Chemistry & the Economy: Global Outlook 2015

12/11/2014

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Thursday, January 15, 2015

“Rookie Lab Mistakes and Other Facts Not Found in Textbooks” Dr. Alison Frontier, Professor of Chemistry, University of Rochester Bill Courtney, Chemist and Chef, Cheese-Ology


“3D Printing: The Future of Manufacturing” Dr. Timothy Long, Professor of Chemistry, Virginia Tech Dr. Christopher Williams, Asst. Professor, Department of Mechanical Engineering and the Department of Engineering Education, Virginia Tech Dr. Mark Jones, Executive External Strategy and Communications Fellow, Dow Chemical


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“Chemistry & the Economy: Global Outlook 2015”

Mark Jones

Paul Hodges

Executive External Strategy and Communications Fellow, Dow Chemical

Chairman, International eChem



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Chemistry & the Economy: Global Outlook 2015 The Impact of the Energy Supply Glut & China’s New Normal 11 December 2014

CREATIVE ENERGY FOR IMPORTANT ISSUES

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INTERNATIONAL eCHEM  Founded 2001. Independent, trusted commercial advisers to the global chemical industry and its investment community.  Work with the world's major companies and financial institutions.  Aim to bring Creative Energy to Important Issues, and create value for clients in business/functional leadership roles, by personally assisting them to implement robust strategies that deliver sustainable profit  Team has an in-depth understanding of the issues, and of the ‘real world’ in which clients operate  Former senior managers from leading major companies  Provide judgement supported by robust data analysis  Co-author of ‘Boom, Gloom and the New Normal’, published by ICIS  Write the ‘ICIS Chemicals and the Economy’ blog 13


CENTRAL BANKS HAVE CREATED A DEBT-FUELLED ‘RING OF FIRE’ WITH MULTIPLE FAULT-LINES RECORD NYSE MARGIN DEBT

RUSSIA ENERGY SUPPLIES

RECORD LONDON HOUSE PRICES

EUROZONE DEBT

ARAB SPRING BRAZIL UNREST

CHINA PROPERTY/ BANKING

ABENOMICS

SEA UNREST

AUSTRALIA MINING S AFRICA MINING

© International eChem, 2014


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CHINA’S SLOWDOWN IS ALREADY PROVIDING WARNING TREMORS OF THE EARTHQUAKE(S) AHEAD

© International eChem, 2014

15 CREATIVE ENERGY FOR IMPORTANT ISSUES

MAJOR CHANGE IS UNDERWAY AS THE ‘GREAT UNWINDING’ OF POLICYMAKER STIMULUS CONTINUES Co-products produced with each ton of ethylene

Page 16 CREATIVE ENERGY FOR IMPORTANT ISSUES

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AGENDA

 The world energy glut and the transition to natural gas  China’s lending bubble drove global chemical and economic growth


REDISCOVERING SUPPLY/DEMAND BALANCES

Oil's rout gained momentum in October and extended into November, with Brent at a four-year low below $80/bbl. A strong US dollar and rising US light tight oil output outweighed the impact of a Libyan supply disruption International Energy Agency, November 2014 (IEA emphasis)

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OIL, LIKE COAL, WILL BE LEFT IN THE GROUND AS GAS GAINS MARKET SHARE FROM OIL

SOURCE: EXXONMOBIL ‘OUTLOOK FOR ENERGY’, 2013


GAS HAS BEEN GAINING GLOBAL MARKET SHARE VERSUS OIL SINCE THE 1970s OIL CRISES OF THE 1970s

SOURCE: EXXONMOBIL ‘OUTLOOK FOR ENERGY’, 2013


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WORLD OIL DEMAND GROWTH HAS BEEN SLOWING WHILST THE US HAS REACHED ‘PEAK DEMAND’


AGEING POPULATIONS DRIVE LESS AS WORK AND FAMILY COMMITMENTS REDUCE USA

GERMANY Co-products produced with each ton of ethylene


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US OIL IMPORTS EX-CANADA ARE NOW LESS THAN ONE-THIRD OF CONSUMPTION


US NOW IMPORTS MORE OIL FROM CANADA THAN OPEC


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CANADA HAS REPLACED NIGERIA’S IMPORTS, AND COULD NEXT REPLACE SAUDI ARABIA “The Kingdom is not going to give up market share at this time for anybody, and allow producers whether in Russia, Nigeria, Iran or other places, to sell oil to Saudi customers because we cut our production” Prince Turki al-Faisal, former military intelligence head


SAUDI ARABIA COULD LOSE ITS US DEFENCE SHIELD, IF IT LOSES ITS US SALES 1990/1

Valentine’s Day 1945


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OIL PRICES AND S&P 500 TYPICALLY MOVE INVERSELY HIGHER OIL PRICES USUALLY REDUCE COMPANY EARNINGS


FINANCIAL PLAYERS NOW SET OIL PRICES, MAKING SUPPLY/ DEMAND FUNDAMENTALS IRRELEVANT


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CENTRAL BANK STIMULUS LED TO THE ‘CORRELATION TRADE’ - WHICH DESTROYED PRICE DISCOVERY


