See below for an extended analysis of why everything is about to go wrong.
Looking forward to picking up some bargain chemical shares over the next two years and some cheap US and UK property!
As the Asian head of M&A and acqusitions for a major bank told me this morning: "Wnen everyone tells me I must buy as the market will definitely keep going up I sell.
"When they tell me to sell, I buy."
Counter-cyclical advice that served the Huntsmans well for a long time, until they became over-leveraged.
Talking about over-leveraging, only interest rate cuts right down to zero will prevent the great unravelling of the paper-bottomed credit-fuelled boom.
Managing volatile and high feedstock costs in an increasingly uncertain demand-growth environment will be just some of the challenges confronting Asian petrochemical producers during 2008.
And, as has been incredibly well documented, the second half of the year will see the beginning of a big ramp-up in olefins and derivative capacity.
The recently revamped Plants and Projects section of ICIS news, which is now downloadable in Excel format, calculates that 7.4m tonne/year of global ethylene capacity will be brought on stream next year, 6m tonne/year of which will be in the Middle East.
A further 5.4m tonne/year of capacity is due to be added in 2009. But, wait for it, a staggering 14.3m tonne/year is scheduled to come on stream in 2010. This will include 6.5m tonne/year of new Chinese capacity.
However, the predominant concern of producers in recent discussions with ICIS pricing editors was the impact of feedstock costs on business planning.
Crude oil fell by $10 a barrel in the space of less than a week’s trading during November - after approaching $100/bbl. Ninety per cent of naphtha pricing is determined by the cost of the crude and so when crude sneezes, the petrochemical industry can easily catch a bad dose of the flu.
Inventory management is therefore going to become a bigger challenge during 2008, both for feedstock and for the finished product leaving a petrochemical plant’s gates.
And given all the continued uncertainty in crude-oil markets, anticipating what level of inventory your customer already has on hand or plans to build will be a major headache.
How crude behaves will, of course, again depend on what the speculators do. Petrochemical producers have been expressing concern that even more speculative funds might be flow in and out of commodities, including crude, if stock markets turn bearish on lower global economic growth.
As for the outlook for growth, the big unanswered question is the affect of weaker finished goods exports to the US and Europe. This uncertainty will make it even harder to assess downstream demand.
The debate is, as always, centred on China and what a US recession might mean for Asia’s powerhouse economy.
The China Economic Quarterly (CEQ), the Beijing-based research publication, says that a US recession would result in China’s GDP (gross domestic growth) slipping to 10% in 2008 from what is forecast to 11.5% growth in 2007.
A fall in growth to 10% might not be a bad thing as it would take some of the heat out of China’s economy, ease international trade imbalances and reduce upward pressure on the Yuan, says the CEQ.
But a key driver of polymer exports to China is the re-export market for finished goods to the West, which are made from these polymers.
While growth in China’s manufactured goods exports to the US has slowed this year, this has yet to feed into an overall decline in export growth because the dollar value of exports to Europe has risen steeply, the CEQ adds.
A Eurozone economic slowdown is being forecast for 2008 as the US economy also weakens. This raises the potential for a decline in the growth of polymer shipments to China, or perhaps a fall in shipments compared with 2007.
Domestic growth in China, though, remains tremendous. How this will be affected by the shift in monetary policy to “tight” from “prudent” - announced on Wednesday at the end of the annual economic policy-setting meeting of government and Communist Party officials - remains to be seen.
Soaring food-price driven inflation, rocketing real estate prices, the 85.5% increase in the Shanghai stock exchange in 2007 and a continued sharp rise in industrial investment are behind the change.
The central bank has already told banks that they must keep net new loans at the level reached at end-October until the end of this year. This limits lending to the equivalent of what is received in loan repayments.
And next year, quarterly limits could be set on the growth in lending. Loan growth is expected to be reined back to 13% in 2008 from 15% in 2007.
Deutsche Bank, however, predicts that the 13% target could well be exceeded. “The reason that the loan growth target is always purposely set conservatively is that a more aggressive target would send out the wrong signal to the banks,” say the bank’s Chief Economist for Greater China, Jun Ma.
He therefore doesn’t expect a big slowdown in domestic growth as a result of the policy shift.
Also, a weaker export environment might – as we’ve already be said - be enough on to take the heat out of the economy without the need for major monetary tightening.
But again, uncertainty makes planning a nightmare. Will lending restrictions make working capital harder to obtain for petrochemical producers and buyers during 2008?
Some local producers and buyers are already struggling to afford and get hold of working capital, as a result of rises in interest rates and increased reserve requirements imposed on the banks introduced this year.
Elsewhere in Asia, economic prospects for 2008 also look uncertain.
Although growth in consumption for many chemicals has been fantastic over the last 3-4 years, a lot of the growth has ultimately gone into finished goods shipped to the West.
And in India, GDP growth fell in the second quarter of the financial year ending 31 March 2008. The economy is being hampered by tighter monetary policy, falling consumer demand and the appreciating Rupee.
It’s also worth noting that India – the other much-hyped Asian economic powerhouse – remains a small consumer of petrochemicals relative to the size of its population.
It only takes one major world scale start-up to throw some markets off-kilter, even in a strong growth environment. For example, polypropylene (PP) exports will increase significantly when Reliance Industries commissions its 900,000 tonne/year plant in mid-2008.
For the time being at least, though, the margins on some products are very strong - particularly polyethylene thanks to tight supply in China resulting from cracker operating cut backs. The cut backs are the result of reduced naphtha supply as refineries boost gasoline and diesel production in order to reduce fuel shortages.
But with naphtha in the mid $800s/tonne CFR Japan range for the last two months, the typical Asian naphtha cracker operator is likely to have been losing money on at least some products.
The seasonal downturn is also upon us when demand across Asia dips. Recovery in many products is not expected until after the Lunar New Year in February.
But still, to repeat, the biggest concerns are all the uncertainties as we head into 2008.
This is a major sea change in the mood of the industry. As a recently as six months ago, delegates at the Asia Petrochemical Industry Conference in Taipei, Taiwan, were certain that strong growth in Asia and the West would continue unabated – resulting in only a mild cyclical downturn.