BOND MARKET UPDATE

PETROCHEMICAL
INDUSTRY

DECEMBER 2019 • PETROCHEMICAL INDUSTRY 17

 INDONESIA’S
PETROCHEMICAL INDUSTRY

We are of the view that the outlook for the petrochemical industry is stable. Prospects
for demand growth are positive in the medium term, although there are short-term
risks from the slowdown in the production of plastic and rubber-based goods. Even
low oil prices allow producers to maintain a stable level of profit. From the supply side,
Indonesia needs new investment to reduce import dependency, especially for aromatic
products.

DEMAND PROSPECTS ARE STILL POSITIVE

Demand prospects in Indonesia are in the field of chemicals, both have

still positive, along with the broad use compound annual growth rates (CAGR)
of petrochemicals as raw materials in of 12.0% over the 2018-2024 period.
products such as plastic, vehicle tires, Ethylene demand is expected to increase
toys, and so on. from 1.5 million tons in 2018 to 3.0
million tons in 2024. Butadiene demand
Two of the opportunities to grow strong is projected to increase from 115,000 tons
are in ethylene and butadiene. According in 2018 to 227,000 tons in 2024.
to Nexant, a professional consultant

EXHIBIT 1. DOMESTIC DEMAND OF

PETROCHEMICAL PRODUCTS (000 TONS)

Product 2018 2020 2024 CAGR

Ethylene 1,518 1,849 2,992 12.0%

Propylene 1,007 1,025 1,646 8.5%

Butadiene 115 135 227 12.0%

Polyethylene 1,596 1,777 2,120 4.8%

Polypropylene 1,752 1,962 2,396 5.4%

Source: Nexant, TPIA’s expose

18 PETROCHEMICAL INDUSTRY • DECEMBER 2019

 PETROCHEMICAL INDUSTRY

EXHIBIT 2. GROWTH IN OUTPUT OF PLASTIC AND

Ethylene is widely used in the chemical RUBBER-BASED GOODS MANUFACTURING (% YOY)
industry, with some converted to
polyethylene which is a plastic raw
material. Butadiene is applied primarily as
a raw material for making tires, synthetic
characters, gloves, and footwear.

For other major petrochemical products,

the CAGR is estimated at 4%-8.5%.
Demand for propylene will grow from 1.0
million tons in 2018 to 1.6 million tons
in 2024. For the same period, demand
for polyethylene and polypropylene will
increase from 1.6 million tons and 1.8
million tons to 2.1 million tons and 2.4
million tons.

*During 1Q-3Q2019
Source: Central Bureau of Statistics

Despite the positive outlook in the medium term, in the short term the petrochemical
industry faces slightly weak market demand. Demand from plastic-based
goods manufacturing is expected to be softer. The output of rubber and plastic
manufacturing contracted 5.7% YoY in the first three quarters of 2019, after growing
6.9% YoY in the previous year. Declining output reduces the demand for petrochemical
products, which are the primary raw material in the industry.

DECEMBER 2019 • PETROCHEMICAL INDUSTRY 19

 LARGE TRADE DEFICIT REMAINS AS NEW FACILITIES NOT YET OPERATIONAL

Indonesia relies on imported supplies to meet the demand for some petrochemical
products. The deficit exceeded USD1.0 billion in the last few years, a large part of the
aromatic petrochemical trade deficit.

The trade deficit value of petrochemical products reached USD821.7 million during
January-October 2019, with exports of USD777.1 million and imports of USD1.6 billion.
For the previous year, the deficit hit USD1.7 billion, the result of exports of USD685.4
million minus imports of USD2.4 billion.

EXHIBIT 3. TRADE BALANCE OF

PETROCHEMICAL PRODUCTS (USD BILLION)

*As of January-October 2019

Source: UNComtrade, Central Bureau of Statistics

Xylenes, ethylene, and benzene are the products with the most significant deficits.
The xylenes trade deficit figure reached USD901.1 million in 2018, and USD331.2
million for January-October 2019. For the same period, ethylene and benzene trade
deficits reached USD626.9 million and USD202.9 million in 2018, and USD442.1 million
and USD95.9 million in the first 10 months of 2019. Another aromatic product that
represent a deficit is toluene, at USD92.4 million in January-October 2019.

