China’s olefins and polymers demand – Can it absorb new US capacity Tehran, Iran Mahua Chakravarty April 2017 Good morning everyone. It is my honour to speak at this conference. My name is Mahua and I am an editor with Argus media in Singapore. Today I would like to discuss about the key issues facing China’s olefins and polymers markets. With the start of a number of new olefins and PE plants in the US, what will be the impact of that on Asia and especially China.

Asian/ Chinese Ethylene Industry Current operations and margins New capacity and investments Coal and methanol based capacity additions In the following slides we will take a look at the current operations and margins for the Chinese ethylene industry. Then we will look at new capacities and investments. Lastly we will touch upon coal and methanol based capacity additions.

Asian naphtha crackers run at high rates, record margins Asia cracker operations & margins Naphtha crackers dominate Asian ethylene production, and also the second largest source of propylene High op rate 91-95pc on average Co-product prices surge in 2017 – propylene, butadiene, benzene Average cracker margins above $900/t now, $600/t in 2016, $365/t in 2015 and $190/t in 2014 Data source: Argus With regard to ethylene production, naphtha crackers dominate asian ethylene production. If we look at the last few years, Asian naphtha cracker margins have been very strong. Naphtha cracking margins have been supported with the fall in crude oil prices in the past few years to the current $50/bl levels. As a result, the spread between naphtha and crude values have improved. In addition to this, higher availability of alternate feeds like LPG has resulted in stronger competition for naphtha cracking. Operating rates have been high in naphtha crackers in Asia at about 91-95pc on an average in the past few years. In 2017 we have seen co-products prices have surged. Propylene, benzene, butadiene prices have all surged and this has further pushed overall cracker margins to a high. Hence, average cracker margins in Asia touched $900 in Q1 this year. And if we look at the previous years we can see here- with the blue section in the graph- that margins have increased every year since 2014. Copyright © 2017 Argus Media group. All rights reserved.

Unconventional ethylene >30pc of China capacity by 2020 China ethylene capacity by feedstock World C2 capacity increased by 17.5 mil tonnes/yr between 2011-15 at an annual rate of 2.3 pc. Between 2016-20 another 34mil tonnes is due to be added, with the growth rate rising to 3.9pc. In this chart what we can see is how ethylene is increasingly being produced from alternate feedstocks like coal and methanol. The use of these alternate feedstocks have mainly been in China. China remains the biggest ethylene producer in Asia with a total capacity of 21 million tonnes/yr in 2015. The capacity growth taking place is largely due to the new coal to olefins and methanol to olefins units. In 2012, out of the nearly 15 million tonnes of ethylene produced in China, nearly 98pc of it was from napthha crackers. But what we have seen over the next five years is that a rapid growth has taken place in terms of ethylene being produced using coal and methanol. By 2020, out of the near 33-34 million tonnes that is expected to be produced in China, about 31pc of the production would be from coal-to-olefins and methanol-to-olefins processes. CTO based ethylene capacity has more than tripled since 2013 when it was only 400kta and reached 1.5 million tonnes/yr in 2015. MTO based ethylene capacity also reached 835kta in 2015 from 275kta in 2013. Copyright © 2017 Argus Media group. All rights reserved.

