PVC markets of Europe and South-East Asia: analysis of profitability and production cost

Consulting 2010

Table of contents

Executive Summary Approach to comparative analysis Overview of PVC production sector Global distribution of PVC production capacities Types of VCM / PVC production processes Pricing Choosing the companies European PVC producers PVC producers in the South-East Asia Results of comparison Conclusions Appendix

2 3 5 5 7 8 9 9 10 11 13 14

PVC markets of Europe and South-East Asia: analysis of profitability and production cost

Executive Summary
The goal of the work is a comparative analysis of production cost and contribution margin of ethylene-based PVC production facilities of Europe and South-East Asia. The analysis revealed the following: The European PVC production contribution margin varies from 56,7 to 247,9 Euro / ton of PVC (excluding PVC production at Rmnicu Vlcea facility that is facing negative contribution margin) and averages at 136,45 Euro / ton of PVC subject to the current average capacity utilization level of 67%. The potentially achievable contribution margin considering existing technologies and prevailing prices 190,85 Euro / ton of PVC. PVC production contribution margin in South-East Asia is negative (65,10 Euro / ton of PVC). It is caused by the low capacity utilization (52% in 2009, including 44% in China). Subject to the full capacity utilization under prevailing prices the PVC production contribution margin is estimated at 81,47 Euro / ton of PVC.

Approach to comparative analysis

1. Due to the lack of publicly available data on production costs and contribution margin of PVC production along with some indicators required for their evaluation, a number of parameters were estimated indirectly. To ensure a solid approach to analysis and practicality of our results we have analyzed the companies that meet the following criteria: All the plants under review accommodate chlorine, VCM, and PVC production facilities; We have analyzed companies that produce suspension PVC and employ some of the most commonly used production cycles by Vinnolit, INEOS, Shin-Etsu, or Chisso. 2. The production cost of PVC has been estimated using information on the capacity of PVC producers and data on materials / power balance of the applied production scheme. For instance for the factory in Burghausen, Germany (Vinnolit) : a) Capacity: 214,000 ton of PVC/year; where: b) Raw materials and energy: The production cost is estimated at clause 2; Expected consumption figures per 1 ton of PVC Ethylene (100%) Chlorine (100%) Oxygen (100%) Steam Power consumption Cooling water 460 kg 585 kg 139 kg 925 kg 290 kW h 152.3 m The proceeds were calculated as a cost of sales of products made by the production facility operating in the mode that provides for output at the installed capacity level and at the price equivalent to the average price for the period in question. c) Basing on a) and b) feedstock requirements for the production of 214,000 ton of PVC are calculated; d) The cost of feedstock required for PVC production was estimated basing on data from official sources: trading floors, publishing houses, research agencies; e) The cost items not quantified in the materials / power balance (General Production Costs, for example) were estimated with the involvement of the sector experts knowledgeable in specific features of production processes applied by the producers in question or by comparison with peers; f) The production cost is estimated by aggregating all the applicable costs estimated at d) and e). 3. The estimate was made according to the following formula: Contribution margin = Proceeds Production cost , Actual PVC Production
* Vinnolit data * Uhde data

PVC markets of Europe and South-East Asia: analysis of profitability and production cost

Overview of PVC production sector

* Harriman data * Technical progresses for PVC production by Y. Saeki and T. Emura, Polymer BREF (Stuttgart-University) * CMAI data 3% 3% 1% 1% 0% 3% 3% 1% 1% 0%

Global distribution of PVC production capacities Asia and Europe are the leading regions in terms of PVC production capacities along with China accounting for the bulk of PVC production in Asia (65%).

The aggregate global PVC production capacities by the end 2009 amounted to 47,972,000 ton/ year. The regional distribution of these capacities is shown at Fig. 1 and Appendix (Table 1).

17% 37% 17%

37%

18% 18% 20% 20%

Asia (China) Asia (without China) Europe North America Latin America

Middle East Africa Russia Oceania

Asia (China) Asia (without China) Europe North America Latin America

Middle East Africa Russia Oceania

Fig. 1. Global production capacities by region, 2009 Global PVC production by end 2009 achieved the level of 29,924,000 ton/year that is equivalent to the utilization level of 62%. Breakdown of production is shown at Fig. 2 and the Appendix (Table 2).

