Industry Overview

6. INDUSTRY OVERVIEW (conl’d) 6. INDUSTRY OVERVIEW (conl’d) Industry Report
The following report covers key aspects of the global petrochemical sector. The reports focus is on the major petrochemical products being produced today which include the following: • Olefins (ethylene and propylene)
• Olefin derivatives (polyethylene, polypropylene and ethylene glycol)
• Methanol
• Urea

The report includes product analysis covering details of market demand, market supply, net trade and pricing.
INTRODUCTION Petrochemicals are chemical products derived from petroleum and other hydrocarbon sources and represent a global industry with revenues of approximately $3 trillion in 2009. They are used principally as building blocks for a wide variety of materials and applications. Given the wide diversity of uses in which the petrochemical industry plays an integral role in both the manufacturing and consumer sectors, and due to limitations of feasible substitutes, an essential component of the global economy. Key market end-use sectors include, transportation, packaging, construction, consumer goods and electronics, fertilizers and agriculture and textiles. The petrochemical industry is predominantly a process-based industry that is characterised by the following key issues: • Feedstock inputs: Raw materials typically account for the majority of operating expenses. Although diverse, feedstocks used are predominantly petroleum based. Therefore most petrochemical producers have significant exposure to crude oil pricing. Given the importance of feedstock, producers with access to low priced gas feedstocks
(e.g. in the Middle East, Malaysia, and Russia), typically have a competitive advantage and higher levels of profitability over higher cost naphtha based producers;
• Regional diversity: Whilst the industry is global, market demand growth for chemicals is highest in developing regions. Asia has become a major consumer and demand driver for petrochemical products. This is attributed to the rapid expansion in the region’s industrial and manufacturing sectors and its large population base and rising income levels. Mature markets such as the US and Europe are significant in size but exhibit much lower growth;
• Capital intensity: Economies of scale through construction of large facilities and continued asset reinvestment to leverage improved technology and maintain plant equipment are essential to sustain competitiveness. Access to capital is therefore a significant barrier to entry to the industry. Capital spending is also cyclical and follows industry peaks when cash pools are more readily available;

Independent Market Report on the Global &Malaysian PetrochemicalsL-1Nexanr 35003.00101 -62 ­6. INDUSTRY OVERVIEW (cont’d) • Cyclicality: Demand for petrochemicals is subject to business and economic developments driving cyclicality in industry profitability. This is further impacted by industrial supply typically increasing during peak levels of profitability due to easier access to capital;
• Portfolio realignment: Despite a high level of diversity, the industry has also experienced considerable portfolio realigmnent and increased levels of vertical integration. This is predominantly the consequence of increased competitive rivalry which has resulted in restructuring, mergers and acquisitions and demergers;

In addition to the above factors, the urea industry, given its primary use as fertiliser to increase agricultural productivity and output, is driven by the growth in food consumption, local government subsidies and limited availability of arable land. As a result, levels of cyclicality in the industry are more moderated given the secular long term growth in both global population and income driving increased demand for food. Table 1.1 Overview of Major Petrochemicals and Polymers Covered within this Review Global Asia Pacific South East Asia Demand 2009 CAGR Demand 2009 CAGR Demand 2009 CAGR Building Block Derivative Key Applications (Thousand Tons) (2010-2017)F (Thousand Tons) (2010·2017)F (Thousand Tons) (2010-2017)F Etlylene 114352 4.3 38028 4.0 6450 4.8 Polyelhylene PacKaging. agricul\ue. 3ubrrotive. construcoon 66901 4.9 6445 5.6 4617 4.5 EG Texiles, packagng & aUllrroive 18233 4.6 13128 5.0 1406 3.4 Sljrene Packaging, eteclronics. aUbrrolive. conSlruclion 24278 3.0 13094 3.3 1201 3.0 PVC Constuc60n, packaging 33741 5.4 17125 6.3 1570 3.3 Propylene 70276 4.3 31329 4.3 3938 7.0 Poljpropylene Packaging. texbles. aubrroive. conS’Iudon 43741 5.0 20833 5.4 3567 4.9 Acrylic Acil Personal care, aubO”ONe. conslrucbon 3904 5.1 1804 5.8 170 2.8 Melhanol 44961 9.4 23605 12.1 2339 3.4 Forrmldehyde Constudon (plywood and chipboard/parliele board) 32664 5.8 16093 7.9 1898 4.3 AcelieAcid Pac1c4lging. textiles. adhesives and coating 12383 4.4 7115 5.2 605 2.9 MTBE Gasolne blending 16002 2.0 5438 4.0 1042 1.7 Ammnia Urea AgricullJre (lartilisers), constuclon (resins) 146967 2.7 101762 2.7 19602 2.4 NOE: F = F01ecasl Source: Nex anI
1.2 OVERVIEW OF INDUSTRY 1.2.1 Industry Outlook Petrochemical industry margins have historically been cyclical. Changes in supply and demand and resulting industry utilisation levels are key factors that influence the cycle and margins. Additionally the sector is highly capital intensive and this also contributes to the cyclicality. Currently the industry has exhibited improved demand through the first half of 2010. This improvement has been driven by a faster pace of recovery in the Asia Pacific markets. Additionally a level of inventory restocking has also been taking place as buyers look to replenish previously depleted stock levels. Although the short term outlook of the industry remains under pressure as further capacity is forecast, we expect that a gradual recovery in utilisation rates and industry margins will occur with sustainable recovery being forecast from 2011. Industry margins are forecast to climb to a new peak around 2015, with returns Independent Market Report on the Global & Malaysian PetrochemicalsL:1Nexanr 35003.001.01 -63­6. INDUSTRY OVERVIEW (cont’d) comparable to those seen in the last major peak in 200617. Within this context, Asia Pacific will represent the most attractive market in terms ofgrowth and profitability. Ethylene and propylene demand in the Asia Pacific is projected to grow at 4.1 % over the 2010­2017 period. Rising living standards and the continuing trend of substitution of basic materials with plastics are key drivers across many Asia Pacific countries. In comparison, we expect mature economies of North America and Europe to exhibit much lower demand growth over the same period of 1.2% and 2.5% respectively. Polyethylene demand was estimated at approximately 67 million tons in 2009 and is forecast to grow at approximately 5% CAGR over the period 2010-2017. Key demand drivers for this sector are the packaging industry and further product substitution of basic materials. Asia Pacific is a key demand driver with forecast growth of over 5% CAGR over the 2010-2017 period. Global demand in 2009 for ethylene glycol (“EG”), a major ethylene oxide derivative, was estimated at approximately 18 million tons and forecast to grow at 4-5% CAGR over the period 2010-2017. A key driver for consumption growth ofEG is the textiles market where polyester holds a strong market position based on cost on performance versus other fibres. Asia Pacific is the major growth region with its growth derived from both self consumption and derivative productions for exports. Other Ethylene oxide derivatives are used predominantly in detergents and water treatment applications and are generally less susceptible to industry cyclicality. Global polyvinyl chloride (“PVC”) demand in 2009 was estimated at approximately 34 million tons and forecast to grow at approximately 5% CAGR over the period 2010-2017. This market is driven primarily by the construction sector where PVC is used in a range of applications including pipes, cable jackets, door and window frames and flooring. Asia Pacific is the major growth region and is forecast by to grow at approximately 6% CAGR over the period 2010-2017. Global methanol consumption has slowed down during 2008 to 2009 as traditional end-uses such as formaldehyde and acetic acid, which are strongly linked to the construction sector, were affected by the global economic crisis. Newer end-uses such as dimethyl ether, gasoline blending and biodiesel mitigated the slowdown of traditional uses contributing to the growth. Overall short term demand growth for some applications will still be effected by global economic crisis and the rate of recovery in key sectors such as construction and textile fibers. However, long term demand growth is still expected to be firm driven primarily by new applications such as methanol to olefins (“MTO”). Urea, given its position as the most widely used fertiliser in the world, is forecast to grow at CAGR of 2-3% over the 2010-2017 period. Population growth, currently increasing worldwide at an average 75 million per year, is a major factor driving fertiliser consumption growth. Economic progress and government policies on tariffs and subsidies are also key contributors that are leading to increasing urea demand. Apart from these traditional drivers, additional urea demand is expected to come from its new usage in environmentally led applications such as bio­fuels and bio-plastics. Independent Market Report on the Global &Malaysian Petrochemicalst-1Nexanr 35003.001.01 -64­


