Asian Chemical Connections

Unbelievable, incredible - what prehistoric planet do these people live on?

Please see below for a rant from a-soon-to-be-extinct species of business leader - the US chemicals executive against Barack Obama.

I have my doubts about Obama, but at least he has a brain bigger than a shrivelled pea (unlike certain other holders of the most important job in the world) - and he gets it.

The point is it's not business as usual, it's not regulation (Democrat) versus anti-regulation (Republican).

The world has changed forever, and this happened long before the financial crisis.

I don't know about you, but I want to be able to tell my son that I did something in the battle to save the world from the energy and environmental crises - even if it's just the odd small thing like recycling my plastic bags annd vicariously (I can't vote in the US election, of course) supporting politicians such as Obama who get it.

03 November 2008 21:04 [Source: ICIS news]

WASHINGTON (ICIS news)--The US appears poised to elect what one chemical industry leader on Monday termed "the most anti-business federal government" in recent history and one that is likely to raise tax and regulatory burdens.

On the eve of the US national elections being held on Tuesday, a wide range of public opinion polls give the Democratic presidential candidate, Senator Barack Obama of Illinois, a perhaps decisive edge over his Republican opponent, Senator John McCain of Arizona.

Perhaps more significantly, according to industry and business observers, the outcome of Tuesday's congressional elections is likely to give Democrats even greater majority control in both the US House of Representatives and the Senate.

Democrats are expected to gain as many as 30 seats in the House, which would boost their grip on that chamber to a 60% majority with 263 Democrats against 172 Republicans in the 435-member body.

More critical, say business sources, is the real prospect that Democrats could secure 60 seats in the 100-member US Senate where they have held only a slim 51-seat majority since the 2006 mid-term elections.

If the Democrats hold a 60-seat majority in the Senate, they would be able to override minority attempts to block legislation and even force some bills into law despite a presidential veto.

"I think we are looking at what will be the most anti-business federal government in many years," said Chris Jahn, president of the National Association of Chemical Distributors (NACD).

Jahn, who served as a senior staff advisor in the US Senate before returning to the private sector, said his gloomy view of the elections likely outcome is not partisan.

"Whether Obama or McCain wins the White House, I think federal policies over the next several years will be very anti-business," he said, "because there will be a much larger, anti-business majority in Congress and no one at 1600 Pennsylvania Avenue [the White House] to act as a check on the pent-up ambitions in Congress."

Jahn expects that a stronger Democratic majority in Congress beginning next year will mean passage of more stringent anti-terrorism chemical security legislation that will include a federal mandate for inherently safer technology (IST) as a security requirement.

In environmental matters, he worries that the new Congress will take the opportunity to reshape the 30-year-old US chemicals regulatory law, the Toxic Substances Control Act (TSCA), as a US version of Reach, the EU's programme for registration, evaluation and authorisation of chemicals.

"Certainly there will be far more regulations coming across the board," Jahn said of what is expected to be a more Democrat-controlled Congress.

In addition, he expects higher taxes on businesses and greater energy costs if, as seems likely, Congress and the new president move to implement a cap-and-trade climate control law.

"If you want to paint a picture of gloom," Jahn said, "put increased regulations and higher taxes on top of an economy that is already struggling."

In anticipation of a new Congress more willing to impose regulations and taxes on business, Jahn said NACD is going to beef-up its advocacy team and work to raise more grass-roots involvement in federal policymaking by the association's member companies.

To discuss issues facing the chemical industry go to ICIS connect

By: Joe Kamalick
+1 713 525 2653

Chemicals demand still exists, believe it or not, but the new economic order -one that could last as long as six years - requires new approaches.

Purchasing managers need to start acting locally as well as globally.

Who would want to be a financial controller if you work for a big company or the jack-of-all-trades managing directors of a small or medium-sized enterprise? Every purchase order and every invoice, literally every single transaction, needs to be reviewed by whoever understands overall credit availability.

One small step out of line, one tiny error by an over-enthusiastic purchasing manager or sales executive and bang, you've exceeded your credit limit. Even if you have a sound business model, your bank might have no option but to say "sorry, but that's it - we are withdrawing all your credit". But is there really such a thing as a sound business model these days?

This new economic order could have major implications for how chemical pricing behaves. Old understandings on how to read the direction of markets might need to be revised.

"There have always been two kinds of demand in the confectionary industry - long and short term," said a plastics-wrapping manufacturer on the sidelines of the ICIS World Polymers Conference, which took place in Bangkok, Thailand, earlier this week.