20 PETROCHEMICAL INDUSTRY • DECEMBER 2019

 PETROCHEMICAL INDUSTRY

EXHIBIT 4. TRADE BALANCE OF INDONESIA’S

PETROCHEMICAL PRODUCTS (USD MILLION)

Export Trade balance

Products
2015 2016 2017 2018 2019* 2015 2016 2017 2018 2019*

Xylenes 0.0 0.0 0.0 22.2 240.1 -803.2 -454.0 -732.1 -901.1 -331.2

Ethylene 22.3 115.3 132.3 130.6 62.9 -758.0 -557.8 -537.8 -626.9 -442.1

Benzene 0.9 4.3 0.0 15.9 13.4 -129.2 -132.3 -219.5 -202.9 -95.9

Propylene - 9.6 32.9 4.8 0.0 -354.1 -123.2 -69.6 -107.9 -81.3

Toluene - - - - - -78.8 -76.6 -83.0 -92.4 -71.9

Cumene - - - - - -3.3 -2.8 -3.6 -3.9 -3.2

Cyclohexane - - - - - -0.2 -0.3 -0.3 -3.8 -1.6

Trichloroethylene 0.0 - - - - -1.8 -1.7 -2.1 -2.7 -2.2

Tetrachloroethylene - - - - - -1.3 -1.1 -1.2 -1.4 -0.6

Ethylbenzene - - - - - -4.7 0.0 -21.3 0.0 -18.4

Vinyl chloride 19.7 80.1 111.3 143.0 98.1 -61.9 12.6 27.1 34.9 20.1

1,2-Dichloroethane 52.0 58.5 69.2 53.6 78.8 52.0 51.3 66.4 49.0 74.2

Butadiene 61.9 125.4 230.2 178.9 62.6 16.2 81.3 158.3 105.2 40.8

Styrene 67.6 90.6 208.3 130.4 132.0 55.7 79.7 189.0 114.3 126.6

Other 7.4 2.3 1.1 6.0 89.2 -74.7 -80.9 -90.0 -101.0 -35.1

Total 231.9 486.0 785.3 685.4 777.1 -2,147.2 -1,205.8 -1,319.6 -1,740.7 -821.7
*As of January-October 2019
Source: UNComtrade, Central Bureau of Statistics

GOVERNMENT ENCOURAGEMENT EXPECTED TO SPUR DOMESTIC PRODUCTION

In recent years, investment in the The additional supply comes mainly polyethylene derivatives such as LLDPE,
petrochemical industry has been from Pertamina’s petrochemical HDPE, and Metallocene LLDPE.
quite intensive. We expect supply to manufacturing facilities, Chandra
increase significantly in the medium Asri Petrochemical Tbk (TPIA), and It also increased the capacity of its
term. Propylene production capacity is Lotte Chemical. After completing the polypropylene facilities, from 110,000
projected to increase from 1.1 million Butadiene capacity increase to 199,000 tons to 408,000 tons, and ethylene
tons in 2018 to 2.4 million tons in 2024. tons in mid-June 2018, Chandra Asri Tbk facilities from 860,000 to 900,000 tons.
For the same period, the production is developing another petrochemical Investment in both projects reached
capacity of butadiene and polyethylene project and targeting its capacity rising USD87.5 million.
is expected to increase from 119,000 tons to 135,000 tons by 2020. The company
and 786,000 tons to 425,000 tons and 2.2 has built a polyethylene factory facility
million tons. worth USD380 million, producing various

DECEMBER 2019 • PETROCHEMICAL INDUSTRY 21

 EXHIBIT 5. PROJECTED CAPACITY FOR SIGNIFICANT
PETROCHEMICAL PRODUCTS (000 TONS PER ANNUM)

Source: Bloomberg

PT Pertamina (Persero) is also quite intensively entering the petrochemical market,

collaborating with China Petroleum Corporation (CPC) on a petrochemical project in
the Balongan refinery area, West Java. With the value of the project reaching USD6.5
billion, the facility will have a capacity of around 1 million tons and operate in 2026.

22 PETROCHEMICAL INDUSTRY • DECEMBER 2019

 PETROCHEMICAL INDUSTRY

Pertamina is also developing a refinery development master plan (RDMP) and grass
roots refinery (GRR) project. Through these projects, it will have polypropylene
production facilities of 1.2 million tons of polypropylene per year, 1.3 million
paraxylene per year, and 750,000 polyethylene per year. The total investment value is
USD16 billion.

