Tom Gellrich, Topline Analytics

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Is your organization mobilized for the Shale Gas Decade?

October 23, 2013 Tom Gellrich TopLine Analytics

Agenda • Dramatic North American Advantage • Chemical Industry Drives Next Wave • Translates Into All Manufacturing • Ohio Valley is a Central Focus • Four Disruptive Impacts • Conclusions • Questions and Answers

1973 Energy Shock

3.2x Increase Source EAI

1979 Energy Shock

2.0x Increase Source EIA

2008 – 2012 Energy Shock

3.8x Decrease Source EIA Natural Gas

North American Manufacturing Advantage 2008 $10.32 $2.74

2012

$11.40 $11.86 $1.25 $2.98

Source: World bank Pink Sheet Average natural gas prices $/MBtu

$14.38 $15.59

Chemical Industry Drives the Next Wave

• Shale gas = Fuel + Feedstock • Fuel + Feedstock can be 80% of the cost of chemicals

Pricewaterhouse Coopers White Paper

Dramatic Shift In 7 Years Ethylene

Source: American Chemistry Council

Dramatic Shift In 7 Years Ethylene

Source: American Chemistry Council

Global Chemical Shift • “The feedstock cost for new crackers in [Saudi Arabia] will be around $6/MBtu as there’s not enough ethane availability … this cost will be much higher than the US gas price, which is currently at $3.504.00/MBtu” –

Jamal Malaikah, president and COO, National Petrochemical Industrial Co (NATPET), Apr 2013

• “The shale gas revolution initiated in the US… is now reshaping not only the energy industry, but global economy and geopolitics as well.” This could cause “a great deal of discomfort” to Asia’s petrochemical sector.

–

Yoshimitsu Kobayashi, chairman of the Japanese Petrochemical Industry Association at APIC, May 2013

• “The shale gas revolution in the US has turned the global petrochemical industry inside out…Basic petrochemicals can now be made in the United States for about half the cost as in Europe” –

Tom Crotty, Ineos group director, ChemWeek Interview October 2013

• “The supply of low-priced products that are based on coal and shale gas will become a threat to the existing petrochemical industry and will bring a significant change in its structure.”

–

Han-Hong Ban, chairman of the Korea Petrochemical Industry at APIC, May 2013

US Chemical Industry Responds 2012 to 2020 • $70 billion in capital investment – 97 projects – 60 million metric tons of chemicals

• Jobs: – 485,000 direct – 700,00 indirect

• Taxes (federal, state, local) – $20 billion during investment phase – $14 billion on-going

• Just the first wave

Source: American Chemistry Council

Chemical Industry Drives the Next Wave Ammonia Methane Methanol

Ethane

Natural Shale Gas

Propane

Ethylene

Propylene

N-Butylene Butane Isobutylene

Source: PwC and TopLine Analytics

Manufacturing Sectors

Product Categories Fertilizers

Apparel and Accessories

Adhesives

Beverages and Tobacco Products

Alkyd Resins

Chemicals

Solvents

Computer and Electronics

Corrosion Inhibitors

Fabricated Metal Products

Textiles

Food and Kindred Products

90%

Inks, Adhesives

Leather and Allied Products

Shampoos, Detergents, Soaps

Machinery, Except Electrical

Paints

Nonmetalic Mineral Products

Coatings

Paper

Pipes, Hoses, Wire Coating

Petroleum and Coal Products

Coolant, Antifreeze

Pharmaceuticals

Films, Packaging, Bottles

Plastics and Rubber Products

Paint Remover

Primary Metal Manufacturing

Plastics

Printed Matter and Related Products

Tires and Rubber

Textile and Fabrics

Lubricant Additives

Textile Mill Products

Solvent, Industrial Cleaners

Transportation Equipment

80%

Wood Products

Polyethylene Economics Polyethylene Cost

US

China

Natural Gas costs

$/MBTU

Crude Oil costs Ethylene cost

$/BBL $/ton

1085

109 1980

Ratio for one ton of HDPE Ethylene cost

$/ton

1.025 1112

1.025 2029

Utilities Direct Cost Other Costs Total Costs

$/ton $/ton $/ton $/ton

15 51 132 1309

36 17 132 2214

1349

2281

Typical polyethylene margin Potential HDPE selling price

Source: NYMEX 11/13/2013

3.75

3.00% $/ton

2.3x Delta

Polyethylene Processor Economics Polyethylene Part

US

China

Polyethylene HDPE Part weight

$/ton grams

1349 100

2281 100

Parts Polyethylene HDPE

units $

20000 1349

20000 2281

Utilities

units

44

109

Labor

$/Hour

31.79

1.38

Labor Other Costs Non Polyethylene HDPE Costs

$ $ $

95 102 241

4 75 185

1637

2540

Typical part processor margin Potential Part HDPE selling price

14.00% $/ton

1.6x Delta

Ohio Valley at the Center • Polyethylene processing within 500 miles – 6MM tons/year – 45% of entire NA demand – 49% of NA converter sites Source: Townsend Solutions and Penn State

Four Disruptive Impacts Shale Gas economics drive Opportunity and Risk in manufacturing: • On-Shoring • Full Substitution • Partial Substitution • Oil versus Shale Gas

On-Shoring • Toothpaste tubes return to US production – 95%+ US toothpaste tubes are produced in China – 90% toothpaste tube by value content are plastics – US shale gas is driving down US plastics production costs 60% to 80% – Avoid the w/c and logistics cost of shipping from China to the US

• Substitute toothpaste tubes with thousands of other items – Household: Ball point pens, lighters, window blinds…

– Medical: IV bags, syringes, oxygen masks, disposable gloves…

Innovative companies will appear and drive widespread on-shoring

Full Substitution • Pressure treated wood – Used in decking, fencing, and exterior trim applications – 7 billion board feet/year

• Competing products, all superior performance but higher price: – Plastic composite – Other wood such as cedar, redwood

• As shale gas prices drive down plastics costs plastics composite products achieve price parity with pressure treated wood • Other sectors: food containers, paint containers, lawn furniture Innovative companies completely replace entire products and market sectors

Partial Substitution • Plastics have for years been used in durable goods, and continue to increase in content – Light weight – Easy to fabricate – Long life, do not corrode

• Potential demand increase in durable goods – Automobiles – Appliances Innovative companies are driving product platforms increase plastics content

Oil versus Shale Gas • Chemical industry complex by-product manufacturing – Shift in US ethylene production to using ethane from 2005 to 2102 drove US butadiene prices 500%

• Some chemicals can only be produced (technically or economically) via crude oil • They compete based on price / performance with those from shale gas – Carpets/Clothing: Nylon, Polyester and Polypropylene Innovative companies are shifting production to shale gas derived chemicals

Conclusions • Shale gas is a dramatic US revolution.

• Next wave of change is in manufacturing driven by Chemical Industry.

• It will require unconventional thinking but isn’t that what drove the shale gas revolution?

• Is your organization mobilized for the Shale Gas Decade?

Questions?

TopLine Analytics

We assist companies in addressing the challenges and opportunities to compete in the changing landscape brought on by the shale gas revolution

Tom Gellrich

www.TopLineAnalytics.com

267-205-1263