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Current Trends in Latin American Polyolefin Market

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Recorded: June 25, 2013
Presented by: George Martin, ICIS

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Current Trends in Latin American Polyolefin Market Summary of Content
Polyolefin trade flow in the region, Challenges in Latin America, Polyolefin prices (PE/PP) and market trends, Import tariffs, Logistics and policy issues, Economic considerations, Impact of shale oil and gas in the region, Supply/demand balances for PE and PP, Impact of LNG exports, Conclusions


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Monica: My name is Monica Mendoza. I'm an Associate Marketing Manager at ICIS. Before we start with the webinar, I just wanted to briefly introduce ICIS and our speaker today, George Martin.

ICIS is the world's largest petro chemical market information provider and we also have fast growing energy and fertilizer divisions. ICIS is part of Reed business information, a provider of business information, data and marketing solutions. Our BI in turn, is a part of our larger parent company, Reed Elsevier, which is a leading provider of information solutions.

At ICIS, our aim to give companies in the petrochemical energy and fertilizer industries, a competitive advantage. We do this by delivering trusted pricing data, high value news, analysis and independent consulting, that enables our customers to make better informed trade and planning decisions.

Our global team covers over 180 commodities across markets, in Asia Pacific, Europe, Africa, the Middle East and the Americas. If you'd like to learn more about ICIS, you can visit our website at icis.com.

And now, it is my pleasure to introduce today's speaker, George Martin who will be talking about Polyolefin Market Trends in Latin America.

George Martin has been a commodities reporter since 1994 and has extensive experience covering polymers. George has been an editor with ICIS for nine years now, covering the Latin American market.

Previously, George initiated the "Latin American Wire", a publication, covering crude oil and refined products in that region [inaudible 00:01:40]. George studied Mechanical Engineering at the Catholic University of Cordoba in Argentina and Information Science, at the National University of Cordoba, also in Argentina. He immigrated to the U.S. in 1976.

George is well known in the sector, for his expertise in polymers, pricing dynamics and logistics and he has spoken at many industry events. Before I turn over to George, to start the presentation, I would briefly like to mention that we will have a question and answer session, at the end of the presentation.

When the presentation is over, you can submit your questions via the question box, which you should be able to see on your screen on the control panel at the right. We will read the questions, as they come in and provide answers.

If we run out of time, we will follow up on any outstanding questions, after the session. And with that, I turn over the presentation, to George.

George: Good Morning everyone. Today, we're going to jump straight ahead, into the agenda, we have a lot of ground to cover. We're going to talk about Polyolefin trade flow in the region, some of the challenges we see, in Latin America. We're going to see a historic view of Polyolefin prices and where we stand today.

Some of the impact of import tariffs in the, in the trade in the region, supply demand balances for Polyolefin and Polypropylene. Briefly, we're going to talk a little bit about, the impact of shale oil and gas, in the region and the changes, that is creating.

We're going to talk about, some of the change factors that are having a profound influence in the price of Polyolefins, mainly Ethylene and Propylene. All of these will have a few conclusions, supported by what we are going to present.

Talking about the regional snapshot, we can say that region of Latin America is very important. We mention here, 21 countries and the we have to say, we apologize, because we're not sure, we know the Caribbean Islands and the smaller countries. In general, we're focusing on the countries which are more important for the petrochemicals.

With the population of nearly 600,000,000, the region promises to be very important, for trade in the world. Although we see here, 21 countries from the petro chemical point of view, we have to say that, only a handful of those, are the ones that matter, in terms of the having high production and high consumption of petrochemicals.
If you see at the last point here, Brazil, Mexico, Argentina, Columbia, Peru and Chile, comprise the 90% of the region's gross domestic product.
This slide shows the global trade of Polyolefins. It looks like a complicated figure but, just to explain it briefly, the areas the show a surplus of material will be North America and the Middle East. Also, also in part though it is not shown here Korea, Indonesia we have a South East Area of Asia is also an exporting area.

Whereas you know, the Middle East, whereas Africa, South America and some regions of Europe are areas of the country, that are not self sufficient and need some type of imports from the exporting areas.

We can see, in Latin America, that the deficit is more pronounced in Polyolefin and not in Polypropylene. Polypropylene we still have some deficit in the region but not as much.

Also, not depicted here, there are some other flows of product, like for instance, we see sometimes, product from Repsol, Spain's Repsol going to Latin America, in very small volumes.