EXHIBIT 6. EXISTING PETROCHEMICAL

PRODUCTION CAPACITY (000 TONS PER ANNUM)

Source: Nexant, TPIA

Korean company Lotte Chemical Titan has also invested USD3-USD4 billion to build a
production facility with a capacity of 2 million tons per year for naphtha crackers, raw
materials to produce ethylene, propylene and other derivative products.

DECEMBER 2019 • PETROCHEMICAL INDUSTRY 23

 GLOBAL PRICES FALL IN LINE WITH DECLINE IN ENERGY PRICES

On the international market, prices for petrochemical products are tending to fall,
thanks to falling raw material prices. According to World Bank data, the average oil
price for 2019 weakened from USD68.3 per barrel to USD61.4 per barrel. Likewise,
natural gas prices also declined. On the Henry Hub spot market in the United States,
the price of natural gas fell 18.5%, from USD3.2 per million British thermal units
(MMBtu) to USD2.6 per MMBtu.

The pressure on the two commodities is projected to continue in 2020, making the
prices of petrochemical raw materials remain cheap. However, the risk of an escalation
in geopolitical tensions has recently led to soaring oil prices. The risk will worsen if the
pressure drags on and moves in an adverse direction.

EXHIBIT 7. FEEDSTOCK PRICE OF

HYDROCARBON-BASED CHEMICALS

Source: World Bank

BUTADIENE AND PARAXYLENE EXPERIENCED SHARPEST FALLS

With the price of raw materials continuing to decline, the prices of petrochemical
commodities have also fallen. Butadiene recorded the most significant decline at 23.5%
YoY to USD1,064 per ton in 2019. Paraxylene saw a decrease of 23.4% YoY to USD793
per ton in 2019.

EXHIBIT 8. PRICE OF HYDROCARBON-BASED

CHEMICALS (USD PER TONS)

Source: Bloomberg

24 PETROCHEMICAL INDUSTRY • DECEMBER 2019

 PETROCHEMICAL INDUSTRY

Considering the weakened price of raw Butadiene capacity in 2019 reached 15.8
materials, low petrochemical product million tons with a capacity utilization
prices should continue in the short- rate of 79.4%. Of the total capacity of 59.5
term. The pressure is quite significant, million in 2019, the utilization rate of its
especially for butadiene and paraxylene production capacity was only 78.0%. To
products. Understandably, their accommodate the growing demand, we
production capacity is quite large, with a believe both producers will likely increase
low level of capacity utilization. their utilization rate to 81%-83%.

EXHIBIT 9. THE CAPACITY UTILIZATION RATE

OF GLOBAL PETROCHEMICAL PRODUCTION

Source: Bloomberg

SLOWER OPERATION OF NEW FACILITIES

With current low prices, the operation Investment also depends on the
of new facilities is relatively unprofitable outlook for global economic growth.
in the short term, because it will Petrochemical derivative products are
lead to excess supply and a further widely applied in various manufacturing
drop in selling prices. Investment in products. Thus, indirectly the demand
the petrochemical sector is likely to for petrochemical products is sensitive to
proceed slowly in the next few years. the global economic cycle. In a report in
Petrochemical projects are very capital October 2019, the International Monetary
intensive and require high economies Fund revised downward global economic
of scale to achieve efficient production. growth in 2020 to 3.4 percent, 0.2 percent
Also, the construction of facilities can below the previous report in April 2019.
take quite a long time at three to seven
years.

DECEMBER 2019 • PETROCHEMICAL INDUSTRY 25

 In the past five years, 2015-2019 CAGRs for petrochemical products averaged under
5%, except for methanol. Four main products — ethylene, propylene, butadiene, and
paraxylene — recorded CAGR of 3.8%, 4.7%, 3.1%, and 4.6%, respectively. Most of the
demand came from packaging usage (28% of global petrochemical product output),
electronics (19%), construction (14%), and automotive manufacturing (12%).

EXHIBIT 10. GLOBAL DEMAND OF

PETROCHEMICAL PRODUCTS (000 TONS)

2015 2016 2017 2018 2019 CAGR

Ethylene 141,455 145,761 153,098 159,414 164,468 3.8%

Propylene 94,758 99,579 103,587 106,596 114,080 4.7%

Butadiene 11,108 11,356 11,917 12,152 12,556 3.1%

Paraxylene 38,740 39,242 41,837 44,015 46,398 4.6%

Caustic soda 72,726 74,468 76,315 78,394 80,738 2.6%

Chlorine 68,705 70,348 72,594 73,879 75,692 2.5%

Soda ash 56,484 58,349 60,292 62,233 64,187 3.2%

Methanol 68,391 78,710 86,250 88,344 95,304 8.6%

Source: Bloomberg, Nexant ChemSystems, Tecnon OrbiChem

PETROCHEMICAL INDUSTRY COMPETITION IN INDONESIA

Competition in the petrochemical industry has led to an oligopoly. Several players

compete in the industry, and some of them are vertically integrated, like Chandra Asri
Petrochemical Tbk (TPIA). Compared to other players, TPIA has the most diversified
products.