CTO competitiveness weak if crude is below $50/bl China CTO operations & margins China has 9 CTO plants and 3 CTP plants Coal-based olefins capacity now 6.9mn t/yr The average O/R was 85pc in 2015 and 73pc in 2016 because of new capacities CTO margins averaged $480/t in 2015, and $400/t in 2016 China invested heavily in CTO/MTO projects to take advantage of the abundant supply of coal at relatively low prices. Hence China’s coal-based capacity is now 6.9 million tonnes, and includes 9 CTO plants producing 4.76 mill tonnes of olefins. They are all located in Northwest China and in Inner Mongolia. There are also 3 CTP units located in NW China- total cap at 1.46 mil. Margins for these producers are dependent on coal prices- which in turn is affected by enviornmental policies by the government. Other factors that may impact is availability of water. And MTO margins are vulnerable to market forces as they purchase merchant methanol. What we saw is that the average operating rates dropped in 2016 to 73pc as more capcaities came up. There was also pressure on prices and margins due to higher coal and methanol prices. CTO margins plateaued in 2016 as new capacities started in China adding another 1.6 million tonnes of olefins production. These were- Shenhua Xinjiang, Zhongtian Hechuang Energy No 1 and Qinghai Salt Lake Industry. Shenhua Baotou Baotou, lnner Mongolia NW China CTO Yanchang & China Coal Yulin Co. Yulin, Shaanxi NW China CTO China Coal Shaanxi Yulin Yulin, Shaanxi NW China CTO Ningxia Baofeng Chemical Ningdong, Ningxia NW China CTO Pucheng Clean Energy Pucheng, Shaanxi NW China CTO Shenhua Xinjiang Urumqi, Xinjiang NW China CTO Zhongtian Hechuang Energy No 1 Ordos, Inner Mongolia NW China CTO Qinghai Salt Lake Industry Haixi, Qinghai NW China CTO Shenhua Ningmei No 1 Ningdong, Ningxia NW China CTP Datang International Duolun, lnner Mongolia NW China CTP Shenhua Ningmei No 2 Ningdong, Ningxia NW China CTP Copyright © 2017 Argus Media group. All rights reserved.

MTO margins are the lowest against other olefins tech Olefins margins by feedstock MTO margins were negative so far in 2017, affected by a downturn in olefins market CTO margins attractive, but are losing their competitiveness to naphtha crackers on lower crude prices If we look at the chart here then we can see that MTO margins have lost their competitiveness in 2017. The start of two new MTOs- Fund Changzhou and Jiangsu Sailboat- added more capacities in the market. Methanol prices also rose sharply from end 2016 on strong demand from these MTOs and this in turn pressured margins lower in early 2017. Simultaneously fall in olefins prices in Q1 2017 also added pressure on margins. Polymer prices also fell from February- after lunar new year holidays. Coal prices have been rising as well in the past year as China has curbed coal production as part of its measures to control pollution. Meanwhile, if we look at other process, the strongest margins were from naphtha crackers and especially in 2016 and 2017. Low LPG prices also pushed up ethane cracker margins versus other processes. MTO margins recovered since early 2016 and reached $140/t on average from $7/t (almost breakeven) in 2015 . MTO average operating rate was 76pc in 2015 and climbed to 79pc in 2016 But additions of two new MTOs, Xingxing’s T/A and poor Q1 2017 margins dragged down O/R to only 60pc Copyright © 2017 Argus Media group. All rights reserved.

Asia/Middle East expansions slow in 2015-16 A rethink of naphtha cracker projects in China and new NGL crackers Limited new cracker capacity in the last 3 years 2017 will see Reliance, Opal, and ramp up at Sadara, 2018 CNOOC Shell Some naphtha crackers had been stalled in China, now talks of reviving from Sinopec. China to build an ethane cracker – 650kt by SP Chemical (construction started Feb 2017) and 1mnt of LPG based cracker by Wanhua – to start construction 2017 In the last three years there have been few cracker expansions in Asia and the Middle East. In 2017 we are seeing a few new crackers- Reliance started its new ethane cracker in Dahej. Opal started its cracker in late 2016 after repeated delays. Sadara has also ramped up production. There are now talks to revive and launch new projects again. There are talks that Sinopec is looking at reviving cracker projects. SP Chem is also due to build a 650kta ethane cracker- which started construction in Feb this yearr. Later this year Wanhua is due to start construction of its 1 mill tonnes LPG based cracker. Total Africa and ME capacity at 33-34 million. Production at about 28 mil- 80pc op rates. Total PE capacity- 21 million (LL/HD 11.4; LD- 4.7; HD-5.8) Copyright © 2017 Argus Media group. All rights reserved.

Asian Ethylene capacity expansions speed up on high margins Asia ethylene capacity additions in 2014-2021 Asian ethylene capacity to expand by more than 5mn t/yr in 2017 and by 3mn t/yr plus in the coming years China leads the expansions by adding on new CTO/MTO as well as naphtha /ethane/LPG crackers * Prorated capacities presented Copyright © 2017 Argus Media group. All rights reserved.

