NOVA Chemicals Conference Call to provide an update on current feedstock dynamics that will be supplemental to NOVA Chemicals' second quarter 2008 earnings conference call. - Final.

Original Source: FD (FAIR DISCLOSURE) WIRE

OPERATOR: Good morning ladies and gentlemen, and welcome to NOVA Chemicals Corporation's feedstock dynamics conference call and webcast. Please be advised that this call is being recorded. Also, please disable any BlackBerry devices you may have for the duration of the call. I would now like to turn the meeting over to Mr. Chuck Magro, Vice President of Investor Relations.

CHUCK MAGRO, VP OF IR, NOVA CHEMICALS: Good morning. Welcome to the supplemental conference call for NOVA Chemicals' feedstock dynamics review and market update. Today you will hear from Jeff Lipton, our Chief Executive Officer. After these remarks we will open the phone lines to analysts and investors for a Q&A session.

During this session we ask that you focus your questions on the material we cover today. All other questions regarding our second quarter performance will be addressed at our quarterly earnings conference call on July 24th. But first, a few comments about disclosure.

Be advised that this call is being recorded for replay through our conference call provider and is being broadcast live through an Internet webcast system. The audio replay will be available in the investor relations section of our comfy web site for the next 90 days. A transcript of the recording will remain available at our company web site, as will all posted materials related to this call, including a set of slides that will be referenced during our comments.

The comments and answers to your questions will contain forward-looking information. This information by its nature is subject to risks and uncertainties as well as other factors that could cause actual results to differ materially from those suggested today. Certain material facts and assumptions were applied in drawing the conclusions and making the forecasts or projections contained in these forward-looking statements. A set of panels that will be referenced today was posted on our web site. Please refer to the forward-looking information slide in that panel set and page 23 of our 2007 annual report for more information. Now I will turn the call over to Jeff.

JEFF LIPTON, CEO, NOVA CHEMICALS: Good morning everyone. Thanks for joining us today. We decided to have this call to cover some important points in advance of our regularly scheduled July 24th quarterly earnings review. These issues are worth in-depth discussion, and we didn't want to take time away from our earnings call and a complete review of what we expect will be very positive quarterly operating results, our expectations for a very strong second half and the years beyond that as well. And our fundamental view that feedstock cost differentiation will allow North American ethylene and polyethylene producers to make solid returns and expected economic and supply demand cycle movements, and for NOVA to make exceptional returns in any situation we and others now foresee.

Today I'm going to cover four topics. First, I'm going to provide a relatively quick overview of what we see as rapidly improving North American and global ethylene and polyethylene market conditions, which we believe are much more positive than the current conventional thinking as outlined by a number of analysts. Chris Pappas, our President and Chief Operating Officer, is with me here in Pittsburgh to help answer questions about current market conditions. Of course, as Chuck said, our second quarter earnings results are not complete, so we can't discuss our financial performance today.

Next, I will cover current feedstock dynamics, and how those dynamics are rapidly widening the Alberta Advantage. Then I will discuss our efforts to reduce working capital at our Corunna flexi-cracker. And finally I will describe a relatively large non-cash accounting charge we will take in the second quarter for Corunna's light feed purchasing program that could mask investor understanding of our second quarter operating performance. We want to be sure the short and longer-term light feed picture is clear to investors and analysts.

Larry MacDonald, our Chief Financial Officer, is on the line from Calgary to help answer questions related the accounting treatment of the feedstock purchasing program. So let's get started with the ethylene and polyethylene market update.

Panel 1 shows the changes during 2007 for Gulf Coast feedstock costs and in Alberta natural gas, which is the major variable in NOVA Chemicals' ethane feedstock cost structure. You can see that US Gulf Coast ethane increased sharply in 2007, and outpaced both crude and naphtha prices. In contrast, Alberta gas costs were up only modestly. The widening differential between US Gulf Coast and Alberta feedstock costs, and very importantly high cost for global naphtha, which is used to produce two-thirds of the world's ethylene, led to record advantages for NOVA Chemicals in 2007 and the best operating performance in our history.

