Asian Chemical Connections

Back from less-than-sunny Perth to discover that the prediction from my good friend and colleague Paul Hodges at International eChem has come true: Benzene has headed south because of:

1.) The rise in its pricing seems to have been out-of-kilter with what has happening downstream in styrene

2.) Traders credit might well have stampeded for the exit after building very high stocks in China in July

3.) Overall reformer economics appear to have been much-improved of late, perhaps encouraging over-production of benzene

See this slide from ICIS pricing which illustrates the point.

View image,

The conclusion has to be, again, that apparent chemicals demand is a long way from underlying demand, despite all the macro-economic confidence.

Expect many more mini disruptions like this - if not the dreaded overall collapse.

The Canton Trade Fair

Source of picture: Blawg.lehman.com

This interesting article from Bloomberg says that while petrochemical output in China rose in August, textile production actually contracted.

We don't as yet have any breakdown for specific petrochemicals.

If the overall increase includes higher aromatics-to-synthetic fibres output then the gamble that the chain has taken on improved sales of textiles and garments will have so far failed to pay off.

As we discussed earlier on this blog, there is evidence of higher output down the entire synthetic fibres chain.

A key measure of improvement in exports to the West of textiles and garments will be the next Canton Trade Fair which takes place in October-November.

Source of picture: Wikipedia

Because benzene has so many end-uses it's widely seen as a pretty good barometer for the overall health of the industry.

As C6 led the recovery last time are recent declines a sign of another broad-based retreat?

See the slide below:

View image

Or is it more the problems we highlighted earlier in the week that are specific to the aromatics and fibre-intermediate chains?

PX and PTA have also been on the retreat of late.

Before winding up for the weekend, see this report from the New York Times.

More later......

Deep in the heart of the great wealth gap

Source of picture: Blogmlive.com

....the more convincing seems to be the argument that financial and commodity markets have got way ahead of the recovery in the real economy.

Take a recent Credit Suisse report, for instance.

Its analysis of monthly apparent demand in China, up until June, for a few key commodities such as polyethylene (PE), asphalt, copper and iron ore show that they were above underlying real demand.

Are we about to be undone by what has undone is so often before, and as recently of course as Q4 last year?

By this I mean the banks and the speculators. Public money, used to bail out the banks, is being poured into oil and gas speculation, creating dangerous bubbles.

And to repeat yet again, there's all the hot money deceiving us over China. In this case its through state-owned banks which have been instructed to attempt to compensate for the mess made by Western lenders.

China, and indeed the rest of Asia, is busy trying to remake much of its economy in order to be less reliant on export trade which saw unsustainable growth.

The problem for the average worker in the US and Europe is that salaries have been stagnating, or even declining, in inflation-adjusted terms due to the great drift of manufacturing east.

Combine this with the loss of perceived wealth caused by recent harmful financial "innovation" (I'd say that's too flattering a word to use. How about manipulation or fraud now being paid for by the tax payer?), and real demand could take many years to recover to 2004-07 levels.

This article from the UK's Guardian newspaper asks whether we have learned anything from the financial crisis.

A new report from the United Nations Conference on Trade and Development (Unctad), referred to in the same article, concludes that we haven't.

"All these rises in markets are said to reflect economic recovery but it is just another bubble," Heiner Flassbeck, Unctad's chief economist, told the Guardian. "These markets are reflecting a recovery that is not there. Wage deflation is a huge danger everywhere and this is not being recognised.

"Banks have been rescued by the taxpayer and are just returning to casino-style speculation that brought us trouble in the first place. We need to focus banking on supporting investment in productive businesses."

This reminds me of a trip through rural Texas I made in March last year. No luxury condos, country-club memberships and multi-million dollar bonuses were evident there.

Polyolefin producers doing RMB business in China were delighted when price increases on the Dalian Commodity Exchange linear-low density polyethylene (LLDPE) futures contract started leading the physical market on the way up.

"We used the exchange to justify charging higher prices for real deals because in the heady days of February-early August the general trend was up or at least stable.