For the next few paragraphs, the confectionary industry and upstream to polyolefins will be used as an example of how purchasing managers need to act differently. The same rules could also apply to other product chains.

"Nothing has changed when it comes to your big 1b bar of chocolates. You can still ship large volumes of packaging material economically from, say, China to the US as these slow-moving items will sit on the shelf for months," the manufacturer added.

But for your fast-moving confectionary - for example, discounted big bags of miniature chocolate bars placed in toddler-reach on shelves near supermarket checkouts - shipping wrapping material from China no longer makes sense.

"A big percentage of a confectionary manufacturers' revenue comes from fast-moving and short-term promotional offers. The trouble is that these promotional offers are no longer as fast-moving because consumers are cutting back on spending."

Much smaller quantities of wrapping material are needed and so for logistics reasons, buying locally adds up. If you make chocolate in a developed markets, these small suppliers might have previously been ruled out because of their high labour costs and low capacity.

"It's not economic to half-fill a container and ship it all the way from China. Local suppliers can also much more quickly respond to small day-by-day changes in demand," the manufacturer added.

There are other reasons to buy in small quantities (and therefore locally).

Oil prices move in an almost perfect relationship with equity markets these days. Stock markets rebound as investors clutch on to some fleeting good news and crude rallies by a few dollars a barrel, only for the reverse to occur the following day.

So nobody at any point in any product chain wants to sell or buy big in case they end up on the wrong side of a shift in highly erratic energy prices. For example, why buy a big quantity of resin today only to see the WTI price tumble the next?

Your equally hard-pressed customers, even the ones you've worked with for years, will not be able to do you any favours if you plead that you made a mistake on crude.

Shortage of credit is a further reason to keep orders at a minimum.

"My MD is signing off every purchase order. You need to make your credit stretch. The other problem is that you need to very carefully monitor the credit situation of your suppliers and your customers. Make sure you have enough of each in every region where you operate in case some of them go bust," said the manufacturer.

Buying locally also extends up this chain to polyolefins.

"Polyethylene (PE) and polypropylene (PP) exports from the States have declined because of the weaker dollar and the collapse in pricing that closed-off arbitrage," said a polyolefins producer on the sidelines of the same conference.

"Another factor is that end-users prefer to buy local because retailers are placing smaller orders."

A further reason to keep inventories low is the huge economic uncertainty out there. Nobody knows how deep this recession will be and how long-lasting.

"We keep looking further and further back into history for parallels," said Matthew Sullivan, Director of Energy Structuring and Origination for Standard Chartered Bank, in a speech during the conference.

First it was the dot-com bubble crash of 2001, then the Asian financial crisis and next the global economy downturn of 1980-82. Now all the talk is of the Great Depression.

"Vehicle sales in the US, on a population-adjusted basis, have fallen to their lowest level since World War II," he added.

"I hate to give you the bad news, but I think it could take 5-6 years to get through this. Most of the iceberg is still beneath the water."

The dreaded consumer confidence feedback mechanism may have only just begun.

Banks might, theoretically, be in a better position to lend thanks to all the rescue packages - but at ground level in the chemicals industry trade finance remains desperately hard to obtain.

Inventory write downs are huge because of raw materials bought before the crash in demand and pricing. This will affect financial results in Q1 next year.

This will in turn lead to more job cuts in chemical and other companies. When you are worried about losing your job, if you haven't lost is already, you don't spend; and as Japan found out during the 1990s, consumers are even less likely to spend if they think that prices will be lower tomorrow.

As consumers make even deeper cuts into their spending, this leads to even worse corporate results, more business failures and more job losses and so on and so on....

"People are reviewing their retirement plans (because of the collapse in equity markets). They feel a lot poorer, which is another disincentive to spend - and they will have to add 5-6 years to their working horizons," Sullivan added.

The next big banking scare just around the corner might be further write downs on credit-card losses

In the midst of economic calamity and the resulting shift in buying patterns, what does this mean for how chemical pricing will behave?

Chinese buyers used to periodically withdraw from markets en-masse, in the case of polyolefins.

This would lead to big price declines because the volume of lost trade was big.

The guessing game would then begin over inventory levels and demand - meaning when they would need to re-stock.

When they did return, of course, volumes on the positive side were equally big, resulting in big price rallies.

Bu increments are these days as low as $20 or $30 a tonne a time because of small-volume sales. Prices then quickly fall back.

When prices retreat, even more ground can be lost than had been gained because of worsening economic news.

Nobody can be sure when chemical-pricing markets will bottom out for good in this current cycle - just as nobody has any clue when the economic recovery will arrive.