Fig. 2. Global production by region, 2009 The highest PVC production falls at Asia and Europe with more than a half of Asian PVC produced in China (51%).

Accordingly the capacity utilization ratio by regions is as follows (Fig. 3):

20,000 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 Asia (China) Asia (without China) North America Europe 1300 Latin America Middle East 7734 7400 6020 5699 44% 79% 84% 75% 67% 53%

93% 77%

100% 90% 80% 70% 54% 60% 50% 40% 30% 20% 10% 0%

Russia

Africa

Oceania

Production, '000 ton / year Idle capacities Utilization level Fig. 3 Utilization of PVC production capacities in various regions, 2009

PVC markets of Europe and South-East Asia: analysis of profitability and production cost

Types of VCM / PVC production processes The raw materials for production of PVC is vinyl chloride monomer (VCM). Depending on the feed materials used for the VCM production there are three main types of VCM crackers: ethylene based, acetylene based and mixed type. CI2 Direct chlorination Ethylene Oxychlorination Oxygen HCI EDC EDC distillation Recycling of EDC EDC thermal decomposition

VCM Fig. 4. Production of VCM from ethylene and chlorine (a chlorine balanced approach)

HCI Oxychlorination Acetylene Fig. 5. VCM production from acetylene VCM

CI2 Direct chlorination Ethylene Thermal decomposition of EDC HCI Oxychlorination VCM

Acetylene

Fig. 6. Mixed approach to VCM production from ethylene and acetylene

Ethylene-feed crackers use ethylene and chlorine as raw materials which are then used for production of ethylene dichloride (EDC) which, in its turn, is processed into VCM. Oxychlorination allows utilisation of chlorine overstock produced during the main process. As for the acetylene-feed crackers it employs calcium carbide (usually produced from limestone and coking coals) as the feedstock, forming acetylene when mixed with water. This acetylene is then proceeds for the vinyl chloride monomer production. The mixed approach implies joint application of these two types of crackers with the hydrogen chloride produced from ethylene being used further to react with acetylene. The received VCM is then polymerized using one of the four methods: suspension, emulsion, in the bulk or in solution. The suspension polymerization is the most common VCM polymerization method in the world. Due to relatively easy access to hydrocarbons in Europe VCM production there usually employs ethylene and chlorine feed crackers. In South-East Asia, mainly in China, the bulk of VCM production is oriented at acetylene consumption. This fact is caused by the lower (as compared to Europe) availability of hydrocarbons as well as by huge reserves of coking coals and limestone used for the production of calcium carbide which, in its turn, is used for the acetylene production.

Pricing The PVC production cost depends on key types of production expenses: raw materials (ethylene, chlorine, acetylene) and processing, with power costs as the latters key driver. In Europe the key price driver is the price for ethylene as it accounts for ~45-55% of the PVC production cost when the ethylene-based production approach is applied. In Asia PVC prices are greatly influenced by the PVC prices in China and therefore, in addition to ethylene prices, the cost of acetylene widely used for the PVC production purposes in China is of growing importance in the region.

PVC markets of Europe and South-East Asia: analysis of profitability and production cost

Choosing the companies

* Harriman, CMAI, Platts, Vinnolit, Chisso, INEOS, Technical progresses for PVC production by Y. Saeki and T. Emura, Deloitte analysis

European PVC producers In 2009 the European PVC producers reached the capacity of 9,150,000 ton of which PVC produced from ethylene accounted for 98% (8,989,000 ton) of the total output and that produced from acetylene - 2%. The ethylene based PVC production capacities in their turn can be broken down to suspension PVC production (8,105,000 ton, 90% of the ethylene based PVC production) and emulsion PVC production (884,000,000 ton or 10%). PVC production leaders are as follows: Ineos (18% of European PVC production capacities), Solvin (16%), Arkema (10%), Vinnolit (9%), Shin-Etsu (7.5%) and LVM (5%) (see the Appendix, fig.1). The diagram with key European producers of the suspension PVC is presented in the Appendix (Fig. 2). Ethylene based PVC production market players may be present at all three stages of PVC production (production of chlorine and sodium hydroxide as by-product from sodium chloride, production of ethylene dichloride by direct chlorination and oxychlorination of ethylene, production of vinyl chloride from ethylene dichloride, production of PVC by VCM polymerization), as well as any one of them.

