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

2. 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

3. 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

4. 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!

5. 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

6. … 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 !!!

7. 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

8. .. 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
      
           

9. 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

10. 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

11. 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

12. 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

13. 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)

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

15. 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.

16. 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

17. 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!

18. 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

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

20. Future PE flow over the globe
ddp NWE cif FE
Revenue Platt’s low ’96-’
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 EUR/t more expensive
European price will follow Asian balance and average at EUR/t above Asia

21. 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

22. 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

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

24. 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

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

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

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

28. 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

29. 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