Asian Chemical Connections

By John Richardson

POLYOLEFIN end-users in China and Southeast Asia began to re-stock in significant numbers last week on anticipation that supply is going to remain tight for the next few weeks at least, the blog has been told.

"There was a feeling among the converters that because of scheduled maintenance work in August and September, prices had the potential to continue increasing,' said a Singapore-based source with a major producer.

Restocking activity has driven further price increases. Polyethylene (PE) rose by $10-50/tonne and polypropylene by $10-70/tonne in Northeast and Southeast Asia for the week ending 29 July, according to our colleagues at ICIS pricing.

The change in the market will come as welcome relief to several traders who started to build stocks during the week ending July 8, in anticipation that the converters would eventually have to bite.

However, one converter in China was reported to have built two months' worth of stocks last week with the intention of withdrawing from the market once he reaches two-and-a-half months of inventory.

"This is quite unusual as processors have only been keeping stocks of about one month for most of this year because of all the uncertainties in the market," the source with the producer added.

Several other end-users had also started building untypically high inventory levels, a Singapore-located trader told the blog.

This suggests to us that a transfer of risk - from the traders to the end-users - might have taken place rather than any fundamental, long-term improvement in the market.

Healthy inter-trade business was also reported to have taken place last week, added ICIS pricing. This suggests that some traders may have added to their exposure.

The demand outlook would have to get a lot better for any fundamental change to occur.

"Re-exporters from China (those who manufacture finished goods from imported resin) have seen a slight improvement in their orders, but you would expect this as we are entering the peak manufacturing season," the trader added.

"But generally speaking, there are no safe havens for export-based converters these days. Demand is weak in the US, Japan and Europe because of all the macroeconomic problems."

At least it looks as if the US politicians are not going to shoot themselves in their collective head. Latest reports indicate that a deal to lift the debt ceiling has a good chance of passing through Congress and be signed by the President before the 2 August.

If not, reports indicate the US might be able to carry on meeting its debt obligations for a few days beyond 2 August - until the negotiations are successfully concluded. This re-affirms what we had been told.

Oil prices and stock markets will inevitably enjoy a relief rally if a deal is reached.

Lifting the debt ceiling might also improve US manufacturing and consumer confidence and therefore the strength of the peak manufacturing.

But dreadful US macroeconomic data that was released late last week - including a downward revision of second-quarter growth - point to a very weak economy.

And even if a debt-ceiling deal is reached all the signs point to S&P stripping the US of its triple-A debt rating. This would increase interest rates and, as a result, further dent US GDP growth with further global consequences.

The head of the world's largest bond investor - Mohamed El-Erian of Pimco - told US broadcaster ABC yesterday: "Things that need to happen are not happening fast enough. If S&P sticks to what it said, it will downgrade."

And so the mood in the polyolefin market remains uncertain, nervous and resiliently pessimistic - especially when you add in the prospect of more monetary tightening in China.

"My gut feeling remains that this price rally will probably not last and that if we push it too hard, we will bring the recovery to a very abrupt halt," added the Singapore-based trader.

"Affordability remains the issue for many of the converters in China because of the increases in interest rates and bank-reserve requirements."

Interestingly, though, converters in Southeast Asia serving local consumer-goods markets are doing considerably better, he added.

"They are not constrained by the same credit issues and local economies are still booming. For example, in Indonesia the converters are working three shifts a day to keep up with local low-end packaging demand."

But no nation is an island and the blog feels that the macroeconomic headwinds are too strong for the polyolefin price recovery to last that much longer.

The question, of course, is how much longer.

"I think we should be alright until September or October because supply will remain tight until then, not only on the scheduled maintenance work but on production problems in the Middle East," added a second trader, who is based in Hong Kong.

By John Richardson

The macroeconomic headwinds are building, making it hard for some of those at the ground level in Asian polyolefin markets to foresee anything but fragile and tough trading conditions.

This is in marked contrast to the fairly optimistic outlook presented by some of the big, well-integrated and differentiated chemicals and polymer companies during the release of their second-quarter results.

Companies remained pretty confident about the second half of the year, even though they acknowledged problems in Q2 resulting from weaker growth in China, sovereign debt issues in the West and higher oil prices.

"I think the crunch time for the big, well-integrated companies won't arrive until the third-quarter results season, as the momentum from earlier this year is still strong," said a sales and marketing office with a major polyolefin producer.

For him pessimism abounds in China on weaker end-use markets for all sorts of chemicals and polymers, not just polyolefins.

The auto sector provides a good example, where sales in the second quarter of this year grew by just 2%. This compares with a 26% increase in the fourth quarter of 2010.

China's Passenger Car Association believes that auto sales could actually decline this year, for the first time since 1992. This would be the result of tighter credit and the removal of one-off subsidies designed to boost sales following the 2008 global financial crisis.

The possibility of a downward correction in property prices is also a concern - although up until June real-estate values were reported to still be on the rise.

Twenty consecutive months of credit tightening, as the government battles against inflation, has led to large volumes of unsold homes.

Supply could be further lengthened by a big building programme to provide affordable homes for average and low-income earners.

Banks are reported to have stopped issuing new mortgages because of better returns from other types of lending.

Purchasing restrictions that had applied to big cities such as Beijing and Shanghai have now also been extended to the smaller cities, where house-price inflation has recently been higher.

"What I am seeing is some of my big customers buying polyethylene (PE) just to get their hands on the credit in order to complete real-estate projects," added the sales and marketing executive with the polyolefin producer.

"They are in a hurry to complete these projects because of new government restrictions. If you don't complete within a certain period of time, you have the land taken away from you.

"There is a lot of anxiety out there about the property market."

The real-estate sector accounts for 12% of China's GDP (gross domestic product), according to the International Monetary Fund.

Polyolefin prices continue to rise, though - in the case of PE by a further $10-50/tonne with polypropylene (PP) higher by $10-70/tonne for the week ending 29 July, according to ICIS pricing. This marked the fourth week in a row that prices had increased.

End-users in both Northeast and Southeast Asia (SEA) were also reported to have returned to the market in significant numbers as they stocked-up on anticipation of further price rises.

This was a step in the right direction as the price recovery had previously been mainly the result of traders taking long positions, said several market sources.

SEA processors are reported to be running flat-out to meet strong domestic demand growth.

"The Indonesian converters I know are working three shifts a day, seven days a week. The economy is growing well and people are becoming wealthier, driving a lot of substitution of natural materials for plastics," said a Singapore-based polyolefin trader.