"The trouble is that prices on the exchange have become more volatile in both directions. Physical trading is also slowing down on what I think are high distributor and trader inventory levels.

"The few buyers who remain interested are picking days when Dalian is on a downtrend in order to ask for discounts.

"It's too early to call this as the correction we've been all been waiting for since April.

"This will become clearer after the long Chinese holidays which take place from 1-8 October.

"At the moment it's hard to decide whether the drop in sales is down to a traditional pre-holiday lull or something much deeper."

August volumes on Dalian were down 58% from their peak so far this year, which was in April.

According to Paul Hodges, who prepared this chart for his Chemicals & Economy blog last week, this indicated that the smart money was flowing out of Dalian and commodity and equity exchanges in general.

His view is that equities, commodites and the real-estate and auto sectors in China have risen way out of line with the underlying demand we keep referring to. As a result, he believes we are heading for a sharp correction.

The polyolefin producer understandably hopes he is wrong but concedes that first-half imports into China, and overall demand, were "highly deceptive" because of the temporary boost from domestic production cutbacks and speculative inventory building.

But still, he added: "I went to China two weeks ago and the mood was bearish because of a decline in Dalian. I came back the next week and the mood was bullish and now it's bearish again!" (he was speaking on Monday this week).

"It's all been driven by sentiment and speculation and by Dalian because nobody has a clue about the fundamentals.

"The big question now is that if the stock market declines continue and liquidity tightens up further, will Dalian volumes go into a long-term decline?

"Less volume might mean has relevance, but with markets so opaque even a market with very low volumes might remain valuable."

His big fear is that buyers will get the most value out of Dalian in future, using it as a big stick to beat their suppliers.

What goes round comes round.....

The US back-to-school buying season

Source of Picture: theglobeandmail.com

As regular readers will remember, last Friday I linked through to this article from the New York Times on the likelihood of a disappointing back-to-school sales season in the US.

I had promised some more thoughts on this article and so here goes....

......This is a sign of the belt-tightening in the US and Europe resulting from the long-term shift in consumer behaviour - as discussed before on this blog - which will lead to:

*Greater dominance of low-priced retailers such as Wal-Mart, which has started selling a Toshiba laptop for just $348. More outsourcing to the developing world seems inevitable as cost pressures increase. The squeeze will work its way up to marginally cost-efficient chemical and polymer producers

*A rise in protectionism: Western manufacturers are likely to respond with more anti-dumping petitions - and perhaps an increase in ex-WTO measures such as complaints over labour and environmental standards. If a cap-and-trade bill is passed in the US we could also see carbon-import taxes for imports from those countries with no comparable systems. Such measures can be politically popular

And what does a 17-inch laptop for $348 mean for innovation in the chemicals industry? Are companies going to bother with expensive R&D?

But to cut back on R&D would show a lack of vision by any company that cannot compete in pure commodities.

More rather than less differentiation is likely to be the key for survival as chemicals and polymers with marginal "added value" will face tougher scrutiny from buyers.

Source of Picture: pupillageandhowtogetit.wordpress.com

And now for something completely different.

I am launching an new and occasional series, hopefully fed by anonymous contributions, on the daftest examples I come across of company strategies.

A friend works for a global training company.

Pass rates are awful at the moment in Asia because students are struggling to grasp the subject matter, which has a very western-focus.

The solution? Less lectures so the delegates concentrate harder in the more limited time available.

Goldman Sachs is talking about crude oil at $85 a barrel by the end of the year.

Sound familiar? Not quite forecasts of $200 a barrel, but is there a danger of repeating the mistake that the James A Baker III Institute on Public Policy claims was made in 2008?

In a new report, the institute claims that in the spring of that year financial speculators - out of touch with physical oil storage - missed the amount of floating storage that contributed to the subsequent collapse.

EF-pub-MedlockJaffeOilFuturesMarket-082609.pdf

Speculators don't care about the effect on the real economy, only in making money their money and getting out at the right time.

