200

2

200

3

200

4

CapacityProductionApparent Consumption

Regional PVC PricesRegional PVC Prices

0

200

400

600

800

1000

1200

1998 1999 2000 2001 2002 2003 2004 2005

Asia Spot $/mt cif

West Europe, Domestic Market, Pipe (Competitive Converters) €/mt fd

USA, Domestic Market, Pipe (Competitive Converters) $/mt

North American vinyl sector integrationNorth American vinyl sector integration

OxyVinyl

Georgia-Gulf

Chlorine EDC VCM S-PVC Finished products

FPC

Westlake

Royal Group

Certainteed

ShinTech

European vinyl sector integrationEuropean vinyl sector integration

Cires

Hellenic

ShinEtsu

Vinnolit

Vestolit

Norsk

SolVin

LVM

EVC

Arkema

Aiscondel

Chlorine EDC VCM PVC Finished products

Oltchim

Borsodchem

Anwil

Spolana

• China

• The PVC market

Outside investment in Chinese PVCOutside investment in Chinese PVC

Japan: Tosoh South Korea: LG Taiwan: FPC USA: Westlake

Japan: ShinEtsu South Korea: HanWha USA: Georgia Gulf USA: OxyVinyl

YES NO

Chinese PVC output in a global contextChinese PVC output in a global context

14.2 18.6

4.5

0

5

10

15

20

25

30

35

199

0

199

1

199

2

199

3

199

4

199

5

199

6

199

7

199

8

199

9

200

0

200

1

200

2

200

3

200

4

200

5

China

ROW

% China

Chinese PVC balanceChinese PVC balance

-8000

-6000

-4000

-2000

0

2000

4000

6000

80001

990

199

1

199

2

199

3

199

4

199

5

199

6

199

7

199

8

199

9

200

0

200

1

200

2

200

3

200

4

200

5

Apparent ConsumptionExportsImportsProduction

The importance of imports in ChinaThe importance of imports in China

50.1

4.2

36.5

26.1

0

1000

2000

3000

4000

5000

6000

7000

8000

90001

990

199

1

199

2

199

3

199

4

199

5

199

6

199

7

199

8

199

9

200

0

200

1

200

2

200

3

200

4

200

5

Pro

duct

ion/

Imp

ort

s (0

00m

t)

0

10

20

30

40

50

60

% Im

po

rted

ImportsProduction% Imports

Implications of Chinese PVC self-sufficiencyImplications of Chinese PVC self-sufficiency There are two implications: a) increasing availability of

Chinese exports and b) more importantly, a dislocation effect for existing suppliers.

Until recently the prospect of Chinese PVC exports of consequence was not an issue.

The drop in domestic prices in China, however, has prompted some coastal producers to export material.

The small scale of this trade means that this is currently more of a psychological, rather than volume, issue, but it does illustrate the change in the complexion of the Chinese PVC balance.

There will be an intermediate phase where PVC flows both in and out of China, but over the longer term there is the spectre of Chinese exports occurring on a more structured basis.

Implications of Chinese PVC self-sufficiencyImplications of Chinese PVC self-sufficiency Changes in the pattern of PVC trade into China have the

potential to cause a ripple effect around the world. Possible scenarios include:

Increased Asian exports to the west coast of the USA Increased Asian exports to India and the Middle East A subsequent dislocation impact of material from these

areas potentially affecting Europe. In terms of dislocation, the major victims will be countries like

South Korea, Taiwan and Japan. The perception of acetylene-based PVC is also changing.

Although certain producers manufacture questionable quality material, the newer plants are able to offer a credible export alternative to ethylene based PVC.

Asia78%

Others22%

Other Asia 3%

Thailand 7%

Indonesia 4%

Japan 24%

Taiwan 29%

South Korea 11%

Sources of Chinese PVC imports 2003Sources of Chinese PVC imports 2003

Europe 10% (largely Russia)North America 9% (mostly USA)Others 3%

Importance of China as a PVC destinationImportance of China as a PVC destination

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%U

SA

Ind

on

esia

Th

aila

nd

Ma

lays

ia

So

uth

Ko

rea

Jap

an

Ta

iwa

n

% ROW% China

551

470213

1235

Importance of China in World PVC tradeImportance of China in World PVC trade

0

1000000

2000000

3000000

4000000

5000000

6000000

7000000

8000000

9000000

10000000

199

0

199

1

199

2

199

3

199

4

199

5

199

6

199

7

199

8

199

9

200

0

200

1

200

2

200

3

Imp

ort

s (m

t)

0

5

10

15

20

25

30

% C

hina

World ImportsChina Imports% China

Chinese PVC capacityChinese PVC capacity One of the misinterpretations of the development of the

Chinese industry has been the belief that the acetylene route is a) an old technology and b) that is places limitations on plant capacity.

