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Australia lube prices increase drivers January 30th, 2005 Australia Lube price increases drivers Baseoil prices & Forex trends Australian diesel prices and CPI trends 110 0.77 140 105 150 130 85 0.755 80 $AU cpl 0.76 90 0.75 75 125 145 CPI 95 $AU/$US $AU cents/kg 135 0.765 100 155 120 140 115 110 70 0.745 60 0.74 Jan-05 Jun-05 Aug-05 Sep-05 Average base oil price cents/kg ($AU) Oct-05 135 105 65 100 Nov-05 130 Jan-05 Jun-05 FOREX $AU/$US Aug-05 Sep-05 Diesel prices cpl ($AU) Oct-05 Nov-05 CPI • Through 2005 base oil prices continued to increase due to escalation in crude oil prices as well as constrained supply of base oils and increased demand mainly in China, India and the US. • Similarly diesel prices increased significantly resulting in higher distribution costs. • Between Jan 2005 and Nov 2005 average base oil prices increased by 46%, and average diesel prices by 20% • Plastics (HDPE) prices increased by about 7% (and by 16% since June 2005) thus increasing packaging costs • Additive import index increased by 9% over the period • Over the period the Australian dollar depreciated by 2% against the US dollar. Thus increasing the cost of base oils in Australian dollars • Inflation has increased with the Australian Consumer Price Index (CPI) increasing by 2% over the period • The International Maritime Organisation (IMO) manages international conventions in regards to shipping. Australia is a signatory to these international conventions. 2 Data and references Indicator SN 150 SN 500 BRT Average base oil price cents/kg ($AU) Additive import index Diesel prices cpl ($AU) CPI FOREX $AU/$US Steel prices cents/kg ($AU) HDPE (plastics) prices cents/kg ($AU) • Jan-05 490 500 648 71 119 105 147.5 0.7649 75 129 Jun-05 548 555 756 81 123 119 148.4 0.7665 76 119 Aug-05 600 603 803 90 123 125 149.8 0.7404 68 139 Sep-05 635 644 843 95 130 132 149.8 0.7461 76 143 Oct-05 686 697 890 100 130 134 150.6 0.7541 72 151 Average % Average % movt Jan to movt Jun to Nov-05 Nov 05 Nov 05 708 44% 29% 721 44% 30% 911 41% 21% 104 46% 29% 130 9% 5% 127 20% 6% 150.6 2% 1% 0.7483 -2% -2% 68 -9% -11% 138 7% 16% One of these conventions is MARPOL (Marine Pollution). It is an international convention for the prevention of marine pollution from ships. From April 5, 2005, MARPOL requires that all Dirty Petroleum Products (DPP) such as heavy lube oils be transported into Australia using double hull ships. (see website below for more details). Commercially, this convention narrows the pool of available ships for use in Australian waters and due to normal supply and demand drivers, directly increases our costs. References http://www.icis.com (base oil prices, additive import index and plastics prices) Quoted Base oil prices are FOB Singapore Quoted HDPE (plastics) prices are CFR South East Asia Diesel prices: fuelwatch.com.au: accessed 24/01/2006 CPI - Australia Bureau of Statistics (ABS Cat 6401): CPI (Consumer Price Index) - basis of index 1989/90 assumed 100 CPI weighted average for 8 cities all groups Forex - $AU -$US hedge settlement rate used http://www.crumonitor.com/80256B48004C7375/vWeb/wpCWAN56WN8X (steel prices) Quoted steel prices are FE non-CIS Cold Rolled coil prices http://www.imo.org/Conventions/contents.asp?doc_id=678&topic_id=258 (MARPOL) 3 Base stock market Evolution of Base stock Manufacturing* • From 1990-2005, over 60 refineries closed removing an estimated 175kbd of base stock capacity • Global base stock manufacturing is running a full capacity • Shift in base stock production from Group I to group II+ (Group II is a higher quality than Group I). Suppliers are repositioning capacity to meet demand for higher quality base stocks • Group I capacities are continuing to decline through plant closures and upgrades. Investment projects are for Group II base stocks and higher • Majority of our locally manufactured lube oils are based on Group I base stock technology. *data source Exxonmobil Reduced capacity in Group I production means that base oil pricing is expected to remain high with the possibility of further increases 4 Market Fundamentals (Exxonmobil L&S understanding/interpretation) Market Fundamentals Situation Implication Energy Complex • All Basic commodity values significantly up • Demand driven, supply constrained • Raw material cost increasing • Value of alternative products increasing Basestock Market • Basestock refineries are closing and there is little investment in new Group I production facilities • Manufacturing operating at full capacity • Finished lube oil market driving a shift in basestock quality requirements • Rebalancing of supply (Move to Group II+) • More profitable alternatives to basestock production drive prices up • New investment focused on meeting higher quality standards (e.g Group II+ and GTL) • Group I basestock capacity reducing Additive Market • Chemical market strengthening • Manufacturing is running at full capacity • Demand driven • Raw materials are capacity constrained • Additive cost increasing • Limited investment in new technology • Returns on additive business below historic levels Total Finished Lube Oil Market • Overall demand flat • Increased demand for higher quality products • All product values increasing • Price increases in all markets Other • Technology demand growing • Rapid and sustained raw material cost increases • Finished product prices lag all market indicators • Market under performing • Prices are increasing Market fundamentals are interrelated. The price increase is not a result of a cyclical blip in any one factor but is a reflection of an overall supply and demand market correction. 5 Additive Market • Natural gas is used in various aspects of additive manufacture and has been subject to significant price increases (see charts) 14 12 10 8 6 4 2 0 Nat. Gas • Operating facilities slow to recover from supply disruptions in 2005 (e.g. fire at Oronite’s Singapore plant and hurricane damage to US Gulf Coast plant) *Data source NYMEX Basestock Average Spot Price ** 100 •Demand for additives continues to grow USD/bbl 90 80 70 60 • Overall tightening of the energy market has resulted in additive raw material shortages and price increases (see charts) • Global additive inventories are low and industry is operating a full capacity Ja M n-0 a 3 M r- 0 ay 3 Ju -03 Se l-0 p 3 No - 0 3 Ja v-0 3 n M -0 ar 4 M -0 ay 4 Ju -04 Se l-0 p 4 No - 04 Ja v-0 4 M n-0 ar 5 M -0 ay 5 Ju -05 Se l-0 p- 5 05 Nat. Gas, $/MBTU Nat. Gas Pricing* USGC 100SN USD/bbl 50 40 • Additive suppliers have reduced manufacturing capacity through the rationalization of high cost production Ja n Fe -0 5 b M - 05 ar Ap - 05 r M - 05 ay Ju -05 n0 Ju 5 l Au 05 g Se - 05 p O - 05 ct No 05 vDe 0 5 c05 • Additive industry re-investment levels low due to poor returns **Data source ICIS-LOR Additive market has experienced a rapid shift from an over to under supply 6