"In 2007-08 dramatically rising oil prices fed US indebtedness. This led to an even weaker dollar, driving oil prices even higher," write the authors of the report.

Index funds linked to the value of the greenback have increased their activity on the Nymex fourfold since January 2006, they add.

Non-commercial players as a whole have been lead indicators of pricing - again from January 2006 - thanks to market liberalisation introduced in 2000.

So do we need governments to use strategic petroleum reserves, as did President Clinton in the 1990s, and the use of spare capacity by producers to take the power away from the speculators?

Source of picture: rateyourmusic.com

...steal a lot and they make you a King," wrote the great Bob Dylan in A Sweetheart Like You on his great 1980s album, Infidels.

This seems appropriatea as we commemorate exactly 12 months to the day since the West's financial system imploded.

Obama is talking tough on new regulations - and I am sure he sincerely means it - but Wall Street seems to control the overall Washington agenda.

Why does it matter for the chemicals industry? Because the distortions in energy, other commodity and equity markets are creating a false impression for the industry.

As the president says: "It is neither right nor responsible after you've recovered with the help of your government to shirk your obligation to the goal of wider recovery, a more stable system and a more broadly-shared prosperity."

Hear, hear.

Source of picture: millermmccune.com

How quickly is China shifting its economy away from exports towards stronger domestic consumption?

The answer to this question is, of course, critical to the global chemicals industry.

On the surface it looks good: Retail sales grew by 16.6% in the first half of 2009 and by a slightly more modest 15.4% in the year-to-date.

The problem is how retail sales are calculated as they include government purchases and shipments to retailers before any sales to actual consumers (could these healthy figures include, therefore, lots of unsold washing machines, fridges etc? China's government has introduced a huge subsidy scheme aimed at encouraging rural residents to buy more white goods, but is unsure of its success).

Michael Pettis - on his always-pessimistic China Financial Markets blog - believes this leaves retail sales as a poor proxy for overall consumption.

He quotes Jim Walker's 14 September issue of Asianonomics, where Walker points out that retail sales have grown at 13-24% over the last six years - well in excess of the increases in GDP (gross domestic product).

Real consumption has, in fact, being growing at only 8-9% over the past few years, concludes Pettis.

This would mean consumption as an arithmetical share of GDP has fallen as GDP has been expanding by 10-12% per year.

A lot of money is going into investment in more surplus capacity, much of which might be inefficient because of the low cost of capital, he warns.

Consumers are subsidising lending costs through low-wage growth and low deposit rates, he adds.

Low-wage growth is obviously no good for encouraging greater, genuine domestic spending.

But low deposit rates versus better returns on local equities and the property market have been partly behind the recent booms in both.

Pettis is gloomy about the long-term ability of China's government to re-balance growth.

The Chinese Economic Quartely's view, however, is "worry - but don't kill yourself" over the pace of and extent to which re-balancing will occur.

Temporary setbacks are possible, but the CEQ believes the government has the financial muscle to get there.

China never gets any easier.

Forget supply and demand, just record the index cards....

Source of picture: Heatusa.com

This amateur pundit is beginning to think he got it very wrong.

"I've been thinking the same thing - I was as gloomy as you a few months ago," said an oil-and-gas consultant friend of mine this morning.

"The Singapore property market is close to its all-time highs of 1997.

"The consumer-confidence indices have seen a complete about-turn from 12 months ago.

"Could the improved sentiment itself result in this being a U rather than a W-shaped recovery?"

"Maybe the Chinese government will continue spending as much as it can to stimulate the economy as a hedge against the US dollars.

"Why buy more Treasuries when dollar weakness seems to be a long-term factor with the risk that the dollar might also be replaced as the reserve currency?

"It could well be in China's longer-term interests to keep investing heavily in moving the economy from an export to a domestic focus.

"This will need to involve winding down policies that have provided temporary relief from the global crisis (i.e. huge increases in bank lending and other stimulus policies) in favour of reforms that will boost the pace of genuine, underlying consumption growth.