TODAY’S RATIO OF US OIL PRICES TO NATURAL GAS IS A LONG WAY FROM HISTORICAL VALUES Co-products produced with each ton of ethylene

 Oil has ~6x the energy content of natural gas, and normally trades at ~10x the WTI price  The past few years may be a ‘new paradigm’  ‘Reversion to the mean’ is normally one of the most profitable investment concepts Page 30 CREATIVE ENERGY FOR IMPORTANT ISSUES

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US ETHYLENE PRODUCTION PEAKED BEFORE THE CRISIS BEGAN

The reality is the US from a chemical standpoint is a very mature market. We have some demand growth domestically in the US but it’s a percent or two, it’s not strong demand growth. Polyethylene hardly grew in the US in a decade. That is not going to change”. Stephen Pryor, president ExxonMobil chemical, January 2014

Page 31


US PE EXPORTS HAVE BEEN DECLINING SINCE 2009 AS LOCAL MARKETS SLOW AND THEIR OWN OUTPUT INCREASES


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AGENDA  The world energy glut and the transition to natural gas  China’s lending bubble drove global chemical and economic growth


THE COST OF CHINA’S ‘GROWTH AT ALL COSTS’ MODEL HAS BECOME TOO GREAT


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“THE CONCEPT OF A “NEW NORMAL” FOR THE WORLD’S SECOND LARGEST ECONOMY IS NOW PREVAILING BOTH AT HOME AND ABROAD” Xinhua, September 2014

PRESIDENT XI JINPING, opening the 3rd Plenum, November 2013

Co-products produced with each ton of ethylene

“The good meat is all gone; all that is left are hard bones to chew.”

PREMIER LI KEQIANG, opening the World Economic Forum, September 2014 “There’s already a lot of money in the pool, and we can’t rely on monetary stimulus to spur economic growth…Facing the New Normal state of the Chinese economy, we have remained levelheaded and taken steps to tackle deep-seated challenges….in the latter half of the year and beyond, we will accelerate the transformation of the development model.” Page 35 CREATIVE ENERGY FOR IMPORTANT ISSUES

CHINA’S STIMULUS WAS MORE THAN HALF OF THE MAJOR CENTRAL BANK TOTAL SINCE 2009 Co-products produced with each ton of ethylene


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AUTO SALES WOULD STILL BE BELOW 2007 LEVELS WITHOUT CHINA The ‘top 7’ are 80% of total world demand


CHINA USED TO BE THE WORLD’S LARGEST PVC IMPORTER, BUT IS NOW EXPORTING


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NEW DECLINE IN GLOBAL CHEMICAL INDUSTRY OPERATING RATES IS WARNING SIGN FOR 2015 OUTLOOK


“ASIA REMAINS AT THE BOTTOM OF THE CYCLE. WE’LL BE IN A CHALLENGING ENVIRONMENT FOR A WHILE, AND THE EXTENT TO WHICH THE SHALE PHENOMENON WILL ADD TO THAT CHALLENGE – THAT’S A FACT OF LIFE TOO.” Stephen Pryor, president ExxonMobil chemical, January 2014


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PROPYLENE MARKETS ARE ALSO MOVING TOWARDS SURPLUS AS ON-PURPOSE AND COAL-TO-CHEMICAL OUTPUT GROWS


CHINA’S COTTON SUBSIDIES BUILT STOCKPILES EQUAL TO 3 PAIRS OF JEANS FOR EVERYONE IN THE WORLD


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CHINA HAS BEEN BUYING 2/3rds OF WORLD IRON ORE: COLLATERAL TRADE = 1200 EMPIRE STATE BUILDINGS (100MT)


THE WORLD IS NOW MOVING TOWARDS DEFLATION Deflation means that the real value of cash increases, whilst prices fall. So it makes sense to pay down debt, and to defer purchases – the opposite of the Boomer-led SuperCycle


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CONCLUSIONS

 Oil price collapse and China’s New Normal will radically change chemical markets in 2015 Price discovery is now resuming in oil markets, as the ‘correlation trade’ ends  The end of QE stimulus means incomes, not ‘wealth effects’ will drive spending  The world is moving into a New Normal of low growth, deflation and protectionism Page 45 CREATIVE ENERGY FOR IMPORTANT ISSUES

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Disclaimer Strictly Private & Confidential This Research Note has been prepared by IeC for general circulation at the ACS webinar on 11 December 2014. The information contained in this Research Note may be retained. It has not been prepared for the benefit of any particular company or client and may not be relied upon by any company or client or other third party. IeC do not give investment advice and are not regulated under the UK Financial Services Act. If, notwithstanding the foregoing, this Research Note is relied upon by any person, IeC does not accept, and disclaims, all liability for loss and damage suffered as a result. © International eChem 2014. All rights reserved



Mark Jones

Paul Hodges





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Mark Jones

Paul Hodges





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Chemistry & the Economy: Global Outlook 2015

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