Yes, that's my target for the truck above, which is actually for 4-11 year olds and my son is only 22 months - but what the hell, don't we all deserve a second or, in my case probably a tenth or perpetual, childhood? And I am trying to teach him the value of recycling (the above picture is of a recycling truck) - even more bad news for the conventional chemicals industry.

The truck was S$249 (Singapore dollars) two weeks ago, has fallen to S$199 and surely has much further to go as the deflationary spiral begins to bite. My target is S$100, provided, of course, it hits this level before Santa sets off with his reindeer and his elves etc (poor old reindeer - less carrots this year, and I imagine Santa will be laying off some of his little helpers and moving those he retains to flexible short-term contracts with less healthcare and other benefits. Do the elves have a union, though? Not sure...answers, please).

But the serious point is that the deflationary vicious spiral - delayed purchases and higher savings rates leading to worsening corporate results, more unemployment and further delayed purchases - may have only just begun.

I remember reading an article in The Economist a few months ago which concluded that the US would not suffer a Japan-style decade-long slump because it had inflation. Not now.

Down every product chain, in the case of lego from crude oil to the plastic (acrylonitrile butadiene styrene) to the finished goods, inventory has been manufactured using high- cost raw materials. Remember when crude was above US$100/bbl? It seems almost a distant memory.

So this means everyone - from the retailer in Singapore selling my boy's truck right up to the ABS producer and the cracker, aromatics and refinery operators - will have to endure lots of hair cuts in this first circle of the deflationay spiral.

Volker Trautz of LyondellBasell is right to say that destocking of this nature is a big cause of weak demand at the moment - and that the true nature of underlying demand might not emerge until Q1 next year (see below for interview).

But by the time the first quarter comes around, we could be into the second loop of a deflationary spiral that might push is into something as bad as the Great Depression, or a global version of Japan's long and painful economic paralysis.

What's your strategy to survive this?

18 November 2008 17:45 [Source: ICIS news]

HOUSTON (ICIS news)--Petrochemical customers have cut purchases as they expect prices to continue falling - a trend that has masked the true level of demand during the global economic slowdown, the CEO of LyondellBasell said on Tuesday.

Starting in the third quarter, customers reduced purchases on the expectations that prices would fall in upcoming weeks, said Volker Trautz, LyondellBasell CEO, during a conference call.

Such destocking accelerated in the fourth quarter, Trautz said.

At the same time, demand has dropped because of the global economic slowdown, he said. "The economy has clearly slowed."

LyondellBasell will not have a clear picture of underlying demand until the first quarter, he said.

As it is, LyondellBasell has idled an olefins plant and reduced operating rates as a result of the slowdown, Trautz said. The company has also shut down polymer plants.

The company has reduced its 2009 capital expenditures programme to $800m (€632m), the minimum deemed necessary to meet safety and environmental standards, Trautz said. LyondellBasell has also adopted a cost-cutting programme.

In the upcoming months, LyondellBasell may consider selling off noncore assets, such as real estate, the company said.

In all, the company should generate cash in the fourth quarter, which should allow it to reduce its net debt, Trautz said.

In other news, LyondellBasell expects to remain in compliance with its covenants in the fourth quarter and in 2009, the company said.

($1 = €0.79)

By: Al Greenwood
+1 713 525 2653

Notice

This blog will be undergoing planned maintenance on the morning (UK time) of Thursday 20, November 2008. During that time you will be able to read this blog, but will not be able to post any comments. We expect full functionality to be restored in the afternoon of 20 November.

Thanks for your patience.

We need great leaders in the current crisis.

Below is the kind of speech I'd like to hear from my CEO - delivered in person - if I worked for a chemicals company.

Everything that now follows is fiction and any resemblance to an industry leader, either living or dead, might sadly be purely coincidental:


"Things are really bad - there is no disguising it, and they will get a great deal worse. This is at least the worst global economic crisis since 1980-1982. Conditions are a lot worse than during the Asian financial crisis of 1997-98 when markets fairly quickly recovered.

"The financial security of hundreds of families depends on our company. Many of the main breadwinners of these families work for us.

"I have been through this myself - I was made redundant. It's not just the money that counts, it's the loss of self-esteem - because work for many of us goes to the core of how we define ourselves, of who we are, of what we mean to ourselves and others."

"I will do my very upmost to avoid having to tell anyone to leave for economic reasons. The only reason I will willingly let anyone go is if they make a careless mistake.

"We are all in this together, we must watch each others backs, support each other, encourage each other - and try not to make any mistakes.

"I would rather see volumes go down substantially than for us to acquire raw material from suppliers or sell product to customers in difficult financial positions.