6. INDUSTRY OVERVIEW (cont’d) 1.2.2 Pricing &Profitability Industry demand is primarily influenced by economic activity while supply is affected by new capacity additions. Capital spending cycles are a common theme of the sector as companies usually have access to large cash reserves at the same time. In times of economic growth, profitability is high and new investments take place. The result is oversupply as large increments of new capacity are realised at the same time. This often leads to lower pricing and depressed margins for extended periods of time until the new capacity can be absorbed by slower growing demand. Cyclicality also promotes restructuring, mergers, demergers and acquisitions. These issues often result in capacity rationalisation whereby older, smaller scale, higher cost production units are closed. The duration of cycles vary in length. We estimate recent cycle lengths have been between 6-11 years in duration, measuring peak to peak. Due to the global nature of the industry, the profitability of all commodity petrochemicals tends to follow the same cycle so that most products typically demonstrate peak or trough levels of profitability in similar years. Occasionally, structural changes in a given market can cause profitability of one sector to diverge from the overall industry cycle. Figure 1.1 provides an overview of petrochemical industry profitability and highlights the cyclicality of the sector. Profitability is represented as a cash margin index which measures aggregate cash flows per ton of petrochemical for leader plants on a production weighted average basis, and is expressed as a per unit of output. This gives an estimated weighted average cash margin for the industry. Period 1988-1995 Profitability for the industry climbed to a sharp peak in 1988 and again in 1995. Conversely, a weak global economy contributed to depressed profitability leading to a broad trough during the 1991-1993 period. Over this period, total ethylene capacity grew at approximately one percent higher than demand on a CAGR basis, resulting in lower industry utilisation. Period 1995-2005 Average profitability levels were high during the 1995 industry peak and this resulted in a significant investment wave. During the period 1997-2002, approximately 21 million tons of new ethylene capacity was added to the market compared to incremental demand growth of less than 18 million tons. Capacity additions resulted across all major regions. The downturn over the period 1995-2005, was particularly prolonged partly due to the consequences of the Asia Pacific crisis which resulted in lower consumption growth from key industry sectors. However, this also resulted in longer lead times and delays for many new project investments which ultimately contributed to the extended up-swing seen during the 2004­2007 period. Period 2005-2010 Industry profitability has been increasingly turbulent, in recent years, driven by increased volatility in crude oil and petrochemical feedstock markets along with irregular purchasing Independent Market Report on the Global & Malaysian PetrochemicalsL-1Nexanr 4 35003.001.01 -65­
6. INDUSTRY OVERVIEW (cont’d) patterns, as consumers optimise purchasing volumes against rapidly changing prices. This period was characterised by robust consumption growth and limited capacity additions, partly assisted by project delays. Average industry profitability steadily increased through 2005, remaining at a broad peak through 2007. The industry has recently experienced a down-turn in profitability, following a period of good margins sustained over the 2005-2007 period. The recent decline in petrochemical industry profitability is partly attributed to a fall in global GDP and sharp increase in incremental petrochemical supply. A net ethylene capacity increase of 11 million tons per year has resulted over the 2008-2010 period. This corresponds with consumption growth of approximately 9 million tons over the same period. From the second quarter of 2009, global demand appeared to stabilise as a result of government stimulus packages, lower crude oil and petrochemical prices, and revived consumer confidence. The full impact from new capacity additions was also partly alleviated by project delays. However, despite this, most product margins reached a low point in 2009. Figure 1.1 Petrochemical Industry Cyclicality (Cash margin index -commodity chemicals &polymers)
1984 1989 1994 1999 2004 2009 2014F Source: Nexant Forecast Period 2010-2015 Petrochemical market demand has improved through the first half of 2010. This improvement has been driven by a faster pace of recovery in Asia Pacific markets. Additionally a level of inventory restocking has also been taking place as buyers look to replenish previously depleted stock levels. Margins in the first half of201 0 have been marginally higher than expected due to some unplanned production outages and delays in new project start-ups. We believe that demand fundamentals remain good for the second half of the year but are ultimately tied to the overall global economic recovery. We expect that product margins will remain under pressure Independent Market Report on the Global & Malaysian Petrochemicals
L-1Nexanr 450 400 350 a ‘;2 II N en 0> X UJ 0 z  300 250 200  150  100  50  0
Illustrative “,-. I /I II II1/I II “, ‘” 35003.001 01 -66­6. INDUSTRY OVERVIEW (cont’d) over the next 6-9 months as further capacity is scheduled to start up in 2010. The full impact of this capacity on industry utilisation may be reduced by delays in project start-ups which are becoming increasingly common due to current scale and complexity of new builds. We forecast petrochemical industry profitability to start a sustainable recovery in 2011 as fewer capacity start-ups are scheduled. We estimate total new ethylene additions in 2011 of approximately 5 million tons compared with approximately 11 million tons in 2010. We expect the rate of new capacity additions to decline from a peak in 2010 of 18 million tons (combined ethylene and propylene) to approximately 6 million tons in 2014. We forecast industry margins to climb to a new peak around 2015, with returns comparable to those seen in the last major peak in 2006/7. This forecast is based on a stable improvement in the global economy being sustained. (Basis: South East Asia Market Pricing)
1~r;C2;L”’;! Ethylene Della Over Net Raw Material Cost -Global utilisation rates Note: -2010F is forecasted on year to date basis • Forecast price is based on Brenl crude af $70 per barrel Source: Nex ant NB. Utilisation is total production expressed as apercentage of nameplate capacity excluding mothballed facilities. We note that the actual timing of peaks and troughs of the cycles are highly speculative, since these depend on economic developments and decisions yet to be made about investments due to come on-stream over the medium and longer term.
1.3 PETROCHEMICALS KEY DRIVERS & TRENDS 1.3.1 Demand Side Fundamentals Consumption growth of petrochemicals can be measured by total olefins (ethylene and propylene) demand. However, most olefins are consumed for captive consumption to produce other olefin derivatives onsite. Therefore actual consumption growth of olefins by region does L-1Nexanr Independent Market Report on the Global &Malaysian Petrochemicals 6 35003.001.01 -67­6. INDUSTRY OVERVIEW (cont’d) not provide a clear overview of end-user demand. We believe that the consumption of polyolefins provides a more accurate representation of petrochemicals demand by region as they are consumed directly by end users in a wide variety of key end uses such as construction, automotive, packaging, agricultural products, textiles and various consumer goods. Emerging economies represent the key demand driver for petrochemicals, which, as an industry, is associated with wider scale investments in manufacturing industries, large populations and rising income levels. In terms of polyolefins’ consumption, the market is increasingly being driven by Asia Pacific and other developing markets such as South America and the Middle East. We forecast consumption in North East Asia and South East Asia to grow at a CAGR of 5.1 % and 4.6%, respectively, over the period 2010-2017. However, we expect China, with a forecasted consumption growth of 6.4% CAGR, to drive demand in North East Asia over the 2010-17 period. We also forecast higher consumption growth from other developing regions such as the Middle East with a CAGR forecast of7.8% over the period 2010-2017, albeit from a lower base. We forecast consumption growth in North America and Europe for the period 2010-2017, to be lower, at approximately 3.5% CAGR basis as we believe that both of these markets have largely reached maturity. CAGR 2010-2017F 2003 2004 2005 2007 2009 2010F 2011 F 2012F 2013F 2014F 2015F 2016F 2017F § North America II Europe 1m Asia Pacific (excl SEA) ~ South East Asia mm Middle East !0 ROWSource: Nex ant
The current level of market penetration of material substitutes in emerging markets also tends to be lower compared to more developed economies, thus providing a further demand driver for petrochemicals. Petrochemical products are substituting basic materials such as wood, glass, metals, paper and card in packaging, automotive and construction industries. This substitution Independent Market Report on the Global &Malaysian PetrochemicalsL-1Nexanr 35003.001.01 -68­6. INDUSTRY OVERVIEW (cont’d) takes place as plastics tend to offer higher performance at a lower cost. Additional inter-material competition also exists between major plastics. This is relatively common between polyolefins and other commodity resins such as polystyrene, PVC and polyethylene terephthalate (“PET”) resins. Such substitution is normally linked to cost and performance issues of the end-user. Asia Pacific has become a major consuming region for petrochemicals over the past decade. According to our analysis, demand growth for polyolefins has been growing at approximately 5% CAGR over the period 2003-2009 and is set to continue at around this level over the forecast period 2010-2017. This development has occurred largely in support of the region’s rapidly expanding manufacturing sectors. A large proportion of this manufacturing is for export­oriented goods. However, domestic consumption levels for finished goods are also increasing, thus providing further demand growth potential for chemical-related products throughout the region. China is a significant contributor to overall. Asia Pacific industrial growth. We forecast that domestic demand for polyolefins alone will grow at approximately 6% CAGR basis over the period 2010-2017. However, other markets, including Taiwan, Vietnam, Malaysia and Thailand have also undergone rapid expansion over the last decade and we forecast demand growth for polyolefins in South East Asia to grow at approximately 5% CAGR basis over the period 2010­2017. We forecast demand growth for petrochemicals in Asia Pacific during 2010-2017 to continue to outpace the rate of new supply additions in the region. As a result, we believe that Asia Pacific will remain a significant importer of various chemical intermediates and polymers for the foreseeable future. The following figure provides our estimate of net trade imports for Asia Pacific and China in 2015 for major petrochemical products. i-1Nexanr Independent Market Report on Ihe Global & Malaysian Petrochemicals 35003.001.01 -69­6. INDUSTRY OVERVIEW (cont’d) Figure 1.4 Forecast Net Imports of Major Petrochemical Products (Basis 2015F) Asia Pacific Net Imports China Net Imports Urea Melhanol Ehylene G~coI Arrrronia ParaXylene LDPE HOPE S~rene Elhylene LLOPE Propylene
0 2000 4000 6000 8000 10000 12000 14000 16000 18000 2000 4000 6000 8000 10000 Source: Nex ant Thousand klns per yearThousand klns per year We expect that a large proportion of these net imports will be for ethylene derivatives such as ethylene glycol, polyethylene and styrene for the Chinese market. For example, we forecast Asia Pacific’s total net import of ethylene glycol in 2015 to be approximately 8 million tons with approximately 98% of this volume for the Chinese market. Key drivers and trends for global petrochemicals’ demand (during the forecast period 2010­2017) include the following: •  Olefins/polyolefins markets are forecast to exhibit growth inline with global GDP  and are relatively sensitive to changing economic climate -Consumption primarily  driven by packaging, automotive and building and construction industries. Consumer  spending and confidence tends to promote market consumption.  Demand also benefits  from the substitution ofbasic materials such as glass, metals, paper and card etc.  •  Ethylene glycol and paraxylene are forecast to exhibit above global GDP growth.  Consumption growth driven primarily by high demand for polyester fibres and polyester  resins for packaging.  Polyester fibres hold  a  strong market share relative  to  other  synthetic and natural fibres based on cost and performance.  Demand growth is highly  focused in China, Taiwan and other parts of South East Asia.  •  Methanol markets are forecast to exhibit above GDP type growth -Consumption  growth driven primarily by new application demand in China.  This includes methanol  for fuel usage in automotive and as a fuel substitute for liquefied petroleum gas (“LPG”).  Additional demand growth emerges for methanol as a feedstock for olefins production.  Traditional applications are more sensitive to the economic environment due to major  applications in construction.
Independent Market Report on the Global & Malaysian PetrochemicalsL-1Nexanr 35003.001.01 -70­6. INDUSTRY OVERVIEW (cont’d) • Urea markets are forecast to exhibit relatively low but consistent consumption growth that is largely resilient to the changing economic climate. Consumption growth is driven primarily by population growth and the ongoing need for fertiliser products in the agricultural market. Population growth and rising wealth has resulted in increased grain demand and in particular demand for protein rich diets such as meat. The higher grain requirement of meat provides further pressure on agricultural output which given limited arable land has increased emphasis on fertilisers such as urea that increase farming productivity and yield. Urea provides an excellent source of nitrogen which is an essential nutrient for crop growth. Additional fertiliser demand has resulted from the rapid increase in bio fuels demand -however this sector is now reaching maturity in some markets. 1.3.2 Supply Side Fundamentals Current and future investments in new petrochemicals capacity is taking place predominantly in the Middle East and throughout Asia Pacific. Capacity expansions for olefins in other markets are relatively minor in comparison. Figure 1.5 Olefins Forecasted Capacity Changes (Million tons, 2010 vs-20 15F)
~;-; ~. < ~~, _._-~~~;):~~ South America (SAM) 90 +——-1 ~75 CAGR 12.43% ~60 ~45 €30i!l 815 o+-“”~”–r-‘~””‘–I .Tolal Capacity =237.3 million tons , ….””;. .. 2010 “2(}!.5 )-:t”;:’ 2010 : 2015 .’ Source,’ NflXiinl L,1Nexanr Independent Market Report on the Global &Malaysian Petrochemicals 35003.001.01 -71 ­6. INDUSTRY OVERVIEW (cont’d) In Europe, the US and Japan, rationalisation of older, higher cost plants has been taking place. This trend is expected to continue in the near-tenn as lower cost capacity from other regions start production. A total of approximately one million tons of olefins capacity is anticipated to be closed in the US and Europe over the period 2010-2015. The majority of new capacity investments in Asia Pacific are taking place in China. We forecast that China alone will add approximately 6 million tons per annum of olefins capacity over the period 2010-2015. These projects are supported by excellent domestic demand fundamentals and available feedstocks from local coal reserves and new refinery investments (providing a source of naphtha). Coal based projects are being promoted by the Chinese government to reduce dependency on oil-based products. This is the principal driver for new capacity developments in the region. However, we do not expect coal based projects to have a significant impact on future Chinese imports ofpolyolefins. Total additions of olefins from coal is expected to be relatively minor over the 2010-2017 period representing around 6% of total domestic olefins capacity. Outside of China, major new investments are also taking place in India, Thailand and Singapore. Longer-tenn, both Vietnam and Indonesia are expected to make significant new capacity investments. Olefins capacity growth in South East Asia is forecast at over 5% CAGR basis over the forecast period 2010-2017, representing an addition of approximately 4 million tons capacity per annum. Investments in the Middle East, representing approximately 10 million tons of olefins capacity, are primarily driven by the availability of low cost gas in the region. However, these projects have also been supported by the following additional factors: • Access to leading process technologies
• Available markets (deficit markets primarily in Asia Pacific)
• Fonnation of strategic partnerships with leading petrochemical players.

