04 June 2007 00:00 [Source: ICB Americas]
KARL MARX wrote, "history repeats itself, first as tragedy and then as farce."
The tragedy was the Asian financial crisis that devastated South Korea and Southeast Asia, leaving economies, banks and businesses in ruins and tens of millions out of work. This decade-old crisis coincided with a big buildup in petrochemical capacity.
What could result in farce is that hardly anybody at the Asia Petrochemical Industry Conference (APIC) in Taipei, Taiwan, seemed to recognize the scale of risks being undertaken by companies once again plowing into huge investments.
Some 40m tonnes/year of ethylene capacity alone is due on stream in 2006-2011, 40% of which is in the Middle East and therefore low cost, estimated one source.
Everyone acknowledged the big capacity ramp-up as large, complex and very expensive. Few, though, were prepared to concede that the "new paradigm" everybody was getting so excited about might be nonsense.
The paradigm is that nothing much can go wrong with growth. A familiar theme was that China, India and other emerging economies have become such major consumption drivers that even a US recession might not be so bad.
Everyone conceded that growth could moderate by a few percentage points. But they added that markets had become so big that the drops in growth wouldn't make much difference, allowing the big new capacities to be easily absorbed.
"It took India 61 years since independence to become a trillion US dollar economy -a milestone we arrived at a couple of weeks ago. The next trillion dollars could be added in six to seven years," was the comment of one Indian delegate and fairly typical of the overall mood.
He believed that the downturn would not be before 2010 and when it did arrive, it would not be as bad as last time.
Other estimates, though, were for global cracker operating rates in the mid-80% range in 2010-11. This would be as bad as the previous downturn in 2001-02.
But project delays were a constant theme. A better-then-expected staggering of capacity and resilient growth would result in the mildest downturn in history, everybody kept repeating over and over again.
However, growth cannot and surely will not continue its almost exponential rise of the last few years.
Lehman Brothers analyst Sergey Vasnetsov makes the point that because global GDP growth underwent a record boom in 2004-2006, a cyclical slowdown is historically inevitable.
There is also always the possibility of a Black Swan. Nassim Nicholas Taleb, the author, mathematician and former trader, argues in his new book The Black Swan that long-term forecasts are a waste of time because we invariably fail to anticipate the unexpected. A classic example is 9/11.
He argues that we are so focused on the short term we don't consider the possibility of the unexpected. The fabulous earnings of the past few years make this a seductively easy trap to fall in to.
On crude oil, many are taking the view that more-efficient use and price-resistant and replacement fuels will cap further price rises. Recent history also shows that consumers have been able to absorb the high cost of crude.
But a geopolitical shock could easily drive crude above $100/bbl. Have we also entered what Paul Hodges, consultant with International eChem, calls a second wave of globalization where excessive credit growth and crude-oil-driven inflation have inflated a bubble that must soon burst?
One very cynical European petrochemicals executive said that if calamity struck, certain Asian companies would continue to operate at 100% out of macho posturing and a desire to sustain market share. History would then be farcically repeating itself, as this is exactly what happened in 1997-1998.
But the Indian delegate contended: "The skeptics have been crying wolf for years. I said in 2003 that this would be the best-ever upswing and nobody believed me. I am telling you again that the downturn will not be before 2010 and when it does arrive it will be mild. The skeptics keep saying the same old things. Eventually they might be proved right, but not for the next few years."
Perhaps even longer. The Black Swan that the doom-mongers, including myself, have failed to recognize is a permanent and irreversible step-change in the scale of consumption, meaning that capacity will be absorbed without major harm to markets.
Demand is at a much bigger base. Every percentage point increase in growth is, as a result, going to consume far more capacity than a few years ago.
Constraints on resources, and a reluctance to invest in some parts of Asia post-1997, have also to some extent capped capacity additions. It is easy to look at what's being built in the Middle East and China and lose overall perspective.
One could also argue that Marxism has hardly proved the best of economic models. So why on earth should anyone believe Marx on history?
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