"These need to include better healthcare and pension systems, financial sector liberalisation and deregulation of distribution and logistics."

"It seems amazing that only a year ago we were talking about something as bad the Great Depression of the 1930s.

"Perhaps the problem is that we've been looking too much at fundamentals - at supply and demand from oil down to finished goods.

"The focus instead should perhaps have been on international capital flows.

"We need to more carefully study how money flows between borders and between different equitiy markets, commodity futures markets and over-the-counter (OTC) trading,"

Here are my views...

Electronic trading systems have revolutionised the speed of capital flows.

The IntercontinentalExchange website, for example, says that transactions on its wide and ever-expanding range of markets each take only two milliseconds.

You have dollar and oil markets sitting on the same exchange. Movements in both markets are presented in real time.

Has this contributed to the correlation between a weaker dollar and higher crude prices -along with the rise of index funds linking the two?

Energy prices have been virtually divorced from stock levels since 2003 and so recent historic-high storage of oil, refined products and natural gas is nothing new.

The current bull-run in crude might well last until real demand catches up.

It seems unlikely that interest rates will rise before then. The US government will want to avoid banks - which are benefiting from public fundingand less competition - in trouble again.

Ironic, isn't it? Bail-out money is being used to make more bets. The bigger the bets the less the risk for a financial institution.

And maybe even the speculators have done us a favour by pricing in future tight supply now.

An issue for chemicals companies is controlling their production and stock levels to reflect the genuine needs of their customers.

The task of separating market froth real and immediate demand would surely benefit from some harder thinking.

MOVING IN THE RIGHT DIRECTION (SORRY, OUCH....!)

Source of Picture: www.autospies.com

The automobile industry in the West has been bought more time by economic stimulus, as this article in The Economist points out.

But some of the discussions at the Frankfurt International Motor Show, which takes place on 15-27 September, will be about the future of the industry over the next few decades.

Producers face big economic, demographic and fuel-efficiency challenges - and capacity is way ahead of current and projected demand. (separate leader from The Economist with some more useful numbers).

So what might this mean for the polymer industry? Here are a few thoughts:

*Demand for smaller cars will increase. Automakers will need to focus on either ferocious cost cutting and/or adding more sophisticated features if they want to achieve anywhere near the same returns for these smaller vehicles compared with big, luxury lines

*This creates a big opportunity for innovation through both lighter plastics (with stricter fuel-efficiency regulations another motive) and plastics which deliver other design benefits. Added value will no longer be defined by a little bit of extra customer service and the odd clever additive. Breakthrough products will be needed

*Feedstock-advantaged producers will be in an even stronger position to meet what commodity-polymer demand remains

*The Western polymer industry's own cost-cutting will have to be accelerated in the search for higher R&D funding, and as auto plants close down (since this recession started, there have been no closures in Europe, according to The Economist). Those with their own advantaged-feedstock positions in the Middle East and/or strong footholds in China will be in a better position to generate enough revenues

*The decline in US and European gasoline demand might lead to short-term feedstock advantages as the value of light-ends declines. Longer term, though, refineries will be shut down - potentially pulling the proverbial rug from beneath even those polymer producers with the right technologies (Note: Western gasoline demand is expected to keep falling after the economic crisis is over on tougher fuel-efficiency regulations and ageing populations, etc)

Source of picture: Chinaenvironmentallaw.com

Talk around the water-cooler in Shanghai offices at the moment is the fall in the cost of a car-license plate in September to a lowest bid of Yuan 27,000 ($3,953) from around Yuan 36,000 in August.

"It surprised everyone because the forecast had been for the price to actually go up to Yuan 42,000," said an ex-pat based in Shanghai.

This has created one of those agonising "if only" moments as he registered his car last month.

But more importantly, the surprise reduction might be an indication of softening auto demand after months of heady growth.

Domestic sales rose by 29.18% during the first seven months of this year over the same period in 2008 to 8.33m units, according to the China Association of Automobile Manufacturers.