But the fragility of the demand from end-users in China - constrained by lack of credit and slower growth in consumer-goods sectors such as autos - remains a worry.

"My gut feeling is that if we push price rises too hard then the end-users will start to retreat," said a sales and marketing executive with a second major polyolefin producer.

"We are being helped by tight supply, which should enable us to maintain recent gains until September or October. Beyond that, though, there is little visibility."

Clouding the picture was the long-running political wrangle over raising the US debt ceiling.

The House of Representatives has approved a bill to raise the ceiling, involving a reduction in spending of about $1 trillion over the next decade. Now the Senate is expected to vote on the proposed legislation on Tuesday, US time. Both the Democrat and Republican parties expect it to pass successfully through the Senate.

Some financial analysts and economists believe that the US could still lose its triple-A debt rating, despite the debt deal.

A credit downgrade would drive-up interest rates globally.

"This debt debate is already further entrenching the pressured US consumer," said a US-based chemicals analyst.

"Businesses aren't hiring and consumers aren't spending. The global economy is largely based around the developed world's consumption of goods," he added.

"Asia is seen as the growth market while the developed nations are the foundation.

"You take away more consumer spending, which would happen if there is a default or downgrade, and it is just a ripple-down to Asia."

"Demand for Asian products would drop significantly from US consumers."

This is crucial for polyolefins, and for all sorts of other chemicals and polymers, as we are now in the peak manufacturing season.

Between August and September, Chinese manufacturers of finished goods traditionally ramp-up production in order to export to the West in time for the Christmas sales season.

Buyers of polyolefins returned to the market last week to both hedge against possible further price increases, and to stock-up for the manufacturing season.

Even without any debt default or downgrade, a weak manufacturing season seems likely due to poor US GDP (gross domestic product) growth and high unemployment.

Container freight rates had fallen by 9.3 per cent since the end of April, said Bloomberg in a report last week.

Major shipping lines were reported to be delaying introducing peak season surcharges on the Asia-US route because of weaker demand from US retailers for finished goods.

"There are no safe havens for export-based converters these days. Demand is weak in the US, Japan and Europe because of all the macroeconomic problems," added the Singapore-located polyolefin trader.

Those who buy and sell chemicals and polymers are inevitably focused on the short term, on the next deal.

So it is possible that they might miss the bigger picture.

But exactly how long does a short-term blip in growth have to last before it becomes a longer-term trend? Trading conditions in China have reportedly been weak since March this year.

By Malini Hariharan

The latest accident at Formosa Petrochemical Corp's (FPCC) refinery at Mailiao, Taiwan, on Sunday is adding to the bullish sentiment in markets for key petrochemicals. A fire in the propylene recovery unit has forced the company to close its 540,000 bbls/day refinery and related facilities, including two residual fluid catalytic cracking units (RFCC) and an olefins conversion unit, for a safety inspection. FPCC has also declared force majeure on all petroleum products.

Styrene hit a 3-year high of $1,600/tonne CFR China yesterday amid concerns that the government would ask sister company Formosa Chemical and Fibres Corp (FCFC) to shut a 600,000 tonnes/year plant, reports ICIS news. Two other styrene plans operated by FCFC have been shut since May following a fire at Formosa Petrochemical's No1 cracker.

Paraxylene (PX) prices rose initially by around $60/tonne with selling indications crossing $1,650/tonne. But prices corrected yesterday by $5-10/tonne on weaker crude futures.

FCFC continues to run its No2 and No3 PX plants but may have to close them for government mandated safety checks. The No1 aromatics facility has been shut since 13 May.

Sentiment in the polypropylene (PP) market strengthened further with confident Chinese distributors raising their offer levels in anticipation of a disruption in supplies from Taiwan, reports ICIS news.

Formosa Plastics Corp (FPC) and FCFC have suspended offers for PP and polyethylene (PE) from their plants in Taiwan. The two companies have a total capacity for 854,000 tonnes/year of PE and 350,000 tonnes/year of PP.

FPCC has also decided to hold to its planned maintenance shutdown schedule of its 1.1m tonnes/year cracker for 45 days from 15 August. It has also not set a date for the restart of its No1 cracker.

"There is mad scramble in Taiwan to import cargoes. Before the Formosa accident there were questions on whether the rise can be sustained through August but now things have changed," said one trader. He now expects markets to remain firm until September as closures by Formosa coupled with maintenance shutdowns are likely to keep markets tight.

The Formosa group of companies are in deep trouble with the government asking for a shutdown of all plants at the huge Mailiao complex in stages to carry out safety checks. The inspections will have to be monitored by local or international experts.

There have been seven accidents in the last twelve months and two fires have taken place at the Mailiao complex at less than a week's interval in July.

The company plans to negotiate with the government as a shutdown of the complex will have implications for the entire Taiwanese economy.

But it is not clear if the government will be in any mood to listen. The country's Industrial Development Bureau (IDB) has ordered the Formosa Plastics Group to provide a detailed report within a week on safety measures that the company plans to take at its plants.

"Unless FPG makes an overhaul of its operations and is able to convince the taskforce that it is ready to resume operations, the suspension will continue," he said," warned IDB's director general.

A second official from the IDB blamed the accidents on poor maintenance as a result of cost cutting by the group over the last one year.

And although FPCC's chairman and president have resigned, this is unlikely to satisfy angry residents in the Mailiao area. They are now planning a rally on 4 August to reiterate their demand for an immediate halt to all operations at the Mailiao complex.

By Malini Hariharan

India's major petrochemical projects are inching forward very slowly and the blog will not be surprised if there are more delays along the way.

Reliance has yet to kick start its 1.4-1.6m tonnes/year cracker project adjacent to two refineries at Jamnagar, on the west coast of India. The cracker will be based on offgases from the refineries. The blog has heard that all is well with the project and final details are being worked out. But then, it has been hearing this for a few months now.

Among the other cracker projects, ONGC Petro-Additions (OPaL), a joint venture between ONGC, GAIL (India) and Gujarat State Petroleum Corp, has finally awarded all major contracts for its 1.1m tonnes/year mixed-feed cracker and derivatives complex at Dahej, Gujarat.

OPaL recently selected technology from Mitsui Chemicals for a 340,000 tonnes/year high-density polyethylene (HDPE) unit, going back on its earlier decision to take technology from Chevron Philips.

And it also selected Marie Technimont as the engineering, procurement and construction (EPC) contractor for HDPE plant, a 340,000 tonnes/year polypropylene (PP) unit and two swing HDPE/linear-low density PE (LLDPE) plants each of 360,000 tonnes/year capacity.

