Cash Will Remain King in 2010

Still too crowded…

cottesloe-beach.jpg

Source of picture:www.tripadvisor.com

 

By John Richardson

 

Dear Readers – Welcome Back.

Having spent the last two weeks lying on Western Australian beaches, drinking beer and reading books on European history – while also building sand castles etc with my three-year-old son – I have given little thought to chemicals.

But here’s to another year and another dollar – or quite possibly a lot less dollars if the forecasts of excess petrochemicals supply prove to be correct.

On the big-picture macroeconomic front these area few of the things we should also be worrying about:

*Global demand being too tied to government economic stimulus packages (Western governments will have to at some point ease back on stimulus to cut back on deficits in order to avoid credit downgrades leading to higher borrowing costs, or perhaps even defaults on debt; China has dollops more cash to spend on boosting the economy, but needs to worry about inflation)

*Consumer debt levels and unemployment in the developed world will remain high and so a big recovery in consumer spending seems very unlikely

*Restocking has come to an end across many industries including chemicals

The question is whether we will see a sustained V-shaped global recovery or a long period where global demand for everything, including chemicals, will remain much-below 2007 levels for many years to come.

My betting is firmly on the latter scenario.

Cash won’t be as tight as early 2009, but some of the hype of H2 last year needs to be put into the context of all that restocking – plus the fact that numerous project delays have postponed the inevitable impact of a flood of new capacity. Even though more delays are likely, the amount of new volumes suggests a tough second half of 2010

The emerging markets story remains exciting, but demand growth in China, India and Indonesia (Indonesia being probably a much under-rated source of demand last year) won’t be enough to return us to 2007.

Commodity chemicals companies that have made big-enough shifts to developing markets and/or to where the cheap feedstock is located should be OK – as long as tight inventory management, and therefore cash preservation, continues.

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