Sometimes, we see product from Sasol in South Africa going into Latin America. But mostly, Latin America is supplied by influx of Middle East, Korea or the U.S. also. The price drivers for Polyolefins are many several but, the three most important would be the raw materials costs, supply and demand factors and other factors that we're going to mention briefly.

Definitely, the raw materials, the availability of raw materials, the cost of raw materials, the cost of producing the raw materials and the cost of transportation is one of the main, elements you know, forming the price.

Supply and demand of course, plants utilization, plant that is running at 100%, close to 100%, will supply a lot better than the one, that is stopped, you know, one that is running at 50%.

Maintenance turnarounds affect supply all the time and the amount of inventories on hand throughout the petrochemical change is also a big cause of change in the prices.

Other factors are like, import tariffs, politics, market expectations, the seasonality, especially in the Caribbean, we have hurricanes every year. The location of a particular buyer or seller is also important because it tells people how easy or how difficult it is to ship materials to that location.

Then, we have all the intangible. You know, the plants that go down unexpectedly, accidents, explosions, hurricanes etc.
In this slide, we see the Ethylene supply chain. Keep in mind that, this slide is not intended to give you a primer on petrochemicals and it's only intended to show, that Ethylene is a very important, basic petrochemical, that is, just about in everything.

The most important application for Ethylene will be for production of Polyethylene. More than 50% of the production of Ethylene goes into producing Polyethylene, which is one of the things that we're going to talk about today. If we know, what's happening with the raw materials, we have a leg up in knowing, what's happening with Polyolefin. In this case, we're seeing here, in the chart, U.S. Spot Ethylene, we're seeing a little more than two years of ethylene and we can see that it is a very volatile commodity.

One thing that we can observe right away, is that, at the beginning of each year, the prices usually go up, drastically and that's usually is caused by the maintenance turnaround for all the crackers, which are usually done, at the beginning of the year.

From January to, about March, the prices go up very sharply and then, they slowly start coming back down, as soon as the crackers and all the production, goes back to normal.

We have seen that happening, for the last three years running and this year has not been an exception. The only difference this year has been the prices have not gone up so drastically, as they were, last year.

This year, all the prices went up with all the maintenance, not as much and ever since the process started to come down, as we are approaching the middle of the year, we still see a lot of volatility in Ethylene on the right end of the curve. It's hard to tell, what's going to happen to Ethylene, in the next few weeks or months. In general, we could say that, because of most of the requirements coming up, that prices should still go down a little bit but, it's not really all that clear. We have many settlements still, to be agreed on, on Ethylene before we can get some conclusions on the performance of Ethylene. Anyway, keep in mind that wherever Ethylene goes, Polyethylene will follow.
This chart shows the performance of prices, actually low density polyethylene prices in Latin America. We can see in all of these curves that the price in Brazil, the red line on top, are typically the highest in the region.

This has some explanation. Part of the problem or part of the reason why this is this way, is that the prices in Brazil include two tax components, the PIS and [inaudible 00:11:32] taxes, which add about 9-1/4% to the price. Roughly, if we remove 10% out of that price in Brazil, we're going to get the price, which is more similar to the one of Argentina.

Even still, the prices the Brazil will be a little higher but, not as much, the prices will be very similar to Argentina. Argentina is the second line, the blue line.

The third line is very special because it's so flat. That belongs to Venezuela. We have had steady prices for, almost a couple of years and we see that towards the right, we see a dip in prices in Venezuela.

That marks the date in which the evaluation was made from 430 Bolivars per dollar, to 630 in Venezuela. Prices came back up immediately because of the price if the imported component of Polyethylene in Venezuela.

Whether it was to be, to price those imports at a certain level that would being everything back to the levels before the evaluation or not, we cannot tell. But the fact is that the prices on average are more or less now, back to where they were, maybe a year ago, before the evaluation.

The last three lines correspond to Columbia, Chile and Mexico. They seem to be, the most competitive prices. The main reason why those prices are so competitive and so low, is that those countries have very competitive markets, open markets, very low, tariffs and they receive materials from many places.

Mexico, receives material from the U.S. free of tariffs because of the North American Free trade agreement, also known as NAFTA. Chile and Columbia are two counties also known for receiving materials from many regions of the world, and having low import tariffs.