Chinese standalone derivatives drive imports SM, EO, VCM , EPDM are key derivatives for C2 imports VCM Despite these capacity growth, China may continue to import ethylene. Majority of C2 derivatives in China are integrated. China continues to be a net importer of C2. Out of the 25.3 mill tonnes of derivatives capacity in China, the 2.87 mill tonnes of non-integrated capa drives the imports and this is main from smaller downstreams like SM, EO, VCM. Integrated total 22434 Non integrated 2870 2016 derivative capacity (in ethylene) 25304 Standalone 2870 Integrated PE 16313 EO/EG 4715 SM 1143 Non inegrated EO/EG 1061 VCM 448 EPDM 222 SM 970 PE 169 Copyright © 2017 Argus Media group. All rights reserved.

China to remain a net ethylene importer Main suppliers South Korea, Japan and Taiwan China will continue to import, with imports averaging around 1.6 mil tonnes. Copyright © 2017 Argus Media group. All rights reserved.

Despite arb, US ethylene export capacity limited In this chart you can see the prices for ethylene in the US, Asia and Europe since 2014. The red line which is Asia has gained price leadership especially in the past year. C2 supplies have been limited in this region. There is nearly a $400/t spread on an average in the past year between Asia and the US prices. Despite the wide price gap between US and Asia, arbitrage window for ethylene is limited and part of the reason is logistics limitations in the US. But currently there are companies which are building terminals and carriers which is expected to bring more ethylene as well as LPG from the US to Asia. Copyright © 2017 Argus Media group. All rights reserved.

Asian/ Chinese Polyethylene Industry China PE capacity development China PE demand and import outlook About 90pc of global ethylene production is used for the production of polyethylene. The growth rate for PE is in line with growing consumption by a growing population and is close the GDP growth usually. There are also limited new applications that are emerging for these grades. HDPE LLDPE LDPE

Copyright © 2017 Argus Media group. All rights reserved. This map is copied twice on the slide, is that intentional?? 2015 World net PE trade 2mnt 9.8mnt 8.5mnt 0.9mnt 1.4mnt 0.85mnt 0.1mnt In this map what u can see is the PE net trade in 2015. China continues to be the biggest market in the world. Middle East as u can see is the largest producer and exporter at that time. In the past US would export about 2 million tonnes of ethylene, but all this is changing as more production is coming up there with the higher availabuilit of ethane from shale gas exploration. Copyright © 2017 Argus Media group. All rights reserved.

PE demand to grow by 20pc by 2020, another 9mnt Asia ethylene demand by segmentation 2016 = 55mn t 2020 = 64mn t PE total 59% PE total 61% Data source: Argus Ethylene Annual 2016 In this chart we can Asian ethylene demand from different sectors. Total Asian ethylene demand in 2016 was 54.6 million tonnes of which PE alone made up 59pc and was 32 mil tonnes of the total ethylene consumption. By 2020, total ethylene demand in Asia is estimated to hit 63.6 mil tonnes. And from this growth production of PE will take up 38.3 million tonnes of ethylene and the percent of consumption for PE will be 61pc. Copyright © 2017 Argus Media group. All rights reserved.

Chinese coal based PE capacity growing Coal based capacity to be 25pc of total Chinese PE capacity by 2020 In this chart we will see how more PE will come from alternate sources in China. Most CTO projects located in inland China support production of PE and PP. MTOs which are dependent on buying methanol have expanded into a wider variety of downstream like MEG, EO and PVC. China’s total PE production is estimated to hit about 18 mil tonnes in 2017 of which 14pc of the total production would be from CTO and MTOs. Meanwhile total PE demand is close to 26 million tonnes this year. But by 2020 we expect that about 25pc of the total share of PE produced in China would come from CTOs and MTOs. Total capacity is expected to reach 25 million tonnes by then and total demand at 31 million tonnes. Copyright © 2017 Argus Media group. All rights reserved.