The monthly price for license plates is set by auction so this could be an early pointer of the effect of reduced bank lending.

Instead, though, it might be merely a lull ahead of the long Chinese national holidays, which take place on 1-8 October.

"The decline in the price happened despite new regulations making it harder to buy a cheaper plate from outside Shanghai for use in the city," the ex-pat worker added.

"There were around 13,400 bidders for 8,500 license plates this month as against 18,000 for 8,000 plates in August."

Petrochemical prices are also on the slide, according to ICIS pricing.

Fibre intermediates had fallen for four weeks in a row as of last Friday.

Raffia-grade polypropylene (PP) was at $1080-1120/tonne CFR China main port compared with $1130-1200/tonne CFR China a month earlier.

Again, though, it's hard to discern to what extent these falls are due to a pre-holiday business wind-down against something much deeper and more fundamental.

"There are a lot of official statements in the local press about how too much lending went into speculation in real estate, in stock markets and in commodity markets in general. Lending rules are getting tougher," the office worker continued.

"I think there's also a danger of China following the US by enjoying a dangerous 'wealth-effect' from rising property prices. This seems unsustainable as real-estate costs are rising much faster than incomes.

"As was with the States again, leverage is on the rise through grey loans. State-owned enterprises (SOEs) borrow from the banks at preferential rates and then re-lend to less creditworthy companies and individuals."

Even pig farmers are involved in speculation through stockpiling copper and nickel, according to this article from Bloomberg.

Should we now be searching pig sties and farmers' fields for bags of polyethylene (PE) pellets?

"China, please please do what we did and spend what you might not be able to afford..."

Source of picture: The Daily Maily

Whether or not China's pace of economic recovery will be maintained would have become an intensely boring topic of discussion if it wasn't so important for all our livelihoods.

More data specific to polymers and chemicals has emerged as to just how staggering the rebound has been: Imports of un-compounded polyvinyl chloride (PVC) were up by 100% in the year to June compared with 2008, according to International Trader Publications Inc.

Benzene, vinyl-chloride monomer (VCM), methanol and propylene imports were up by 100-550-% during the same period, the publishing company added.

"During the last recession, when prices bottomed around December 2001-February 2002 period, there were also spikes in imports of some products into China," said Jean Sudol, the company's president.

"What was different then versus now is that fewer products were involved, the spikes were nothing like the magnitude we are seeing now, and the surge only lasted 1-3 months. This time it's endured for 7-8 months."

Evidence of weaker demand has emerged over the last few weeks.

At the risk of boring you yet again (if you are not too worried about your job), is this demand-decline partly the result of too-much of inventory re-building of chemicals, polymers and of semi - and finished-goods?

All will hopefully become a little clearer after the very-long Chinese national holidays from 1-8 October. It is hard to discern to what degree recent sales dips are due to business winding down ahead of this break, overstocking and bleaker economic prospects.

On the surface, a lot of the macro-economic numbers look terrific: Retail sales grew by 16.6% in the first half of this year and by 15.4% up until the end of August.

But scratch the surface and you find that retail sales include government purchases and shipments to shopkeepers before any sales to consumers are recorded.

"This makes them a very bad proxy for consumption," writes Michael Pettis on his blog, China Financial Markets. Pettis is a professor at Peking University's Guanghua School of Management.

Retail sales-growth was in excess of the expansion in GDP (gross domestic product) over the last six years, he adds.

"Consumption (real consumption and not the retail-sales numbers) has been growing over the past several years by about 8-9% a year, while GDP has been hurtling forward by 10-12% a year," he argues

"Not surprisingly, this implies arithmetically that consumption is declining as a share of GDP."

The China Economic Quarterly (CEQ), an online research publication, agrees that the retail sales numbers aren't much use in tracking genuine consumption. Even government officials don't attach much credence to them, it adds.

But, unlike the more-pessimistic Pettis, the CEQ believes it's well within China's capability to maintain GDP growth at 8-9% in 2010 (growth is expected to easily reach 8% in 2009).