If we look at the Mexico curve, we see a marked increase at the end of the curve, which reflects the last increase that [inaudible 00:13:49] in Mexico has done, mostly, to compensate for a large variation in currency.

We can see the same in Brazil, it's not that the prices in Brazil are going down so much, you know, keep in mind that here, the prices are expressed in U.S. dollars per metric ton.

Even if the prices in Brazil have not changed by much in Brazilian eyes, still the fact that the currency has lost a lot of ground versus the U.S. dollar, has made the prices in expressing dollar per metric ton, to go down. This is something that Brazilians will have to address, I guess, in the next price setting. After looking at the charts, that we just saw, everybody would say, everybody who has something to sell, would think that Brazil will be the best destination because this is where the prices are the highest but, that is not always the case.

This table shows the import tariffs in many countries of Latin America and we can see that they can vary very much. We have countries like Argentina, Brazil, Venezuela, Bolivia and Paraguay, Uruguay, up to a certain point, that have very high import tariffs.

Even when they may have nice volumes to purchase, it's not very easy to negotiate with those counties, especially because you have to have, a competitive price after paying all of these import taxes. There are many other countries like, Chile, Peru, Ecuador, Guatemala you know, that have zero import tariffs but the downside, to trading with those nations would be that, their volumes would be small in relationship to the demographics of each country.

Now those are small countries with small populations and their consumption cannot be that great because of that reason. This import tariff, it's something to watch, if you're going to trade with any of these countries, that's something to keep in mind, definitely.

In terms of production, here we see the production of low density polyethylene in the American continent. That, this chart includes the U.S. and Canada. And the reason we have included the U.S. and Canada is, to show that the production in Latin America is not that great, in context, with the production of the U.S. and Canada.

Now, if we remove the U.S. and Canada component, the chart changes significantly, showing that Brazil has the largest petro chemical industry in region and produces more than 50% of the low density polyethylene in the region.

The numbers on the bottom of the chart will show you the production of each country and which is... those are the numbers used for the preparation of this chart.

If we go to linear low density polyethylene, we find the similar picture. With Brazil dominating production, followed by Argentina and Mexico and Venezuela. Again, the figures are in the bottom. Not much changes for high density polyethylene production. Brazil's still the dominant force, followed not so closely by Argentina and Mexico and Venezuela. This table summarizes everything we have seen in the other charts. It shows, altogether, in one place, the production of low density polyethylene, linear low density polyethylene, high density polyethylene and this amounts to almost 5,000,000 tons a year combined.

Keep in mind, this is the nominal capacity, so actual production of these countries, is likely to be slightly less, let's say maybe, 75-80% of the numbers you see here. This data comes from our ICIS plans and projects. It's a group of people at ICIS, that gathers this information for everybody to access. You can access it, going to our website. Now, what's going to happen in Latin American terms of, addition of capacity? What are the changes in polyethylene supply, that we see ahead? In general, we have seen that there's been many projects talked about, in the past five six years.

Beginning with Venezuelan projects, [inaudible 00:19:00] and [inaudible 00:19:01], they have a memorandum of understanding. They even started making all the feasibility status for projects, very ambitious projects in Venezuela, considering that Venezuela has natural gas and has oil and has natural resources.

All of these things came to halt when the 2008, recession came and also, that coincided with Saudi Arabia in general, with the Middle East having a tremendous increase in production of Polyolefin's. So, that kind of cooled off all the plans you know, to making this new plant.

The project provided for a large cracker in the very large production of polyethylene and polypropylene, which Venezuela couldn't possibly have solved by itself. So, not having an export market, was really a big problem. In addition to other problems, like you know, funding the project or finding the proper political environment, not just to guarantee business in the area. Also, projects in Brazil, mainly the project from Rio de Janeiro, has also had a series of delays.

Seems to be going ahead with changes but, it will probably be a couple of years until, we know for sure, what going to happen with this project. We had projects in Peru and Columbia, especially in Peru because of Camisea.

[inaudible 00:20:42] also has a foot on every country, has been trying to secure a position, secure a contract or some initial talks with Peru, to be a market participant, whenever the conditions are ready to start utilizing the Camisea gas, that Peru produces. There are a few projects in Columbia also. Columbia, as you may have seen, has only production of low density polyethylene but, intentions are to have production of high density and linear low density polyethylene in the future. We don't know, when that is going to happen.

