Chemical Cycles and the Outlook for 2006 ISM Chemical Group Mid-Winter Conference, Las Vegas February 24, 2006 Joseph Chang Editor.

Chemical Cycles and the Outlook for 2006

ISM Chemical GroupMid-Winter Conference, Las Vegas

February 24, 2006

Chemical Cycles and the Outlook for 2006

ISM Chemical GroupMid-Winter Conference, Las Vegas

February 24, 2006

Joseph ChangEditor

Forecasts from February 2005Forecasts from February 2005

Verdict:Forecasts:

Cycle upturn will continue in full swing Mostly true

Further profit gains for commodity group, but easy money’s been made in stocks

On the money!

Specialty chemicals are next to advance—both in profitability and stock prices

20-to-life!

Bullish CaseThe Best is Yet to Come!

Bullish CaseThe Best is Yet to Come!

Supply/demand to stay tight after years of underinvestment

Steady demand growth with consensus US GDP forecasts of 3.4% for 2006

Gulf Coast rebuilding

Fed rate hikes to halt

Energy prices to stabilize or fall

Low inventories

Middle East capacity delays

Large number of planned maintenance outages

Bearish CaseThe Party’s Over!

Bearish CaseThe Party’s Over!

New global capacity coming on in 2006 in China and Iran

Capacity creep to take advantage of high prices

Large price gap between US and Asian spot prices

Shifting global trade balance to topple upcycle

Declining US exports, increasing imports

US supply/demand to normalize after Hurricane-related disruptions

Wall Street Crystal BallWall Street Crystal Ball

E2006 % Change Stock price* P/E**

Dow ChemicalDow Chemical $5.38 $5.38 22%22% $43.36 $43.36 8.1x8.1x

Lyondell $4.03 40% $24.66 6.1x

HuntsmanHuntsman $2.92 $2.92 33%33% $19.49 $19.49 6.7x6.7x

Nova $4.53 421% $33.59 7.4x

EastmanEastman $5.76 $5.76 -7%-7% $51.82 $51.82 9.0x9.0x

Celanese $2.68 24% $19.02 7.1x

Georgia GulfGeorgia Gulf $4.00 $4.00 40%40% $32.43 $32.43 8.1x8.1x

DuPont $2.89 19% $40.24 13.9x

Rohm and HaasRohm and Haas $3.08 $3.08 7%7% $47.12 $47.12 15.3x15.3x

Hercules $1.04 22% $11.17 10.7x

ChemturaChemtura $0.97 $0.97 52%52% $12.94 $12.94 13.3x13.3x

Albemarle $2.54 19% $39.61 15.6x

Source: First Call*Prices as of close of Jan 12, 2006**Based on estimated 2006 EPS

Psychology is Key to Predicting CyclesPsychology is Key to Predicting Cycles

Cycles derived from human nature

(FEAR vs. GREED)

Contrarian approach needed

Prior Projections in 2000Why the Peak Never CamePrior Projections in 2000Why the Peak Never Came

peak to occur in 2002 or 2003, and be predominantly monomer driver. By this time NOVA

Chemicals will have approximately 2.5 times the polymer production capacity we had in1995.

construction and acquisition, has been timed to take full advantage of the expected

Many analysts expect the next

Our growth, through

peak in the earnings cycle.

Source: Nova Chemicals

Psychological Profile 2003Harbinger of the peak to come!

Psychological Profile 2003Harbinger of the peak to come!

Much less talk about the coming peak

WALL STREET CUTS PEAK FORECASTS

High oil and natural gas costs

Companies struggling financially

Lack of North American projects in the works, low level of capital expenditures

(Slide from CMR Speech 9/3/03)

Contrasting 2003 with 2000

Capital Spending as % of DepreciationMajor/Commodity Chemicals

Capital Spending as % of DepreciationMajor/Commodity Chemicals

Source: CMR

-100%

-50%

0%

50%

100%

150%

200%

250%

300%

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Dow Chemical DuPont Eastman Solutia Nova Lyondell Georgia Gulf

Steel Industry CAPX as % of DepreciationSteel Industry CAPX as % of Depreciation

-100%

-50%

0%

50%

100%

150%

200%

250%

300%

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

AK Steel US Steel Nucor Oregon Steel

US Steel (X)US Steel (X)

$0

$10

$20

$30

$40

$50

$60

$70

Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05

Source: Yahoo! Finance

Dour Mood in Mid-2003Dour Mood in Mid-2003

“In the previous ethylene trough of 1991 to 1992 and the

peak of 1995 to 1996, US chemicals have been fortunate enough to enjoy a favorable oil

to natural gas price ratio. Those lucky days seem to

have gone. Higher ethylene feedstocks could mean that

cash margins at the next cyclical peak are lower than in

previous peaks.”

June 2003

“In the previous ethylene trough of 1991 to 1992 and the

peak of 1995 to 1996, US chemicals have been fortunate enough to enjoy a favorable oil

to natural gas price ratio. Those lucky days seem to

have gone. Higher ethylene feedstocks could mean that

cash margins at the next cyclical peak are lower than in

previous peaks.”

June 2003

“The US is the highest cost ethylene producing region

in the world at current natural gas price levels.

Directionally, we expect the North American

petrochemicals industry to become a high-cost

globally uncompetitive producer serving a large

local market.”

June 2003Source: CMR

Nova Chemicals (NCX)Nova Chemicals (NCX)

0

10

20

30

40

50

60

Source: Yahoo! Finance

Bearish Forecasts

Jun 2003

Bearish Forecasts

Jun 2003

Early 2005: LONGER AND STRONGER

Early 2005: LONGER AND STRONGER

“We continue to believe that staggered

ethylene/chlor-alkali/styrenic

cycles will create a LONGER,

STRONGER peak.”

January 28, 2005

“We expect the coming peak to be

LONGER and STRONGER,

reminiscent of the 1988-89 peak.”

January 6, 2005

“We expect the coming peak to be

LONGER and STRONGER,

reminiscent of the 1988-89 peak.”

January 6, 2005

“We see a LONGER,

STRONGER ethylene peak extending into

2007.”

December 10, 2004

Source: CMR

Nova Chemicals (NCX)Nova Chemicals (NCX)

0

10

20

30

40

50

60

Jan-0

3

Mar

-03

May

-03

Jul-0

3

Sep-0

3

Nov-0

3

Jan-0

4

Mar

-04

May

-04

Jul-0

4

Sep-0

4

Nov-0

4

Jan-0

5

Mar

-05

May

-05

Jul-0

5

Sep-0

5

Source: Yahoo! Finance

Bullish ForecastsDec-Jan 2005

Bullish ForecastsDec-Jan 2005

Conclusion: Upcycle Intact!Conclusion: Upcycle Intact!

Wall Street bulls and bears battle it out

Investors skeptical

Valuations appear low

Companies positive, BUT CAPX REMAINS LOW

Healthy amount of fear

Specialty chemical prices and stocks to move higher along with commodities

Thank You!Thank You!

Joseph ChangJoseph ChangEditor

ICIS – Chemical Market Reporter360 Park Avenue South, 12th Floor

New York, NY 10010

T: 212-791-4224E: joseph.chang@icis.com