© 2013 Platts, McGraw Hill Financial. All rights reserved.

Unexpected challenges: How will PX producers cope with margins pressure? Michelle Kim, Editor, Platts Petrochemical

April 16, 2014, Wed

Platts Petrochemicals Forum, Shanghai, Grand Hyatt

Agenda

2

1. Asian PX producers facing challenges ahead of new PX plants expansion

2. Why are PX production margins under pressure? -‘Short’ PX expected, but ‘Long’ in reality

3. PX production margins outlook from Q2 2014 -PTA/PX spread outlook

-PX/MX spread outlook

-PX/Naphtha spread outlook

1. Asian PX producers facing challenges ahead of new PX plants expansion

PX production margins under pressure

Poor PX production margins for most feedstocks in Q1 2014

4

-$200

-$100

$0

$100

$200

$300

$400

$500

PX/MX PX/Naphtha PX/TL$/mt

• It is not profitable to make PX from any of the feedstocks – MX, Naphtha, and Tol

• The main reason is bearish PX along with relatively high feedstock costs in Q1 2014

• PX/MX spread has been negative for more than 11 months. Non-integrated PX producers have suffered since 2013. But in 2014, even integrated PX producers have faced difficulties.

All three feedstock production margin flipped to

negative in Jan 2014

Source: Platts

Feedstock

Processes Breakeven Spread

Major Producers

Heavy Naphtha

Full range naphtha->Naphtha Splitter->Heavy naphtha->Reformer->MX->Parex->PX

PX/Light Naphtha =$350/mt Heavy Naphtha =$50-60/mt +Light Naphtha

(Fully Integrated) GS Caltex SK Global JX FCFC

Toluene TL->MTPX->PX TL->TDP->MX->Parex->PX

PX/TL =$150/mt

(Partly Integrated) Samsung Total

Mixed Xylene

MX->Parex->PX PX/MX =$230/mt

(Non-integrated) Lotte Chemical Hyundai-Cosmo

Main feedstock for PX

Asia PX margin for non-integrated PX producers has flipped to negative for more than 11 months and even integrated PX producers turned in red since early this year

5

0

50

100

150

200

250

300

350

400PX/MX spread

PX/MX breakeven spread at $230/mt

$/mt

3 year 5 month low $137/mt (Mar 4, 2014)

Company Location Capacity (mt/year)

Status/Timing Facilities

Lotte No. 1 Daesan, S Korea 250,000 Shutdown/Aug 2013 Parex

Hyundai-Cosmo No. 2

Daesan, S Korea 800,000 Run rates cut to 70-80%/Dec 2013

Parex

Qingdao Lidong

Qingdao, China 700,000 Shutdown/Apr 2014 Run rates cut to 60-70%/Mar 2014

Parex

Non-integrated PX producers cut OR or SD

Source: Platts

0

100

200

300

400

500

600

700

800PX/Naphtha breakeven spread at $350/mt

3 year 8 month low $196.25/mt (Mar 14, 2014)

PX/Naphtha Spread $/mt

Company Location Capacity (mt/year)

Status/Timing Facilities

Idemitsu Chiba, Japan 265,000 Cut by 20%/end-Mar

Refinery

GS Caltex Yeosu, S Korea 400,000 Mulling run rates cut

Refinery

JX Kashima, Kawasaki, Mizushima, Oita, Japan

2.7 mil Cut by 20-30%/Mar-Apr Cut by 40-50%/May-Jun

Refinery

S-Oil Onsan, S Korea 900,000 Cut to 80-85% in Mar

Refinery

Fully integrated PX producers cut OR or mull SD

2. Why are PX production margins under pressure?

Earlier expectation: ‘Short’ PX

Firm PX Demand expected: ① PTA Startup Plans in Asia expected in Q1=>New PX demand