In the end, though there are many other projects and expansions, in many other countries but the only one that is a reality is, Mexico's ethylene 21 projects, you know, which will have production, according to their owners, [inaudible 00:21:39], probably in the second half of 2015.

Some people say, I'm more pessimistic and they say, early 2016 but, the owners insists that end of 2015, will be the date. This is a good project, in the sense that they have secured now, natural gas from Pemex, at competitive prices and they have the plant in the country, that has a very large need for additional volumes of polyethylene.

They will furnish their own ethylene with cracker in their own polyethylene in a country that right now, has a large deficit, which is mostly supplied by the U.S., with the NAFTA agreement.

[Braskem Idesa], they are very aware that, they will not replace all the products from one month to the next one. They are preparing the market to, export some of their production, to begin with, to different, other counties in Latin America, that may need additional volumes. These are some of the pictures of the project, facilitated by Braskem Idesa, showing that the project is on schedule, at about, maybe 35% completion now. So far, everything seems to point that this production will occur timely, at the end of 2015. What can we say, in terms of Latin American Demand? In 2012, this is the distribution that, our ICIS consulting group has created. We can see the usual suspect, you know, countries like Mexico and Brazil because of their demographics and their large population and their advanced industry, they have the most demand for polyethylene.

Most other countries are growing their demand for polyethylene rapidly also but, still the numbers. If we remove the large players in the region, the numbers will be very small for all the other countries.

If we look at a projection of Latin American demand for polyethylene, this is ICIS consulting group has produced. The dotted line represents a part that is a projection, that is not a reality yet.

They do project that, polyethylene demand will increase at about 1.3%, 1.3 times, the gross domestic product of each country. You can see that the last two points, have been plotted in five year intervals. Nothing special occurs in that part of the chart, on the right and that's the reason, we have circled those three values because those depict five year intervals, instead of one year intervals. Nothing special happens there that will increase demand. Let's say that the demand will continue growing at more or less, the same pace.

Here, we start talking about the propylene chain. Also, propylene it's a very ubiquitous commodity, it's on everything, it's one of the most versatile commodity.

It's a product that is slowly, replacing or encroaching in the field of many other plastic resins. With this said, still the main use of propylene will be polypropylene as it's marked here, in the chart. That's the reason why we were going to talk now about polypropylene, which is the topic of our conversation today. Knowing where propylene is headed, we can tell something about where polypropylene will be headed soon. Here we have a little more than two years of propylene and just similarly to ethylene, we are seeing that propylene prices go up at the beginning of the year with the maintenance of crackers.

Although, we have to remember that, crackers are not the main source of propylene, refineries are. You know, whenever the gasoline season comes, the production of propylene increases and when gasoline fortunes are down, propylene goes down.

We have seen the same volatility prices usually get to the lowest point around the middle of the year, maybe September, October and slowly at the end of the year, the demand goes down a bit and slowly starts going back up and whenever January starts, now with all the maintenance procedures, propylene prices usually sky rocket.

When that happens, demand disappears, people know that this is [modeled], that it may not last. What they do, they build up their stocks in December, ahead of the high prices and they, try to go back to the market maybe, in March, when the prices may be going down. That is something that we have seen, repeating in the last couple of years.

Looks like, prices of propylene prices have touched bottom now and they are beginning to grow. We don't know, where they will go from now, they could go up or down but, the estimation of our observers, market observers here, at ICIS, is that, whichever way it goes, up or down, it will not be by March, the variation maybe small.

Here we have the Domestic Latin American polypropylene prices. This curves have a much similarity to, what we have seen for polyethylene. The prices in Brazil, seem to be the highest in the region. Also, with that tax component and followed by Argentina and all the other countries.

Again, it shows that, the curve's going down, the prices going down in the last few weeks, the last couple of months. Simply, they are exaggerated by the fact that their currencies have gone down so sharply. Keep in mind that part of what you're seeing here is in part produced by currency variations.

As you can see, as we have seen for polyethylene, the line for Venezuela, is a flat line, which goes down, whenever the evaluation of the Bolivian, Venezuelan currency happened in February and since Venezuela does not have much need for imports of polypropylene, the prices have remained at a lower price.

We don't know for how long this will happen but we are accustomed to not seeing very many changes in prices in Venezuela under the current circumstances. See, the production of polypropylene shows, seen in the picture, Brazil dominates production, followed by Columbia, Mexico, Argentina and so on.

