Trends and Challenges in the European Polyolefin Industry Mark Vester 18 February 2003

Contents Short introduction to SABIC EuroPetrochemicals Typical project investment WE and ME Global and European S/D balance for Polyethylene The European Case Managing the cycle: The Past and The Future

The Power to Provide … … for the long term Resources to guarantee long term supply Modern technology for efficiency and quality Global marketing and distribution network to serve our customers … for the long term

SABIC’s vision: to be a leading global manufacturer and marketer of hydrocarbon and metal products. SABIC … … is 70% owned by Saudi government and 30% by private sector … started from scratch in 1976 … produced first tons in 1983 … now produces 40 million tons of products per year … has a turn-over of € 11,4 bln in 2002 Think about it: 2 mln tons of new capacity added annually!

SABIC’s headquarters in Riyadh SABIC EPC: the Powerhouse comes to Europe … SABIC’s headquarters in Riyadh SABIC’s Geleen site SABIC … … is number 3 global PE player … markets almost 5 million tons of PE/PP … is now established in Europe … has technical centres in KSA, USA, India and The Netherlands … accelerates its expansion

… with the Power to Provide … 4 highly integrated sites direct access to low cost feedstock world-scale facilities direct market access multiple lines per technology Gelsenkirchen Geleen Houston Al Jubail Yanbu Vadodara Riyadh Kerteh … anywhere !!!

Global Polyolefins position SABIC SABIC, after acquisition DSM Petrochemicals: number 4 global Polyolefins player number 3 global PE-player number 4 global PP-player KTON

.. and anything !! Application Automotive Corrugated board Dustbins Foam Furniture Houseware and appliances Geomembranes Masterbatches Multi purpose injection moulding Packaging Photo and imaging Pipe Sheet Textiles Wire and cable … Process Bi-axially oriented film Blow moulding Blown film Cast film Extrusion coating Extrusion compression moulding Foam extrusion Fibre, filament and tape extrusion Injection moulding Injection compression moulding Masterbatch compounding Pipe extrusion Sheet extrusion Thermo forming Material HDPE High cristallinity polyolefin LDPE LLDPE Long glass fibre reinforced PP Modified PP PP block copolymer MF PP homopolymer PP homopolymer MF PP random copolymer PP reactor elastomer modified PP reactor elastomer modified MF                   

Middle East PE has significant cost advantage LLDPE gasphase 350 kta Take into consideration: License cost Infrastructure Marketing and Sales cost Research and Development Cost of overhead Working capital HDPE slurry 300 kta PP gasphase 2*200 kta Co-products Naphtha cracker 650 kta revamp cracker 650 kta Europe Middle East HDPE gasphase 350 kta Low cost feedstock !! Investment scale Investment cost Utilities cost are lower No co-products credit LLDPE gasphase 2*350 kta Ethane cracker 1050 kta

Structure of typical projects vary LLDPE gasphase 350 kta HDPE slurry 300 kta Europe PP gasphase 2*200 kta Co-products revamp naphtha cracker 650 kta HDPE gasphase 350 kta LLDPE gasphase 2*350 kta Middle East Ethane cracker 1050 kta

Distribution Customer Warehouse Hub Plant Europe Middle East Warehouse Warehouse to customer Warehouse to customer Import Duties Warehouse Hub Document cost Outbound cost Inbound cost and storage Sea port to hub Terminal cost Sea freight Warehouse to sea port Plant Europe Middle East Warehouse Plant

Using ethane for ethylene leads to propylene deficits … 71,5 mio other FCC 32 % 54 mio FCC 30 % Steam cracker 65 % Steam cracker 68 % … which leads to improved co-product contribution

ME suppliers will export most PE to Asia, however … 2002 + 2750 + 950 - 1400 +2700 - 1300 - 800 + 800 Surplus: + 3,7 mln t (= 6,4 % of CTP) Global overcapacity will be reduced from 3700 kton in 2002 to potentially 200 kton in 2007 2007 + 1300 - 600 - 4700 +6100 -1700 - 900 + 700 Surplus: + 0,2 mln t (= 0,3 % of CTP) Net export position (CTP > demand) Net import position (CTP < demand) Asia is growth market ME export net backs will make European pricing follow Asian balance Note: Balance is calculated as Local CTP -/- local demand (trade is excluded)

… West Europe leaves opportunity window … kton Realisation Forecast West European demand will outpace capacity growth in coming years

Room for 100 kt extra imports per year … for ME to further increase its market share. Room for 100 kt extra imports per year Realisation Forecast Middle East imports will make up for WE production deficit.

Despite ME producers’ cash cost advantage over WE … NWE producer Typical ranges for gas and naphtha Structural delta in cash cost Low High Low High Gas price ($/mmBTU) Naphtha (EUR/t) Delta depends on oil price and co-product values

contributing to deterioration of margins … … WE capacity has outpaced demand, kton contributing to deterioration of margins … Margin as C4 LL -/- C2 (EUR/t) … and resulting in poor profitability; even for WE leaders!

Re-investment level required for IRR of 20% ME re-investment level is lower than average WE level ME producer NWE producer Re-investment level required for IRR of 20% Delta in re-investment level Delta in cash cost Low High Low High Gas price ($/mmBTU) Naphtha (EUR/t) Within WE players differ in site scale and integration, portfolio, … Only strong WE super sites (cost leaders) remain

Pricing in Europe will be affected Re-investment level WE ME Middle East attracts investment at lower levels than Europe

Future PE flow over the globe ddp NWE cif FE Revenue Platt’s low ’96-’01 900 750 Discount -/-25 - Import duties (4%) -/-35 Inland logistics -/-50 - Transport overseas -/-45 -/-20 Contribution 745 EUR/t 730 EUR/t Asia is growth market Export to Europe is 100 - 150 EUR/t more expensive European price will follow Asian balance and average at 100 - 150 EUR/t above Asia

Cyclicality in Petrochemicals is “a fact of life” The cycle ……is due to Long lead time of investments No reliable forecast global economic gowth Globalisation ……affects mainly margins but also volumes and …… leads to strong fluctuations in cash flow

Essentials of the Petrochemical Business Global Utilisation Rate drives the margins Position on the global cost curve indicates the chance to survive the dip in the cycle Position on the learning curving quantifies the yearly needed cost improvement

Cracker margins correlate with the global utilisation rate CTP = Capacity to Produce Global Utilisation rates > 92 % are needed for a healthy cracker margin

Position on the global cash cost curve A low cost position is essential to survive the dip in the cycle and is determined by: Scale Integration Technology Cracker feedstock position / flexibility Upgrading cracker co-products Logistics Employees

Global cash cost curve crackers Small scaled Laggards Cash costs/ton C2 Naphtha/ethane/LPG in Europe/USA Low cost ethane Cumulative ethylene capacity

Learning curve of ethylene production Cash costs/ton C2 Cumulative ethylene production

Managing through the cycle Losers First Quartile Sitting ducks Cash costs/ton C2 (Potential) Super sites Hors category Cumulative ethylene capacity

Conclusions No rationale for investment in additional integrated ethylene and PE capacity in Europe Potential for scrap and build Little further improvement of cost position All cost laggards in Europe will disappear Central and Eastern Europe have the same future as WE European cost leaders will be able to compete Future PE source for West Europe WE super sites Growth will come from Middle East

Drivers for European industry: We enter a new era Period ’95 – ’02 Scale and cost Site integration and M&A Technology and Catalyst Development Period ’02 – ’09 Cost & Rationalisation Bottomline cashflow Invest and grow scale cash flow Re-establishment of sustainable profit levels