Longer-tenn developments in the region will primarily depend on future availability of advantaged feedstocks, specifically ethane and other natural gas liquids (“NGLs”) extracted from associated (from crude oil production) and non-associated gas sources.
1.3.3 Petrochemicals Cost Position The cost of producing petrochemicals varies greatly by location around the world. The principal factors in detennining operating costs are linked to the cost of the prevailing feedstock. However, secondary cost advantages are associated with the following key points: • Plant scale
• Utility costs
• Technology!complexity
• Co-product credit values (location/integration)
• Fixed costs (location issues)

Independent Market Report on the Global & Malaysian Petrochemicalsi-1NeKanr 35003.001.01 -72 ­6. INDUSTRY OVERVIEW (cont’d) Currently, the lowest cost olefin producers are based in the Middle East. Leader ethylene crackers in the region are typically 100% ethane-based. The ethane is usually supplied at a fixed price, that is considerably below market price levels available in Europe or the US, with no linkage to the wider energy market. Additional advantages for many Middle East players include; low average utility costs, excellent economies of scale and lower associated capital expenditure (“CAPEX”) with 100% ethane­based crackers relative to naphtha cracker counter-parts. New ethylene plants in the Middle East are being constructed with capacities of approximately 1.2 million tons per year. This scale is approximately double the typical ethylene cracker sizes in operation in Europe, US and most ofAsia Pacific. (Cash Cost Basis: 2009)
20 32 49 66 87 102 114 122 129 Source: Nexanl Cumulative Capacity (million tons) ME (Middle East), E1P (ethane/propane) Ethylene is mainly produced from two different feedstocks (oil and gas) via steam cracking process. Oil-based ethylene feedstocks such as naphtha and condensate produce a greater proportion of propylene and butadiene per unit of ethylene produced while gas feedstocks such as ethane produce almost exclusively ethylene. In general, naphtha-based plants offer the highest cost route to ethylene production (via steam cracking). These operations have no noticeable feedstock advantage and are highly capital intensive due to the complexity of the facility required to separate and utilise co-product streams. Independent Market Report on the Global & Malaysian PetrochemicalsL-1Nexanr 3500300101 -73­6. INDUSTRY OVERVIEW (cont’d) Figure 1.7 Impact of Crude Oil Pricing on Ethylene Production Costs (Basis -Leader Cracker) 1400 140 1200 120 ~ 1000 100 Q) 0 0>. -‘= 80 ~ID 800 0 0 CD c .8 600 60 gID 0.. CD ~ 400 40
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010F -SEA(naphtha cracker) -Middle East (ethane cracker) –Crude Oil Price Source: Nex ant Prior to the rapid escalation in crude oil prices (before 2004), production cost comparisons between naphtha crackers and advantaged ethane crackers were more evenly matched. According to our analysis, the average difference in production costs between leader ethylene producers in the Middle East and a conventional naphtha producer was approximately $190/ton of ethylene produced over the period 1996-2004. The difference in production costs between naphtha-based producers and ethane (stranded gas) producers has increased greatly over the last five years following the sharp escalation in crude oil pricing. The average difference in production costs between leader ethylene producers in the Middle East and a conventional naphtha producer increased to approximately $600/ton of ethylene produced over the period 2004-2008. Crude oil price volatility has continued to impact the global competitiveness structure of the industry. According to our analysis, the cash cost spread between leader and conventional producers peaked at approximately $1200/ton in Q2 2008 before crashing to approximately $230/ton in Q4 2008, as oil prices declined to below $50 per barrel. More recently (2008-2010), the ethylene production cost spread has increased gradually back up to over $600 per ton as oil prices have climbed to approximately $70 per barrel. 1.4 MALAYSIAN PETROCHEMICAL INDUSTRY The petrochemical industry is an important sector in Malaysia’s overall economy. Investments in the petroleum and petrochemical industries in Malaysia for 2008, according to the Ministry of Industrial Development Authority, MIDA were in the region ofRM 57.2 billion. Independent Market Report on the Global & Malaysian PetrochemicalsL-1Nexanr 35003.001.01 -74­6. INDUSTRY OVERVIEW (cont’d) Overall petrochemical industry in Malaysia is dominated by two major producers including PETRONAS Chemicals Group Berhad (“PCG”) and Titan Chemicals Group Berhad (“Titan”). Titan primarily focuses on olefins and polyolefins productions with an integrated operation based on naphtha feedstock. PCG has a comparable scale in olefins and polyolefins productions, however, it offers a wider range of petrochemical products including methanol, ammonia, urea, aromatics and other derivatives. Most of these products are produced domestically, solely by PCG. PCG has access to low priced gas feedstocks, which places PCG amongst the world’s lowest cost producers of olefins and urea. PCG further leverages its feedstock position by forward integration into more value added downstream derivatives. Through efforts provided by the Malaysian government and PETRONAS, Malaysia has attracted a number of major international petrochemical players such as Dow Chemical, BASF, Mitsui, Toray Industries and BP. According to MIDA, there are currently forty one petrochemicals companies operating in Malaysia, out of which 53 % are based on foreign investments and the remaining 47 % are from domestic sources. According to data published by MIDA in 2008, the US is the largest source of foreign investment into Malaysia’s petrochemical sector followed by Japan, the United Kingdom, Gennany and Taiwan. Domestic players consist ofPETRONAS, the largest domestic player, and Titan. 600 -,——————————–,
Nagalive number indicates net import-800 .L——-‘ 2003 2005 2007 2009 2011F 2013F 2015F 2017F .HOPE l!illILLOPE ~LOPE ~PPSource: Nex anI Although the Malaysian market is self sufficient in many petrochemical products, it also relies on imported petrochemical products from other countries. Some of these imports include materials that compete directly with products already being produced domestically. Within the polyolefins’ sector, Malaysia is a net exporter of low density polyethylene (“LDPE”) and polypropylene (PP) grades but is reliant on imports for linear low density polyethylene (” LLDPE”). Commencing 20I0, Malaysia is also expected to become a net importer of HDPE. Independent Market Report on the Global & Malaysian Petrochemicalst-1Nexanr 35003.001.01 -75­6. INDUSTRY OVERVIEW (cont’d) Longer-tenn dependency on imports is forecast to increase further as there are currently no finn plans for new polyolefins capacity in Malaysia. Overall growth for the Malaysian petrochemicals industry in 2009 remained relatively unchanged compared to 2008. However, Asia Pacific consumption levels displayed an improvement in the first half of 2010 for most petrochemical products as manufacturing activities increased. Following the conclusion of the ASEAN Free Trade Area (“AFTA”), petrochemicals producers in Malaysia now benefit from tariff free access to other South East Asian markets. Additionally, the ASEAN-China agreement, concluded in early 2010, provides free trade access to China for many petrochemical products. Malaysia is a major producer of petrochemicals in the South East Asia region. In 2009, Malaysia had approximately 2.8 million tons per year of olefins capacity which accounts for approximately 24% of the total capacity of the South East Asia region. The majority of olefins production is consumed domestically for the production of polyolefins and other key intennediates such as ethylene glycol, acrylic acid and styrene. Titan and PCG are the leading producers of petrochemicals and polymers in Malaysia. Both companies have a strong domestic position but also export significant volumes to other countries such as Indonesia and China. It is reported that Korea’s Honam Petrochemical is currently in the process of acquiring a controlling stake in Titan for $1.5 billion. The deal is expected to be completed at the end of November 2010. Major product exports from Malaysia include polypropylene, polyethylene, methanol and urea. Additionally, the domestic market also imports these products from other producers operating outside ofMalaysia. This type of trade is generally driven by price. The following table provides an overview of domestic capacity and demand for major petrochemicals and polymers. L-‘1Nexanr Independent Market Report on the Global &Malaysian Petrochemicals 35003.001.01 -76­6. INDUSTRY OVERVIEW (cont’d) Table 1.2 Overview of Malaysian Petrochemical Industry Demand Growth Capacity 2009 Demand 2009 CAGR CAGR Products (Thousand Tons) (Thousand Tons) (2003-2009) (2010-2017)F Elhylene 1775 1364 1.3 0.5 Propylene 1081 754 -0.7 1.2 Polyelhylene 1035 958 5.9 3.5 Polypropylene 560 338 0.9 3.4 VCM 400 266 15.7 2.8 PVC 260 163 1.4 2.2 EO 385 327 0.2 1.2 EG 380 185 0.8 1.8 Styrene 240 295 2.7 0.7 Acrylic Acid 160 62 -2.0 0.6 Melhanol 2427 723 3.0 2.8 MTBE 300 284 15.6 2.3 Ammonia 1288 774 0.9 3.2 Urea 1450 538 -0.9 2.5 Para Xylene 540 291 -4.1 0.3 Benzene 309 198 3.2 -0.4 Source: Nexant Titan utilises naphtha as the primary feedstock for its business and is regarded as a higher cost player based on open market naphtha pricing. The company has a combined olefins capacity of 1.2 million tons per year. peG, via its upstream activities, has access to low priced gas feedstocks and is amongst the world’s lowest cost producers of olefins and urea. The company is one of South East Asia Pacific’s leading producers of olefins by capacity with a capacity of approximately 1.5 million tons per year. Independent Market Report on the Global & Malaysian PetrochemicalsL-‘1Nexanr 35003.001.01 -77 ­6. INDUSTRY OVERVIEW (cont’d) Table 1.3 Overview of Malaysian Petrochemical Production Capacity (Thousand tons, 2009) Company Ethylene Propylene Polyethylene Polypropylene MTBE VCM PVC Benzene PCG 1040 466 495 80 300 400 150 179 Titan 735 495 540 480 130 Shell Cherricals 120 Industrial Resins 30 Kaneka Paste Polymers 30 Malayan Electrocherrical 50 % PCGshare 59% 43% 48% 14% 100% 100% 58% 58% % Titan share 41% 46% 52% 86% 42% % OIhers share 11% 42% Company Paraxylene Ethylene Oxide Ethylene Glycol Methanol Ammonia Urea PCG 540 385 380 2427 1288 1450 % PCGshare 100% 100% 100% 100% 100% 100% Source: Nex ani PCG is also the sole domestic producer of natural gas chemicals, methanol, ammonia and urea and a major exporter ofthese products throughout Asia Pacific. 1.4.1 10th Malaysia Plan (“10 MP”) Under the 10 MP, oil and gas sector has been designated as one of the twelve national key economic areas (“NKEA”) for generating income to support Malaysia’s target of 6% annual GDP growth until 2015. The 10 MP also envisaged downstream oil and gas operations to contribute RM39.8 billion in 2015. In order to achieve this, investment targets in the petrochemical sector have been set at RM 11.3 billion annually with an export target at RM 27.7 billion by 2015. These targets set out by the government under the 10 MP will provide further opportunities for the petrochemical sector to grow and to compete in international markets. Key Incentives for investors in petrochemicals include the following: • 100% foreign ownership in petrochemical assets
• Reinvestment Allowance (“RA”) up to a rate of 60% on the qualifying capital expenditure made for companies’ that are engaged in the manufacturing sector. Companies that undertake reinvestment projects in promoted areas, e.g. PETRONAS at Gebeng or Kerteh could also offset the RA against 100% of its statutory income for the year of assessment.
• Accelerated Capital Allowance (“ACA”) is a special allowance that allows the capital expenditure to be written off within three years with an initial allowance of 40% followed by an annual allowance of20% for the subsequent years.
• Tax Exemption on Exports -incentives to encourage the export of Malaysian products, whereby the rate of tax relief for statutory income is based on the percentage of increase in value of the overall exports.