This is a, it's a constant in Latin America or Brazil, with its large population and large petro chemical industry, always dominates production. This is the table that summarizes the production, polypropylene production capacity for each country, going to about, almost 3.6 million tons a year and also, keeping in mind, that this is nominal capacity and is not, actual production capacity.

In terms of demand for polypropylene, again, the demographics play the most important role, Brazil and Mexico, that have the largest relations, have the larger demand, followed by Columbia, Argentina, Venezuela and some of the other counties that we've seen in the other charts. Our consultants at ICIS, have a similar projection.

They seem to think that the gross of polypropylene demand will be a little higher, than polyethylene, that polypropylene will grow at a higher rate and again, the change in direction in the curve at the end, is caused by the change in interval.

There's a five year interval at the end of course, is a steep change in the direction of the dotted line but, nothing special occurs, in that time, that will cause that particular change.

Now, we're going to talk about some other aspects and factors which are, having an impact on the prices of Polyolefins.

In general, we look at crude oil, as a big clue, as to what is going to happen to the prices of Polyolefins because we have determined close relationships between crude oil and petrochemicals.

Now here we have several years in prices, since 2005 to present in crude oil. The big pick in process was in 2008, when the prices reached, $145.00 or something like that. Then the prices came down and they've recovered.

We have seen that, for the last two or three years, the prices have been moving, in a relatively narrow band, anywhere from $80.00 per barrel to $100.00 per barrel. In that, where we are today, you know, the charts, it's a little short in data but, two or three weeks, maybe a month, that is missing in the chart has not shown any variation over what we see here. You know, prices remain in between $80.00 and $100.00 per barrel and that's what we envision they will continue for a while.

Why crude oil is important you know, as an indicator? This chart shows why that happens. You know, the green line is our petro chemical index, we call the IPEX Petro Chemical Index.

The IPEX is an index, is a product of a basket of 12 essential petrochemical products, includes, ethylene, propylene, benzene, toluene, paraxylene, styrene, methanol, butane, PVS, polyethylene, polypropylene and polystyrene.

We follow the figures of those commodities in three regions of the world, to generate 36 data points. In this case, we have made a comparison of WTI with our petrochemical index and this is what we get.

We can see, that the red line is natural gas and we can clearly see, that natural gas and crude oil prices have parted ways, you know, starting like in, 2006 or so. And that has made a profound change in the petrochemical world because everybody now, would like, of possible, to produce petrochemicals, out of natural gas.

The prices of petrochemicals will continue to respond to NAFTA production but, the margins that people can get, using natural gas, will be much, much higher.

We can see, on the yellow rectangle, that that marks the time when the hurricanes, Katrina and Rita, hit the U.S. Gulf. The process of natural gas spiked because of the production in the U.S. Gulf, was closed. That had no impact whatsoever, in the prices of crude oil or the price of petrochemicals. Definitely, petrochemical prices, follow crude and not, natural gas.

This has created, a glut of natural gas in large amounts of Ethane in the market. Since everybody is trying to use Ethane and crack Ethane to produce ethylene. The reason for that trend is that the margins that are achieved with the use of NAFTA are much lower than the margins achieved through the use of ethane.

This chart shows exactly that. The red line, it's the margins for NAFTA and the blue line, is the margin of the U.S. Ethane contract. The green bars, show the difference between the two and that is, the margin that companies gain by making petro chemicals, using natural gas.

Where is all this gas coming from? Definitely, as you probably guessed it, shale gas. This is a map made by the American Petroleum Institute showing all the areas of production and the change that they have produced.

It's been more than 20% of the gas produced in the U.S. now, it comes from shale gas and its being calculated that, this original discovery of about 400 trillion cubic feet of gas will almost double in five to ten years.

Let's say, the discovery of this reserve of 400 trillion you know, cubic feet of gas, that was done like, maybe seven years ago. I would say, production may be close to double that, at this time, it's hard to assess exactly, what it is. There have been many new discoveries done, everything, shale gas became prominent in about 2006.

Just to put that in perspective, 400 trillion cubic feet of gas is the equivalent to 20 liters Saudi Arabian full production of oil in Saudi Arabia, the largest produced in the world. So, it's that gives you a picture of, how important shale has been in which, the production in the U.S., is probably twice as much, by now.