A source close to developments says work on the cracker is 50-60% complete and the company is aiming for mechanical completion in January 2013 while the polymer plants will be ready in the second quarter of 2013.

However, this is an ambitious target and 2014 for full start up of the complex looks more realistic.

Meanwhile, GAIL is confident of completing an expansion of its Pata complex in December 2013. A source close to the company says work on the project, which includes a new cracker of 450,000 tonnes/year, a swing 400,000 tonnes/year HDPE/linear-low density PE (LLDPE) plant and a 20,000 tonnes/year butene-1 unit is progressing well and the company should have no problems in meeting the targeted date for completion.

However, GAIL's second project, a small cracker and derivatives complex at Assam, on the east coast of India will be delayed.

"Work on the project has currently stopped because of the monsoon season and will resume in a couple of months. Completion will be delayed from April 2012 to July 2013," he adds.

On the aromatics side, Indian Oil Corp (IOC) is still waiting for board approval for 600,000 tonnes/year of paraxylene (PX) and 370,000 tonnes/year of purified terephthaic acid (PTA) project at Vadodara, Gujarat. The company hopes to get approval over the next few months and would then look to complete the project during 2014-15, a delay from the earlier target of 2012-13.

Among the projects under implementation, expansion of a fluid catalytic cracking (FCC) unit at IOC's refinery in Mathura, Uttar Pradesh is due for completion in January 2013. The extra propylene will be moved to Panipat where it will be used at an existing PP plant.

And work on a 138,000 tonnes/year butadiene extraction unit at the Panipat complex has started and it is likely to commence production in Q1 2013 along with a joint-venture styrene butadiene rubber (SBR) plant.

Meanwhile, the blog has also heard of Sabic evaluating a polycarbonate (PC) investment on the east coast of India. The company has been eying Indian projects for a few years now and finally seems to have narrowed down on one. However, the fate of this project is uncertain given the tensions between India and Saudi Arabia over the anti-dumping duty that India has imposed on Saudi PP exports. A removal of this duty is likely to be a precondition for any major investment by a Saudi company in India.

By John Richardson

Crude oil and commodities markets have lost touch with the fundamental realities. This didn't just happen yesterday, but began a decade ago.

That's the argument the blog put forward in the latest chapter of our new free eBook, 'Boom, Gloom and the New Normal - how the Western BabyBoomers are changing chemical demand patterns, again'.

We highlights how the supposedly 'informed commentary' that gets widely reported in the media is often focused on boosting income for the trading houses, not market understanding.
And co-author of the blog, Paul Hodges, describe some of the issues this raises for chemicals in this interview with ICIS' Will Beacham.

Please click here if you would like to download Chapter 3.

By Malini Hariharan

The margin pain experienced in Asia in the last quarter is clearly evident in the recently released results by South Korean majors Honam Petrochemical and LG Chem.

Honam's operating profit for Q2 declined 36.8% from the previous quarter to Won36.1bn. LG Chem's operating profit was down 7.2% at Won775.4bn while its petrochemical segment saw a 11.9% decline in profit to Won642bn.

High butadiene and acrylontirile prices and weak demand from the information technology industry hit LG's key acrylonitrile butadiene styrene (ABS) business which accounted for 30% of the petrochemical division's operating profit in the second quarter. Contribution from the naphtha cracker and polyolefins business remained stable at 26% despite weak product prices and LG attributed this to the special grades that it offers.

Honam's results were dragged down by the poor performance of affiliate companies KP Chemical and the recently acquired Titan Chemicals.

Analysts at Woori Investment & Securities estimate that earnings at KP declined 50% due to a sharp narrowing of the spread between purified terephthalic acid (PTA) and mixed xylenes (MX). KP is a standalone PX, PTA and polyethylene terephthalte (PET) producer and has to buy MX feedstock for its operations.

Earnings at Titan also declined mainly because of inventory valuation losses.

Honam was saved by the strength in butadiene and monoethylene glycol (MEG) markets. Butadiene prices have been in the $2,750-4,150/tonne range because of a structural shortage of the product globally.

Woori estimates that Honam's per tonne EBITDA from butadiene was ten times the average EBITDA for polyethylene (PE), polypropylene (PP) and MEG. With butadiene projected to remain short for the next couple of years Honam will continue to benefit and butadiene's contribution to the company's EBITDA is likely to touch 50% in 2012.

Both LG and Honam have predicted a stronger Q3. The price increases seen since the beginning of July certainly point in this direction and many market players are fairly confident that markets will remain firm in August and September supported by plant turnarounds and shutdowns like the one at Formosa Petrochemical in Taiwan.

But the consensus for the fourth quarter is that there is still too much macroeconomic uncertainty to make a prediction.

By John Richardson

CHINA'S polyolefin market was in "total chaos and panic" this morning, according to a Singapore-based trader.

The Dalian Comodity Exchange's futures contract in linear low-density polyethylene (LLDPE) fell a further 5% this morning after declines earlier in the week, according to ICIC news.

The weak futures markets caused a supply surge in the physical market as local distributors released cargoes. 

The recent price recovery always seemed as if it was at risk of falling victim to macro-economic events.

Tighter supply was a big factor in the rebound, firstly as result of awareness in the market of scheduled maintenance shutdowns in August and September. The blog then heard reports of technical problems at two polypropylene (PP) plants in Saudi Arabia, affecting 1.1m tonnes of capacity on an annualised basis.

The problems at Formosa had a further positive influence on sentiment with an unconfirmed rumour this week of yet more production problems - this time at a cracker complex in Southeast Asia.

The arrival of both the peak production season for exporting finished goods to the West and the latest agricultural film season in China offered additional encouragement.

A slight seasonal uptick in demand was also been seen in SEA, ahead of the Muslim fasting season.

But what kind of peak demand season can we expect in China for all those manufactured goods heading to the West as fears grow that developed economies are heading back into recession? Martin Feldstein, emeritus professor of the US National Bureau of Economics, now believes that there is a 50% chance of the US heading back into recession.

US gasoline demand was up "a miniscule" 0.1 per cent for the week ending 29 July, according to the latest MasterCard SpendingPulse's latest survey. This is supposed to be the peak driving season.

The European Central Bank resumed purchases of Irish and Portuguese bonds yesterday in a sign of growing concerns over the Eurozone sovereign debt crisis. Italy and Spain may also need financially rescuing.

Oil prices tumbled yesterday with West Texas Intermediate for September delivery falling more than 5% to settle at $86.63 a barrel, removing all the gains made during 2011.