China grade wise PE demand Here we are going to look at PE demand and production for the major grades. The blue bars are for HDPE or high density polyethylene, the green bars are for LDPE or low density polyethylene and the red bars are for linear low density polyethylene or LLDPE. From 2013 to 2016 we have seen that HDPE demand has grown by 2.2% to about 11 million tonnes/yr in China from about 9 million tonnes in 2013. Production on the other hand has grown too and was close to 6 mil tonnes in 2016, up from 4.5 mil tonnes seen in 2013. But demand far outstripped production in the Chinese market. Hence when we look at the chart on the right we can see that HDPE imports- which is the blue bar- rose along with demand and touched 5 million tonnes in 2016, an icnrease of 500,000t from 2013. Coming to LLDPE, which was the second biggest among the three grades in terms of growth. Chinese demand touched 9 million tonnes in 2016 from around 7.5 million in 2013. Production of LLDPE has grown in China and was above 7 million tonnes in 2016. Hence we can see here how imports of LLDPE fell in the past few years to a little over 2 million tonnes. LDPE remains as the most limited in terms of supply among all the major grades. Majority of the CTOs make LLDPE or HDPE. It is usually priced higher than the other grades usually. Production of LDPE in China saw the smallest increase among all the grades and was a little above 2 million tonnes/yr in all these years, while demand went to 4 million tonnes. And now if we look here at imports, imports just about reached 2 million tonnes in 2015-16, which covers the shortfall in China. Cto MAKERS USUALLY PRODUCE lldpe OR inj HDPE. But lately some also making HD film Copyright © 2017 Argus Media group. All rights reserved.

World PE industry is facing massive capacity expansions in 2017-2018 Major ethylene downstream PE’s capacity expansions outpaces demand growth during 2017-2018-2019 The impact to ethylene could be negative as most PE projects are integrated World PE demand growth vs. capacity expansions Demand growth Capacity growth Demand growth Capacity growth * Annual capacities presented PE global capacity is expected to outstrip growth in demand in 2017. PE demand globally is expected to grow about 3 million tonnes. But the capacity growth globally is expected to be more than double of the demand growth. In the US alone, about 3 million tonnes of capacity is expected to start from this year. In Asia, another 4-5 million tonnes capacity is starting. Copyright © 2017 Argus Media group. All rights reserved.

China PE capacity growing, remains net importer Scenario 1 - China imports between 9-10mnt 85% O/R China has imported close to 10mnt of PE annually PE O/R remain high around mid 80’s Coal and naphtha based capacity operates well Now what happens when all these new plants start. Can China absorb the excess capacity? There are two scenarios that I would like to present. In scenario 1 we can expect that China will continue to import 9-10 million tonnes like it has been in the past. If u see here at the red line u can see that imports have been pretty steady at about 9 million tonnes. And operating rates remain stable at 85pc. This would also mean that coal and naphtha based units operate well. Copyright © 2017 Argus Media group. All rights reserved.

China PE capacity as well as imports grow Scenario 2 - China imports grow to around 12mnt 75% O/R A drop in O/R to 75pc needed for imports to grow to 12 mnt and absorb more US exports PE growth rate assumption at 6pc until 2020 In the second scenario- if China is to absorb some of the new capacities that come up in the US, then operating rates need to fall to 75pc by 2020. Copyright © 2017 Argus Media group. All rights reserved.

Copyright © 2017 Argus Media group. All rights reserved. 2020 World net PE trade 5.5mnt 11.7mnt 12mnt 0.05mnt 2.2mnt 1.5mnt 1.2mnt Now if we look at this map again, the change we see is that US export capacity has grown to 5.5 mln tonnes and China’s imports have grown to 12 mil tonnes. Mid east exports are also expected to grow to 11.7 mil. In conclusion, by 2020 PE will be more well supplied globally and witth higher imports in major regions operating rates will come under pressure. Copyright © 2017 Argus Media group. All rights reserved.

Developments in the Asian/ Chinese Polypropylene Industry China PP capacity development China PP demand and import outlook PP is the largest downstream sector propylene and accounts for about 63pc of the total C3 produced globally. Now we will take a look at the China PP capacity and demand growth and what the outlook is for imports. PP growth rates are healthy and at about 4-5pc. Developing economies use higher amount of propylene to convert into PP.