Now, what has happened here, is that this production was intended to be profitable at about 4-$6, per million BTU. The abundance of gas has depressed prices to as much down, as $2.00 per million BTU or slightly less.

Prices have recovered ever since and they are hovering now, at about $3.00 per million BTU, 3.73, almost $4.00 per million BTU. That is making it a little more palatable for natural gas producers. People have concentrated on the liquids, on the Ethane liquids, in some of these natural gas liquids are concentrated in the Marcellus area, in some parts of the Eagle Ford area and some parts of Barnett and the Bakken area in North Dakota.

There are also reserves in California, which are practically untouchable because of the regulations in that state. But just to make the story short, this assures that the U.S. will have a production of gas that will revitalize the industry for decades to come. That's the reason why it has been called a game changer.

People have used this gas mostly to produce ethane. Ethane has been growing exponentially in the last three years and we can see that, in this projection that, although we don't know what the rate will be, what the production will be in 2030, it is expected, that we continue the same [inaudible 00:39:59], that we see in prior years. With shale gas, becoming more and more prominent in the U.S. economy.

People start trying to adequate their capacities to the new availability of natural gas and the availability of ethane in particular. Companies are planning to make new crackers that are like eight to ten new crackers announced.

We don't know exactly when the completion will be. It is expected that, 2017 to 2018, 2018 would be the key years in which all of this production of ethylene will come to fruition because it takes a while to produce a cracker and a large investment that not everybody's willing to produce.

There are all kinds of feasibility studies going on. Companies like Exxon Mobil, Chevron Phillips and Dow, they are world scale crackers in the Gulf Coast. Shale has been mentioned as probably having one somewhere in the north east, close to the Marcellus area, to take care of the Ethane in the natural gas liquids in the region.

Nobody really knows exactly, which ones will rebuild and how quickly. Those seem to be, some of the ones that have the best chance of hitting the market next.

Also, there are some expansions into restarts of existing facilities. Expansion, making of some other plans because people need to produce more ethylene, seeking to monetize all of these new bonanza with ethane being so abundant and so cheap, in the U.S..

This is something that we're going to continue to monitor, just to see, how it will impact availability of ethylene and polyethylene's in the market.

With use of light fill stocks in crackers, we have seen a change in the proportions of the production of ethylene, propylene and butadiene, benzene, which is not part of our conversation today but, the production of benzene has also declined significantly and that's the reason why, the prices of benzene have been so high, in the last couple of years.

This chart shows that, ethylene, the crackers produce about, 50% of their production is ethylene, about 30%-35% of the production is propylene and only about 5% of their production, its butadiene.

The reason also why the, SBR you know, the styrene butadiene rubber, which is one of the main by-products for butadiene has SJY rocketed and have achieved you know, very high prices.

This has produced a tremendous change in the industry, creating a structural shortage of propylene in the market.

Propylene now, 60% of it comes from refineries or all about 60% of the propylene. However, refineries have their own problems. The perforation of bio fuels and hybrid cars, it's making that the gasoline is not so profitable. Production of gasoline, is diminishing, for several reasons.

For once, we have that in the U.S.. We have the mix of ethanol with gasoline is at 10%. I believe that today, there were talks that the conversation for the courts to approve a blending of 15% and are taking place now, it may go to 15% soon.

Definitely, the refining industries adamantly oppose to the increase of ethanol, in the gasoline but, it's something that, that may or may not be able to stop. Also, the fact that people are driving hybrid cars, and that people have this consumption of gasoline, has gone down, ever since the prices have gone, over $3.00 per gallon of gasoline. People are being more careful with what they buy.

They are buying smaller cars, more fuel efficient cars, they are going to hybrids and also, there are projects, to start fueling buses and trucks you know, with compressed natural gases. It's already happening in many countries in Latin America.

All of those things attempt, against the production of gasoline and because of that, production of propylene, which comes mostly, as an accident after the production of gasoline, is also going down.

The industry is trying to find an answer for that, you know? This chart shows, created by ICIS consulting, shows that Propylene, Butadiene and Benzene, as by-products of a cracker, are declining and they're projecting the decline of the production of these three components, in a cracker. We continue to decline in years to come.

This means that the pricing mechanisms will be shifting maybe, instead of considering the by-products of a cracker, they will start considering the alternative production like, the on- purpose production processes, that are brought by PDH plants. The onset of the industry has been, the proposal of several PDH plants.