The Dow Jones Industrial Average has also seen all of its 2011 gains erased.

The Hang Seng Index in Hong was down 4.81 per cent this morning when the market opened.

And so not surprisingly, the Dalian Commodity Exchange's Rmb-priced futures contract in linear low-density polyethylene (LLDPE) has responded to all these macro trends.

"The futures contract across all delivery months has lost around Rmb1,000/tonne over the last week," added the Singapore-located polyolefins trader.

"My phone hasn't stopped ringing - it is total chaos and panic out there. In my view, the end-users were not the main driver behind the recent price rally. The rebound was because of traders taking positions.

"Now, of course, the end-users don't want to make any commitments until they see where pricing is going to bottom-out."

By John Richardson

DOW Chemical CEO Andrew Liveris said in a 27 July conference call that China's industrial economy was still doing very well. "They're managing themselves down very nicely," he added, pointing to official GDP growth numbers of 8-9%, which translate into chemicals and plastics growth of 12-13%.

"We're not seeing any issue here with polyethylene (PE) in terms of demand, especially our polyethylene, which is very much into applications such as agriculture, for example, and films and packaging in general, industrial packaging and the health and hygiene medical markets," he said.

"We are seeing the demand growth, good volume growth and decent price power."

In the article we linked to above, some of the other big, well-integrated and diversified chemicals companies also remain upbeat about the rest of this year. 

PE demand in China fell by 2.5% in the first half of this year, according to Paul Hodges.

A senior executive with a major polyolefins producer said: "You are not going to see very strong polyolefins demand growth in China this year - you are more likely to see negative growth. This is unless inflation falls below 4% which would allow Beijing to improve lending conditions.

"We might see some specific measures to help the small and medium-sized enterprises (SMEs). There is talk about the introduction of some kind of measures, but no details yet.

"I see buying by the converters and the traders staying hand-to-mouth and PE and polypropylene (PP) margins in Asia remaining under pressure for the less well-integrated Japanese and South Koreans.

"I think profitability has peaked in the US and Europe. Some grades of polyolefins are still too expensive in the West and need to come down more to reflect China prices, even taking into account the recovery in China over the last few weeks."

The blog believes that the peak manufacturing season will be very bad (how can it be anything but bad?). We hear continued talk about tight polyolefin supply and this peak season justifying firm pricing. As far as demand goes, this can surely no longer be credible.

The next few weeks might see relief rallies in oil and stock markets which polyolefin traders holding long positions would use to justify a better outlook.

But this is a squash ball bouncing down the stairs - meaning, the overall trajectory is down with mini-peaks and troughs on the way as the global economy heads into a new recession.

And equity and oil markets could well react negatively to S&P's decision to downgrade its US debt rating one notch to AA+ with a negative outlook attached. 

Higher interest rates. in response to the downgrade, are likely to weak consumer and business spending even further in the States and elsewhere.

BUT, we think the Chinese government might well be tempted to react with more economic stimulus, even at the risk of adding to inflationary pressures.

Controlling the cost of living could become less of an immediate priority than avoiding large-scale manufacturing job losses.

By John Richardson

AS the global economy enters a new recession the great hope, as we discussed yesterday, is that China once again steps in with a stimulus package as did in late 2008.

But can China risk a repeat of the huge increase in bank lending, a key part of that stimulus package?

The answer is quite possibly no for the reasons we give below. This leaves doubting that China has the ability to do anything that will effectively compensate for all the problems in the US and Europe.

It was the doubling of bank loans in China in 2009 that helped overseas industries, including chemicals, recover as the country's imports soared.

This article from the Wall Street Journal points out that the country's bank-sector credit as a share of GDP (gross domestic product) could be close to 180%.

Importantly also China is getting less bang for its buck by flooding the economy with easy credit. From 2003 to 2008, total social finance--a Chinese government measure that includes on- and off-balance-sheet lending by the banks as well as bond and equity issuance--expanded on average by 18% a year, supporting growth in nominal GDP of 17% a year. In 2009 and 2010, finance exploded 33% a year on average, but GDP growth slowed to 12%.

Concerns are growing that a lot of this debt has the potential to turn bad if the real-estate sector implodes.

To date this hasn't happened with property prices in the second-tier cities still on the increase.

But as the amount of unsold housing stock builds up and with buyers sitting on the sidelines in the hope that prices will correct to more-affordable levels, the risk is increasing of a sharp correction in property prices.

Local government debt now accounts for 27% of China's GDP, according to the Business Spectator.

"In all previous cases of countries following similar growth models, the dangerous combination of repressed pricing signals, distorted investment incentives, and excessive reliance on accelerating investment to generate growth has always eventually pushed growth past the point where it is sustainable, leading always to capital misallocation and waste," adds Michael Pettis, the Beijing-based finance professor.

"At this point - which China may have reached a decade ago - debt begins to rise unsustainably."

By Nigel Davis and John Richardson

On the financial markets it depends when investors feel confident enough to step back into shares. An analyst on Tuesday asked who would be willing to catch a falling knife?

But there are already indications of a mini-rally following the slump on global markets of the past week. Stock market indices in Europe moved higher on Tuesday and the Dow opened up on the Monday close. Chemicals stock prices rallied following steep falls.

But in this latest downturn, it has not been so much the magnitude of the slump on stock exchanges globally that has caught the attention but the speed of the fall.

The downgrade of US sovereign debt by Standard & Poor's triggered the latest turn down in stock and commodity markets, alongside the on-going struggle with the eurozone debt crisis.

The fundamentals behind the painfully slow recovery from the 2008-2009 crisis have been clear for a long time. High stock and commodity prices, particularly the price of oil, have built largely on the assumption that times are a lot better than they were.

No-one likes a bad story so no-one listens. But when the news is particularly bad, they sit up and take notice.

Fiscal stimulus underpinned market growth in 2009 and 2010 and, the removal of this underpinning of demand growth has begun to bite.

Consumers and companies react by spending less. Government cutbacks put the brakes on economies with little or no forward momentum in the first place.

Clearly, the chemical industry has benefited greatly from the money pumped into the US, European and China economies. It is one of the first to react to stronger industrial demand.

By the same token, it should be one of the first respond to falls in physical market demand and to lower commodity (feedstock) prices.

Chemical markets in Europe and the US have been weakening since late in the second quarter. That became widely apparent as producers reported on a strong period but one which demonstrated the first signs of weakness for some time.

China's important polyolefins markets had been weak since April and the impact was beginning to show. At the time the weakness in these markets was traded off to some extent by improving fundamentals in the US and in Europe.