L-‘1Nexanr Independent Market Report on the Global & Malaysian Petrochemicals 35003.001.01 -78­6. INDUSTRY OVERVIEW {cont’d} • Incentives for High Technology Companies -Tax incentives for companies with relatively high R&D expenditure or where scientific and technical staffing comprise at least 7% of a company’s total workforce.
• Incentives to Strengthen Industrial Linkage (“ILP”) -expenses incurred during personnel training, product development, testing and factory auditing to ascertain vendor’s product quality are eligible for certain income tax deduction.

Other general incentives include industrial building allowance, infrastructure allowance and tariff related incentives. 1.4.2 Prevailing Laws and Regulations The petrochemical industry is highly regulated. Associated regulations are intended to protect and improve the worker’s and the nation’s health, safety and environment. Regulations cover every step of a chemical products life cycle, from the manufacturing process through to its final disposal. The regulatory environment of the industry is subdivided in a number of ways and monitored by various government departments and agencies. Examples of the principal monitoring agencies include the following: • Environmental Protection Agency -clean air act and the control of pollutants. Also covers site clean-up and clean water act.
• Food and Drug Administration (“FDA”) -sets standards for and evaluates tests of food, drugs and cosmetics
• Department of Labour -Defines hazards and permissible exposure limits to prevent industrial accidents
• Department of Transportation -Defines regulations for hazardous materials transportation.

1.4.3 Governing laws and regulations specific to Malaysia The Petroleum Development Act 1974 regulates the petroleum and petrochemicals industries in Malaysia. PETRONAS is authorised to regulate all activities in the upstream sector, while the downstream sector is regulated by the Ministry of Domestic Trade and Consumer Affairs and the Ministry of International Trade and Industry (“MITI”). All associated licensing for the marketing, distribution and production of petrochemicals are granted through MITI and governed by the following legislations: • Industrial Co-ordination Act 1975 -licensing for manufacturing activities.
• Petroleum Development Act 1974 -specific to petrochemicals

• – Occupational Health and Safety Act 1994 -employee training requirements • Environmental Quality Act 1974 -restricting pollution (atmospheric, ground and noise).
• Atomic Energy Licensing Act 1984 -regulating the control of atomic energy.

Independent Market Report on the Global & Malaysian Petrochemicals 18L-1Nexanr 35003.001.01 -79­6. INDUSTRY OVERVIEW (cont’d) 1.5 OLEFINS & DERIVATIVES KEY DRIVERS & TRENDS 1.5.1 Global Overview We regard base olefins (ethylene & propylene) to be the most commercially important components of the petrochemical industry and the primary building blocks for various chemical intermediates and polymers. We estimate that the combined consumption of base olefins (ethylene/propylene) was approximately 185 million tons in 2009 and we forecast this to grow at a CAGR of 4-5% over the period 2010-2017. The main consumption drivers are tied to further growth from packaging, automotive, textiles and construction sectors. We estimate that approximately 63% of base olefins is consumed directly to make polyolefins. Intermediates, such as ethylene dichloride, styrene and cumene account for approximately 21 % of consumption and oxides (ethylene oxide/propylene oxide) approximately 11 %. Figure 1.9 Global Oletins Supply and Demand Balance Global Consumption by End Use Global Supply and Demand Balance (2009)
100%350000Olhers 5%
300000Oxides 80~,11% 251lOO1 60% ~.s 200000 ‘= ~ 151lOO1 40% ­0­Inlerrredia\lS = 100000 .21% 20%Po~ok 5000063′;’ O~, 2003 2004 2005 2006 2007 2008 2009 1010f 201lf 2012f 2013f 2014f 2015f 2016f 2017f • EIh~ene Consumption EJ PlOp~et1e Consumplion SoIIIte:Ne:,’ -C1paci~ ~-Utilisation ratesTotal Consumption =l8Smillion Ions NB. Utilisation is total production expressed as apercentage of nameplate capacity excluding mothballed facilities. Market consumption is predominantly for ethylene which in 2009 accounted for approximately 62% of the total. However, we forecast both ethylene and propylene to exhibit similar demand growth of4-5% CAGR over the forecast period 2000-2017. The majority of olefins produced tend to be for captive consumption whereby production is consumed on site. This trend is partly driven by the high cost of transportation associated with olefins which are gases at standard temperature and pressure. Global utilisation rates remained high throughout the 2004-2007 period as markets exhibited firm demand growth with limited incremental capacity being added to the market. However, utilisation rates declined in 2008 and we forecast they will remain at a low level in 2010. This decline is attributed to weaker demand for key derivatives resulting from the recent economic downturn. Independent Market Report on the Global & Malaysian Petrochemicalsi-“Nexanr 35003.001.01 -80­6. INDUSTRY OVERVIEW (cont’d) Additionally, the slowdown in markets corresponds with the start-up of significant amounts of new olefins capacity. This includes conventional olefins capacity from refining and cracking and additional capacity from coal to olefins projects in China. We expect some plant closures of older, higher cost facilities in North America and Europe and forecast a total of 42 million tons of new capacity additions over the 2008-2012 period. This corresponds with our forecast for consumption growth of approximately 23 million tons over the same period. The majority of this new capacity is being built in the Middle East and throughout Asia Pacific. We expect average utilisation rates to begin to recover gradually from 2011 onwards as excess supply is gradually utilised, and forecast a new operating peak in 2015 when we expect average utilisation levels to be at approximately 90%. (Thousand tons per year) CAGR 2010-2017F Malaysia ROW South East Asia Middle East Europe North Arrerica Asia Pacific
0.8% 11.2% 5.6% 8.1% 2.5% 1.2% 4.1% o 10000 20000 30000 40000 50000 60000 70000 80000 Source: Nexanl
Markets are forecast to recover gradually as the global economy emerges from recession. Demand for polymers and key intermediates have already displayed an improvement in 2010, especially in key Asia Pacific markets. The outlook is for a steady sustainable recovery in consumption levels, resulting in improved utilisation rates as excess capacity is gradually utilised. Higher growth levels for olefins are tied to Asia Pacific, the Middle East and other developing markets. It is within these markets where the majority of new olefin derivative capacity investments are being made. However underlying demand drivers for olefins’ derivatives consumption is more closely linked to developing regions where there are higher levels of manufacturing and construction taking place. We expect demand growth levels of olefins in Independent Market Report on the Global & Malaysian PetrochemicalsL-1Nexanr 35003.001.01 -81 ­6. INDUSTRY OVERVIEW (cont’d) Asia Pacific, which we forecast will experience a CAGR of 4% over the period 2010-2017, to be 2-3 times higher than Europe and North America. Overall, growth rates for olefins are relatively modest in North America and Europe as we expect new derivative investments to be more limited in these regions over the forecast period. Plant closures of older derivatives capacity is also expected in these markets. 1.5.2 Malaysian Market Total olefins capacity is approximately 2.9 million tons in Malaysia. The market is supplied by three companies; peG, Titan and Shell Chemicals. PCG holds a majority capacity share with an estimated 53% of the domestic olefins market in 2009. Most of olefins produced by PCG are consumed onsite to produce polyolefins and key intermediates such as glycols and acrylic acid. Titan is also a major domestic olefins producer. Titan’s market share in 2009 was estimated at 43%. The company also has relatively high levels of forward integration predominantly into polyolefins. Shell Chemicals is also active in propylene production, via refinery integration. However its overall capacity is relatively small. Figure 1.11 Domestic Market Share (Capacity basis 2009) Shell 4%
Total Capacity =2.9 million tons Source: Nex ant Exports of olefins take place, however overall volumes are relatively modest. We forecast this trend to continue as producers take advantage of short-term market situations. 1.5.3 Competitive Positioning Olefins supply in South East Asia primarily consists of regional companies operating from a domestic base. However, international players, including Shell Chemicals, ExxonMobil and Sumitomo, also have olefins capacity in the region. All major olefins producing companies have Independent Market Report on the Global & Malaysian Petrochemicalst-1Nexanr 21 35003.001.01 -82 ­6. INDUSTRY OVERVIEW (cont’d) forward integration into polyolefins. A number of producers, including Petroleum Authority of Thailand (“PIT”), PCG and Shell Chemicals, also have integration into ethylene oxide and ethylene glycol. Figure 1.12 Dletins Top Ten South East Asia Producers (Capacity basis 2009) 3000 .——————————-,
[ • E1hylene n\i Propylene I 2500 ~ 2000 ~ ~
~ 1500 en c .8
u 1000 c co en ::l ~ 500 C .c·0 co o 0 coco0­0- .~ 0­ CJ :.a ::l Cco 0::: E c C (.) ::l Q)o(.)0 0 a.8 « “E c0… ~ (5 ::2: (5 = c Q) “E ~~ ii5 ..c ::lu a:f­CJ Q)(J) (J) c 0… 0… W (J) ..c f­~ (.) co co (.) U5 Source: Nex ant We have estimated ethylene competitiveness on a cash cost basis to highlight the differences in production costs between different producers in different regions. Ethylene competitiveness on this basis is an important parameter for determining the competitiveness of a range of derivatives. Key assumptions include the following: • Producers in Saudi Arabia, Middle East and North America are based on 100% ethane cracking at prevailing domestic pricing levels.
• Malaysian gas-based producer for ethylene and polyethylene (“Malaysia Gas”) is based on 100% ethane cracking at prevailing domestic pricing level.
• Middle East economics are representative of typical leader crackers in the region.
• Comparison is on a per ton of ethylene produced, therefore credits for co-products produced, e.g. propylene or benzene, reduce the overall cost of ethylene production.
• Singaporean, other Malaysian, and Western European producers are based on 100% naphtha cracking.
• China ethylene production is based on a mix feed cracker based on naphtha and gas oil.