Now we have seen that in North America, Dow Chemical has two projects. Enterprise has two projects for most plastics. Petro Logistics has an expansion to its existing plan, which is the only one functioning in the Gulf.

Many other players have also expressed their intentions of producing propylene, out of the dehydrogenation of propane. Project Independent, that will produce Propylene without using a cracker or without using, without refining NAFTA or using gasoline.

How many of these projects will take place, w cannot be sure. We expect that, as soon as four or five of these are completed, the others may not find enough economic incentives to go ahead. But, this remains to be seen.

As you can see the start-up date for this project, it is as early as 2015 and 2016, it will remain to be seen, what the impact they will have. Definitely, they will make propylene more available and that may have an impact on the price of polypropylene.

Another issue that is hot in the U.S., is the exports of LNG. Producers of natural gas are saying well you know, "We do not have competitive prices to, give us an incentive to continue drilling and then, producing natural gas."

They would rather like to liquefy the gas and go into the international market where countries like Japan, because of the fukushima, are paying somewhere between $15.00 and $17.00 per million BTU.

When you compare that to a price of $4.00 per million BTU they can get here in the States, exporting LNG becomes very attractive. That is also not such a clear cut and just chemical producers in the U.S. are also opposed to the exports of LNG because they feel the U.S. will be exporting their margin advantage they have in the production of chemicals.

So, what's going to happen? We don't know. Two projects have been approved so far. There is one in Texas and one in [inaudible 00:48:57] Pass in Louisiana. Still, even with the approval, the permits approved for those two projects, still the exports may not happen until, until the end of 2014 or 2015. So, it's not clear cut, what's going to happen.

At the same time, there are productions of LNG in some other countries like, Australia, which may depress international prices further, whenever the LNG prices start going down. This is something that we're going to continue to watch and try to determine the implications for the industry. It's something that is happening but, up to what extent, it remains to be seen.

To conclude the presentation, we are saying, to summarize, we have said, Latin American demand is growing at about 1.3 gross domestic product. That means there will be needs for polyethylene and polypropylene in the area.

As we have seen, there's no new production coming up anytime soon, other than the Braskem Idesa project, the Ethylene 21 project in Mexico. There will be a need in Latin America for more products which will be supplied by, who knows? The U.S., the Middle East, Asia, you know, that remains to be seen.

The supply in Latin America will be steady until 2016. There are many ways of trading, in Latin America, many opportunities, may countries that are growing their consumption of Polyolefin but, we have to keep in mind, the location of those countries, their politics, also, their import tariffs that they have or don't have and all the factors that, make, facilitate trade. The U.S. will continue to have the lower costs, the same with the U.S., that doesn't mean that they will have the lowest prices.

As we can see today, the U.S. has a big advantage, with the shale gas but, the prices of polyethylene and polypropylene for exports in Latin America, are not competitive at all. You know, most traders say that, they cannot sell U.S. products in the U.S., at this time.

Shale Oil and gas, will continue to shape the industry, not only in the U.S. but, every country in the world, is trying to see, what the reserves are, for shale oil and shale gas and how they can monetize those reserves.

It is a matter of having the proper technology also, the capital for exploration and also, having enough water because shale gas production, consumes lots of water and even in the U.S., not everybody is happy about, the heavy usage of water and time in which, many areas of the country, are experiencing droughts.

Also, in one of these crackers and projects take place, we see, where ambition of potential ethylene or capacity for 2017 and beyond, which could be applied to the production of polyethylene, considering that polyethylene is a lot easier to ship, than ethylene, that requires, a special vessel you know, under high pressures, at very low temperatures.

This is something we have to be watching also, what's going to happen with all of these crackers, with the production and the impact on prices, beyond 2017.

This marks the end of the presentation and we'll be opening the, open to receive questions, if any. Thank you so much.

Monica: Thank you George, for that great presentation. We will start looking at, if you want to submit your questions via the question box, we have a few minutes to answer them. Let's see, looks like we have quite a few already. Okay, let's see.

"In Latin America 2012 polyethylene demand, you have percentages per country. How much is the actual demand in tons, for Latin America?"

George: Actually, I do not have the demand, in tons. The projections that we receive from ICIS Consulting, is what they perceive, in terms of the percentage, in terms of GDP but, I have not been given the actual figure, in tons.

Not sure if they have it, they probably do have it or they have ways to estimate it but, I don't have it, at this particular time.

