Abandon Fear And Plan For The New Utopia

Michael Corleone once told his fiancee, “The old way of doing things is over – even my father knows that. In ten years time, the Corleone family will be entirely legitimitate” and ten years later he was still killing lots of people. So beware of what follows…

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Source of picture: www.i-italy.com

 

By John Richardson

IT has been a remarkable year, one that has exceeded just about all expectations in Europe, the US and Asia as my colleague Nigel Davis wrote in an ICIS news Insight piece yesterday.

Confidence remains high that we could even be though the bottom of the cycle, as we said on Monday.

We have talked at length about the supply issues that continue to keep markets tight in certain grades of polyolefins. While overall profitability, as this Nexant ChemSystems report points out, might have been down very sharply in Q3 over the second quarter, this doesn’t reflect persistently strong pockets of profitability.

On Monday we also referred to how excellent demand growth in certain geographies – most obviously, of course, in India and China – might be distorting what on a global basis remains a very shaky outlook.

But the doom-mongers, including us until the first quarter of this year when we started questioning our old assumptions, keep being wrong. What if the old ways of measuring demand growth are no longer good-enough because of an historic shift in the way the emerging-market economies are behaving?

“Look at India, China, Indonesia and Vietnam. Together they account for about 40% of the global population. At no previous point in history has such a large proportion of the world’s population been entering the consumer economy,” a Singapore-based oil and gas consultant told the blog yesterday.

This got us thinking that the gizmos that people want today are creating much-greater chemicals and polymer demand than a macro analysis of the fundamentals might indicate.

Clever marketing campaigns and technology innovation are creating more wants that at any other time in history (in the West, though, the focus has switched back to needs).

“The standard approach is you take an estimate of GDP (gross domestic product) growth for a particular country and use that to calculate the rise in consumption of plastics and chemicals,” continued the consultant.

“This has been the traditional base method, with varying degrees of further sophistication, that companies, consultants – everybody – and you as journalists have slavishly reported these numbers as if they were the gospel truth – have used in the past.”

The blog now wonders whether we need deeper analysis further downstream into different end-use applications to understand the impact of emerging market growth – that stimulation of greater wants – on demand. What, for example, will be the consumption of polymethyl methacrylate into flat-screen TVS and polypropylene (PP) into autos?

“I read recently that Indian auto sales have risen by 30%. This is probably why India is reporting such strong demand-growth numbers for random co-polymer PP as you wrote about in Monday,” said the consultant, who agreed with our above point.

One assumption we used to hold was that all investment bubbles had to eventually burst.

But could emerging markets behave differently because of demographic, resource availability and government policy differences with the West?

For example, property prices have increased three -to four fold in Mumbai over the past five years.

The city is short of housing (even the middle classes are being forced to live in poor-quality housing or even slums because of this shortage), and so why shouldn’t price rises continue at around the same pace?

In Singapore, the property market is going sideways following government tightening measures – but limited land availability and population pressures might guarantee long-tem inflation, albeit at more moderate rates than recently.

As we said, we need more detail – more granularity – as you go further downstream which requires deeper study into the opportunities and also the risks of the emerging-market boom.

The most obvious risk is the impact on energy costs if this boom continues. Are there enough resources to meet these levels of growth?

How will making better use of resources, through dealing with issues such as water pollution and all the challenges of urbanisation, benefit the chemicals industry?

But returning to the here and now, there seems to be a deep mistrust of the conventional top-down way of looking at things.

As a result, the pessimists are not being believed as they have long been predicting another post Lehman Bros collapse, but it has yet to happen.

This represents a danger in itself in that just because a lot of the commentators have been wrong so far doesn’t necessarily mean they will continue to be wrong.

But month after month when sales figures keep exceeding budget targets that have been based on some of the gloomier forecasts, what is the chemicals corporate world supposed to think?

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