The reason is that there is still plenty of money in China's state-owned banks to support high levels of lending with equal oodles of cash around to maintain investment in public infrastructure.

As to asset bubbles which might lead to drastic government slowdown measures, the "hysteria is premature", writes the publication in its third-quarter issue.

"Price-earnings ratios are well under half their truly speculative October 2007 peaks.

"Our detailed analysis (of the housing market) suggests that the pool of prospective upgrading -and investment buyers is so large that the market can continue to rally for another year or so."

But it warns: "Continued growth at 8-9% in subsequent years will depend on whether the government uses the time it has bought through monetary stimulus to push through domestic market reforms."

"We are pretty optimistic about financial sector liberalisation; less so about service-sector reform."

China has finally created a bond market, meaning capital is being more accurately priced rather than always handed out virtually free to state-owned enterprises (SOEs).

A new stock market for small -and medium-sized enterprises will probably begin trading in Shenzhen in the fourth quarter this year.

These measures should help shift the economy away from dominance by the SOEs towards what in theory are more-efficient private companies.

Extra credit mechanisms are also being created to increase the availability of consumer finance.

"But we have yet to see much evidence of a serious effort to deregulate service sectors, notably distribution and logistics, that remain sink-holes of state-dominated inefficiency," the publication adds.

Liberalisation and deregulation are crucial in re-balancing the economy away from exports and towards a genuine growth in consumption as a share of GDP.

"Don't trust the government, any doctor or any lawyer," I was once told by a drunken tour-guide in Greece before he started reciting poetry.

In this case we have to trust the Chinese government in the hope that it can do a better job than certain White House administrations.

You could argue that wouldn't be particularly difficult.

Source of picture: zerohedge.blogspot.com

It might seem a little melodramatic (and it's a wonderfully melodramatic name), but what kind of threat do dark pools - and other off-exchange trading mechanisms - present to all our livelihoods?

You can see that the World Federation of Exchanges might have a financial motive in making their complaint to the G20 over the threat these mechanisms represent to their "macro-economic role".

But after the role that the shadow banking system played in the financial crisis you have to be worried.

The $64,000 dollar question has to be how you regulate dark pools etc.

And for the sake of melodrama: Unseen forces, unaccountable and anonymous, might start determining all our livelihoods.

Sudden and entirely unpredictable shifts in global commodity markets could push countries into financial ruin and even wars.

At least in the case of the exchanges, because pricing is transparent, you can challenge the logic of say the futures price of oil being way out of step with supply and demand fundamentals.

But the problem with these dark pools etc is that you won't have a clue on what might happen until it hits you.

I thought I would publish Michael Pettis's reply to my piece yesterday here rather than approve as a comment:

Good piece but one correction.

I don't think 8-9% growth this year and next is impossible. On the contrary, I think that if the government keeps up its stimulus they can force high levels of growth for at least another year or two.

This will make even the consumption growth of 8-9% of the past few years tough to maintain. Since GDP growth must be less than consumption growth over the next decade, ultimately this is the number that has to be boosted.

Thanks, Michael

A bit like the fund managers who are anxious to keep the equities rallies going until the end of the year in order to protect bonuses, there must be a lot of petrochemicals people hoping pricing in our sector will stay equally firm.

Perhaps, though, these hopes will be more inspired by job preservation rather than fat bonuses - yet another indication of how financial-world reality has become divorced from the demand for actual stuff out there.

Apart from presenting a relentlessly upbeat face in an effort to sway sentiment, there is little any one of us can to do influence petrochemical pricing.

So anxiety is building as to exactly what will be the level of demand after the long Chinese holidays, which take place from 1-8 October.

"I am not expecting demand to fall off a cliff in Q4, as stocks are not that high, relative to the position last year," said Paul Hodges of International eChem.

"There may be some destocking if the oil price does slip back towards $40/bbl, but really it's a question of what happens next, now that restocking is coming to an end. 

