Singapore Singapore Shanghai Shanghai New York New York Houston Houston London London Düsseldorf Düsseldorf Dubai Dubai CARE Conference May 9, 2007 CARE Conference CARE Conference May 9, 2007 May 9, 2007 Jacob Pittman, Jacob Pittman, Consultant, Nylon Intermediates Consultant, Nylon Intermediates (281) 752 (281) 752 - - 3229 3229 [email protected][email protected]
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CARE Conference · Plastics? • Petrochemicals are the source of raw material supply – Plastics are just organized hydrocarbons • Energy demand establishes floor prices for petrochemical
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SingaporeSingapore ShanghaiShanghai New YorkNew York HoustonHouston LondonLondon DüsseldorfDüsseldorf DubaiDubai
CARE ConferenceMay 9, 2007
CARE ConferenceCARE ConferenceMay 9, 2007May 9, 2007
Jacob Pittman, Jacob Pittman, Consultant, Nylon IntermediatesConsultant, Nylon Intermediates
SingaporeSingapore ShanghaiShanghai New YorkNew York HoustonHouston LondonLondon DüsseldorfDüsseldorf DubaiDubai
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OilOil20 MM20 MMBPDBPD
RefiningRefining
93%93%TransportationTransportation
&&Heating FuelsHeating Fuels
NaphthaNaphthaGas OilGas Oil 7%7%
PetrochemPetrochem
GasGas60 B Cubic60 B CubicFeet/dayFeet/day Ethane, PropaneEthane, Propane
Natural Gasoline,Natural Gasoline,ButaneButane 5%
MethaneMethane(Fuel Gas)(Fuel Gas) 95%
GasGasProcessingProcessing
U.S. PetrochemicalsU.S. PetrochemicalsU.S. Petrochemicals
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Why Do Oil & Gas Matter to Plastics?
Why Do Oil & Gas Matter to Why Do Oil & Gas Matter to Plastics?Plastics?
•• Petrochemicals are the source of raw Petrochemicals are the source of raw material supplymaterial supply–– Plastics are just organized hydrocarbonsPlastics are just organized hydrocarbons
•• Energy demand establishes floor prices for Energy demand establishes floor prices for petrochemical feedstockspetrochemical feedstocks–– 62% of U.S. energy is supplied by Oil & Gas62% of U.S. energy is supplied by Oil & Gas
•• Where does it come from and where does Where does it come from and where does it go?it go?
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World Crude Oil Production and UsageWorld Crude Oil Production and UsageWorld Crude Oil Production and UsageCrude Oil SupplyCrude Oil Supply
7%7%6%6%
13%13%
4%4%
35%35%
35%35%
U.S.U.S.North SeaNorth Sea
CISCISChinaChina
OPECOPECOtherOther
Crude Oil DemandCrude Oil Demand
25%25%
20%20%
5%5%8%8%7%7%
35%35%
U.S.U.S.North SeaNorth Sea
CISCISChinaChina
Middle EastMiddle EastOtherOther
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U.S. Crude Oil Supply and DemandU.S. Crude Oil Supply and DemandU.S. Crude Oil Supply and Demand
Source: U.S. Energy Information AdministrationSource: U.S. Energy Information Administration
Source: U.S. Energy Information AdministrationSource: U.S. Energy Information Administration
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Relationship of Oil & PlasticsRelationship of Oil & PlasticsRelationship of Oil & Plastics
•• If plastics come from oil (hydrocarbons) If plastics come from oil (hydrocarbons) can baseline value relationships be can baseline value relationships be developed?developed?–– YesYes
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$/kg ratio to Crude Oil($/Tonpolymer per $/TonCrude)
$/kg ratio to Crude Oil$/kg ratio to Crude Oil($/($/TonTonpolymerpolymer per $/per $/TonTonCrudeCrude))
Ratio (Polymer $/ton to Crude $/ton)Ratio (Polymer $/ton to Crude $/ton)
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Establishing a Floor PriceEstablishing a Floor PriceEstablishing a Floor Price•• Since we are comparing hydrocarbons Since we are comparing hydrocarbons
substitutions shouldnsubstitutions shouldn’’t we also look at the t we also look at the relationship on an energy (Btu) basis?relationship on an energy (Btu) basis?–– Yes, the laws of thermodynamics still apply, Yes, the laws of thermodynamics still apply,
consuming less hydrocarbons is ecologically consuming less hydrocarbons is ecologically preferable to consuming more preferable to consuming more
–– Lowest value in concept is a products fuel value Lowest value in concept is a products fuel value (plastics are just organized hydrocarbons)(plastics are just organized hydrocarbons)
0.950.95Btu per PoundBtu per Pound Dollars Per PoundDollars Per Pound
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Fitness for UseFitness for UseFitness for Use
•• Why do different hydrocarbon forms (oil, Why do different hydrocarbon forms (oil, gas, coal, etc.) have different prices?gas, coal, etc.) have different prices?–– Fitness for use via systems economicsFitness for use via systems economics
•• There are not adequate systems available There are not adequate systems available for thermal recyclingfor thermal recycling
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How Do I Determine Market Price For My Product?
How Do I Determine Market Price How Do I Determine Market Price For My Product?For My Product?
1.1. Sell some (A lot actually)Sell some (A lot actually)2.2. Estimate vs. available alternativesEstimate vs. available alternatives3.3. Discounted Ratio vs. Oil Discounted Ratio vs. Oil
•• Deduct for less than prime grade; quality, Deduct for less than prime grade; quality, delivery, terms, etc.delivery, terms, etc.
