22 December 2008 16:10 [Source: ICIS news]
By John Richardson
SINGAPORE (ICIS news)--The global economic crisis – at the very least the worst since the early 1980s – will have huge implications for ?xml:namespace>
“I hate to give you the bad news, but I think it could take five-to-six years to get through this. Most of the iceberg is still beneath the water,” said Matthew Sullivan, director of energy structuring and origination for Standard Chartered Bank. He was speaking at the ICIS World Polymers Conference in
The danger is that the vicious cycle of declining consumer spending in the west, job losses and even further declines in consumption, is only just beginning. We could also be entering a global deflationary spiral like the one that kept
Why buy anything today when it could be cheaper tomorrow – and why buy at all when you are in danger of losing your job and the real value of your debt is increasing rather than decreasing because prices are falling?
Heavily export-based Asian economies, such as
But more factory closures will surely follow among export-focused manufacturers in the southern and eastern provinces if the vicious circle mentioned above continues. This will inflict a great deal more pain on those who ship chemicals to
Ironically, governments across Asia have funded the
Letters of credit have become very hard to obtain, especially for small-and-medium-sized companies. You need to ration credit, if you have it.
A lot of this money is no longer available, creating the fear that growth – even if it stays reasonable healthy in the short term despite the global crisis – will eventually slow down as a result of inadequate roads, railways, ports and airports.
And to make a virtue out of lack of exposure to manufacturing is a little perverse, given that this is at the core of one of
Other economies face their own problems, including
Despite the appointment of another new prime minister, the battle between the “red shirts” (mainly the working class and the rural communities and the “yellow shirts” (the urban middle class) looks set to continue. Another military coup seems possible and an end to fully representative democracy.
Even if the world economy hadn’t been in major crisis,
Those two crackers, one by PTT Chemicals and the other by Siam Cement and Dow Chemicals, are due to start-up over the next few years. So too are new ExxonMobil and Shell Chemicals crackers in
It is hard to see how these volumes will be placed in markets where demand will be much weaker than anyone had forecast. Any chemicals demand-growth predictions drawn up before September this year (in other words all the forecasts used in feasibility studies used to justify the current wave of investment) are likely to be way off the mark.
The problem with demand is two-fold. Firstly, the lack of credit and the volatility in energy prices is making every company at every stage in each production chain very unwilling to buy or sell anywhere near close to the quantities seen before September.
The risk is that you end up stocking up on polypropylene (PP) resin if you are a converter, for example, only to see the oil price fall the next day. This will almost instantly translate into lower PP prices.
Your hard-pressed customers, even your closest customers who you’ve been doing business with for many years, will not be in a position to do you any favours by paying over the market odds for their packaging material.
Secondly, there is a great deal of uncertainty over what is the state of fundamental demand. Nobody knows the full extent of the damage to economies and how much worse it will become. Sales volumes could remain far below expectations throughout 2009 and beyond.
Those saddled with debt from ill-timed capacity expansions (isn’t hindsight a wonderful gift?) could in theory be subject to mergers and acquisitions.
For many years, the South Koreans have been singled out as perhaps the most vulnerable to further consolidation because they expanded aggressively in 2004-05 when they had the cash in order to maintain economies of scale. But government support might enable companies to limp through the crisis intact.
The Japanese might also be vulnerable as they struggle to compete with the Middle East and
One advantage of this crisis is that it has reduced energy costs, even though oil prices remain erratic as they rise and fall in almost perfect alignment with stock markets.
But if you believe the International Energy Agency, we are heading for another major supply crunch once the world economy recovers because of the decline in investment in new conventional and unconventional oil fields. This could mean that future economic cycles are much shorter with recoveries frequently nipped in the bud by soaring crude costs.
A disadvantage of the current economic turmoil is that everyone is obsessing with how governments can return the world to “business-as-usual” – a rebound in consumer confidence so everyone will once again rush out to buy more things that they have been convinced by marketing people that they need rather than only vaguely want.
Climate change, water scarcity, the threat to food supply from overfishing, poor agricultural practices, the loss of biodiversity and demographics have long been major challenges for chemicals producers everywhere. The kind of growth
When you are struggling to keep your company going in perhaps the worst economic crisis since the Great Depression, the dangers are that you slash research and development (R&D) spending. Good people might leave because they become disillusioned or more likely they will be laid off.
Ultimately, the chemical companies that fail to effectively innovate in the face of growing environmental pressures are likely to fail anyway, even if they get through the next few years.
($1 = CNY6.85)
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