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Number 4,
Spring 2012
12
21
30
40
47
Winning in India:
The specialtychemicals opportunity
Using microeconomics
to guide investments
in petrochemicals
47
new investments.
48
a casino.
the investment.
A fundamentals-based approach to
evaluating investments
49
Exhibit 1
MoChem
establishing2012
the new pricing level. By 2010,
Petrochemicals
the US propylene market had reached a major
Exhibitpoint,
1 of becoming
6
tipping
tight as propylene
19982005 average
Alkylation value1
200609 average
201011 average
490
PE cap on PP2
1,160
590
1,070
790
PS cap on PP2
490
1 The
1,280
1,060
1,280
1,010
1,500
1,450
alkylation value shown here includes purication/transport cost to be comparable with price for polymer-grade propylene.
price of polymer-grade propylene before polypropylene (PP) cost exceeds polyethylene (PE) or polystyrene (PS) price.
These price mechanisms occur when the propylene supply is tight and its price rises to the highest price point where propylene
demand declines to the point where it balances with supply. The PE cap on PP fell below alkylation value after 2005 primarily due to
the microeconomic effects of higher oil prices.
2Maximum
50
cant errors.
or recommendation in itself.
A case study
ranges that are microeconomically reasonable even if they have no basis in history. Margin-
51
MoChem 2012
Petrochemicals
Exhibit 2 of 6
Exhibit 2
Middle East/
Africa
Americas
Greater
Europe
China
Asia (excluding
China)
Canada ethane
1,000
500
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
180,000
140,000
160,000
180,000
Canada
ethane
1,000
500
0
20,000
40,000
60,000
80,000
100,000
Effective capacity,
1 Thousand
120,000
KTA1
(Exhibit 2).
The price side
Not surprisingly, a number of companies have
52
Exhibit 3
MoChem
2012
effective high-volume
option for new naphtha
Petrochemicals
crackers, positioning these plants as the
Exhibit
3 of 6 price setter for ethylene and
global long-term
The full cost cost curve suggests that Chinese naphtha crackers
will be required to meet global ethylene demand.
Full cost (including capital recovery)
for potential new sources of ethylene,
$ per metric ton
Required margin
Cash cost
US ethane
Russia E/P2
1,500
Middle East
(ME) ethane
Noneconomic/
1,000 other
1,470
China P/N3
CTO1
ME P/N3
China 1,150
1,170 1,170
1,080
1,180
920
500
10
15
20
25
30
35
40
45
50
55
60
65
1 Coal
to olens.
2Ethane/propane.
3Propane/naphtha.
70
75
80
85
90
53
polyethylenecan be lower.
and US crackers.
US cracker investment.
barrel,1
which we believe
54
MoChem 2012
Petrochemicals
Exhibit 4 of 6
Exhibit 4
1,000
900
US ethane
demand and
supply, thousand
barrels per day
(KBD)
800
700
600
0
2004
2005
2006
2007
2008
2009
2010
Market price
Theoretical light
naphtha-linked price
1,250
1,000
750
Ethane market
price vs historical
price mechanism,
$ per metric ton
500
250
0
250
500
2004
2005
2006
2007
2008
1 Based
2009
2010
on Energy Information Administration (EIA) data plus 20 KBD additional supply from reneries (above average 20KBD
reported by EIA). Includes inventory removals.
2Based on highest (90th percentile) months ethane consumption in each cracker multiplied by months industry utilization for
each year through 2007, adjusted for announced or estimated ethane-cracking expansions after 2007.
Source: US Energy Information Administration; The Hodson Report; Petral; McKinsey analysis
55
Exhibit 5
MoChem
leading
to a 2012
rise in ethane prices. But the
Petrochemicals
price
might not return all the way up to the design
Exhibit
5 of
6
yields
price
of ethane
competing with naphtha.
Value
US ethane price
Fuel-value equivalence
Discount from naphtha-cracking equivalence
Netback from polyethylene exports to Asia1
China naphtha-cracker
by-product credits
US naphtha-cracker
by-product credits relative
to China credits
1 Asia
Low values, ie, propylene at full cost from propane and butadiene at full cost from butane
Higher values, ie, propylene price is at a level where polypropylene is cost capped by
polyethylene price, and butadiene price reflects moderate tightness (similar to recent years)
United States near or below China values, eg, netback from export of derivatives to Asia
United States above China values, eg, propylene at alkylation value
10% discount to Western costs
50% discount to Western costs
polyethylene price netted back to the United States, less conversion costs of ethane to ethylene and ethylene to polyethylene. This
represents the price of ethane if the capacity to consume exceeds supply and the ethane price rises to its maximum possible level.
56
Exhibit 6
MoChem
2012 pricing mechanisms, naphtha
such as natural-gas
Petrochemicals
pricing mechanisms, or gasoline-pool market
Exhibit
6
dynamics.6Itof
would,
however, raise the number of
10%
High
High
Low
High
Low
Low
50%
High
High
Low
1A
change in margin of $100 per metric ton of HDPE represents a swing of about 3 IRR points.
polyethylene.
3US ethane price mechanisms: fuel value: ethane at equivalence to natural gas ($7.70 per million British thermal units in 2020
dollars); reduced yields: ethane at a discount to historical price relationship to naphtha, ie, advantaged cracking feed but not at
fuel-value oor; Asia netback: ethane at a price in which exible feed crackers (50/50 ethane/naphtha), integrated with HDPE,
are competitive for exports to Asia but offer low margins for the cracker and HDPE plant.
2High-density
57
ILLUSTRATIVE
Margins in 2020
exceed level needed
for 30% IRR4
Margins in 2020
would provide
2030% IRR
Margins in 2020
would provide
1020% IRR
US ethane price3
Scenario 1: fuel value
70
100
130
160
190
70
100
130
160
190
70
100
130
160
190
503
857
1,208
1,560
1,910
453
697
861
1,025
1,187
117
88
104
122
145
502
854
1,206
1,558
1,910
451
670
841
1,013
1,182
136
140
142
145
154
315
619
923
1,228
1,531
274
503
653
795
930
264
279
291
292
299
314
615
916
1,218
1,519
272
453
571
696
826
283
349
414
466
508
315
667
1,018
1,369 1,720
264
491
655
819
980
305
311
327
345
368
314
666
1,018
1,369 1,720
262
482
653
819
980
324
328
330
345
368
171
476
780
1,082 1,383
130
359
488
622
759
408
423
435
468
494
170
471
773
1,074 1,375
128
310
427
557
689
427
493
587
602
638
4Internal
rate of return, based on using this (nominal dollars, no ination) for the life of the project.
metric tons per annum.
5Thousand
58
fundamentals-based price-and-margin-forecast
of petrochemicals.
Scott Andre (Scott_Andre@McKinsey.com) is a senior practice expert in McKinseys Houston office, where Thomas
Hundertmark (Thomas_Hundertmark@McKinsey.com) is a principal and Rajeev Rao (Rajeev_Rao@McKinsey.com) is
an associate principal. Copyright 2012 McKinsey & Company. All rights reserved.