Independent Market Report on the Global & Malaysian Petrochemicals 22L-1Nexanr 35003.001.01 -83­6. INDUSTRY OVERVIEW (cont’d) • Co-product crackers (associated with heavy feed crackers) are based on local market valuations. Figure 1.13 Comparison of Ethylene Production Cash Costs (2009) 1000 -,——————————–, 800 c .8 ill 600 c.. lii en 0 a 400 en ::::> 200 o Saudi Arabia Malaysia Middle East Norlh Singapore Olher Western Leader Gas America Malaysia Europe
~ Net Raw Material Cost l:X Utility Cost. Fixed Cost Source: Nex ant
Saudi Arabia is estimated to have the lowest cost position in ethylene production. However this advantage, based on 100% ethane cracking, is limited to only a few plants in the country. Overall, Malaysia Gas also has a leading cost position for ethylene production which is comparable with leading producers in the Middle East. Its advantage is largely derived from low cost ethane available in Malaysia. PCG is currently the only gas based producer of olefins in Malaysia. A number of Middle East producers have access to low priced ethane pnce that provides significant competitive advantage over most producers in other regions. Additional benefits result from plant scale and utility costs. However, it is noted that only a few crackers in the Middle East enjoy this maximum advantage. The majority of crackers in the Middle East utilise mixture of ethane and propane gas and these have a marginally higher cost ofproduction overall. Naphtha-based crackers from different regions tend to have comparable economics as the price of naphtha is similar. The main differences result from plant scale and co-product valuations which vary marginally by location. 1.5.4 Polyolefins Global Overview Polyolefins are commodity thermoplastic polymers consisting of long chains of the monomer ethylene or propylene. These plastics are used in a wide range of market segments including consumer, automotive, construction, packaging and general industrial and agriculture. Independent Market Report on the Global & Malaysian Petrochemicalsi-1Nexanr 35003.001.01 -84­6. INDUSTRY OVERVIEW (cont’d) Global demand for polyolefins was approximately 111 million tons in 2009 and we forecast this to grow at a CAGR of 5% over the period 2010-2017. We forecast the demand split between the different products will be as follows: PP 39%, high density polyethylene (“HDPE”) 27%, LLDPE 17% and LDPE 16%. Figure 1.14 Polyolefins Consumption per Capita 12% India LL Brazil…….
~ 8% 6 C> Former Soviet UnionN a: ~
China« C> “0 Q) o Q) “e4% n… South East Asia 0% L­
—–J o 10 2030 40 Consumption per capita (2009) kilogram/capitaSource: Ne,anl The market growth potential within developing markets for plastics is evident on a consumption per capita basis. Key developing regions such as India and China still have a relatively low consumption per capita for polyolefins, relative to more developed regions. These and other high population countries provide high consumption potential for plastics as living standards improve and material substitution continues to take place. North East Asia is a major driver for global polyolefins consumption growth. We forecast total consumption growth in the region at approximately 5.1 % CAGR basis over the period 2010­2017. Within the region, we expect China to be a key driver for consumption with forecast demand growth of over 7% over the period 2010-2017. Domestic consumption is being driven by the rapid development of the Chinese economy, resulting in increasing investments in manufacturing and rising disposable income levels leading to higher domestic consumption. Demand growth is also highest in developing regions such as the Middle East which we forecast to grow at close to 8% CAGR over the period 2010-2017. We forecast demand growth in South East Asia, where markets are less mature and product substitution of basic materials is having a greater impact on consumption growth, to grow at a 4.6% CAGR over the period 2010-2017. North America and Europe are large markets for polyolefins, but growth rates have been relatively flat in recent years due to application maturity and low population growth. We forecast
Independent Market Report on the Global & Malaysian Petrochemicals~’1Nexanr 35003.001.01 -85­6. INDUSTRY OVERVIEW (conl’d) growth at approximately 3.0-3.5% CAGR for both regions over the period 2010-2017. Demand in North America is also supported by the rapid development ofthe Mexican economy. (Thousand tons per year) CAGR 201D-2017F Malaysia Middle East Sou1h East Asia RON Nor1h Arrerica Europe Asia Pacific
3.5% 7.2% 4.6% 7.0% 3.4% 3.5% 5.5% o 5000 10000 15000 20000 25000 30000 35000 40000 45000 50000 ~ 2005 • 2ff.J7 fgj 2009 Source: Nex ant From 2004 to 2007, utilisation rates for polyolefins remained consistently high at close to 90% levels on average. This was mainly driven by strong consumption growth and a relatively tight supply situation which was sustained partly due to project delays. This resulted in price spreads over primary feedstocks approaching $700 per ton. Despite limited capacity additions in 2008, global utilisation rates declined as consumption contracted as a result of the global economic slowdown. This impacted all end use sectors, although demand from construction, automotive and consumer related products were the most badly affected. L:1Nexanr Independent Market Report on the Global & Malaysian Petrochemicals 35003.001.01 -86­6. INDUSTRY OVERVIEW (cont’d) Figure 1.16 Polyolefins Supply, Demand and Trade -Asia Pacific 90000 ….———————————T 100% 80000 70000 ‘”–Ctl CD >-60000 ‘”-­CD 0­CJ) 50000 c .8 -0 40000 c Ctl CJ) :::::l 300000 ..r:::::. I­20000 10000 o –.. … .. —-­-.. ­-. ­

80% 60% 40% 20% 0%
2003 2004 2005 2006 2007 2008 2009 2010F 2011 F 2012F 2013F 2014F 2015F 2016F 2017F ~NetExport ~~ Net Import —Total Capacity … Production —Consumption —-Utilisation rates Source: Nex ant NB. Utilisation is total production expressed as apercentage ofnameplate capacity excluding mothballed facilities. While consumption improved marginally in 2009, utilisation rates declined further as new capacity came on-stream predominantly from Middle East but also in China. As a result, price spreads declined to below $600 per ton level. Independent Market Report on the Global & Malaysian PetrochemicalsL-1Nexanr 35003.001.01 -87­
6. INDUSTRY OVERVIEW (cont’d) (Price spreads are in current US$) 1200 ,.———-,———-“T100% History  Forecast  1000  881
2003 2004 2005 2006 2007 2008 2009 2010F 2011F 2012F 2013F 2014F 2015F 2016F 2017F S01Jce: Nelanl c::J pp CO”,llIl~ion -Tol~~ly Nee: .2010F ~ betasW on year ~ ille bas~ . FllIemlpri:e ~ Illsed on Brenlcnxle alS70 ~r barr~ NB. Utilisation is total production expressed as a percentage of nameplate capacity excluding mothballed facilities. We expect further capacity increments by the end of 2010 to drive global utilisation rates to approximately 80%, which we expect will mark a low point in the cycle. We expect that margins will recover post 2010 as surplus capacity is gradually used up, with 2011 representing the first increase in margins and we expect margins to accelerate towards a new peak in 2015. This forecast is based on a gradual improvement in demand resulting from a continued recovery in the global economic environment. Malaysian Market Malaysia consumes plastics across a variety of different products including; packaging, electrical/electronics, household products, construction materials and automotive components. We estimate that approximately 50% ofthese products are for exports. Malaysia consumed approximately 1.3 million tons of polyolefins in 2009 with the majority of this material produced from domestic sources. We forecast demand growth at a 3-4% CAGR over the 201 0~2017 period. Overall, Malaysia is broadly balanced in polyolefin supply and demand. However, with no firm capacity additions expected in the near-term, we expect Malaysia will rely increasingly on imported polymers from other countries. Malaysia is currently a net exporter of LDPE and PP with the majority of these exports shipped to China and Indonesia. Conversely, Malaysia is a net importer of LLDPE and HDPE. The majority of these imports originate from the Middle East, Singapore and Thailand. Independent Market Report on the Global & Malaysian PetrochemicalsL-1Nexanr 35003.001.01 -88­6. INDUSTRY OVERVIEW (conl’d) Figure 1.18 Polyolefins Supply, Demand and Trade -Malaysia
2’:00 ,—–::———————,100’/0…………

ZID 2100 ~ 19xj>. ! 1700 rn c 1fOO.8 -0 c ctl 1:IXl rn ::J 0 1100.c: I­
gxj 700 fOO … ………………..
…_-. 0Cf’/0 rn
00% -§ c o .~ 4C1’/0 .~ 5 21’/0 0’/0 2m 2X):\ ;m; an> ZJJ1 2X6 ::mJ ;!J1(F 2l11F 2l12F al13F al14F 2l15F al16F al17F ~NaEx~ la_ NalrT]:Ot –TdilC<pmy o 5:me: Nei<a1 ______-_–_C<r6lrrPi.Cl1 _-_-_-U1i_·lisai_Cl1_raES_
–+-f’Ju:WCl1__­I NB. Utilisation is total production expressed as a percentage ofnameplate capacity excluding mothballedfacilities. Malaysia has two producers of polyolefins, Titan and PCG. Titan has a larger capacity share estimated at approximately 64%. PCG holds the remaining 36% capacity share. PCG has a higher olefins production capacity but also produces other derivatives such as ethylene glycol and acrylic acid. Overall, competition in the domestic market is relatively high both between domestic players as well as imports from various regional producers and Middle Eastern sources. Competitive Positioning Polyolefins supply in South East Asia largely consists of regional players operating from a domestic base. In terms of regional market share the market is dominated by three companies; PTT, Titan and Siam Cement Group (“SCG”) (Thailand). Combined, these companies account for approximately 50% of regional polyolefins capacity. Additionally, major international players such as ExxonMobil, Sumitomo and Chevron Philips also have an operational presence in the region. Leading polyolefin players typically produce most product grades (HDPE, LDPE, LLDPE and PP). Independent Market Report on the Global & Malaysian PetrochemicalsL-‘1Nexanr 35003.001.01 -89­6. INDUSTRY OVERVIEW (cont’d) Figure 1.19 Polyolefins Top Ten South East Asia Producers (Capacity basis 2009) 1800
I!I PP18″101600 1400 ~LLDPE:ti Q) >. 1200~ Q) 0..
c<J) 1000 !!illILDPE.8 “0 c <tl 800 <J) ::J 0
.HDPE£: 600 t::.. £
u 400 <tl 0.. % Capacity<tl 0 share 0 0.. <J) 0.. (j) CJ co co .~ ::J 1§ ::J :0 £: 0 g<J) >. .s.? 0 ‘E «2 2 0… 0E’E :.cCJ CJ :2: ~ 0… E Q) ~ Q) c 0… ::J £: l-£:CJ 0E (f) u “0 I-0 g c ~ c0 ~ 0 2coCJ0… c (f) w >: -,£:E <Dco Q)0::J 0… (f) £:Source: Nex ant 1= 0 Competitiveness of polyolefin’s production is primarily detennined by the cost of olefin supply. The majority of production operational today has upstream integration into an olefin production source, usually on the same site. For polyethylene competitiveness cash cost of ethylene is the key detenninant. Key assumptions for polyethylene competitiveness include the following: • All producers have been evaluated on an integrated ethylene basis with ethylene cost being transferred at a cash cost value.
• Polyethylene costs have been compared on a delivered market basis to China.
• Import duty levy of 6.5% was applied to all polyethylene exporters in 2009.

