Key Drivers of Financial Performance

NOVA Chemicals’ earnings and cash flow are primarily influenced by the margins earned on the products it manufactures. Margin is the difference between the selling price of products and the direct cost to produce and distribute them. Margins for companies in the plastics and chemical industry are driven by the supply/demand balance and tend to be cyclical.

SUPPLY/DEMAND BALANCE — THE KEY DRIVER OF PROFITABILITY

The supply/demand balance, as measured by industry operating rates, is generally the best indicator of profitability in the plastics and chemical industry. During peak conditions, when operating rates tend to be high, prices and margins tend to increase as customers attempt to secure scarce supply to meet their production needs. Conversely, during trough conditions, which tend to occur when operating rates are low, margins tend to decrease since there is ample supply to meet customer demand.

NOVA Chemicals’ low-cost position provides for enhanced earnings leverage during the peak of the commodity business cycle.

PLASTICS AND CHEMICAL INDUSTRY EARNINGS ARE CYCLICAL

By its nature, profitability in the plastics and chemical industry is cyclical. Demand growth is driven by economic growth, which is relatively consistent over time. In contrast, new product supply grows in large increments through the construction of large new plants, which generally require significant capital and lead-time of four to six years to complete.

As industry operating rates increase, prices and producers’ margins tend to increase. Extended periods of profitability encourage new investment in plants to serve growing demand. New supply added in excess of demand growth causes industry operating rates and profitability to decline. Periods of reduced profitability deter investment in new plants and force high-cost, unprofitable producers to rationalize capacity. Continued demand growth and lack of new investment lead to tightening capacity utilization and a return to increased profitability. This alternating pattern of supply surplus and shortage creates the earnings cycles that are typical in commodity industries.

PRICE, VOLUME AND COST INFLUENCE PROFITABILITY

Price is driven by feedstock costs
Pricing for NOVA Chemicals’ polymer and chemical products is based on the amount its customers are willing to pay for its products compared to similar available or competing products. Prices can change rapidly as a result of feedstock costs and fluctuations in the supply/demand balance. While feedstock costs heavily influence the price of NOVA Chemicals’ products, margins drive profitability.

Volume is driven by economic growth
Sales volumes for plastics and chemical products are most heavily influenced by economic growth, a key driver of demand. Sales volumes may also be influenced by short-term changes in customer buying patterns which are driven primarily by expectations of price volatility. Anticipation of higher prices or limited product availability can motivate customers to purchase beyond short-term needs and build inventories. Conversely, expectations of lower prices can motivate customers to delay purchases and consume inventories. These short-term buying patterns can create quarterly earnings volatility for plastics and chemical producers and are not necessarily representative of longer-term profitability.

Costs — feedstock cost advantage is critical to sustained profitability
Feedstock costs are the single largest component of NOVA Chemicals’ costs and account for 70-80% of the total cost of its products. NOVA Chemicals’ primary feedstocks include ethane, crude oil, propane, butane and condensates, while INEOS NOVA’s primary feedstocks are benzene and ethylene. Feedstock costs heavily influence the price of NOVA Chemicals’ products, and in recent years, feedstock cost volatility has led to rapid changes in product prices. Since feedstock costs represent the most significant portion of total production costs, a feedstock cost advantage, like NOVA Chemicals’ Alberta Advantage, can lead to enhanced profitability relative to industry peers and is the key to sustainable profitability throughout the cycle.

The remaining 20-30% of total cost of the Company’s products consist of variable conversion costs and fixed costs such as: plant operating and distribution costs; selling, general and administrative costs (SG&A); and research and development costs (R&D). SG&A costs represent all direct and most indirect expenses incurred in directing and managing the Company. R&D costs relate to technical activities that support the development and commercialization of new products, technologies and applications.