Outlook for the International PVC Market

1. Outlook for theInternational PVC Market June 2005 Stephen Harriman – Harriman Chemsult

2. The PVC market • China • In Summary

3. PVC production by region, 1995-2005 35 Asia North America 30 West Europe Others 25 20 15 10 5 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

4. World PVC balance, 1990-2004 40 Capacity 35 Production Apparent Consumption 30 25 20 15 10 5 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

5. Regional PVC Prices 1200 1000 800 600 400 200 0 1998 1999 2000 2001 2002 2003 2004 2005 Asia Spot $/mt cif West Europe, Domestic Market, Pipe (Competitive Converters) €/mt fd USA, Domestic Market, Pipe (Competitive Converters) $/mt

6. FPC Westlake Georgia-Gulf OxyVinyl Certainteed Royal Group ShinTech North American vinyl sector integration Chlorine EDC VCM S-PVC Finished products

7. Aiscondel Arkema EVC LVM SolVin Norsk Vestolit Vinnolit ShinEtsu Hellenic Anwil Cires Borsodchem Oltchim Spolana European vinyl sector integration Chlorine EDC VCM PVC Finished products

8. The PVC market • China

9. Japan: Tosoh South Korea: LG Taiwan: FPC USA: Westlake Japan: ShinEtsu South Korea: HanWha USA: Georgia Gulf USA: OxyVinyl Outside investment in Chinese PVC YES NO

10. Chinese PVC output in a global context 35 China 18.6 14.2 30 ROW % China 25 20 4.5 15 10 5 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

11. Chinese PVC balance 8000 Apparent Consumption 6000 Exports Imports 4000 Production 2000 0 -2000 -4000 -6000 -8000 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

12. 50.1 36.5 4.2 The importance of imports in China 9000 60 Imports 26.1 Production 8000 50 % Imports 7000 6000 40 5000 Production/Imports (000mt) 30 % Imported 4000 3000 20 2000 10 1000 0 0 1992 1994 1995 1997 1998 2000 2001 2003 2004 1990 1991 1993 1996 1999 2002 2005

13. Implications of Chinese PVC self-sufficiency • There are two implications: a) increasing availability of Chinese exports and b) more importantly, a dislocation effect for existing suppliers. • Until recently the prospect of Chinese PVC exports of consequence was not an issue. • The drop in domestic prices in China, however, has prompted some coastal producers to export material. • The small scale of this trade means that this is currently more of a psychological, rather than volume, issue, but it does illustrate the change in the complexion of the Chinese PVC balance. • There will be an intermediate phase where PVC flows both in and out of China, but over the longer term there is the spectre of Chinese exports occurring on a more structured basis.

14. Implications of Chinese PVC self-sufficiency • Changes in the pattern of PVC trade into China have the potential to cause a ripple effect around the world. Possible scenarios include: • Increased Asian exports to the west coast of the USA • Increased Asian exports to India and the Middle East • A subsequent dislocation impact of material from these areas potentially affecting Europe. • In terms of dislocation, the major victims will be countries like South Korea, Taiwan and Japan. • The perception of acetylene-based PVC is also changing. Although certain producers manufacture questionable quality material, the newer plants are able to offer a credible export alternative to ethylene based PVC.

15. Taiwan 29% Asia Others Japan 24% 78% 22% South Korea 11% Thailand 7% Indonesia 4% Other Asia 3% Europe 10% (largely Russia) North America 9% (mostly USA) Others 3% Sources of Chinese PVC imports 2003

16. 551 470 213 1235 USA South Japan Korea Taiwan Thailand Malaysia Indonesia Importance of China as a PVC destination 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% % ROW % China

17. Importance of China in World PVC trade 10000000 30 World Imports 9000000 China Imports 25 8000000 % China 7000000 20 6000000 Imports (mt) 5000000 15 % China 4000000 10 3000000 2000000 5 1000000 0 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

18. Chinese PVC capacity • One of the misinterpretations of the development of the Chinese industry has been the belief that the acetylene route is a) an old technology and b) that is places limitations on plant capacity. • Both these myths have been dispelled. The majority of new expansions in China are acetylene-based and the size of new acetylene plants is now well into the 200-300,000mt/year scale. • The Western model of integrated cracker-vinyl plants has not really evolved in China because of the success of the acetylene route and the reluctance of olefin producers to get involved with chlor-alkali.