Independent Markel Report on the Global & Malaysian Petrochemicalsi-1Nexanr 35003.001.01 -90­6. INDUSTRY OVERVIEW (cont’d) Figure 1.20 Comparison of Polyethylene Production Costs. Basis: Cash Cost 2009 Basis: Delivered China 2009
1500 1500 ..————–‘———–, 1200 1200 c dOO Q; BOO) £ 0­Q; 0­” ~600o ~ •o 0
(J) ::J ~300300 0 ~600 “‘IISaudi Arabia Widdle East Malay~a North OIhel Singapore· China Westeln Saudi Arabia M1lay~a !l{dd~ East North China OIher Leooer

Europe Leader Gas America M11a ~a ~\\\\~ Net RilII Malerial Cost r;/;UWity Cost -F~edCost 111111 Fre~hI&Poc!IagillJ alii! Tariff -MillketPri:e

Comparison of competitiveness of polyethylene displays a similar picture to ethylene cash cost economics. Lowest cost producers are ethane-based olefin producers including Saudi Arabia, the Middle East and Malaysia Gas. On a cash cost basis Middle Eastern producers are estimated to have the lowest production cost. On a delivered market basis producers in Saudi Arabia are estimated to have the best competitive position derived primarily from Its low gas feedstock position. Malaysia Gas is also competitive due to its low cost gas position. Malaysia Gas gains additional competitive advantage over Middle Eastern players due to lower logistics costs into key Asia Pacific markets. Other producers are primarily disadvantaged due to higher ethylene production costs resulting from naphtha. This is also the case for US producers where ethane prices are sensitive to wider energy markets. However US producers still have an attractive advantage over conventional naphtha-based producers. 1.5.5 Ethylene Glycol (UEG”) Global Overview EG is a major raw material used in the production of polyester fibre and resin. EG is produced from ethylene oxide (“EO”) which is also used as a raw material for other derivatives productions. Global demand in 2009 was approximately 18 million tons and we forecast demand to grow at a 4-5% CAGR over the period 2010-2017. A key driver for consumption growth of. EG is the textiles market where polyester holds a strong market position based on cost on performance versus other fibres. EG is also widely used as an ingredient in antifreeze blends due to its ability to resist freezing. It is commonly used as a de-icer in windshield applications. Independent Market Report on the Global & Malaysian Petrochemicals 30t-‘1Nexanr 35003.001.01 -91 ­6. INDUSTRY OVERVIEW (cont’d) Figure 1.21 Ethylene Glycol Global Consumption by Application (2009) Ind~ial 7%
Total Consumption = 18.2 million tons Source: Nex anI On a global basis, EG demand is highly concentrated in Asia Pacific. This is due to the high concentration ofpolyester production in the region that has resulted in very high growth rates for EG consumption. Total Asia Pacific demand in 2009 was approximately 13 million tons, or 72% of global demand, and we forecast demand growth of approximately 5% CAGR over the period 2010-2017. New capacity developments are usually linked to wider olefin complexes and are typically constructed with upstream integration into ethylene oxide. In recent years, most new capacity developments have been taking place in Asia Pacific and the Middle East.
Independent Market Report on the Global &Malaysian Petrochemicals”1 Nexanr 35003001.01 -92­Figure 1.23 Overview of Ethylene Glycol Consumption by Region
Malaysia Middle East  IGLOBAL CAGR 4.6% I  1.8% 6.4%  ROW  8.4%  Soulh East Asia  3.4%  Europe Norlh America  0.9% 4.1%  Asia Pacific  5.0%  o  2000  4000  6000  8000  10000  12000  14000
6. INDUSTRY OVERVIEW (cont’d) Product price spreads over ethylene peaked in 2007 at approximately $460 per ton. This was supported by relatively high industry utilisation backed up by strong market demand. However, price spreads declined sharply in 2009 to approximately $145 per tons as demand growth subsided and new capacity was brought on-stream. We expect the high level of capacity addition in 2010 to reduce global utilisation rates significantly, to below 80%. Capacity additions of approximately 3.5 million tons per year are expected to come online in 2010. We forecast product price spreads to recover relatively quickly due to strong outlook on consumption growth. (Thousand tons per year) CAGR 201G-2017F Source: Nex ani ~ 2005 • 2Cf.Jl ~ 2009 Independent Market Report on the Global &Malaysian PetrochemicalsUNexanr 35003.001.01 -93­6. INDUSTRY OVERVIEW (cont’d) Figure 1.24 Ethylene Glycol Supply, Demand and Trade -Asia Pacific 100%25000 ~ –.–. —-… .. … 80%20000 ~ Q} >.
(f) ~ Q) 2 Cl.. 15000 60% ~ (f) cc 0.9 10″0 .!!2c 10000 40%co 5(f) :::J
5000 20% o 0% 2003 2004 2005 2006 2007 2008 2009 2010F 2011F 2012F 2013F 2014F 2015F 2016F 2017F ~NetExport ~, Net Import –Total Capacity –…..-Production —Consumption —-Utilisation rates Source: Nex ant NB. Utilisation is total production expressed as a percentage ofnameplate capacity excluding mothballedfacilities. Malaysian Market EG is primarily consumed for polyester production which will continue to be the principal driver for EO/EG growth. Malaysia is a relatively minor consumer of EG and consumed approximately 185 thousand tons of EG in 2009. This accounts for just over 1% oftotal Asia Pacific demand. Independent Market Report on the Global &Malaysian PetrochemicalsL-1Nexanr 35003.001.01 -94­6. INDUSTRY OVERVIEW (cont’d) Figure 1.25  Ethylene Glycol Supply, Demand and Trade -Malaysia  450  100%  —-­ 400  ~  —­ ~  80%  en  ::> 0  150  ..c:  I­ 100  20%  50

o 0% 2003 2004 2005 2006 2007 2008 2009 2010F 2011F 2012F 2013F 2014F 2015F 2016F 2017F ~NetExport _Nellmport –Talal Capacity __Production —Consumption —-Utilisation ratesSource: Nex ant NB. Utilisationistotalproductionexpress(!dasapercentage ofnameplatecapacityexcludingmothballedfacilities. We forecast domestic consumption growth to increase at an average annual rate of close to 2% per year from 2010 to 2017. Malaysia has become a net exporter ofEG. However, we expect that total net trade will decline modestly as domestic demand for EG continues to grow. PCG is currently the only EG producer in Malaysia. Competitive Positioning Total EG capacity in South East Asia is approximately 1.1 million tons. The supply base consists of only four companies. PCG and PIT together account for an estimated 69% of the regions total installed capacity. EG Singapore is a joint venture between Shell Chemicals and Mitsubishi. It has been reported that Shell Chemicals is set to commence operation of new 750 thousand tons per year EG facility in Singapore in 2010. PolyChem is Indonesia’s sole producer ofEG and also manufactures polyester. L-1Nexanr Independent Market Report on the Global & Malaysian Petrochemicals 35003.001.01 -95­6. INDUSTRY OVERVIEW (cont’d) (Capacity basis 2009) 0­ OJCl ::J E <.) o OJ o .r::; 0­<5 ~ 0>n.. m l­o c:: I­n.. U5n.. ClSource: Nexant w
EG is produced by the reaction of ethylene oxide (“EO”) with water and its economics are therefore driven principally by the cost of ethylene. All EG plants are back-integrated into EO. This is essential as EO is explosive and cannot be easily transported. Cost competitiveness is largely determined by the cost of ethylene supply as most leading producers are also integrated into ethylene feed. Key assumptions for EG competitiveness include the following: • All producers have been evaluated on an integrated ethylene basis with ethylene cost being transferred at cash cost.
• EG production costs have been compared on a delivered market basis to China.
• All EG plants except the plant in Singapore employ conventional EO/EG technology (ethylene oxidation and ethylene oxide hydration).
• EG production in Singapore is based on Shell Chemical’s OMEGA technology, which gives higher yield ofEG per ton of ethylene.
• Import duty of5.5% was applied for EG exporters into China in 2009.

L,1Nexanr Independent Market Report on the Global & Malaysian Petrochemicals 35003.001.01 -96­6. INDUSTRY OVERVIEW (cont’d) Figure 1.27  Comparison of Ethylene Glycol Production Costs  (2009)  EHis: cma:a<ml  EHis: Illi\as:lOim<ml

SulAct:ia MtilBH Mt¥B fIbt1!mlia 9mne GTa W!im SulAct:ia Mt¥B MtilBH fIbt1!mlia GTa 9mne W!im Im1J BJq:e Im1J BBBBflttRwMiJOGH ?W1JiIf<ht _R>a:lGHI BflttRwMiJO<ht ;r,Lmt<ht IR>a:l<ht IS1D!1IOOt 111I1111I1 Filijt&Rlkgg _Tal -Ml1aRi:e EG producers in the Middle East (leader producers) and Malaysia, have much lower cost positions as a result of a low cost ethylene feedstock. Leading Middle Eastern producers have lower production cash costs but bear higher freight costs to key Asia Pacific markets. Other producers are primarily disadvantaged due to higher ethylene production costs. Producers in Western Europe and North America are also subjected to high transportation costs due to the proximity to the destined market. Other Ethylene Derivatives PVC PVC is a highly versatile plastic and the third most widely used after polyethylene and polypropylene. Key applications are tied largely to the construction sector. These include profiles (door and window frames)· flooring, pipe & conduit and cable insulation. Global demand for PVC is estimated at approximately 34 million tons and is forecast to grow at approximately 5% CAGR over the period 2010-2017. Asia Pacific currently accounts for approximately 50% of global consumption. The main consumption driver is the construction sector. Ethylene Oxide Derivatives More than 70% of ethylene oxide production is used for the production of glycols with the remaining 30% consisting of a variety of smaller chemical· intermediates. These include ethoxylates and ethanolamines. These products are consumed largely in mature end-use sectors such as detergents, solvents and gas treatment. However these tend to offer more stable growth, albeit low, and less subject to market cyclicality. Independent Market Report on the Global & Malaysian PetrochemicalsL-‘1Nexanr 35003.001.01 -97­6. INDUSTRY OVERVIEW (cont’d) Ethoxylates Ethoxylates are generally classified in two main categories, alcohol ethoxylates and aromatic based alkylphenol ethoxylates. Ethylene oxide and in some cases propylene oxide are the reactive chemicals employed to form the ethoxylated non-ionic surfactants, which is the principal application for ethoxylates. Smaller volumes of ethoxylates are used as solvents, adhesives and for surface coatings. Ethanolamines Ethanolamines end use markets depend largely on application and can vary significantly by geography. Monoethanolamine (MEA) is used in wood preservatives a practice most common in North America while Diethanolamine (DEA) is used in manufacture of herbicides glyophosphates, a practice not common in Europe or other markets. Other DEA applications are relatively small scale and include gas sweetening and pharmaceuticals. 1.6 METHANOL KEY DRIVERS & TRENDS 1.6.1 Global Overview Global methanol demand is approximately 45 million tons. Methanol is consumed as a chemical feedstock (~43%) and in fuel related markets (~22% of the market). The balance of the market is difficult to quantify accurately and includes various applications such as solvent uses, antifreeze and chemical intermediate methylamines (used in textiles and animal feed production). The major chemical use for methanol is in formaldehyde, which accounts for approximately 33% of global consumption. Formaldehyde is predominantly used in producing resins (glues) for use in binding plywood and chipboard/particle board. Methyl tertiary butyl ether (“MTBE”) and fuels represent the second largest outlet for methanol. However, in the last decade, a large proportion of MTBE demand has been lost because of concerns about groundwater contamination in the US market. As a result, MTBE usage in the US as a gasoline blend component has been phased out completely. MTBE is still widely used as gasoline blend component in other markets outside of the US. Direct blending of methanol into gasoline has been minimal due to immiscibility, volatility and toxicity issues. Nevertheless, due to high oil prices and insufficient hydrocarbon reserves, methanol blending into gasoline continues to grow in China. L,1Nexanr Independent Market Report on the Global & Malaysian Petrochemicals 35003.001.01 -98­6. INDUSTRY OVERVIEW (cont’d) Figure 1.28 Global Methanol Consumption by Application (2009) Gasoline Blending 7%
Total Consumption =45 million tons Source: Nex ant We forecast global methanol demand to exhibit relatively high growth in the near-term at approximately 9% CAGR over the period 2010-2017. The principal driver for demand is new and emerging applications such as methanol to olefins (“MTO”) and dimethyl ether (“DME”), a possible substitute for LPG. Traditional applications are expected to grow more closely to GDP levels. However, during 2008 to 2009 demand declined for traditional end-uses such as formaldehyde and acetic acid, due to the economic slowdown which negatively impacted the construction and synthetic fibres sectors. Despite this, the wider methanol market continued to exhibit positive growth despite the adverse economic climate.
Independent Market Report on the Global &Malaysian Petrochemicals’-”1 Nexanr 35003.00101 -99­6. INDUSTRY OVERVIEW (cont’d) Globally, methanol is predominantly produced using natural gas as feedstock. As with the pricing of other commodity chemicals, methanol prices have been driven by feedstock costs and supply/demand factors. Due to its transparency, the US natural gas prices are usually used as a feedstock benchmark for methanol production. Spreads between methanol prices and the US gas prices provide the simplified profitability of methanol production. Average methanol price spreads have come down dramatically in 200911 0 due to the current market oversupply, with a low point in 2009 ofjust $6/ton based on market priced US gas prices. Average utilisation rates have declined quite sharply due to the extent of new methanol capacity coming on-stream in 200911 O. There is also a significant capacity over hang in China from higher cost coal based methanol producers. Many ofthese producers have been operating at very low utilisation levels recently due to the current oversupply. We expect average price spreads to recover to an average of approximately $70 per ton over the forecast period, marginally below historic levels. Margins showed a slight increase in 2010 based largely on improved market demand. We expect this trend to continue into 2011 especially as traditional end-use markets recover from the recent economic downturn, and forecast a new peak will occur in 2015. Methanol prices in Asia Pacific began to recover during the fourth quarter of 2009 and increase significantly in the first quarter of 2010. This is due to supply shortages as regional producers confronted unplanned production disruptions as well as tight supply in China where some of the natural gas based were forced to cease production as natural gas was diverted for heating purposes during winter season. Major developments in methanol capacities tend be located in the regions with access to low cost natural gas resources such as the Middle East and parts of South East Asia. An additional increase in capacity is also taking place in China via coal-based projects. However, most of these methanol projects are part of fully integrated MTO projects and are expected to have a limited impact on merchant methanol markets. Additionally, many of these coal-based projects are located in land-locked locations, close to coal reserves but long distances from major methanol end users located at coastal locations. Logistics costs to these markets are high due to distance and available infrastructure. As a result, we expect the majority of methanol produced from these projects to be consumed within relatively close proximity of the operations. Independent Market Report on the Global & Malaysian Petrochemicalst-1Nexanr 35003001.01 -100­6. INDUSTRY OVERVIEW (cont’d) (Thousand tons per year) CAGR 201o-2017F Malaysia GLOBAL CAGR 9.4″10 I ROW Soulh East Asia Middle East Norlh America Europe Asia Pacific
2.8% 19.2% 3.4% 3.8% 3.0% 2.7% 12.1% o 5000 10000 15000 20000 25000 Source: Nex ani Asia Pacific is the world’s largest methanol market with consumption of approximately 24 million tons in 2009. High demand growth in the region is largely associated with China and developing end use markets such as various fuel usages and MTO. We forecast methanol demand growth in China at approximately 15% CAGR over the period 2010-2017. The price of natural gas is a key determining factor in the location of mega methanol facilities. Recent capacity investments have largely been restricted to regions where advantaged gas pricing is available such as the Middle East, South America and South East Asia. The only exception to this has been China, where new projects based on a coal feedstock are also being developed. We expect an estimated 28 million tons of new methanol capacity to be added to the Chinese market over the 2009-2015 period. The majority of this capacity is planned for captive consumption via coal to olefins projects. Independent Market Report on the Global & Malaysian Petrochemicals””Nexanr 35003.001.01 -101 ­

