20 October 2008 00:00 [Source: ICB]
"Nothing can stop a global recession," Credit Suisse ominously said in a note to clients early last week.
The global bank's reasoning: US consumers have $2.4 trillion (€1.76 trillion) of excess leverage there are still 2m excess homes there European housing is 20% overvalued and its interest rates are broadly 2% too high.
"The key is to stop a recession turning into a depression by getting the credit markets opening up and by having stimulatory macro policies," the company said in the research note.
This has been a momentous few days, as governments around the world have struggled to grapple with the mounting financial crisis.
"An utter lack of confidence, probably last experienced by our grandparents and great-grandparents, pervades credit and equity markets," the American Chemistry Council (ACC) said in its weekly report on October 10.
This comment was to the point, to say the least, as European, Middle East, Asian and Australasian governments moved to unblock the global credit logjam.
The steps being taken now are historic not simply in the context of the current financial market turmoil but in the position in which they place governments and taxpayers as owners of some of the world's largest banks.
The world's stock markets reacted violently but rebounded this week as coordinated action appeared to be stemming the flood.
And, not surprisingly, the world's chemical markets have been thrown into confusion. They will remain unstable until credit is unblocked and the implications of the crisis and its effect on market growth become clearer.
Sector players in Europe have become increasingly alarmed about buyers' ability to pay for product.
Fear stalked the markets on Friday. Some were in a prepayment mode if there were any concerns about the creditworthiness of trading parties.
"Letters of credit are not really worth the paper anymore, are they?" was the comment from one olefins trader.
These sentiments were echoed across the glycol and polymer markets. In the styrene market, traders were seeking cash rather than product for fear of holding too much inventory as spot prices slumped.
Credit lines have been stretched in US markets and polymer trade in Asia has been badly affected.
The effectiveness of the national bank rescue packages will be assessed over the coming days and weeks, but until credit is freed at a local level, chemical players will continue to suffer. They then face the downturn, as well as an expected significant drop in demand. And, if the US markets are anything to go by, the coming few months look decidedly bleak.
On the economic front, the US indicators were negative during the week of October 5. Consumer credit fell as a result of slumping light vehicle sales, and wholesale trade was falling as well, ACC chief economist Kevin Swift said.
The prices of imports declined, and may herald a deflationary trend exports declined too, a worrisome sign of weakness overseas, he added.
In chemicals, individual product reports were negative for August, and the indications are that the weakness continued into September, a trend reinforced by a weakness in railcar loadings, an important indicator for the health of the business, which fell for the fifth straight week.
Polymer production was down in August with captive use of high density polyethylene (HDPE) a significant 22% lower year on year.
In the US, the chemical markets are reflecting extreme weakness in the key automobile market and in housing construction. The auto malaise is spreading, and some construction markets are under real pressure in Europe.
There is a degree of buoyancy elsewhere, but it remains to be seen how credit difficulties ultimately affect chemical buyers across the globe.
US-based chemical corporations particularly have benefited from the continued strength of markets in Europe, Asia and Latin America this year but the credit contagion is global.
The financial crisis will make itself felt in all physical markets. It is simply a matter of time.
Entering a recession, the depth of which no-one can yet be certain, chemical players will be challenged to generate cash and hold on to market share.
Those companies with strong balance sheets and a global reach will, possibly, fare the best. But it will be the majority rather than the minority that will be put under real pressure.
The market talk and hearsay evidence emerging do not point simply to a localized market disruption - but rather to a sharp industry downturn.
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