7

Country Company Location 2014

Q1 Q2 Q3 Q4

China Xianglu Xiamen, Fujian 4,500

Shenghong Jiangsu, Lianyungang

1,500

Yisheng No. 4 Ningbo, Zhejiang 2,200

BP No. 3 Zhuhai, Guangdong 1,250

Hengli No. 3 Dalian, Liaoning 2,200

Sanfangxiang No. 2 Jiangyin, Jiangsu 1,200

Chengda Chendu, Sichuan 1,200

China Total

14,050

India Reliance Dahej, Gujarat 1,100 1,100

Total 16,250

In Q1 2014, 9.3 mil mt of PTA was expected to be added

=> 6.2 mil mt of feedstock PX was expected to be required (Conversion factor=0.67)

Source: Platts

Supply ①As, new PX plants startups are mainly in H2 2014, PX supply remained unchanged in Q1 Demand ①On new PTA SU in Q1, new PX demand expected ②Chinese PTA producers kept OR high, commitment to end-users that they will keep high OR in 2014 ③Chinese PX end-users kept buying PX a lot

Unchanged PX Supply

Tight PX

Firm PX Demand

Firm PX Demand expected: ②Chinese PTA producers kept OR high in Jan-Feb ③Chinese PX end-users bought large volumes of PX

8

50

55

60

65

70

75

80

85

Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14

PTA operating rates in China

Source: Platts

%

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

2012

2013

2014

China’s PX imports surged in Jan-Feb

mt

2. Why are PX production margins under pressure?

Reality: Long PX in Q1 2014

But, in reality, Asia PX has been bearish in Q1 2014

10

$/m

t

1100

1200

1300

1400

1500

1600

1700

1800

2013/01/02 2013/02/02 2013/03/02 2013/04/02 2013/05/02 2013/06/02 2013/07/02 2013/08/02 2013/09/02 2013/10/02 2013/11/02 2013/12/02 2014/01/02 2014/02/02 2014/03/02

Paraxylene FOB Korea Marker

Falling -Lower PTA plants OR partly due to poor PTA production margin

Falling -Sluggish PTA, polyester -Lower PTA OR -Delay in PTA SU

Hit 1 year 9 month low of $1,201/mt FOB

Korea (Mar 11)

Source: Platts

Summary: Reasons for the ‘long’ PX in early 2014

11

Heavy PX Supply

Weak PX Demand

Long PX

Supply ①Bullish BZ generated additional PX through high TDP and MPTX OR ②Bullish olefin(Ethylene, Propylene) generated more heavy naphtha->more aromatics ③Poor gasoline market resulted in more reformate to produce Isomer-MX and PX ④Unsettled ACP added extra PX spot supplies ⑤Difficulties in PX OR cut for refiners due to high naphtha and hydrogen demand

Demand ①Poor polyester market led to high feedstock PTA inventories in China->less demand in feedstock PX ②Poor PTA production margin led to PTA SD->less demand for PX ③Poor PTA production margin led to PTA OR cut->less demand in PX ④Delay in new PTA SU postponed new PX demand

Heavy PX supply: ①② Bullish BZ & olefin markets create surplus PX

12

-100

0

100

200

300

400

500

600

700

600

800

1,000

1,200

1,400

1,600

1,800

$/m

t Benzene FOB KoreaPX FOB KoreaBZ/Tol TDP margin

*BZ/Tol TDP margin=BZ-Tol-$80

• BZ FOB Korea > PX FOB Korea on Jan 13, 2014 [for the first time since 2005], due to sluggish PX against bullish BZ

• BZ/Tol TDP production margin hit 6 year 9 month high on Jan 15, 2014 on bullish BZ

• High TDP OR on firm BZ generated extra MX and PX output

• High reformer OR on firm BZ generated extra PX output

Source: Platts

-400

-200

0

200

400

600

800

1000

1200

1400

1600

0

200

400

600

800

1,000

1,200

1,400

1,600

$/m

t

Naphtha C+F Japan CargoEthylene FOB Korea WeeklyPropylene Poly Grade FOB KoreaEthylene production marginPropylene production margin