Both these myths have been dispelled. The majority of new expansions in China are acetylene-based and the size of new acetylene plants is now well into the 200-300,000mt/year scale.

The Western model of integrated cracker-vinyl plants has not really evolved in China because of the success of the acetylene route and the reluctance of olefin producers to get involved with chlor-alkali.

Average PVC plant size by region 2005Average PVC plant size by region 2005347

149117

101

0

100

200

300

400

No

rth

Am

eri

ca

We

ste

rnE

uro

pe

Mid

dle

Ea

st

Lat

inA

me

rica

Oce

ania

Wo

rld

Ea

ste

rnE

uro

pe

Asi

a

Afr

ica

Average Asian PVC plant size 2005Average Asian PVC plant size 2005

117

160

97

327

0

50

100

150

200

250

300

350

Asia AsiaExcl. China

China Japan India Taiwan SouthKorea

Chinese limiting factorsChinese limiting factors The development of the vinyl industry in China is not without

its growing pains. These can be summarised: Economy – outside of the coastal regions, China is

fundamentally a rural economy. Logistics – there is a problem in China, with a domino-effect

of getting product out of the market: this has underpinned the development of the acetylene route as you also can’t move ethylene/EDC/VCM any distance in inland China.

Caustic soda – logistics also affects the movement of caustic soda, which is largely sold as a 50% solution. This can inhibit operating rates at chlor-alkali plants.

Raw material shortages – power, salt and ethylene

Regional production costsRegional production costs

0

50

100

150

200

250

300

350

MiddleEast

Brazil WesternEurope

China Japan USA

1999 2001 2002 2003 2004 2005

Regional power cost range 2005Regional power cost range 2005

0

50

100

150

200

250

300

350

MiddleEast

Brazil WesternEurope

China Japan USA

Chinese salt trade balanceChinese salt trade balance

-2500

-2000

-1500

-1000

-500

0

500

1000

1500

2001 2002 2003 2004

ExportsImportsNet trade

+911

-1345

50%OTHERSETHYLENE

50%

ChinaEthylene – 26%

IndiaSouth Korea

IndonesiaPhilippines

ThailandJapanVietnam

ChinaUnspecified

26%

ChinaAcetylene

24%

China VCM Imp. 9%

China Mer. Ethylene 2%

New Asian PVC projects by feedstock typeNew Asian PVC projects by feedstock type

Chinese capacity by location and regionChinese capacity by location and region

AcetyleneEthyleneMerchant ethyleneImported EDCImported VCM

ALL CHINAEAST

NORTH

NORTHEAST

WEST28%

24%

SOUTH6%

37%

6%

Future capacity in China by typeFuture capacity in China by type

Ethylene29%

Acetylene28%

Unspecified30%

Imported VCM10%

Merchant ethylene

3%

Acetylene-based PVC economicsAcetylene-based PVC economics

Cost of PVC from carbide:

RMB 5695/mtTotal cost of PVC

RMB 300/mtConversion cost

RMB 4945/mtVCM costPVC cost:

RMB 4846/mtTotal cost of VCM

RMB 250/mtConversion cost

RMB 1289/mtHydrogen chloride cost

RMB 2857/mtAcetylene costVCM cost:

RMB 6319/mtTotal cost of acetylene

RMB 250/mtConversion cost

RMB 5619/mtAcetylene raw materials

RMB 2100/mtCalcium carbide priceAcetylene cost:

Full cash cost ex-works RMB 5695/mt (US$688/mt)

Harriman Chemsult estimates

• China• In Summary

• The PVC market

In summaryIn summary North America – the major event is the potential

commissioning of the Shintech unit and dislocation to the market of the introduction of new major capacity.

Europe – the ongoing absence of investment owing to poor margins and so a continuation of the relative balance across the region. There are longer term prospects for investment in Russia.

Middle East – the fundamental problem of cheap feedstock versus limited domestic demand, with a continuation of the model of exporting ECUs (caustic soda & EDC/VCM).

Africa – the absence of any investment. Latin America – a growing caustic soda deficit stimulating

demand for new vinyl capacity. Asia – the potential inability of China to absorb increases in

supply. The prospects for a dislocation to existing exporters to China and the possibility of Chinese exports of PVC.

New PVC capacity, 2005-10New PVC capacity, 2005-10

China73%

India5%

Other Asia3%

Asia81%

Others19%

Middle East 6%Europe 7%Others 6%

PVC capacity by regionPVC capacity by region

0

5

10

15

20

25

30

35

Asia Europe North America Middle East Others

200120052010

When Chinasneezes…

…the Worldcatches a cold

In summary…