Collapsing chem prices could signal slowdown - consultant

28 May 2010 15:12  [Source: ICIS news]

By Will Beacham

LONDON (ICIS news)--Dramatic falls in US and Asian chemicals prices in recent weeks could indicate a faltering in the global economic recovery, an industry consultant said on Friday.

The steep declines could indicate falling demand in end use industries as incentive schemes come to an end and consumers return to more cautious spending habits, according to Paul Hodges, chairman of International eChem .

“The chemical industry is always a leading indicator of the general economy because we’re so tied in to consumption, he said. “When ICIS reports that ethylene prices in the states have dropped by more than 20% in a week it’s a serious sign.

"If you look at what’s been happening in Asian olefins and polymers in the past three to four weeks we’ve seen dramatic falls."

The warning signs are there from behaviour in the US and Asian chemical markets that things may not be as we and people in the financial market might hope.”

Economists and politicians are pinning their hopes on consumers continuing to spend at the increased levels which were fuelled by incentive schemes which are now ending, he added ahead of publication by ICIS of an update to his White Paper 'Budgeting for a new normal'.

“I’m afraid that over the last six months I see increasing signs that this is not happening.” 

He pointed out that auto sales in Germany were down 32% in April versus April last year, with the ending of stimulus.

The US is also seeing a similar failure to maintain momentum after the end of the cash-for-clunkers programme in the summer.

Auto sales growth in China is falling, but April was still 35% up versus 2009.

Hodges is concerned that huge government spending on incentive schemes may simply add to state debt rather than helping economic growth.

“Perhaps I’m overcautious but if it [the theory that consumers will continue high levels of spending] is wrong then the great problem we have is that governments have not only replaced debt created by the private sector, but they’ve generated their own debt.

"Now countries like Greece are beginning to have their own debt crisis. We may have created a new problem whilst giving ourselves only a temporary reprieve.”

Hodges believes the global economy is entering a ‘new normal’ of lower levels of consumption and debt.

He added: “The characteristics of the boom years were very high levels of consumption, particularly in areas relevant to the chemical industry like housing and autos together with a lot of debt and leverage.

“We saw the end result of this leverage in the crash of 2008. The ‘new normal’ says that we’re not going to go back to those days but we’ll go forward to an era of lower consumption and lower debt.”

Bookmark Paul Hodges’ Chemicals & the Economy blog
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By: Will Beacham
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