• High ethylene and propylene production margins drove refineries to make more light naphtha to sell to NCC

• More heavy naphtha produced, which went to reformers to generate more BTX

• As a result, PX became surplus

Heavy PX supply: ③Poor gasoline market generates more

reformate to produce Isomer-MX and PX

13

Gasoline/crude spread

0

5

10

15

20

25

30

0

20

40

60

80

100

120

140

160

20

11

/07

/05

20

11

/08

/05

20

11

/09

/05

20

11

/10

/05

20

11

/11

/05

20

11

/12

/05

20

12

/01

/05

20

12

/02

/05

20

12

/03

/05

20

12

/04

/05

20

12

/05

/05

20

12

/06

/05

20

12

/07

/05

20

12

/08

/05

20

12

/09

/05

20

12

/10

/05

20

12

/11

/05

20

12

/12

/05

20

13

/01

/05

20

13

/02

/05

20

13

/03

/05

20

13

/04

/05

20

13

/05

/05

20

13

/06

/05

20

13

/07

/05

20

13

/08

/05

20

13

/09

/05

20

13

/10

/05

20

13

/11

/05

20

13

/12

/05

20

14

/01

/05

20

14

/02

/05

20

14

/03

/05

$/m

t

Asian gasoline/crude spread narrows

ICE

gasoline

spread

Source: Platts

Heavy PX supply: ①②③Bullish BZ & Olefin, Poor gasoline create surplus PX

14

Full Range Naphtha

Naphtha Splitter

Heavy Naphtha Light Naphtha NCC Ethylene

Reformer

TL BZ IMX

MTPX TDP PAREX

Heavy PX

High ethylene ->more heavy naphtha->high reformer OR->more MX->more PX High BZ->high reformer OR->more MX->more PX

High BZ->high MTPX OR->more PX High BZ->high TDP OR->more MX->more PX Poor gasoline->reformate->more MX->more PX

Propylene Reformate

Gasoline

Source: Platts

Heavy PX supply: ④Non-settlement of ACP creates additional PX spot liquidity ⑤Difficulties in PX OR cut for refiners due to high naphtha and hydrogen demand

15

0200 0

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

2014 1415 0 0 0

2013 1625 1685 0 1400 0 1400 1410 1440 0 1470 0 1400

2012 1445 1590 1650 1585 1550 1355 1218 1365 1450 1490 0 1550

ACP settlement 2012-2014

• There was no ACP settlement in Feb, Mar and Apr 2014, and 4 times in 2013, whereas in 2012, it remained unsettled only once.

• Non-settlement of ACP could generate more spot PX availability in spot market. • High volatility in annual term contract prices; Major Pricing Formula of Term

Contract=ACP 50%+Spot Average 50%+alpha

Source: Platts

“It is very difficult. We cannot just cut PX production because we need to think about inventory of variety of feedstocks [such as high hydrogen and light naphtha demand] and even prices and balance of oil products. We need to consider the entire refinery operations.” -A Japanese refiner-

Weak PX Demand: ①Poor polyester caused high feedstock PTA inventories in China->less demand for feedstock PX

16

0

20

40

60

80

100

120

Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14

%

Falling sales/production ratio of polyester in China

*Polyester Filament Yarn

Source: Platts

-100

-50

0

50

100

150

200

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

PX CFRTaiwan/China

PTA CFRChina

PTAproductionmargin

PTA margin has been negative since Aug 2013

PTA production margin=PX CFR Taiwan/China-PTA CFR China*0.67-$100

Poor PTA production margin $/mt

Weak PX Demand: ②Poor PTA production margins led to

PTA SD->less demand for PX

17

Country Company Location Capacity

(kt/year)

2013 2014

Dec Jan Feb Mar

China Yisheng Petrochemical Ningbo, Zhejiang

No. 1 650 S D!

1 37.5

Dalian No.3 2,200 S D!

