<p>GLOBAL PLASTICS: WINNERS AND ...<br/>Key Points<br/>• Our recent BB&T Capital Markets Global Plastics Conference Call featured knowledgeable<br/>industry veteran and seasoned traveler Bob Bauman, vice president of Nexant<br/>ChemSystems.<br/>• Polyolefins: Could be Very Tight in H2’08. With new capacities delayed to late 2008<br/>or 2009, the global supply/demand (for polyethylene more so than polypropylene) could<br/>tighten in 2008 if there is no major recession. Strong capacity utilization of ~95% is<br/>possible, and any unplanned disruption could drive prices/margins up significantly. The<br/>capacity reduction in North America (Petromont’s 580M lbs HDPE capacity) is also helpful,<br/>and we believe export demand will remain robust (advantaged forex and feedstock in the<br/>United States).<br/>• Shipping Capacity behind Production Capacity. Although the Middle East<br/>polyethylene capacity “surge” may come on line next year, Bauman pointed out that the<br/>world lacks the necessary shipping containers and vessels to move plastics. While North<br/>America has developed a sophisticated distribution system for plastics (hopper cars and<br/>hopper trucks), producers in the Middle East and Asia are not set up for such shipping<br/>methods. Building fleets of shipping containers tailored for the U.S. market is not a trivial<br/>task, and there are no standard containers yet. Asian customers typically use small packages<br/>in 1,000 lbs or less while U.S. customers are accustomed to 200,000 lb railcars for plastics<br/>handling.<br/>• More Bullish than NCX? After an extended period of poor profitability, Bauman thinks<br/>“polystyrene could be a winner in 2008.” With substantial capacity reduction (and more<br/>to come?), consolidation (leaving only three major players in the field), and very little new<br/>capacity build, polystyrene should benefit from interpolymer substitution (mainly from PP)<br/>both in the domestic and export markets, leading to improved operating rates and<br/>margins. As supply/demand starts balancing out, Bauman, and we, believe that NOVA<br/>Chemicals’ N.A. JV with INEOS should turn a profit for the rest of 2008, and potentially<br/>PS could send investors scrambling to redo their earnings models.<br/>• PVC Demand Could Recover. The N.A. housing market has been a heavy headwind<br/>against PVC, and operating rates and demand have dropped. However, with little capacity<br/>additions expected globally and potential consolidation, a bottom may have been reached if<br/>a recession is avoided. Construction markets will remain the major user of PVC, and<br/>demand could increase due to the use of PVC pipe in developing countries such as Africa.<br/>China is rapidly expanding its coal-based PVC and could become a net exporter by 2010 (it<br/>already exports ~500,000 tons).<br/>• “Producers Overreacted and Overbuilt.” Although PET demand has remained<br/>steady, the industry is, and will likely continue to be, suffering from the overbuilding of the<br/>past couple of years. Oh, and there’s even more additional capacity on the horizon. In this<br/>oversupply environment, Eastman should benefit from its position as the lowest-cost U.S.<br/>producer and from its technology licensing, but we believe the glory days are in the rearview<br/>mirror.<br/>• Winners and … Given Bauman’s cogent recap of current industry conditions, and the<br/>expectations for the future, we believe NOVA and Dow Chemical will be beneficiaries on<br/>better-than-consensus industry expectations for 2008. Dour conditions for PVC should<br/>restrain Georgia Gulf.</p><p>CONTENTS<br/>Contents.........................................................................................................................................2<br/>Overview........................................................................................................................................3<br/>Polyethylene ..................................................................................................................................5<br/>Polypropylene................................................................................................................................9<br/>Polystyrene .................................................................................................................................. 12<br/>Polyvinyl chloride........................................................................................................................ 14<br/>PET............................................................................................................................................... 16<br/>Selected Companies Overview..................................................................................................... 18</p><p></p><p> <br/></p><p></p>