6. INDUSTRY OVERVIEW (cont’d) 2003 2004 2005 2006 2007 2008 2009 2010F 2011F 2012F 2013F 2014F 2015F 2016F 2017F
~NetExport ~Netlmport —Tda! Capacily _ PrOOJctiooSource: Nex ant —Consumptioo —-Utilisatioo rates NB. Utilisation is total production expressed as a percentage ojnameplate capacity excluding mothballedJacilities. Figure 1.32 Methanol Forecasted Capacity Changes (Million tons, 2010 vS-2015F) Central &Eastern Europe (CEE),tt——:-CA:”::G””R5′”””‘.36″””,..-1 ‘;,,§9iJ \ ~1~~ ‘0 , ~o 4.7 ~ 6.1 “”::7:~ ~~~Y::?:0~ … ~.”‘ 0 ‘-‘-“-‘;~O1O ‘-~””~ 2015-J’­< -.. ~:. (~~\~1.:;: /”.;.-~’~:·;~tS~’. OtherAs~~’
CAGR ·11.0′, CapacilfShare 2010 ‘IE. HAM 0″” ~:: ~~~:~:;;J .._~ .._~…….. 1.0 “:80 1———1 2010 . 2015 . J.;~~ CAGR O.OO~, ~ 40 ~ .. i7ii 4.4~ 4.4’-‘ . 0 f-“.””-“”’-r-””””’-.””'””-1 2oio • 2015 Total Capacity =87.6 million tOIlS Source: Nexant
L-1Nexanr Independent Market Report on the Global &Malaysian Petrochemicals 35003.001.01 -102 ­6. INDUSTRY OVERVIEW (cont’d) The combined capacity of the top ten producers accounts for approximately 30% of the global total capacity in 2009. The remaining 70% of the market comprised a highly fragmented group oflargely small coal based producers in China. Figure 1.33 Methanol Top Ten Global Producers (Capacity basis, 2009) 7000 • Capacity 6000 7%
% Capacity Share ro 5000Q.) >­Q.; 0-4000<f) e .9
-0 e 3000 lJl
::::J a .<:: 2000t:. .?;­·u ro 1000 0­ro C>
0 x ·N <f) (9 -l aa xau C>Q.) a ero Nro l-e e C> ro Ero .:= roa: rn a.. ::r:: ·08 ~ ro ro .<:: ro .<:: .ll!.<:: :::;;.;;: N a:; a:; .!!!a:; ~ Q.) :::;; :::;; :::;; 0>:::;; aSource: Nexant <f) I­~ Methanex, the world’s largest producer operates multiple sites at different locations around the world and has a total production capacity of approximately 6 million tons. Ar Razi is the world’s second largest methanol producer. The company, based in Saudi Arabia, is joint venture between Sabic and Mitsubishi Gas Chemical. PCG is one of the world’s largest methanol producers with an annual production capacity of approximately 2.4 million tons. PCG was ranked as the number four methanol player globally. The majority of other leading producers are national oil or petrochemical companies that operate locally with access to advantaged gas pricing. The majority of leading methanol producers are 100% merchant suppliers with limited forward integration. Independent Market Report on the Global &Malaysian PetrochemicalsL-1Nexanr 35003.001.01 -103­6. INDUSTRY OVERVIEW (cont’d) Figure 1.34 South East Asia Methanol Market Share (Capacity basis 2009) Myanrrar Slate 4% Medco Methanol
Source: Nex ant Total Capacity :: 3.6 million tons Nole: . Brunei Methanol plans 10 start up a 850 kta plannn 2010 -Medea Methanol has been shut:fown since earty 2009 1.6.2 Malaysian Market Malaysia has historically been a small net importer of methanol. However following the start up ofPCG’s new mega methanol plant in 2009, the country is now a major net exporter. PCG is the sale domestic methanol producer and exports primarily to other Asia Pacific markets such as Japan, Taiwan, Korea, and China.
2003 2004 2005 2006 2007 2008 2009 2010F 2011 F 2012F 2013F 2014F 2015F 2016F 2017F ~NetExport ~_Netlmport –Tolal Capacity Source: Nex ant–Production —Consumption —_Utilisation rates Independent Market Report on the Global &Malaysian PetrochemicalsL-1Nexanr 35003.001.01 -104­6. INDUSTRY OVERVIEW (cont’d) NB. Utilisation is total production expressed as a percentage ofnameplate capacity excluding mothballed facilities. Methanol demand in Malaysia is driven primarily by chemical uses; acetic acid, fonnaldehyde (for particle board resin), and MTBE production. Fonnaldehyde and acetic acid production account for more than half of total methanol use. 1.6.3 Competitive Positioning Methanol is large volume bulk commodity that is produced by similar plants utilising comparable production technology. The cost of producing methanol varies greatly by location around the world. The key detennining factor for production competitiveness is tied to the prevailing natural gas price. As a result producers in advantaged gas regions have leader production economics. Secondary factors effecting competitiveness are tied to plant scale (economies of scale) and proximity to market. Key assumptions for methanol competitiveness include the following: • Methanol production technology in Malaysia, Indonesia, Saudi Arabia, the Middle East and New Zealand is natural gas-based.
• Methanol technology in Western Europe is vacuum residue-based (representative producer).
• Methanol costs have been compared on a delivered market basis to China.
• Import duty of 5.5% was applied for methanol exports originating from the Middle East and Western Europe in 2009. Under New Zealand-China free trade agreement, methanol exports from New Zealand was imposed with 3.3% import tax in 2009.
• Chinese domestic methanol production from coal has been excluded from the analysis as these costs are location specific and are generally tied to inland locations and markets.

Independent Market Report on the Global &Malaysian PetrochemicalsL-1Nexanr . 35003.001.01 -105­6. INDUSTRY OVERVIEW (cont’d) Figure 1.36 Comparison of Methanol Production Costs (2009) 9]) 9]),—————–,
c ~3lJ ~ ‘” “0oa:D (f) :::> 1()J Sadt.a:ia t.fdJeBl’l Irdrnia ME,Sa N3Nlffiad vetmfirq:e ME,Sa N3Nlatrd vetm6.rq:e _ Rxe:lCal (vaurlTll’nEjs:ure ~irtlHm I_G_IIl1_Fbv_Mtm_·O:II____._Rx_e:I_Cal_’1 ~:: “”” IIl1FbvMtmO:Il:WhLli¥CaI~_lDJ_Cal”mllll· FrEig1&f\Da;Tg _ Tail -M’J\{jR’re Overall production competitiveness of methanol depends primarily on feedstock and shipping costs. Producers in lower cost gas regions (Malaysia, Indonesia and the Middle East) are considerably more competitive versus other producers. 1.7 UREA KEY DRIVERS &TRENDS 1.7.1 Global Overview Ammonia demand is driven primarily by urea consumption, which in tum is driven by fertiliser demand. Fertiliser demand has historically been linked to food consumption through GDP and population growth as well as declining availability of arable land, increasing the need to improve yields and productivity. However, in recent years this dynamic has begun to change somewhat, due to the rapid growth in bio-fuels. Urea is used in many areas of the world as the primary source of nitrogen for crop nutrition. With approximately 46% nitrogen content, it is the most concentrated form of solid nitrogenous fertiliser, and therefore, has a logistical advantage over ammonium nitrate fertilisers. It is used extensively in developing regions of the world and traded widely on international markets. In addition to fertiliser usage, urea is also consumed in the production of certain resins such as urea formaldehyde resin and melamine. Urea formaldehyde resins are the dominant wood glues in particle board, chip board, and plywood. Over 90% of urea is used in fertiliser applications. The industrial sector, which contributes to approximately 9% of global urea demand, is generally expanding at rates close to GDP. Independent Market Report on the Global & Malaysian Petrochemicalst-‘1Nexanr 35003.001.01 -106­6. INDUSTRY OVERVIEW (cont’d) Figure 1.37 Urea Global Consumption by Application (2009) Olher Nfertilizers Biofuels fertilizers 3% DEF/Adblue 0%4%
Source: Nexant Total Consumption =147 million tons Fertiliser consumption growth is the primary driver for ammonia and urea markets and is a function of the following: • Population growth -resulting in increased demand for food products.
• Increasing wealth -increasing demand for protein rich foods (e.g. meat) and hence grain for cattle
• Declining arable land leading to an increased demand for fertilizers to improve crop yield and productivity
• Government policies on tariffs and subsidies -providing price protection to farmers and promoting consumption ofbio-fuels
• Environmental implications -increased agricultural demand for bio-fuel markets