But the extreme stock and commodity market nervousness of recent days has highlighted the uncertainty that overshadows both the US and other major world economies. The US is pulling out of the 2008-2009 recession but only slowly and could well dip back. Germany's encouragingly strong industrial growth in recent quarters was driven by exports - largely to the rest of Europe. As those exports weaken so the gloss is taken off the industrial giant which is so important to the well-being of the European chemicals sector.

In chemicals all eyes must turn to China, a country which has provided so much of the growth for the industry since 2009.

A key question is whether China can or, indeed, wants to, stimulate the economy the way it did in 2008 and 2009. Inflation hit a three-year high in July, and bad debts are rising, so this looks difficult.

For weeks now there has been a recovery in petrochemical prices in Asia as local manufacturers gear up to feed products into a Christmas season market in the West.

Asian markets are also being supported by tight supply in polyolefins as a result of scheduled maintenance work and mechanical problems at plants in Saudi Arabia and Taiwan.

But as of yesterday, confidence had evaporated. Traders were nervously eyeing their inventory levels as buyers hung around on the sidelines waiting to see when prices might bottom.

And given very weak consumer sentiment in Asia, it is hard to envisage a very strong peak manufacturing season.

The fact that producers and traders in Asia are now talking about when prices might bottom is a big change. Only a week ago they were talking about how much further they would be able to increase prices.

This new bottom in the market is likely to set by where oil prices settle.

By John Richardson

THE fact that the focus has turned to what China might be able to do to once again rescue the global economy reinforces just how important it has become for global growth prospects.

For the chemicals industry it seems as if it is one of the few good news stories around. Other emerging markets offer tremendous potential, but it is the volumes of chemicals and polymers that are already being consumed by China that matter the most.

The West seems set to be mired in multi-year struggles to solve sovereign debt problems. This is likely to keep consumer spending at extremely depressed levels as governments cut back on entitlement programmes, increase taxes if politics allow and perhaps even raise retirement ages.

There is much talk about China's economy being driven by too-much investment in industrial capacity with consumer spending as a proportion of GDP (gross domestic product) declining over the last decade. Michael Pettis, finance professor at Peking University's Guanghua School of Management and author of the China Financial Markets blog, goes as far as to warn that China has indulged in such an investment binge, leading to a major misallocation of capital, that in a couple of years' time the country will start to see sub-par economic growth.

But the recent growth numbers have been quite staggering. Polyethylene (PE) demand rose by a staggering 53% in 2008-2010, according to Paul Hodges of International eChem.

And despite a clear slowdown in PE demand growth on tighter credit conditions, the underlying seemed to be demonstrated by GDP growth of 9.1% in the second quarter - above the expectations of most analysts.

Beijing is also awash with reserves - some $3.2 trillion - and so it is well able to launch another economic stimulus programme on the scale of late 2008.

Back then, when the world economy seemed near total collapse, central and local government infrastructure spending and a doubling of bank lending, led to the 53 per cent rise in PE and double digit demand growth for numerous other chemicals and polymers. This was a boon for overseas producers as every spare molecule was shipped to China.

Now, though, the concern is that problems left over from that huge stimulus package make a repeat very unlikely. Anything approaching the same scale of government spending would increase the likelihood of the Michael Pettis prophesy coming true.

One of the most obvious left-over consequences of the stimulus programme is inflation which has yet to peak.

Many financial analysts had expected the risein the cost of living to start tapering off from the second half of last year. Now they expect this to occur at some point in H2, but the inflation rate was 6.5% in July, up from 6.4% in June. July inflation was the highest in three years.

State-owned banks were told to go out and lend as much as they could from late 2008 onwards in order to reverse the rise in unemployment, leading to lots of money pouring into speculation in chemicals, other commodites and crucially, the real-estate sector.

It is this hot money that is partly being blamed for persistently high inflation, although food prices are still a major driver of the rise in the cost of living. Food prices should come down later this year when temporary supply problems have been resolved, is the theory.

But the official policy of the People's Bank of China remains bringing inflation below the government's target of an annualised rate of no more than 4% for 2011.

"Until or unless that policy is changed interest rates are not going to come down and credit is going to remain restricted," said a Hong Kong-based polyolefins trader.

Controlling inflation is a top priority because of the threat that rising costs presents to social stability.

A further reason to doubt whether China can ride to rescue of the global economy is the number of bad debts left over from the last stimulus package.

Local governments played a big role in the package as they built railways, airports and roads and invested in real estate.

Beijing has released figures showing that borrowings by Chinese local governments had climbed to 10.7 trillion yuan ($US1.65 trillion) in debt, equal to a staggering 27 per cent of China's GDP.

Some analysts have warned that local government debt as a percentage of GDP is much higher than 27 per cent - and that the country's total liabilities could even be in excess of 100 per cent of annual output. This would put China in the same category as basketcase economies such as the US, Japan, Italy and Greece.

China might therefore only have the flexibility to introduce a few relatively minor, targeted measures designed to compensate local manufacturers for weaker Western demand.

Polyolefin producers and traders hope that small and medium-sized enterprises (SMEs) might be helped. The SMEs , which make up the bulk of the buyers of chemicals and polymers buyers in China, have been hurt by tighter credit, higher interest rates and rising wages costs.

But modest support for certain industrial sectors is obviously not going to deliver anything like the same demand boost the chemicals industry enjoyed in late 2008.

By John Richardson

Fifty per cent of the blog (John Richardson) is on leave for the next two weeks.

Next week Paul Hodges will be posting on Asian Chemical Connections. Paul runs the ICIS Chemicals & Economy blog.Then from the week starting 22 August my fellow ACC blogger, Malini Hariharan, returns from her leave and will be posting articles.

Before I sign off here are some thoughts on events over the last week.

It has been the kind of week the blog has been expecting for two years or so, ever since the recovery from the late 2008 global financial crisis.

The recovery was based on hugely increased liquidity via the Fed and the Chinese government - but all this extra money flowing around the world merely papered over the cracks. And as we discuss in Chapter 3 of our e-book, 'Boom, Gloom and the New Normal - how the Western BabyBoomers are changing chemical demand patterns, again', one of the consequence of the Fed's largesse has been oil prices out-of-line with underlying demand. You can download a copy of the chapter for free here.

The loss of the US triple A debt status and fears over the Eurozone, which have now even spread to France, point to the deep, fundamental problems with the global economy that are going to take a generation or more to fix. This is something we discuss in Chapter 4 of our book, due to be published at the end of this month.