1 83

Hainan 2,200 S D!

1 83

Mitsubishi Chemical Ningbo, Zhejiang

600 SD

2 5

BP Zhuhai Chemical Zhuhai, Guangdong

No.2 1,100 S D

115

Taiwan Capco Taichung No. 6 700 SD

558

Oriental Petrochemical Taoyuan 400 S D!

33

India MCC Haldia No. 2 800 SD

2 33

Mitsubishi Haldia 800 SD

1 00

Total Loss in Production

125 645 254 520

Estimated loss in PTA production=1.57 mil mt in Total

Estimated loss in PX demand=1.05 mil mt in Total (Conversion factor=0.67)

SD!=Sudden Shutdown

SD=Scheduled Shutdown

Source: Platts

Weak PX demand: ③Poor PTA production margins led to PTA OR cut->less demand for PX

18

75%

80%

70%

60%

12/1/2013 1/1/2014 2/1/2014 3/1/2014

PTA operating rates

PTA operating rates

Source: Platts, Market

Weak PX Demand: ④ Delay in new PTA SU deferred new PX demand

19

Country Company Location 2013

2014 2015 2016

Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

China Xianglu Xiamen, Fujian 4,500

Shenghong Jiangsu, Lianyungang 1,500

Yisheng No. 4 Ningbo, Zhejiang 2,200

BP No. 3 Zhuhai, Guangdong 1,250

Hengli No. 3 Dalian, Liaoning 2,200

Sanfangxiang No. 2 Jiangyin, Jiangsu 1,200

Chengda Chendu, Sichuan 1,200

Yisheng No. 2 Yangpu, Hainan 2,200

China Prosperity No. 2 Jiangyin, Jiangsu 2,200

Jiaxing Petrochemical No. 2

Jiaxing, Zhejiang 1,500

Formosa No. 2 Ningbo, Zhejiang 1,500

Mitsubishi No. 2 Ningbo, Zhejiang 1,200

Sinopec Yizheng 2,000

Shaoxing Yuandong Shaoxing 2,000

China Total 10,600 9,350 6,700

India Reliance Dahej, Gujarat 1,100 1,100

JBF Mangalore 1,120

Indorama Ventures Tamil Nadu 1,000

Taiwan Oriental iwan No. 3 Kuan Yin, Taoyuan 1,500

Total 12,800 11,970 7,700

Total PTA start up from 2014-2016: 32.5 mil mt

In 2014, 12.8 mil mt/year of PTA will be added Original

Schedule New

Schedule Source: Platts

3. PX margins outlook from Q2 2014

Although rebounded, Long-term demand/supply fundamentals - no change=>long PX

21

Source: Platts, KPIA

-1000

-500

0

500

1000

1500

2000

2500

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

2010 2011 2012 2013 2014 2015 2016

kt

Capacity

Demand

Balance

1100

1150

1200

1250

1300

1350

1400

1450

20

14

/01

/02

20

14

/01

/09

20

14

/01

/16

20

14

/01

/23

20

14

/01

/30

20

14

/02

/06

20

14

/02

/13

20

14

/02

/20

20

14

/02

/27

20

14

/03

/06

20

14

/03

/13

20

14

/03

/20

20

14

/03

/27

Paraxylene FOB Korea Marker

Hit 1 year 9 month low of $1,201/mt

FOB Korea (Mar 11)