"We need excellent market intelligence on the viability of all our suppliers and customers. How strong are their business models and credit positions? This knowledge needs to be constantly revised.

"I am not asking you to take any risks out of anxiety to achieve unrealistic sales targets. I will be revising those targets down, and will revise them and down even further if necessary - regardless of the initial impact on our share price.

"I believe that caution over business conditions will earn us the long-term support of our banks and our shareholders. I really don't care about my share options in the short term - all that matters is that we survive this together. And anyway my share options - and those of the fellow directors - will be worthless if we go bust.

"We cannot afford to make the mistakes of overbuying raw materials or over committing on sales because of our own credit position, the extreme energy-price volatility and the uncertainty over what is 'fundamental' demand'.

"Inventories have been run down because the industry was living in chemicals 'parallel universe', as Paul Hodges of International e-Chem so rightly pointed. Stocks were built-up earlier this year as crude prices soared on anticipation of further price rises up and down the product chains.

"This flew in the face of clear signals that the economic crisis was deepening. These signals included the collapse of Bear Stearns and the US government rescue of Freddie Mac and Fannie Mae. We were also guilty of this and I take the responsibility for following the herd.

"Once bitten twice shy and so everyone is as a result keeping stocks low. And as I've already mentioned, energy-price volatility and the uncertainty over demand is depressing buying and selling activity. Inventories are also being kept to a minimum due to the financial year-end.

"This means that I do not see our raw-material costs and finished-product prices moving up by anymore $20-30/tonne until at least the New Year and so there are no substantial gains to be made out there. But pricing hasn't necessarily hit the bottom and so declines could be much bigger than any temporary and slight increases - so the danger of taking a risk for the potential of a very small gain is the risk of a huge loss!

"But I am telling my sales team to be prepared for sharp upward price corrections at some point - possibly as early as January 2009. Demand is still out there, if only at very-much reduced levels, and once the end-user demand re-emerges, our prices could literally double overnight from very low levels.

"This creates an even greater risk for us and so the policy will remain the same: be cautious, don't take risks and if you miss targets and there is good justification for doing so, you will not be penalised. I would rather lose the odd upside deal when prices start rising and falling in large amounts than run the risk of a disastrous mistiming of raw-material buying and an increase in our operating rates.

"And finally, let's forget about the crisis for the rest of this evening. DINNER'S ON ME - LET'S GO AND GET DRUNK."

For many years, many an Asian country has wanted a petrochemical industry as much as car or a textile industry.

Some of those countries have pursued investment even though their competitive advantages in petrochemicals have been somewhat dubious.

Singapore can argue that - because of its very efficient ports and corrupt-free politics - it is a good location for petrochemicals.

Shared and efficient utilities and feedstock advantages tied to mixed-feed cracker technologies by ExxonMobil, and soon Shell Chemicals, add to the argument. In the past, the case has been won by very strong profitability.

But what kind of growth will lift the West out of recession? Will it be the new-energy New Deal proposed by Obama?

Is this the only kind of growth possible, given that US and the UK consumers are leveraged up to their eyeballs and bankers will remain exceptionally cautious in lending?

In other words, no matter how many tax breaks are thrown at consumers, they might well be unable or unwilling to rush out and buy yet more junk that they do not need - made from petrochemicals shipped from Singapore to China to be manufactured into finished goods for re-export to the West.

The other danger, if the International Energy Authority is right, is that we run the risk of another crude-oil price surge if growth in the conventional economy returns to previous levels.

It seems unlikely, therefore, that we will see further crackers in the foreseeable future (beyond those already under construction) in an Asian country without a home market for petrochemicals big enough to result in only marginal export volumes.

Paul Hodges, my good friend and colleague in his excellent Chemicals & The Economy blog describes the "Minsky moment" for the global economy, when deleveraging accelerates. Hyman Minsky, the famous old economist, described how long periods of stability were followed exactly what we were seeing at the moment.

One former investment banker once said of my articles, "if you predict the end of the world for long enough, it will eventually happen".

In a petrochemicals context, though, I've been worried that the more that things went up - including pricing and a flood of investment predicated on a very simplistic view of growth - the greater the fall. At last May's APIC, somebody very senior in the industry was virtually saying that down cycles were no more. His company is now sitting on a huge inventory loss and depressed local and export demand as it prepares to bring on stream a huge slug of new capacity.

Let's hope that the same irrational idiocy doesn't take hold of the industry ever again.

I'm on holiday until 8 December, but don't worry there'll be a number of posts between now and then.
all the best

John