Chemicals Face More Financial Sector Damage

Greed definitely not good for chemicals….



gordon-gekko-from-wall-street.jpgSource of picture: reelmovienews.com

 

By John Richardson

THE chemicals industry is once again confronting the risk of being badly damaged by the ever-more interconnected oil, other hard commodity, currency and equity markets.

As fellow blogger Paul Hodges told us last November: “Demand visibility – even without as yet a collapse in crude – is already extremely poor, making planning very difficult.

“More companies go bust in an upturn than a downturn, because of the inevitable increase in working capital. This is a major risk in 2010, given the fragile state of the financial system, and banks’ unwillingness to lend.”

We have now seen a mini-collapse in crude from around $87/bbl at the beginning of May to this morning’s NYMEX price for July delivery of $70.33/bbl.

One of the reasons for poor visibility back in November was confusion over to what extent crude prices reflected a fundamental improvement in demand versus financial speculation that a sustained global economic recovery was just around the corner.

Now we have our answer: Money has poured out of crude and into the US dollar, indicating widespread aversion to risk and a clear indication that the rise in oil prices was, indeed, mainly built on speculation. The switch to the dollar, as the US dollar carry-trade starts unwinding, could gain very damaging momentum.

Further strengthening of the dollar would also very likely lead to greater reductions in other futures-traded commodities, such as metals – and equity markets.

John Authers of the Financial Times neatly summarises the evolution of markets to where we are today.

Problems he identifies include the rise of super-fast computers that can move hundreds of millions of dollars in milliseconds between commodities and equities, the “other people’s money” syndrome” (i.e. the rise of trading by institutions), and “herding” – investment managers following the general trend because of the way they are incentivised.

This has exacerbated bull runs and has made bear markets worse.

Fear has once again overtaken the investment community as talk of a double-dip recession and deflation regain popularity.

Until or unless regulations are introduced to make commodity and financial markets less greedy, less short-term, and less driven by what Hodges describes as “irresponsible bankers”, an important part of managing chemicals businesses will remain understanding how all these markets work.

 

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