Panel 2 extends the curves to the end of the first quarter of 2008. Gulf Coast ethane costs fell, but crude and naphtha costs rose sharply in the second half of the quarter. Alberta gas continued to increase, and our Alberta Advantage, while still at very strong levels, contracted slightly. As a result of these changes, Gulf Coast light feed crackers saw margins improve during the quarter.

But heavy crackers on the Gulf Coast and the rest of the world saw margins contract severely, especially since coproduct pricing generally did not increase in the same rate as naphtha feedstock costs. This dynamic expanded the already significant export opportunities for North American light feed-based polyethylene, and contrasted them with the naphtha based facilities in Asia and Europe.

Panel 3 extends the curve to the end of the second quarter. As we pointed out in the webcast presentation on the 21st of May, we expect ethane costs to move up because we saw that ethane consumption was exceeding production, leading to very low ethane inventories. As we predicted, US Gulf Coast ethane costs rose rapidly, which put pressure on light crackers while heavy feed producers continued to experience very weak margins. Alberta natural gas costs continue to increase, but at a much lower pace than the US Gulf Coast ethane and our advantage began to expand rapidly.

Panel 4 shows the Alberta Advantage for the first six months of 2008. It is much stronger than our record 2007 pace. We averaged $0.17 a pound in the second quarter versus $0.13 per pound in the second quarter of 2007. It was $0.25 a pound in June, and for July month to date the Alberta Advantage is $0.32 per pound. By the way, ethane has not moved down over the last few days while oil and gas fell, strengthening our advantage further.

In the same webcast presentation on May 21st, I pointed out that North American polyethylene consumption based upon NOVA Chemicals' customer activity, and American Chemistry Council industry analysis was much stronger than sales orders and that polyethylene chain inventory appeared to be extraordinarily low, setting up conditions that in the past led to surge in buying. In the second half of May, the order rate pickup became clear. Domestic orders for May, according to the American Chemistry Council, were up 6.5% versus April, leaving polyethylene producers with record low inventory levels of 35 days compared to a norm of 43 days.

The industry data for June is not yet available. But for NOVA Chemicals, and we expect other producers, domestic orders in June exceeded our ability to produce polyethylene. NOVA Chemicals ended June with 13 days of sales for polyethylene inventory, the lowest quarter end in our history. With the severe cost pressures, low inventories through the chain, continued strong export demand and margins, and strong North American buying, producers finally began moving prices up rapidly to recover costs, and even expand margins.

I have never seen a non-incident related environment, including the daily media focus on oil prices, that has been more conducive to price increases for polyethylene producers and, most importantly, for our customers as well.

Panel 5 outlines the polyethylene price increase story for North American producers. The first two price increases totaling $0.11 per pound have been fully implemented. On July 1st, we began implementing a $0.07 per pound increase and we expect that this increase will be very successful. All major producers have announced price increases of at least $0.08 per pound for August 1st. One announced $0.10 per pound. And we and others have put in meaningful fuel surcharges as well.

All this has developed without much pushback. Our customers know many producers need the price increases, and their customers understand that the converters need them as well. As I said, these prices are being implemented without the pressure of a supply interruption. It will be interesting to see what happens with the first real hurricane threat on the US Gulf Coast. We expect margin expansion in the third quarter for the entire industry and significant margin expansion for NOVA Chemicals.

Our view is that North American polyethylene consumption year-to-date, and in the second quarter, is much stronger than it was in 2007. Inventories are lower and export opportunities remain outstanding based on strong demand and very high global costs. Chinese and other Asian market polyethylene orders for July have been priced up $0.075 a pound higher than June and will be $0.02 to $0.03 per pound above NOVA's average North American price expectations for the month. We expect prices in Central and Latin America will be up $0.08 to $0.09 per pound in July, as Asian competition is withdrawing due to their very high ethylene costs and high shipping costs, leaving the market ripe for US exports and margin expansion.

We see very different ethylene and polyethylene markets than the conventional wisdom projects and strongly believe investors should know that's the case. The North American light feed supply, even with increasing gas liquid pricing, should provide significant cost leverage to US producers that will allow high capacity utilization and keep domestic inventories low under all current global supply demand projections.

The feedstock dynamics that I just described are impacting not just polyethylene, but every commodity chemical value chain. Polypropylene price increases of up to $0.17 a pound for August have been announced. Propylene is in …