19. Average PVC plant size by region 2005 400 347 300 200 149 117 101 100 0 Asia Africa World Europe Eastern America America North Latin Europe Oceania Western Middle East

20. 160 117 97 Average Asian PVC plant size 2005 350 327 300 250 200 150 100 50 0 Asia Asia China Japan India Taiwan South Excl. China Korea

21. Chinese limiting factors • The development of the vinyl industry in China is not without its growing pains. These can be summarised: • Economy – outside of the coastal regions, China is fundamentally a rural economy. • Logistics – there is a problem in China, with a domino-effect of getting product out of the market: this has underpinned the development of the acetylene route as you also can’t move ethylene/EDC/VCM any distance in inland China. • Caustic soda – logistics also affects the movement of caustic soda, which is largely sold as a 50% solution. This can inhibit operating rates at chlor-alkali plants. • Raw material shortages – power, salt and ethylene

22. Regional production costs 350 1999 2001 2002 2003 2004 2005 300 250 200 150 100 50 0 Middle Brazil Western Europe China Japan USA East

23. Regional power cost range 2005 350 300 250 200 150 100 50 0 Middle Brazil Western China Japan USA East Europe

24. Chinese salt trade balance 1500 +911 1000 500 0 -500 -1000 Exports -1500 Imports Net trade -2000 -1345 -2500 2001 2002 2003 2004

25. China Mer. Ethylene 2% China Acetylene 24% China Unspecified China VCM Imp. 9% 26% New Asian PVC projects by feedstock type Vietnam Philippines Indonesia Japan Thailand South Korea India China Ethylene – 26% ETHYLENE OTHERS 50% 50%

26. Chinese capacity by location and region NORTH WEST 6% 28% NORTH EAST 37% ALL CHINA EAST 24% Acetylene Ethylene Merchant ethylene Imported EDC SOUTH Imported VCM 6%

27. Acetylene Ethylene 28% 29% Merchant ethylene 3% Imported VCM 10% Unspecified 30% Future capacity in China by type

28. Calcium carbide price RMB 2100/mt Acetylene raw materials RMB 5619/mt Conversion cost RMB 250/mt Total cost of acetylene RMB 6319/mt Acetylene cost RMB 2857/mt Hydrogen chloride cost RMB 1289/mt Conversion cost RMB 250/mt Total cost of VCM RMB 4846/mt VCM cost RMB 4945/mt Conversion cost RMB 300/mt Total cost of PVC RMB 5695/mt Full cash cost ex-works RMB 5695/mt (US$688/mt) Acetylene-based PVC economics Acetylene cost: VCM cost: PVC cost: Cost of PVC from carbide: Harriman Chemsult estimates

29. The PVC market • China • In Summary

30. In summary • North America – the major event is the potential commissioning of the Shintech unit and dislocation to the market of the introduction of new major capacity. • Europe – the ongoing absence of investment owing to poor margins and so a continuation of the relative balance across the region. There are longer term prospects for investment in Russia. • Middle East – the fundamental problem of cheap feedstock versus limited domestic demand, with a continuation of the model of exporting ECUs (caustic soda & EDC/VCM). • Africa – the absence of any investment. • Latin America – a growing caustic soda deficit stimulating demand for new vinyl capacity. • Asia – the potential inability of China to absorb increases in supply. The prospects for a dislocation to existing exporters to China and the possibility of Chinese exports of PVC.

31. China 73% Asia Others 81% 19% India 5% Other Asia 3% Middle East 6% Europe 7% Others 6% New PVC capacity, 2005-10

32. PVC capacity by region 35 30 25 2001 2005 20 2010 15 10 5 0 Asia Europe North America Middle East Others

33. In summary… When China sneezes… …the World catches a cold