Source of picture: eacci.net
By John Richardson
THE edginess and nervousness of Asian polyolefin markets we talked about last week is likely to be part of the mindset of any chemicals company CEO right now.
As my colleague Nigel Davis wrote about last week, the industry's financial results for 2010 are set to exceed all expectations. INEOS, Lanxess and Clariant will see their profits double over 2009, according to S&P analysts. Profits at the world's biggest chemicals company by sales, BASF, are forecast to hit a new record high.
But to what extent will better results be due strong emerging markets while Western demand remains below pre-crisis levels?
To what degree will improved returns reflect inventory building down production chains after a de-stocking overreaction? A classic example and extreme example is the re-stocking which supported US chemicals and other industries throughout 2010 after the great 2008 collapse.
A further factor behind good results will be manufacturing-rate discipline. We saw this in the chemicals industry in 2009-2010 when it became much better at matching production to what, on a global basis, was depleted demand versus before the crisis.
This was the result of plant closures and constantly adjusted operating rates at facilities that continued to run.
All of this can be hard to calculate in the frenzy and noise of any reporting season. Even in quieter periods, numbers can be notoriously hard to analyse correctly.
If all of these factors turn out to be very significant in last year's stellar performances, it will not take the shine off what has been achieved. The industry has clearly been very smart in managing extremely volatile economic conditions.
However, talking about our first point, a lot of companies still depend on the West for a high percentage of their sales.
The blog, along with Paul Hodges at International eChem, believes that many of the policies adopted by Western governments have failed to address to the underlying causes of sub-par growth. This is the ageing of the Babyboomers.
Watch out for much more on this subject over the coming year as we prepare a book on this subject.
Persistently high US unemployment and the state of the country's housing market reflect policy failures.
To what degree has emerging-market growth depended on importing chemicals and polymers for re-export as finished goods to the West? Policy weaknesses of Western governments and a deliberate change of course by the Chinese government are threats to this growth.
And finally and most immediately, the threat of inflation must rank very high in any CEOs concerns.
As we shall discuss later this week there is an argument to be made that hidden inflationary pressures in China indicate that Beijing has lost control of the problem.
We also believe that the crude-oil market is dysfunctional and is firmly in the hands of speculators. Both short and long-term pricing do not reflect demand and supply fundamentals.
As a result, we could well be in the middle of a mini repeat of 2008. Crude seems to have risen to unsustainable levels due to the demand destruction it is causing the ultimate consumers - the motorists, the shoppers etc.
It is always very hard for chemicals-company purchasing managers to assess the extent of this demand destruction and inevitably, as crude continues on a bull run, they will have to buy forward.
"Even if raw-material purchases are only 10% more than normal in any one month, add all those ten per cents together in any product chain and this represents a big risk," said Paul Hodges.
Chemicals companies face inventory losses if there is a crude-oil price correction. We believe such a correction will happen in H2.
But the chemicals companies who innovate for the future can attempt to look well beyond any one set of financial results, provided their investors have patience.
Such innovation needs to be around products that deal with the consequences of demographic changes in the West and surging consumption in emerging markets.
All the above are the big issues confronting not only the chemicals industry, of course, but the world economy as a whole. They should be at the forefront of discussions at this week's World Economic Forum in Davos.