One of the big themes we have covered this week is China and what it might do to protect its economy from weaker demand in the West.

Premier Wen Jiabao said earlier this week that it was important to balance growth and inflationary expectations. He noted that price rises had to be slowed, but his statement omitted the previous emphasis on tackling inflation as being a top priority.

"I think we might see targeted measures in certain regions to help the small and medium-sized enterprises," a senior executive with a major polyolefins producer told us this week.

"But the government will have to be careful to structure these measures so that the money goes to SMEs and not to the bigger companies and the speculators."

This article from the China Daily suggests that help for the SMEs is probably on its way.

And perhaps interest rates and liquidity restrictions will be eased across-the-board because, a we have said, dealing with inflation appears to no longer by China's number one priority.

Beware of misleading reports of all being right in the chemicals world as a result of China adjusting economic policy to support is manufacturing industry.

Chemical prices might temporarily recover, as will commodity prices in general and stock markets, but this will constitute nothing more than a collection of bouncing dead cats. China cannot stimulate its economy on the same scale as 2008 because of the problems left behind by this earlier huge injection of cash into its economy, as we discussed earlier this week.

And every measure taken to help China's manufacturers will only weaken manufacturing industries in the West as China seeks to export its way out of trouble.

This could create trade tensions, even tariff barriers.

Exporters of chemicals and polymers to China might enjoy temporary benefits from new measures to support manufacturing industry.

But chemical manufacturers in their home markets will lose out as China floods Western countries with cheap, government-subsidised manufactured goods. An example could be a sharp rise in auto exports from China, as Paul Hodges discusses in this post from his blog. 

The unavoidable problem is that total global demand for chemicals and polymers is down and will remain depressed for many years.

by Paul Hodges

The Chemicals and the Economy blog was almost alone at the end of April, when it launched the IeC Downturn Alert. Today, its fear that we are close to a global downturn has become mainstream.

As the American Chemistry Council report, "fears of another global recession are rising with several noted forecasters raising the chances of another recession to one‐in‐two".

The disfunctionality of financial markets is clearly a major factor in boosting chances of a downturn:

• 75% of US equity trading in August was High Frequency Trading
• This is traders playing computer games, in micro-seconds.
• It has no value whatsoever, and clearly destabilises markets
• But Wall Street-friendly regulators continue to excuse it

In terms of chemical markets, most players have sensibly retreated to the sidelines, as ICIS pricing comments note. The chart shows how prices have moved since April, when IeC Downturn Alert launched:

Naphtha Europe (brown dash), down 16%. "Factors dampening activity include the ongoing summer holiday season, and crude oil price volatility".
Brent crude oil, down 15%.
S&P 500 Index (pink dot), down 14%.
HDPE USA export (purple), down 13%. "Prices were assessed notionally higher based on price ideas from traders".
PTA China (red), down 7%. " Most buyers were pessimistic about the market outlook."
Benzene NWE (green), down 3%. "Benzene has been incredibly resilient to the volatility seen for crude."

by Paul Hodges

China's credit bubble is one of the largest the world has ever seen. This is true not only of its total size, but also in relation to GDP.

The history of credit bubbles is very clear about what happens next. Anyone who has followed the US subprime lending disaster will know the script already. But the blog worries that too few companies seem to be learning from history, and making the necessary contingency plans.

The great analyst of credit bubbles is Hyman Minsky. We described his insights in Chapter 2 of 'Boom, Gloom and the New Normal':

• Long periods of stability lead to complacency
• Lenders no longer check whether borrowers can repay the loan
• They are instead convinced that capital values will always rise
• They therefore believe foreclosed assets can be sold at a profit

China is now going through the late stages of this cycle. The 'Minsky Moment' is therefore getting closer. This is when prices begin to fall, and lenders suddenly panic about the real value of their assets. Liquidity dries up, and there is a sudden rush for the exits.

The chart shows how monthly borrowing has grown since 2008. The big jump began in Q4 2008 when the government ordered banks to increase lending, to compensate for the loss of exports:

• Monthly lending averaged RMB 386bn ($57bn) in Q1-Q3 2008 (red line)
• It then jumped 24% to RMB 477bn in Q4
• 2009 saw it jump a further 67% to RMB 796bn (brown line)
• 2010 saw a small decline to RMB 660bn (green line)

Latest figures for July show very little change in 2011 (purple line). Monthly lending has so far averaged RMB 667bn.

The sums involved are huge. Lending doubled in 2009 to $1.4trn, around one third of total GDP. Most of this money went into housing, in the belief that 'the government would never let property prices fall'.

The rise in lending was great news for the chemical industry. Demand for the most basic polymer, polyethylene, jumped 53% between 2008-10.

But just as Minsky would predict, the government is now worried about what happens next. Bloomberg reports it is introducing new restrictions "to guard against the risk of bad loans should property prices fall".

Coincidentally, the Financial Times notes that "China's debt burden is far higher than it likes to admit". It adds that "people forget that it undertook its fiscal stimulus package through the banking system, rather than by issuing public debt".

Credit bubbles are like balloons. They expand whilst more air, or debt, is pumped into them. But as soon as this stops, they begin to deflate.

Of course, 'this time may be different'. But companies cannot afford to plan on the basis of wishful thinking.

China's own central bank is now planning for a possible property market downturn. Prudent chemical company Boards would be wise to follow its example. The risk of a downturn in China's chemical demand growth is becoming too great for comfort.

by Paul Hodges

Last year, Warren Buffett paid only $7m taxes, just 17.4% of his income.

Now he says rich Americans, including himself, should pay more, in order to help reduce US debt. He notes that:

• In 1992, the wealthiest 400 Americans paid 29.2% tax on $16.9bn income
• In 2008, they paid just 21.5%, on incomes of $90.9bn

And he adds:

"People invest to make money, and potential taxes have never scared them off. And to those who argue that higher rates hurt job creation, I would note that a net of nearly 40 million jobs were added between 1980 and 2000. You know what's happened since then: lower tax rates and far lower job creation."

Buffett says the US should "raise tax rates immediately on taxable income in excess of $1 million, including of course dividends and capital gains".

This would have impacted just 236,883 households in 2009. He would also like an extra tax on the 8274 households who earn $10m or more.

It will be interesting to see if Congress follows his advice.

by Paul Hodges

The blog is a great believer in the predictive power of the retail sector.

Wal-Mart and Tesco were the first to spot the downturn in the summer of 2007, a year before it became obvious to everyone else.