Monica: Another question. "What is the reason for Dow to plan, to make propylene by propane dehydrogenation, when they do not have a PP business anymore?"

George: That is for Dow to answer. I believe, my own opinion on this, is the shortage of propylene is so large, that anybody that has a production of propylene, they can sell the propylene very easily because many, many companies, would like to have extra propylene that they cannot produce.

To give you an example, Chile, a few years back, made a change to the extruder and increased the polypropylene capacity by about 30,000 tons a year. They have not been able to utilize that extra capacity because they do not have propylene.

They could be potential clients for companies like Dow that will have propylene, even if they no longer have polypropylene production.

Monica: Another question. "I guess you do see polyethylene prices falling or struggling after 2017, due to over capacity and the low price ethane from the shale resources boom. Any comments?"

George: I don't see the prices falling, There may be ethylene capacity. Let's say, they may fall, it will depend on the growth of demand, worldwide and to see what, what demand we have and what's the production and how balanced or unbalanced those forces are.

Prices may not fall at all. Just the fact that, people with [inaudible 00:55:46], have better margins, doesn't mean that they will give away the product or that, they will lower their prices.

Monica: Another question." Should new polypropylene or polyethylene be built for export to the Asian market, if Latin America is adequately supplied?"

George: That is a difficult question, in the sense that, what we have seen in Asia recently, is that they have, especially China, they have been trying to substitute imports with every new plant they open.

I looked at a slide recently, showing the comparison of China demand from imports ten years ago and now and we have seen that, the demand for imports in China, has diminished considerably, because China has been substituting those imports.

It will remain to be seen, how much China continues, in the path of creating, generating industries to substitute imports. I'm mentioning China because that's the largest consumer but definitely, we have other countries like India or Pakistan or Turkey, that may become more important players.

Definitely, if there's no room in Latin America for those exports, I believe that people, especially in the middle east and west, will look to have exports into those other regions of Asia.

Monica: Okay, one more question. "To what degree, could substitution of polypropylene to polyethylene, change the market for both products, if there is a large over supply of polyethylene?"

George: I would say, if there's an explosion in the production of polyethylene, we could see a large impact on polypropylene, with substitution, especially, every time we have seen the spikes in the price of polypropylene, high density polyethylene becomes more popular.

We do not see production of polyethylene exploding to such an extent to have a large impact on the production of polypropylene and getting part of their market share. If there is an impact, if there is a substitution of polypropylene with polyethylene, I do not see it happening in large scale, and I don't see it happening, anytime soon.

Monica: Okay, time for maybe, one or two more questions. "Do you think, recycled polypropylene and high density polyethylene can cover, part of the needs of this materials in Brazil and Argentina?"

George: Probably not, probably not. Again, it's a good question, very good question. I don't think that we'll see many changes any time soon. Like I said earlier, the production of polyethylene is not increasing to a point that we can have an unaffected substitution of polypropylene. I do not see the recycling of the business, being able to provide those shortages.

Monica: Okay, one last question. "Now that Braskem has expanded a footprint into Mexico with coming polyethylene and expansion and current polypropylene production in the U.S.A, what is the U.S.A government doing, to equalize trade barriers we face when exporting and trying to sell into Brazil?"

George: Then again, I'm not the U.S. government, I don't know what the government will do. I cannot answer for the government. Really, in general we have seen that the U.S. is very free. In theory, it's all for free markets.

But if the U.S. doesn't have an advantage on trade usually. They are also likely to turn very protectionist. We see that with the agricultural subsidies and things like that so, or with ethanol. I don't know.

I would say, if we look at what the U.S. government is doing now, we can say that, those policies will continue. In other words, whenever necessary, the government will turn protectionist.

Monica: Okay. Unfortunately, we've run out of time. I want to let you know that we will follow up with people offline with questions that have remained unanswered. George's contact information is also on the slide, you can feel free to reach out to him with your questions.

And with that, I would like to thank all of you, for attending this webinar. I just wanted to remind you once more that the recording and slides which some of you have been asking about, will be made available shortly after this session.

Host: Yes, thank you George and Monica. As Monica just said, we will be sending a link to the recording of today's event, that you can watch at anytime or show it to others at your company.

Once again, thank you all for attending and as you exit, please take a moment to share your thoughts about today's webinar. Thanks again and have a great day.