Typical feature is the presence of ethylene dichloride production in close proximity with the chlorine production facilities and as the chlorine transportation may be difficult the ethylene is most often bought from ethylene producers. In addition the capacities may not correspond with each other at different stages and the companies may use self-produced semi-finished products (chlorine, ethylene, EDC, VCM) and purchase these components at the same time. For the purposes of reviewing the European production let us select the companies that integrate all the PVC production stages from chlorine production to VCM polymerization using both its own and purchased ethylene materials. Such producers are listed in the Appendix, Table 3. PVC producers in the South-East Asia China is the key PVC producer in the South-East Asia and the whole world. It is also the worlds No. 1 in terms of PVC production capacities: in 2009 the aggregate capacity achieved the level of 19,890,000 ton / year, that is 37% of the worlds total capacity). However such a high level is achieved due to large investments in construction of new production facilities prior to the global financial crisis. 2009 saw the aggregate utilization ratio of the PVC production in China reach 44% (in Europe this factor amounted to 68%, in other Asian countries 79%; while the production in China in 2009 totaled 7,734,000 ton / year or 26% of the global production level).

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PVC production in China is represented by two key types: an acetylene based and ethylene based and the former type prevails. The acetylene-based approach uses calcium carbide (as a rule produced from calcareous rock and coking coals which are more readily available in China than hydrocarbons) as key raw materials. Calcium carbide is used to produce acetylene which in its turn is used for the vinyl chloride monomer production In addition there are mixed type production facilities in China where the mix of vinyl chloride produced from acetylene and vinyl chloride produced from ethylene is polymerized. By end 2010 the capacity of PVC production from acetylene is expected to achieve 16,100,000 ton / year (81% of the total PVC production capacities in China), the capacity of PVC production from ethylene 3,040,000 ton / year (15%), that of mixed type production 750,000 ton / year (4%). Six key producers of PVC from ethylene may be selected in China (Appendix, Fig. 3) with all of them integrating the entire production chain from chlorine production to the polymerization. The remaining PVC production in the region originates mainly from Japan, Taiwan and South Korea. The largest facilities there belong to Asahimas Chemical (ASC, majority owned by Japanese Asahi Glass), LG Chemical Ltd from South Korea, Formosa Plastics from Taiwan as well as Shin-Etsu from Japan. These four countries account for 81% of production and 86% of capacities in the South-East Asia (see Appendix, Fig. 4).

PVC markets of Europe and South-East Asia: analysis of profitability and production cost

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Results of comparison
Results of Deloitte calculations are shown in Table 1 Table 1. Economic performance per 1 ton of PVC PVC price, EUR / ton PVC production cost, EUR / ton 866 673 Ethylene, EUR / ton of PVC 434 323 Chlorine, EUR / ton of PVC 161 100 Processing, EUR / ton of PVC 271 250 Utilization ratio, % of installed capacity if 100% if 100% Contribution margin, Euro / ton of PVC 190,85 81,47

Europe average South East Asia average

1 057 730

Table 2. Economic performance calculated on the basis of monthly production of PVC with breakdown by producers PVC sales, EUR 000 PVC production cost, EUR 000 6 499 7 405 8 174 8 540 9 132 9 647 9 620 10 635 10 719 16 347 18 245 20 434 20 970 21 439 23 417 29 856 14 933 Ethylene, EUR 000 Chlorine, EUR 000 Processing, EUR 000 Utilization ratio, % of installed capacity 82% 78% 82% 80% 83% 82% 81% 88% 82% 82% 81% 81% 82% 82% 69% 81% 30% Contribution margin, Euro / ton of PVC 158,78 247,93 158,78 56,69 160,03 158,78 155,6 170,38 158,78 158,78 151,51 151,51 158,78 158,78 123,25 151,51 -160,24 136,45 3 342 11 626 13 370 13 660 17 438 3 781 13 150 15 122 15 451 19 725 1 488 5 175 5 951 6 080 7 762 458 1 592 1 831 1 871 2 388 1 835 6 383 7 341 7 500 9 575 44% 44% 44% 44% 44% -65,10 -65,10 -65,10 -65,10 -65,10 -65,10