Now Wal-Mart's problems are providing some important messages about how companies need to adjust their strategies to survive as we transition to the New Normal:

• Financially-driven strategies are a dead end
• Focusing on Gross Margin loses sales

As the chart from the Wall Street Journal shows, Wal-Mart has increased Gross Margin consistently since the Great Recession began. But it has also suffered 9 quarters of declining US same-store sales. This is the key metric for any retailer.

As Wal-Mart's COO, Bill Simon has told analysts, "I think the gross margin could be an impediment to sales growth." The financial focus meant less attention was paid to customers' changing needs:

• Wall Street loved Wal-Mart's removal of low-priced, low-margin items
• But customers simply went elsewhere for their bargains

In turn, this has led to a bigger problem.

Many consumers are now living from pay-check to pay-check. They simply can't afford to buy large sizes, even though these offer better value. As a result, they prefer the 'Dollar Stores', where they can cover their basic needs for the week ahead.

Wal-Mart is still the world's largest retailer. But it will now have to move quickly, to catch up. Chemical company boards need to review their own strategies, to ensure they are not making the same mistake.

by Paul Hodges

Today's 419 point fall on the Dow Jones Average, and $6/bbl fall in WTI crude oil prices, may not be just another example of the wild volatility that has come to seem normal in financial markets.

It may also mark the end of an era.

Since 1994, the US Federal Reserve has used all its resources to support the stock market in times of strain. This took it well beyond its official mandate of fighting inflation and supporting employment.

Instead, it meant interest rates were lowered, and liquidity provided, any time the market experienced a major sell-off. It created the dot-com bubble in 1999-2000; the subprime housing disaster; and more recently the bubble in energy and commodity markets.

Today, for the very first time in 15 years, 2 senior US Federal Reserve Governors have spoken out against this policy:

• Philadelphia Fed chief Charles Plosser said taking action after stocks tumbled "signalled that we are in the business of supporting the stock market."
• Richard Fisher, the Dallas Fed chief, said the Fed "should never enact such asymmetric policies to protect stock market traders and investors."

It remains to be seen whether this change of policy becomes permanent. There are very powerful forces, not only on Wall Street, ranged against it. Will the Fed really do nothing, if today's falls continue next week?

But if it does, then financial markets will be quite different in 5 years time:

• Markets will not be protected from their own follies
• Investors who cannot evaluate credit risk will lose money
• Commodity prices will be driven by fundamentals of supply and demand
• Computerised high frequency trading will disappear

Unfortunately, it is almost certain that the path back to reality will be extremely painful. 15 years of Fed 'bubble-blowing' will take a long time to put right. But if Plosser and Fisher really mean what they say, then Fed policy is indeed headed Back to the Future.

I've enjoyed writing the Asian Chemical Connections blog this week, whilst John and Malini have been on a well-deserved holiday.

If you would like to continue reading my posts, please visit ICIS Chemicals and the Economy blog, by clicking the link

Paul Hodges

GDP growth figures in Europe and the USA have shown virtually no growth in Q2, whilst China is clearly also slowing fast.

It is hard to believe that even today, some analysts are still arguing that a new Supercycle is now underway.

The blog remains convinced that we are in transition to a New Normal, not a new Supercycle.

Next week sees the publication of chapter 4 of its new eBook, 'Boom, Gloom and the New Normal', co-authored with Paul Hodges.

This Chapter is titled 'Where we are Headed'. It offers 10 predictions about how the world will look in 2021. We believe it will become essential reading for anybody who is concerned about where we are headed in the next few years.

By Malini Hariharan

Asian petrochemical markets continue to face downward pressure on concerns about the health of the global economy. Market sentiment for most products remains poor with buyers in no rush to resume purchases.

Polyolefin markets closed last week on a weak note. Prices of low-density polyethylene (LDPE) and polypropylene (PP) dropped $10-40/tonne last week across the region, reports ICIS pricing. Linear-low density PE (LLDPE) and high-density PE (HDPE) prices were stable but buying sentiment for the products was weak.

There was little support coming from ethylene and propylene markets. Propylene prices were assessed higher for the week on tight regional supply but buyers stepped back on Friday after a sharp fall in equities and crude oil. Ethylene dropped $10-40/tonne in Southeast Asia with buyers unwilling to enter markets at a time of great uncertainty.

Benzene and styrene markets were also similarly affected with prices of both proudcts sliding $20-40/tonne.

The only exceptions to the trend were paraxylene (PX) and purified terephthalic acid (PTA) as news of an impending shutdown of Fujia Dahua's 700,000 tonnes/year PX plant spread in the market. The company is at the centre of widespread public protests after a typhoon hit a wall at the plant site. This raised fears of a PX spill prompting local residents to demand closure and relocation of the plant.

However, the strength in the PX and PTA markets is under question given the global economic uncertainty. The news today from the Asian stocks markets is bleak with declines recorded at all major bourses today. Brent crude dropped by more than $3/bbl on news of Libyan rebels capturing Tripoli raising hopes of an end to the country's civil war and a resumption of Libyan oil exports.

If the trend continues, optimism will be a scarce commodity in petchem markets this week.

By Malini Hariharan

Asian polyolefin producers confront yet another challenging week.

The macro environment suggests that implementing price hikes for September cargoes will be difficult. Stock markets around the world continue to be jittery with concerns about a US recession and debt problems in Europe still in the forefront.

Support from oil also appears uncertain. Prices softened yesterday in reaction to developments in Libya where rebels have finally captured Tripoli. The expectation is that Libya will quickly resume oil exports although this may take months to materialize as damaged infrastructure will first need to be repaired.

China's manufacturing story continues to disappoint. The preliminary HSBC China Manufacturing Purchasing Managers Index for August at 49.8 is higher than analyst expectations and above the July figure but is below 50 indicating a contraction in activity.

The country's vice commerce minister has acknowledged that China's foreign trade is facing slow external demand and pressure from surging costs.

Polymer plant turnarounds in Northeast Asia are expected to keep product availability under check and producers will probably be banking on this factor to drive price stability. In polypropylene (PP), producers will also be looking at the strength in propylene prices which were up $20-40/tonne last week.

But what matters in current markets is sentiment which is still very weak. Polymer buyers are understandably in no rush to make large volume purchases. And only the very brave traders will be willing to take a long position.

"Buyers are very hesitant; crude is down and there will be more price corrections if crude continues to fall," admits one producer.

Polyolefin prices have fallen by $30-50/tonne in the last two weeks, a swift correction to the five weeks of gains recorded since early July. Producers will be very lucky if prices can be maintained at current levels.