"My view is that its not going to be 'onwards and upwards' in a V-shaped recovery, but a more muted outlook where the environment is characterised by  higher savings, lower consumption, and global GDP growth of perhaps 2.5% rather than the historical 3.5%."

China's economic stimulus will continue, but perhaps at a slower pace.

And no government in the West will be willing to jeopardise the fragile recovery - although temporary stimulus measures, such as cash-for-clunkers, are coming to an end.

In Asia we have now seen a month of falling prices in polyolefins with the declines in benzene and fibre intermediates lasting even longer.

This slide, from ICIS pricing, illustrates the point:

Presentation1.ppt 

This indicates that however confident people might feel about the overall economy, chief financial officers and traders are playing it cautious.

Chemical companies don't want to risk high inventories in case demand falls of a cliff in late October, assuming they want to keep their jobs.

You are also likely to see similar wind-downs towards the end of the year in order to preserve cash.

De-stocking by traders in China seems to be another factor behind the recent price falls, a clear indication that the 7-8 straight months of record-high polymer and chemicals imports into China involved considerable speculation.

Operating rates new plants are also reported to be stabilising.

Polypropylene (PP) has already seen a big increase in output from the Middle East and elsewhere.

Now a wave of new polyethylene (PE) and monoethlyene (MEG) capacity is expected.

"And what's an interesting challenge in balancing inventories for producers is that these new plants are a lot bigger," said my colleague Malini Hariharan, India country manager for ICIS (She will soon join this blog as a full-time commentator - more details later).

"This means if that there is a sudden unanticipated correction in demand you could be left with very high stock levels."

Asian cracker operators are talking about rate cuts in October after three months of running at 100% in many cases.

How much of the improved demand was down to re-stocking after historically high de-stocking and rate cuts in Q4 last year and the first quarter of 2009?

All should become clear very soon.

SWIMMING IN OIL?

Source of Picture: fashionfunky.com

The threat posed by Iran test-firing its Shahab-3 missiles and a rally in US equities on increased M& activity in the drug and technology industries pushed crude slightly higher yesterday after last week's steep declines.

This is yet further evidence that the oil market is why out of sync with real demand for the black stuff and just about all its derivatives.

"July's Vehicle Miles Travelled (VMT) figures were released last week, with total miles driven clocking in at 263.4 billion miles, up 2.3% from July 2008," writes today's Schork Report, the daily online data and analysis service for energy and shipping markets.

"That is a solid increase but keep in mind: Gasoline prices have decreased by 38% since last year.

"Further, July 2008's VMT figure was 3.5% lower than July 2007. Therefore, this year's 'increase' was 1.3% below 2007 and 0.5% below the 2003-07 time-step, thereby continuing a steady VMT decline."

This is more evidence that we are miles away (excuse the pun) from the credit-fuelled demand levels of 2003-07 for everything from barrels of oil and gigajoules of natural gas to synthetic dog coats.

Chemicals demand in the UK might not return to pre-recession levels until as late as 2020, Oxford Economics has warned.

But don't bet against speculators pushing crude prices back up again, especially if conflict breaks out with Iran over the missile testing and the alleged development of nuclear-weapons capability.

This is despite weak demand, as the Schork Report has pointed out, and deeply oversupplied crude and crude products markets.

Such is the oversupply that even a disruption in Iranian production (Iran is the world's fourth-largest producer) might not make much of a difference, assuming that the conflict doesn't spread to elsewhere in the Middle East.

"Saudi Arabia was running just about flat out in 2007. Now it has 6m barrels a day of spare capacity," said an oil industry observer last week. 

Recent falls in gasoline mean that its pricing could be close to "meltdown", according to this report from Bloomberg.

And as my fellow blogger Paul Hodges pointed out last week, the historically high amount of oil in floating storage is now being delivered to refiners due to a narrowing of the contango.

So I am with those who believe we are heading for $45 a barrel before the end of this year. 

Still, a two-way bet might be advisable - just in case there is another rally.