Gendorf, Germany Runcorn, UK Burghausen, Germany Tarragona, Spain Neratovice, Czech Republic Cologne, Germany Porsgrunn, Norway Stenungsund, Sweden Knapsack, Germany Rheinberg, Germany Tavaux, France Balan, France Marl, Germany Wilhelmshaven, Germany Kazincbarcika, Hungary Jemeppe, Belgium Rmnicu Vlcea, Romania Europe average Hebei Jinniu Chemical, China LG Dagu, China Tianjin Dagu, China Shanghai Chlor-Alka, China Sinopec Qilu Co. Ltd., China South East Asia average
12

7 647 9 427 9 617 9 076 10 762 11 352 11 282 12 679 12 613 19 235 21 313 23 871 24 674 25 226 26 510 34 876 12 967

3 138 3 539 3 947 4 103 4 421 4 659 4 634 5 208 5 176 7 894 8 788 9 843 10 126 10 353 10 889 14 381 5 326

1 164 1 313 1 465 1 523 1 640 1 729 1 719 1 932 1 921 2 929 3 261 3 652 3 757 3 841 4 041 5 336 1 976

2 196 2 553 2 762 2 915 3 071 3 260 3 267 3 494 3 622 5 524 6 196 6 939 7 086 7 245 8 488 10 139 7 631

Conclusions
Hebei Jinniu Chemical, China Sinopec Qilu Co. Ltd., China -65,1 13 Shanghai Chlor-Alka, China -65,1

200 150 100 50 0

158,8

158,8

160,0

158,8 155,6

170,4

158,8 158,8 151,5 151,5 158,8 158,8 123,3

151,5

56,7

Neratovice, Czech Republic

Tavaux, France

Balan, France

Wilhelmshaven, Germany

Runcorn, UK

Burghausen, Germany

Rheinberg, Germany

Gendorf, Germany

Tarragona, Spain

Cologne, Germany

Porsgrunn, Norway

Knapsack, Germany

Marl, Germany

Kazincbarcika, Hungary

Stenungsund, Sweden

-100 -150 -200 -250

Jemeppe, Belgium

-50

-65,1

-65,1

LG Dagu, China

250

-65,1

-160,2

European producers Chinese producers

1 2

Maximum feasible contribution margin of PVC production in Europe, 2009 Maximum feasible contribution margin of PVC production in Asia, 2009

Fig. 1 Contribution margin of PVC production in Europe and Asia, 2009

Average contribution margin of PVC production in Europe is 136,45 Euro / ton of PVC. Excluding non-profitable PVC production at Rmnicu Vlcea (Romania) the contribution margin is within the range between 56,7 Euro / ton of PVC (Tarragona, Spain) and 247,9 Euro / ton of PVC (Runcorn, UK). Subject to existing technologies and prevailing prices potentially achievable contribution margin will be 190,85 Euro / ton of PVC.

Given the existing capacity utilization ratio (52%, including 44% for China) the PVC production contribution margin in South-East Asia is negative (65,10 Euro / ton of PVC) for all the companies discussed. Subject to the full capacity utilization under prevailing prices the PVC production contribution margin is estimated at 81,47 Euro / ton of PVC.