PP prices at discount to PE in Asia/China Helping PP grow faster than PE Increasing PP supply and persistent price discount to PE resulting in faster growth rates for PP in Asia PP supply has been growing in recent years due to a rise in capacities from unconventional sources using coal, methanol. The rapid increase in production from CTO, MTO have resulted in lower prices compared with PE. If we see here at the blue portion we can see the spread between PE and PP prices. It has been on an average of $200 difference, which shows the hefty discount on PP prices. Copyright © 2017 Argus Media group. All rights reserved.

PP demand to grow 32pc by 2020, leading derivatives Asia propylene demand by segmentation 2016 = 52mn t 2020 = 65mn t Data source: Argus Propylene Annual 2016 If one looks at PP’s position from the upstream angle we can see that it is among the fastest growing among propylene derivatives. PP will consume 47 mil tonnes of propylene by 2020, up from 35.5 mill tonnes consumed in 2016. PP takes up 69pc of the total C3 used in Asia. By 2020, PP will account for 72pc of the total C3 produced in Asia. Copyright © 2017 Argus Media group. All rights reserved.

Surging propylene capacity drives PP supply, demand Unconventional propylene will reach 45pc of China’s production by 2020 Chinese PP production stands at 19.8 million tonnes. Chin will continue to dominate the PP market globally as it rapidly grows capacity especially from unconventional sources using coal, methanol and propane/butane. Among the 12 mil t/yr of new capacities in China seen in the past few years, on-purpose propylene production has been the primary growth driver. PDH capacity was at 3.9 mil in 2015 from zero capacity in 2012. CTO capacity was 2.8 mil in 2015 from 810kta in 2012 and MTO capacity was at 3.8 mil t/yr from 100kta in 2012. The share of C3 from CTO and MTOs have reached 20% and is expected to outstrip the share from refineries and crackers by 2020 and will be nearly 30% of the total C3 production in China. China has also continued to add PDH units to take advantage of the abundant propane. The PDH producers are net sellers in the domestic and result in oversupply in the domestic market time to time. Copyright © 2017 Argus Media group. All rights reserved.

Copyright © 2017 Argus Media group. All rights reserved. Summary Naphtha cracker margins in Asia still robust amid high ethylene and coproduct prices; High margins are prompting new cracker projects in China – including naphtha, ethane and LPG Market share of coal based olefins production technologies is expanding, but their economics and operations are vulnerable. Coal based PE capacity to reach 25pc of China’s total by 2020. Operations of this segment key to overall domestic PE production in China China building more propylene and PP capacity. PP demand growing more rapidly than PE on competitive prices, availability and properties. PP to take some share from PE and other polymers Massive US PE capacity expansions in end 2017 and 2018 and the need to sell them to China will weigh on global PE prices Copyright © 2017 Argus Media group. All rights reserved.

Mahua Chakravarty Petrochemical Markets Editor Email: Phone: Office: Web: Blog: Mahua.chakravarty@argusmedia.com +65 6496 9935 Singapore www.argusmedia.com http://blog.argusmedia.com Stay Connected @ArgusMedia Argus-media +Argusmediaplus argusmediavideo Copyright notice Copyright © 2017 Argus Media group. All rights reserved. All intellectual property rights in this presentation and the information herein are the exclusive property of Argus and and/or its licensors and may only be used under licence from Argus. Without limiting the foregoing, by reading this presentation you agree that you will not copy or reproduce any part of its contents (including, but not limited to, single prices or any other individual items of data) in any form or for any purpose whatsoever without the prior written consent of Argus.   Trademark notice ARGUS, the ARGUS logo, ARGUS MEDIA, ARGUS DIRECT, ARGUS OPEN MARKETS, AOM, FMB, DEWITT, JIM JORDAN & ASSOCIATES, JJ&A, FUNDALYTICS, METAL-PAGES, METALPRICES.COM, Argus publication titles and Argus index names are trademarks of Argus Media group. Disclaimer All data and other information presented (the “Data”) are provided on an “as is” basis. Argus makes no warranties, express or implied, as to the accuracy, adequacy, timeliness, or completeness of the Data or fitness for any particular purpose. Argus shall not be liable for any loss or damage arising from any party’s reliance on the Data and disclaims any and all liability related to or arising out of use of the Data to the full extent permissible by law.