Rebounding PX $/mt

PX

In H2 2014, massive PX expansion planned->long PX

22

Country Company Location Quarter

2014 2015 2016

BZ TL MX PX BZ TL MX PX BZ TL MX PX

China Sinopec Hainan Q1 600

PetroChina Yangzhou - 400 1000

Sinopec Zhenhai - 1600

China Total 2200 400 1000

Korea SK Global Chemical Ulsan Q3 1000

SK Energy/JX Nippon Oil Incheon Q3 1000

Samsung Total Daesan Q3 1000

GS Caltex/Taiyo Oil/Showa Shell

Yeosu - 400 1000

Korea Total 3000 400 1000

India ONGC Mangalore Q2 270 900

Reliance Dahej, Gujarat

Q1 200 1500

Indian Oil Group Vadodara, Gujarat

Q1 370

India Total 270 900 200 1870

SEA Jurong Aromatics Singapore Q2 450 800

PetroViet Vietnam Q2 240 700

PTT Global Chemicals Thailand

SEA Total 450 800 240 700

Middle East SATORP(Aramco/Total) Saudi Arabia Q1 700

ME Total 700

Total 720 7600 840 3570 400 1000

Total PX start up from 2014-2016: 12.2 mil mt

In 2014, 7.6 mil mt/year of PX will be added Source: Platts

PX

Slowing down China GDP growth rate limits growth in PTA demand/OR declines due to thin margins, but capacity expansion surpasses =>long PTA

23

Source: World Bank, KPIA, Markets

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

16.00%

0

5,000

10,000

15,000

20,000

25,000

30,000

2009 2010 2011 2012 2013 2014

kt

Asia PTA Demand(kt)

China GDP Growth Rate(%)

Asia PTA Demand Growth Rates(%)

Correlation Coefficient of China GDP Growth Rate and Asia PTA Demand Growth Rate= 0.8630

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

2010 2011 2012 2013 2014 2015 2016

kt

Capacity

Demand

OperationRates

PTA

Arbitrage volume of MX from US to Asia has reduced => tight Asian MX

24

US MX exports to Asia decreased due to less output on shale gas boom resulted in high US MX price

Asia US

MX shut

0

200000

400000

600000

800000

1000000

2011 2012 2013

Decreasing MX exports from US to S. Korea

Isomer-MXexports(mt/year)

Source: Korea Customs

MX

In H2 PX expansion may trigger new demand/OR to increase While capacity to remain stable=>Balanced to long (short-term) Balanced to short (long-term)

25

Country Company Location

Quarter

2014

BZ TL MX PX

China Sinopec Hainan Q1 600

Sinopec Zhenhai - 1600

China Total 2200

Korea SK Global Chemical Ulsan Q3 1000

SK Energy/JX Nippon Oil

Incheon Q3 1000

Samsung Total Daesan Q3 1000

Korea Total 3000

India ONGC Mangalore

Q2 270 900

India Total 270 900

SEA Jurong Aromatics Singapore Q2 450 800

SEA Total 450 800

Middle East SATORP(Aramco/Total)

Saudi Arabia

Q1 700

ME Total 700

Total 720 7600

In 2014, 7.6 mil mt/year of PX will be added

But MX capacity expansion lagged

New MX capacity is not enough to cover new PX capacity

70%

72%

74%

76%

78%

80%

82%

84%

86%

88%

90%

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

2010 2011 2012 2013 2014 2015 2016

kt

Capacity

Operation Rates

Source: Platts, KPIA

MX

Firm in Q1 but Soft from Q2

26

Tight Supply

Firm demand

Firm Naphtha

Supply ①Low inventories in Asia ②Curtailed Western arbitrage (US-Asia arbitrage closed)

Demand ①Firm seasonal demand for naphtha, as alternative cracking feedstock, LPG, has been firm on high demand for heating

Easing Supply tightness

Easing Tight Naphtha

Less demand

Supply ①Naphtha availability from the US may increased on shale gas production ②Expansion of the Panama Canal may facilitate exports from the US->Asia, on cheaper costs and less time for logistics

Demand ①Less demand for naphtha, as cheaper LPG mix as cracking feedstock is available ②Influx of cheap olefin from the US on shale gas boom may reduce NCC OR in Asia->Naphtha demand in Asia may fall ③New naphtha crackers SU in Asia (Taiwan’s CPC, Philippines’ JG Summit) may add demand(-)