Table 1. Structure of PVC production capacities in the world, 2009 Capacities, 2009 Asia (China) Asia (ex China) Europe Russia North America Latin America Near East Africa Oceania Total 000 ton / year 17 700 9 367 8 551 627 8 013 1 541 1 393 650 130 47 972 37% 20% 18% 1% 17% 3% 3% 1% <1% 100%

Table 2. Structure of global PVC production by regions, 2009 Production, 2009 Asia (China) Asia (ex China) Europe North America Latin America Near East Africa Oceania Total Total 000 ton / year 7 734 7 400 6 280 6 020 1 300 740 350 100 29 924 47 972 26% 25% 21% 20% 4% 2% 1% <1% 100% 100%

* Harriman data * CMAI data, Stream Report

PVC markets of Europe and South-East Asia: analysis of profitability and production cost

Tianjin Dagu, China

247,9

Rmnicu Vlcea, Romania

Appendix

* CMAI data, Stream Report * Harriman data

1,800 1,600 1,400 1,200 1,000 800 600 400 200 0

1,586 1,443

857

786 643 486 443 429 400 337

Ineos

Solvin

Arkema

Vinnolit

Shin-Etsu

LVM

Oltchim

Vestolit

Borsodchem

Anwill SA

Fig. 1. PVC production leaders in Europe, 000 ton / year, 2009

1,200 1,000 800

969

787

730

602 600 400

523 429 400 313 276 257 308 249

450

200 0 Solvin Ineos Vinyls Vinnolit Borsodchem

135 135 112

130 104 Ercros

Vestolit

Arkema

Oltchim

Spolana (Anwil)

Production, '000 ton / year Idle capacities Fig. 2. Production and total capacity of fully integrated suspension PVC production facilities in Europe, 000 ton / year, 2009

14

800 700 600 500 400 300 200 100 0

800

600

400

370 250 115

Tianjin Dagu Chemical

Sinopec Qilu

LG

Shanghai Chlor-Alkali Chemical

Tosoh (Guangzhou) Chemical Industries

Hebei Jinniu Chemical

Fig. 3. Suspension PVC production capacities in China (ethylene based), 000 ton / year, 2009

18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0

17,700

7,734

2,393 1,750 China Japan

1,754 1,470 Taiwan

1,498 1,295 South Korea

Production, '000 ton / year Idle capacities Fig. 4. PVC production and total capacity in Asia, 000 ton / year, 2009

PVC markets of Europe and South-East Asia: analysis of profitability and production cost

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* Upgrade of existing capacities * Mixed type (ethylene + acetylene) processing capacities * Harriman, CMAI data, Deloitte analysis

Producer

Location

Established in

Capacity growth 1960-1970

Solvin Oltchim Borsodchem Ineos Vinyls Vestolit Arkema Solvin Solvin Vinnolit Ineos Vinyls Ineos Vinyls Vinnolit Spolana (Anwil) Ercros Vinnolit Ineos Vinyls Vinnolit Tianjin Dagu Chemical Co. Ltd. LG Dagu Chemical Ltd. Sinopec Qilu Co. Ltd. Shanghai Chlor-Alkali Chemical Co., Ltd. Tosoh (Guangzhou) Chem Industries Inc Hebei Jinniu hemical

Jemeppe, Belgium Rmnicu Vlcea, Romania Kazincbarcika, Hungary Wilhelmshaven, Germany Marl, Germany Balan, France Tavaux, France Rheinberg, Germany Knapsack, Germany Stenungsund, Sweden Porsgrunn, Norway Cologne, Germany Neratovice, Czech Republic Tarragona, Spain Burghausen, Germany Runcorn, UK Gendorf, Germany China China China China China China

1949 1970 1963 1980 n/a n/a 1953 1958 n/a 1967 1950 n/a n/a n/a n/a n/a n/a 1939 1995 1966 1992 2007 1979 55 6

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Utilization % 1970-1980 1980-1990 1990-2000 2002 2004 2006 2008 2009 450 36 150 U 450 400 320 313 308 275 244 160 70 110 U 80 150 145 144 135 130 122 115 97 280 240 230 320 299 480 340 600 390 299 680 340 600 430 295 240 400 600 470 220 230 460 400 600 470 250 115 81% 30% 69% 82% 82% 81% 81% 82% 82% 88% 81% 82% 83% 80% 82% 78% 82% 44% 44% 44% 44% 44% 44%

PVC markets of Europe and South-East Asia: analysis of profitability and production cost

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PVC markets of Europe and South-East Asia: analysis of profitability and production cost

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