Government subsidies are a key driver for fertiliser demand in many countries as governments recognize the importance of a strong agricultural sector and a need to ensure that they do not become over reliant on food imports to feed growing populations. The cost of applying fertilisers at levels consistent with high productivity can be prohibitively expensive for low GDP/capita countries. As a result, various government schemes have been implemented to protect farmers from volatile pricing thus providing a more stable demand environment for fertiliser products. These subsidies take many forms and some of the key ones are summarized below: • Direct subsidies direct subsidies to farmers for fertiliser use recompensing fertiliser companies for differentials between market price & cash cost + ROJ on a per ton basis tax breaks and VAT holidays for fertiliser manufacturers.
Independent Market Report on the Global & Malaysian PetrochemicalsL-1Nexanr 35003.001.01 -107 ­

6. INDUSTRY OVERVIEW (cont’d) • Indirect subsidies discounts on energy prices for fertiliser manufacture -widely used in regions of high energy costs such as South East Asia and China interest free loans for farmers at the start of the growing season, repayable at harvest time exemption from import tariffs for fertilisers and fertiliser feedstocks such as ammonia and phosphoric acid subsidies for transportation of fertilisers and fertiliser feedstocks. In general, demand growth for urea is relatively stable and less susceptible to the changing economic environment. This is partly attributed to government subsidies that offer price protection to end users and its application as an essential input into grain production. Overall, global urea demand was approximately 147 million tons in 2009 and we forecast this demand to grow at a CAGR of2.7% over the forecast period 2010-2017. However, the market is still cyclical, due to its commodity nature, and new investments are expected to continue to have a downward effect on utilisation rates in the near-term as significant new capacity is added to the market. 25000o,———————, 300,———–,————-,-100% F~casl 250 2OIlOO0 90% ~ 151J111){) ~ 150
~ 1011000 j 100 7572 , 70% ~ 50 4: ;£~ I ~~ 50000 60%~o~I;,i~I’11 o 2003 2004 2f1D5 2006 2007 2008 2003 2005 2007 2009 2017F ~~ I ~Ullllfir~MalNIJN~RawMaIIli3C!&1 –GldBiliisiDJIiiles I_CII&II¢ri -TItIC¢! N~~· aJ11F is treca;ejm jlll’llilIeillSis ·fll8:3SlpkeislBslJl mB!at flIlEa I”roJllllml NB. Utilisation is total production expressed as apercentage ofnameplate capacity excluding mothballed facilities Average price spreads peaked in 2008 at approximately $240 per ton supported by high industry utilisation rates of close to 90%. However, following the start-up of new capacity and a weakening within some market segments, price spreads declined to approximately $119 per ton. We forecast price spreads to remain relatively low in the near-term as new capacity is added to the market. We estimate that approximately 9 million tons per year of new capacity will commence in 2011 compared with only 4 million tons per year of demand growth which we Independent Market Report on the Global & Malaysian Petrochemicals 47L-1Nexanr 2(109 2010F 2011F 2012F 2f113F 2014F 2f115F 2fI16F 2l117F 2011F 2013F 2015F 35003.001.01 -108­
6. INDUSTRY OVERVIEW (cont’d) outpace the rate of further capacity additions. We forecast average utilisation rates and margins to recover gradually, with a new peak in 2015. On a regional basis we expect urea demand to grow at higher rates in developing regions where population growth is highest and farming techniques are being improved and industrialized via increased usage of fertilisers. Conversely, North America and Europe are expected to exhibit limited growth due to lower population growth and a well-developed agricultural industry. CAGR 2010-2017F Malaysia GLOBAL CAGR 2.7% I Middle East ROW Europe North America South East Asia Asia Pacific o 20000 40000 60000 80000 100000 120000 I ~ 2005 • 2007 (!IijJ 2009 ISource: Nex ant China is the world’s biggest fertiliser consumer, representing more than half of the Asia Pacific market and approximately one third of global demand respectively. Besides China, sizeable urea consumption is found in India, Indonesia, Thailand, and Vietnam. 2.5% 2.9% 3.9% 2.8% 1.7% 2.4% 2.7% Independent Market Report on the Global &Malaysian PetrochemicalsL-1Nexanr 35003.001.01 -109­6. INDUSTRY OVERVIEW (cont’d) Figure 1.40  Urea Supply, Demand and Trade· Asia Pacific  140000  100″10  120000  80″10  ID a.  80000  60″10  (f) 2 ~

(f) c .8 0c “0 10 c 60000 ~ ell 40″10 (f) = :::J =:J 0 ..c 40000I­20″10 20000 o 0″10 2003 2004 2005 2006 2007 2008 2009 2010F 2011F 2012F 2013F 2014F 2015F 2016F 2017F _NetExporl ~~Netlmporl –Tolal Capacity Source: Nex ani _Production —ConSLITlption —-Utilisation rates NB. Utilisation is total production expressed as a percentage ofnameplate capacity excluding mothballedfacilities. Global urea supply is relatively fragmented and consists largely of regional entities that have access to domestic gas resources. Approximately 10 million tons of new urea capacity IS scheduled to be added in the Africa and Middle East regions over the period 2010-2015. Independent Market Report on the Global &Malaysian PetrochemicalsL-1Nexanr 35003.001.01 -110­6. INDUSTRY OVERVIEW (cont’d) (Million tons, 2010 vs-20 15F)
Conversely, urea plant closures are expected to take place in the US and Europe as average price spreads remain below $1 DO/ton level. These are regarded as a higher cost plants for urea production. The top ten urea producers account for 16% of total global capacity. Most of these players have access to low cost gas and are predominantly located in the Middle East, Africa and Russia. Urea supply in South East Asia is dominated by Indonesia and Malaysia. Indonesian producers, Pupuk Kaltim and Pupuk Sriwidjaja are currently the two largest urea producers in the region. Most producers in the region are integrated with ammonia feedstock. PCG is ranked as the third largest producer in South East Asia. Independent Market Report on the Global & Malaysian Petrochemicalst-1Nexanr· 35003.001.01 -111 ­6. INDUSTRY OVERVIEW (cont’d)
(Capacity basis 2009) ~ -‘” u ,§ .~ <.9 0> E “00 m U “”CJ ‘” c Q) ~ 0-(ij :::J C ‘” :-g 0-:;;;: “5’ a; ‘” E ~ ::.::: ‘” <D Q)U'” -‘” s: ::.::: :> ..c Q) LLlii C/)C/) u:::J ;§.j «l -‘” C/) (ij0-“”CJ :::J e “E'” e c :::J C Q) “~-‘” 0-Q; :s2 Q; “§.0-:::J :::J 0>J2 0-0-E0-0-e m Q):::J !!l Q; ~ ..c0-«l C-‘” 0-w z U:::J E0-C u :::JSource: Nex ant 0-‘” 0>-..0 ‘” :;;;: ‘” :r: 1.7.2 Malaysian Market Malaysia imports a vast array of fertilisers with the exception of granular urea and ammonia which are produced domestically. Through the availability of low cost gas, Malaysia has become a major producer and exporter of granular urea in Asia Pacific. Total net exports are sustainable at approximately 500-700 thousand tons per year or approximately 50% of production. The domestic urea market is relatively small and only offers modest growth prospects. As a result, Malaysia is expected to continue as a significant net exporter of urea over the 2010-2017 period. Major export destinations include Thailand, the Philippines, Australia, Japan, and other Asia Pacific countries. peG is the sole urea producer in the country with two production facilities located in Bintulu and Gurun Kedah. Both of these facilities are integrated with ammonia productions. Independent Market Report on the Global &Malaysian Petrochemicals””Nexanr 35003.001″01 -112 ­6. INDUSTRY OVERVIEW (cont’d) Figure 1.43  Urea Supply, Demand and Net Trade ­ Malaysia  1800  100%  1600  1400  80%  ;U <D >­<D  1200  60%  C/) 2  c. C/) c: .8 “”0c: CIS C/) :::::l 0..c:  1000 800 600  40%  ~ c: 0 ~ .!!1 5  I­ 400  20%  200
o-f–.—-.—,——,——r—-,—-,——.–,..—.—-,–,——,–+ 0% 2003 2004 2005 2006 2007 2008 2009 2010F 2011F 2012F 2013F 2014F 2015F 2016F 2017F ~NetExport –Tolal Capacity ___Produc1imSource: Nex ant —CCXlSumptim —-Utilisation rates NB. Utilisation is total production expressed as a percentage ofnameplate capacity excluding mothbal/edfacilities. 1.7.3 Competitive Positioning The key detennining factor for production competItIveness in ammonia/urea is tied to the prevailing natural gas price. As a result producers in low cost gas regions have leader production economICS. Key assumptions for urea competitiveness include the following: • All models are based on integrated ammonia/urea production with ammonia transferred at its cash cost of production. With the exception of China which is coal-based other technologies are gas based.
• Comparisons have been made on a delivered market basis to India (a major net importer of urea).
• Existing market tariffs of 10% are applied to all producers for exports to India.

Independent Market Report on the Global & Malaysian Petrochemicals~1NexanT 35003.001.01 -113 ­[Company No.: 459830-K 6. INDUSTRY OVERVIEW (cont’d) Figure 1.44  Comparison of Urea Production Costs  (2009)  Basis: Cash Cost 2009  Basis: Delivered India 2009
400 ..———————-, 400..——————­300 c .9 :;; a. ~2oo ~ <3 o C/) :::> 100
300 c .9 II8­~200 .!!1 “0 o en :::> 100IIII
Saudi  Middle East Indonesia  Malaysia  North  China (coal)  Western  saudi Arabia Middle East  Indooesia  Malaysia  North  China (coal)  Western  Arabia  America  Europe  Leader  America  Europe  Leader  Source: Nexant  • Fixed Cost  r. Utility Cost  ~ Net Raw Material Cost  ~,’>-” Net Raw Materi~ Cosl “// /.Utility Cost 1111111 Fre~hl& Packagiri;! _Tariff  -Fixed Cost -Mall<elPrice
The cash cost of urea is generally dominated by feedstock costs and scale of production. As a result producers from the Middle East; Malaysia and Indonesia have leading comparable competitive positions. Additionally there are producers in other locations such as Africa and Russia that have comparable production costs. Chinese producers, utilising coal, are relatively high cost in comparison but have a mmor advantage over producers in North America and Western Europe. Independent Market Report on the Global & Malaysian PetrochemicalsL-‘1Nexanr 35003.001.01 -114­



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