.....said Mervyn King, governor of the Bank of England

Source of picture: northbriton45blogspot.com

ANY excitement over US house-price figures for July - which showed the biggest monthly gain for years when they were released yesterday - has to be put into the kind of context that undermines a lot of recent positive economic numbers.

The price recovery is partly the result of the $8,000 tax credit for first-time buyers and the Federal Reserve buying mortgage-backed securities. The tax credit expires at the end of November.

Inventory of unsold homes is at its lowest level in more than two years, according to The National Association of Realtors.

But there's a "shadow inventory" of delinquent or foreclosed mortgages of some 7m houses, according to Amherst Securities.

This matters to the global chemicals industry because of the large amount of chemicals and polymers which go into your average US home.

More importantly, without the return of some kind of "wealth effect" (this still seems a long way off in real-estate as the S&P Case Shiller Index is still 30% below its 2006 peak) it's hard to see a sustained rebound in US consumer spending.

"It's the level, stupid - it's not the growth rates. It's the levels that matter here," Mervyn King, governor of the Bank of England, was quoted as saying last month.

Levels to be concerned about include western consumer indebtedness that is still too-high relative to income expectations and credit availability, wrote Mohamed El-Erian in the FT yesterday. He is chief executive and co-chief investment officer of Pimco.

Bank balance sheets are also still too geared for the comfort of regulators and the managers of the banks, he added.

As my colleague Nigel Davis saidthis Insight article from ICIS news, real levels of lending to businesses, especially the small -and medium-sized ones, remain constrained.

Unemployment has also risen well beyond expectations and it will take years for the jobless rate in the US to return to its natural rate, El-Erian continued.

Yesterday I quoted the excellent Schork Report which put into context some more supposedly encouraging statistics: July's Vehicle Miles Travelled (VMT) figures were released last week, showing a 2.3% increase from July 2008.

But as the authors pointed out: "The July number was still down by 3.5% compared with July 2007."

This was a year when demand for just about everything under the sun was at historic highs.

Further - the modest improvement in July 2009 happened after a 38% year-on-year fall in gasoline prices.

Growth in urban VMT was less than that for rural travel, according to the latest statistics.

Urban driving is seen a stronger indicator of overall economic health as it includes travel work.

Unemployment was therefore a threat to the "nascent recovery", added the Schork Report.

The US Conference Board's latest index of consumer confidence, which was also released yesterday, seemed to support the Schork view: The index slid to 53.1 in September from 54.5% in August.

How should chemical companies respond to these challenges?

There will be more on this, and the implications for Asia, over the coming days and weeks.

Source of picture: Time.com

Yesterday I talked about lack of willingness by western banks to lend money because their focus was on rebuilding reserves.

But Steven Major, Global Head of HSBC's Fixed Income Strategy Team, puts a different spin on the problem.

In the Fragile Recovery video from the Financial Times' View From The Markets section, he said banks would dearly love to be earning 8-10% from loans rather than the paltry interest rates on leaving cash in reserves or on low-yield government bonds.

The demand for loans simply wasn't there because the "real economy" had yet to recover to the extent of financial markets, he added.

Stock markets have long been lead indicators, pricing in recoveries before they reach consumers and companies. The same has also become the case with energy markets where price discovery is now driven by futures contracts.

Equities had already priced in strong growth in consumption and company profitability in 2010-11, Major said.

Neither, of course, is guaranteed - meaning that investors entering markets now "are not being paid for the risk", he continued.

The same is true for oil, but fundamentals are set to catch up very soon with a dip to $45 a barrel on the cards before the end of the year.

Here are a couple of questions anybody attending this weekend's European Petrochemical Industry Association (EPCA) meeting in Berlin might want to put to chief executive and chief financial officers etc:

*How much of your recovery over the last few months has been the result of cost-cutting and restocking?

*When both come to an end (and this may well have already happened for restocking) how confident are you on a scale of 1-10 that you'll be able to continue delivering quarter-on-quarter improvements in 2010-11? In other words, can you grow volumes?

The answers could be very telling.