EXHIBIT 11. KEY PLAYERS IN INDONESIA’S

PETROCHEMICAL INDUSTRY

Players Product and installed capacity (000 tons)

Chandra Asri Petrochemical Tbk (TPIA) • Ethylene (860)

• Propylene (470)
• LLDPE (200)
• HDPE (136)
• Polypropylene (480)
• Pygas (400)
• Crude C4 (315)
• Butadiene (119)
• Styrene (340)
• Synthetic rubber (80)

Lotte Chemical Titan Nusantara • LLDPE (200)

• HDPE (250)

26 PETROCHEMICAL INDUSTRY • DECEMBER 2019

 PETROCHEMICAL INDUSTRY

Players Product and installed capacity (000 tons)

Pertamina • Ethylene (70)

• Propylene (608)
• Polypropylene (45)
• Benzene (125)
• Para-xylene (298)

Polytama Propindo Asahimas Chemical • Polypropylene (240)

• Ethylene dichloride (760)
• Vinyl chloride monomer (875)
• Polyvinyl chloride (550)

Sulfindo Adiusaha • Ethylene dichloride (370)

• Vinyl chloride monomer (130)
• Polyvinyl chloride (95)

Trans Pasific Petrochemical Indotama • Benzene (400)

• Para-xylene (540)

Source: TPIA’s expose

Competition is also not only domestic, but also from imports. Local supply is mostly in
the form of olefins, where some products are dependent on imports. For example, for
polyethylene and polypropylene products, half of the domestic supply of 1.7 million
tons comes from imports, at 53% and 57%, respectively, based on a TPIA presentation.
For polyethylene, the remaining amount comes from TPIA at 20% and Lotte Chemical
Titan Nusantara at 27%. For polypropylene products, aside from imports, supplies also
came from Pertamina (3%) and Polytama Propindo (13%).

Indonesia imports most of its aromatic-based petrochemical supply needs, such as

benzene, toluene, and xylenes. The most significant deficit was for xylene products,
which reached 440,117 tons during January-October 2019. In the same period,
the trade deficits for benzene and toluene were 151,152 tons and 105,853 tons,
respectively.

DECEMBER 2019 • PETROCHEMICAL INDUSTRY 27

 EXHIBIT 12. TRADE BALANCE OF
AROMATIC PRODUCTS (000 TONS)

Indicator 2015 2016 2017 2018 2019*

Export

Benzene 179.8 216.5 261.7 251.8 174.5

Toluene 108.3 119.9 120.7 117.1 105.9

Xylenes 957.8 595.2 875.4 875.1 676.4

Import

Benzene 2.9 5.7 0.0 23.5 23.4

Toluene - - - - -

Xylenes 0.0 0.0 0.0 20.4 236.3

Net trade

Benzene 176.9 210.8 261.7 228.3 151.2

Toluene 108.3 119.9 120.7 117.1 105.9

Xylenes 957.8 595.2 875.4 854.8 440.1

*Annualized for data of January-October 2019, Xylenes comprises of o-Xylene, m-Xylene, p-Xylene, and mixed xylene isomers
Source: Central Bureau of Statistics, UN Comtrade

Compared to olefins, investment in aromatic production is relatively limited, but the

need for these products in the future is still evident. Benzene, for example, is a raw
material for synthetic dyes and detergents, and xylene is widely used to produce
plastics and synthetic fibers.

Among the producers of aromatics are Pertamina and Trans Pacific Petrochemical
Indotama. Pertamina has an annual production capacity of 125,000 tons for benzene
and 298,000 tons for paraxylene. Trans Pacific Petrochemical Indotama has an annual
production capacity of 400,000 tons of benzene and 540,000 tons of paraxylene. Thus,
the successful restructuring of Indotama’s Trans Pacific Petrochemical by Pertamina is
expected to reduce the aromatic petrochemical trade deficit.

28 PETROCHEMICAL INDUSTRY • DECEMBER 2019