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Estimating vs. Available Alternatives
Estimating vs. Available Estimating vs. Available AlternativesAlternatives
•• Obtaining estimated pricesObtaining estimated prices–– Trade magazines publish prices that are high Trade magazines publish prices that are high
relative to the market and prices rarely move relative to the market and prices rarely move with short term price changeswith short term price changes
•• Industry Reports (CMAI)Industry Reports (CMAI)–– Report prices are less expensive than bad Report prices are less expensive than bad
decisions!decisions!–– Good indicators of the market (contracts often Good indicators of the market (contracts often
tied to these reports)tied to these reports)–– Large buyers typically buy at a discountLarge buyers typically buy at a discount
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Polypropylene Price Ratio to CrudePolypropylene Price Ratio to CrudePolypropylene Price Ratio to CrudePo
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How Do I Use This Information?Go/No-Go Evaluations
How Do I Use This Information?How Do I Use This Information?Go/NoGo/No--Go EvaluationsGo Evaluations
•• Maximum ratio to crude $/ton = Highest Maximum ratio to crude $/ton = Highest price obtainable for virgin polymer (not price obtainable for virgin polymer (not likely sustainable)likely sustainable)–– $60$60 x x 7.3 Bar.7.3 Bar. x x 3.9 3.9 tontonoiloil = = $1,708$1,708 = = $0.77$0.77
Bar. Bar. tontonoiloil tontonpolymerpolymer tontonpolymerpolymer lb.lb.polypoly
•• Minimum ratio to crude $/kg = Lowest Minimum ratio to crude $/kg = Lowest price virgin material is likely to be supplied price virgin material is likely to be supplied to the market to the market –– $60$60 x x 7.3 Bar.7.3 Bar. x x 3.1 3.1 tontonoiloil = = $1,344$1,344 = = $0.61$0.61
Bar. Bar. tontonoiloil tontonpolymerpolymer tontonpolymerpolymer lb.lb.polypoly
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Polypropylene Price Ratio to CrudePolypropylene Price Ratio to CrudePolypropylene Price Ratio to CrudePo
etc.)etc.)$0.02/lb. Shipping$0.02/lb. Shipping$0.01/lb. Overhead and other$0.01/lb. Overhead and other$0.50/lb. Total delivered to customer cost$0.50/lb. Total delivered to customer cost
15% Target margin15% Target margin
$0.57/lb. Hurdle Price$0.57/lb. Hurdle Price
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Polypropylene Price Ratio to CrudePolypropylene Price Ratio to CrudePolypropylene Price Ratio to CrudePo
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Estimating Actual Recycled PriceEstimating Actual Recycled PriceEstimating Actual Recycled Price
$0.70/lb. Published Price$0.70/lb. Published Price-- $0.02/lb. Less 2% for indexing to reach actual price$0.02/lb. Less 2% for indexing to reach actual price-- $0.07/lb.$0.07/lb. Less 10% for recycle delta to virgin priceLess 10% for recycle delta to virgin price$0.62/lb. Total delivered to customer cost$0.62/lb. Total delivered to customer cost
Margin at $0.62/lb. = 24%, Not bad butMargin at $0.62/lb. = 24%, Not bad but……what what happens when virgin margins go to bottom of range?happens when virgin margins go to bottom of range?
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Polypropylene Price Ratio to CrudePolypropylene Price Ratio to CrudePolypropylene Price Ratio to CrudePo
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Estimating Actual Recycled PriceEstimating Actual Recycled PriceEstimating Actual Recycled Price
$0.61/lb. Virgin price with low margins in chain$0.61/lb. Virgin price with low margins in chain-- $0.01/lb. Less 2% for indexing to reach actual price$0.01/lb. Less 2% for indexing to reach actual price-- $0.06/lb.$0.06/lb. Less 10% for recycle delta to virgin priceLess 10% for recycle delta to virgin price$0.54/lb. Total delivered to customer cost$0.54/lb. Total delivered to customer cost
Margin at $0.54/lb. = 8%Margin at $0.54/lb. = 8%
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Polypropylene Price Ratio to CrudePolypropylene Price Ratio to CrudePolypropylene Price Ratio to CrudePo
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Do The Math!Do The Math!Do The Math!
•• Challenge your assumptions!Challenge your assumptions!–– Have a non vested party challenge your Have a non vested party challenge your
assumptions (be careful who you ask!)assumptions (be careful who you ask!)•• You told your wife she looked nice in that dress You told your wife she looked nice in that dress •• Your mother told you that you could be PresidentYour mother told you that you could be President•• Your friends said she would go out with youYour friends said she would go out with you
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ConclusionsConclusionsConclusions
•• Polymer prices track crude oilPolymer prices track crude oil•• Value is determined by propertiesValue is determined by properties•• Accurate math performed on bad Accurate math performed on bad
assumptions yields a bad assessment assumptions yields a bad assessment –– Do the Math!!!Do the Math!!!
•• Check your workCheck your work•• Have someone else check your work and assumptionsHave someone else check your work and assumptions•• Conventional wisdom is often wrongConventional wisdom is often wrong
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Providing high quality, clientProviding high quality, client--focused services directed towards focused services directed towards developing valuable relationships for nowdeveloping valuable relationships for now……