Naphtha

Asia PTA/PX/MX Balance for long-term

27

Source: Platts, KPIA

PTA Long

MX Balanced

Short

PX Long

-4000

-3000

-2000

-1000

0

1000

2000

3000

4000

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

kt

Capacity

Demand

Balance

Outlook of PTA/PX margin from Q2 2014

Demand

①Weak demand for PTA due to bearish downstream polyester in tandem with weak China economy(+)

Supply

①New PTA startups add 11.7 mil mt of PTA in Q2-Q4 2014->heavy PTA(+)

②Poor PTA/PX production margin led to SD of PTA & OR cut of PTA->tightening PTA(-)

Demand

①Weak downstream PTA market on bearish demand from polyester in tandem with weak China economy may reduce PX demand(+)

②Poor PTA/PX production margin led to SD of PTA & OR cut of PTA->reduced PX demand(+)

③Delay in PTA startups in China may defer PX demand(+)

Supply

①New PX startups add surplus in PX, with 7.6 mil mt in 2014(+)

②High TDP, MTPX OR on bullish BZ may continuously generate surplus in PX(+)

③Bullish ethylene and benzene markets may keep NCC and reformer OR at high level->surplus in PX(+)

28

Less Weaker PTA

Weaker PX

Slightly Widening

Spread

(+):long (-):tight

Outlook of PX/MX margin from Q2 2014

Demand

①Weak downstream PTA market on bearish demand from polyester in tandem with weak China economy may reduce PX demand(+)

②Poor PTA/PX production margin led to SD of PTA & OR cut of PTA->reduced PX demand(+)

③Delay in PTA startups in China may defer PX demand(+)

Supply

①New PX startups add surplus in PX, with 7.6 mil mt in 2014(+)

②High TDP, MTPX OR on bullish BZ may continuously generate surplus in PX(+)

③Bullish ethylene and benzene markets may keep NCC and reformer OR at high level->surplus in PX(+)

Demand

①Downstream PX startups, but not immense impact as mostly not to use MX but condensate, TL(-/+)

②Demand for substitutes of relatively expensive toluene and solvent-MX to blend gasoline and paints(-)

③Gasoline season may boost MX demand further(-)

④Reversed arbitrage from Asia to US is happening on less output of MX on shale gas boom and high demand for gasoline blending in the US(-)

Supply

①Fundamentally short(-)

②Shutdown of US-Asia MX arbitrage on less output in the US on shale gas boom(-)

③TA season in May-Jun will tighten MX supply(-)

④Gasoline blending season will turn reformate to make gasoline, rather than MX->less MX supply (-)

29

Weaker PX

Slightly Firmer MX

Steadily thin Spread

(+):long (-):tight

Outlook of PX/Naphtha margin from Q2 2014

Demand

①Weak downstream PTA market on bearish demand from polyester in tandem with weak China economy(+)

②Poor PTA/PX production margin led to SD of PTA & OR cut of PTA(+)

③Delay in PTA startups in China(+)

Supply

①New PX startups add surplus in PX, with 7.6 mil mt in 2014(+)

②High TDP, MTPX OR on bullish BZ may continuously generate surplus in PX(+)

③Bullish ethylene and benzene markets may keep NCC and reformer OR at high level(+)

Supply

①Naphtha availability from the US may increased on shale gas production(+)

②Expansion of the Panama Canal may facilitate exports from the US->Asia, on cheaper costs and less time for logistics(+)

Demand

①Less demand for naphtha, as cheaper LPG mix as cracking feedstock is available(+)

②Influx of cheap olefin from the US on shale gas boom may reduce NCC OR in Asia->Naphtha demand in Asia may fall(+)

③New naphtha crackers SU in Asia (Taiwan’s CPC, Philippines’ JG Summit) may add demand(-)

30

Weak PX

Easing tight Naphtha

Slightly Widening

Spread

(+):long (-):tight *All the margins outlook may be changed depending on various factors in the future.

Q&A

Thank you very much!