By Malini Hariharan

Indonesia's sole cracker operator Chandra Asri faces yet another ownership change with Singapore's Temasek Holding reported to be looking at divesting its stake in the company.

The news report in the Wall Street Journal said several companies from Thailand, South Korea and Japan have shown interest in Temasek's stake, including Thailand's PTT Chemical and Siam Cement and South Korea's Honam Petrochemical Corp.

The Thai companies have yet to confirm their interest but a Honam source admitted that Chandra Asri is one among various foreign companies being studied for possible investment.

Acquisitions are an important part of Honam's expansion strategy and company sources have in the past confirmed that opportunities are being studied.

Taking a stake in Chandra Asri makes sense as the cracker already provide some ethylene to its two polyethylene plants in Indonesia. These plants came to Honam via the Titan Chemical acquisition that it completed last year.

It would also strengthen Honam's position in the Indonesian industry. Earlier this year, the chairman of the Lotte Group, parent company of Honam, had announced plans for new $3-5bn cracker project in the country.

But Honam is likely see competition from the Thai players. Speaking to a Thai newspaper the PTT Chem's ceo did not confirm interest in Chandra Asri but acknowledged that Indonesia is an important target market.

In an interview to the blog earlier this year, PTT Chem's ceo had said that the company was keen to expand its regional presence via acquisitions. It had last acquired a 50% stake in Cognis Oleochemicals in 2008.

Replacing a financial investor with an experienced petrochemical producer should help Chandra Asri quickly implement its expansion plans. It operates a 600,000 tonnes/year cracker at Cilegon. Downstream facilities include two PE plants, three polypropylene (PP) plants and two units for styrene mononer.

The company, which merged with Tripolyta in January this year, has announced plans for expanding the cracker to 1m tonnes/year and adding to its PE capacity. It also recently issued a contract for construction of a 100,000 tonnes/year butadiene plant.

Temasek had acquired a 50% share in the Chandra Asri back in 2006 from several shareholders, including trust fund Commerzbank International Trust Singapore. But it has since then diluted its stake to 22.9% and is said to be expecting $400m for this. The rest of Chandra Asri is in the hands of Barito Pacific.

By Malini Hariharan

Operations at the Formosa group of companies in Mailiao, Taiwan, are slowly resuming but the group faces an uphill task in regaining public and government confidence in its ability to run plants safely.

There have been seven accidents in the last twelve months with two fires at the Mailiao complex in July. The latest incident was a fire at a propylene recovery unit at end-July which forced Formosa Petrochemical to shut its refinery. An accident in May led to the shutdown of its No1 cracker and an aromatics unit operated by Formosa Chemicals and Fibre Corp.

The reasons for these accidents are still being studied but there are indications that the Formosa companies slipped in maintenance of the facilities. A shortage of manpower could have been one of the reasons for this, said Jack Shieh, general manager at the Petrochemical Industry Association of Taiwan (PIAT), in an interview with ICIS news yesterday.

The Formosa group will now need to conduct monthly inspection at 70 plants, pipelines and other equipment at the Mailiao complex, a heavy burden as the exercise would require considerable money and also manpower.

In addition to this, all the plants will have to be shut within a year for maintenance. The sequence of shutdowns will be determined based on Taiwan's domestic requirement of the various products.

Meanwhile, Formosa Petrochemical has restarted the No1 crude distillation unit and the No2 unit is due to start at end-August, reports ICIS news. The No3 unit is like to resume production in early September.

This would enable the company to quickly restart one of its two residual fluid catalytic cracker (RFCC) units which are together capable of producing 650,000 tonnes/year of propylene. The second unit is likely to remain offline until mid-September.

By Malini Hariharan

The blog has been reading with interest a recent report about the Energy Information Administration (EIA) cutting its estimate of the Marcellus shale gas reserves by 80% following a recent study by the US Geological Survey (USGS).

The USGS has estimated that the Marcellus field, which stretches from New York to Virginia, contains only about 84 trillion cubic feet (tcf) of gas, significantly lower than an EIA projection of 410 tcf that was made in April this year.

Differing methodologies are probably responsible for the widely divergent numbers by two government agencies

The EIA focused on reserves and relied on future projections, including technology improvements that would allow more gas to be produced. On the other hand, the USGS study focused on resource estimates (the amount of gas that is in the ground and can be extracted) but did not look at how high gas prices prices will have to rise justify drilling.

Both methodologies have their limitations but the EIA's decision to revise its assessment suggests that its numbers were inflated. Therefore questions must also be asked about estimates made by the EIA on other fields in the US, which have prompted every major US petrochemical producer to plan new ethane cracker projects. In its April study the EIA has estimated that the US has 1,744 tcf of technically recoverable gas of which 550 tcf is shale gas.

Shale gas supporters have not been discouraged by the recent development and have argued that the USGS number is higher than its estimate made in 2002. And even at 84tcf the Marcellus field is still much bigger than other fields in the US.

But in the overhyped world of US shale gas where large sums of money are being made on promises of immense riches deep under the ground, the USGS report confirms that there is a great deal of risk associated with the business.

By John Richardson

ALL of us would love to be able to see into the future. Chapter 4 of our new eBook, 'Boom, Gloom and the New Normal', does just this.

It offers 10 predictions about how the world will look in 2021, which are :

1. Young and old will be focused much more on 'needs' rather than 'wants'.
2. A major shake-out will have occurred in Western consumer markets.
3. Housing will no longer be seen as an investment.
4. In emerging economies, companies will have recognised that the phrase 'middle-class' doesn't define people with Western income levels.
5. Chemical markets will have become more regional.
6. Western countries will have increased the retirement age beyond 65 to reduce unsustainable pension liabilities.
7. Taxation will have been increased to tackle the public debt issue.
8. Social unrest will have become a more regular part of the landscape.
9. Consumers will look for value-for-money and sustainable solutions.
10. Investors will be focused on 'return of capital' rather than 'return on capital'.

The New Normal offers the potential to restore a greater balance to society if companies refocus their creativity and resources on real needs.

There is also an urgent need for companies to focus on basic research to tackle these needs, rather than simply taking government grants to deploy old technologies.

The transition to the New Normal will be a difficult time. The world will be less comfortable and less assured for many millions of Westerners.

The wider population will find itself following the model of the ageing boomers, consuming less and saving more. Rather than expecting their assets to grow magically in value every year, they may find themselves struggling to pay-down debt left over from the credit binge.

More engineers and more scientists are going to be required to create the new products that will serve needs arising from the megatrends.

We will also need to find politicians with sufficient vision to sell the need for hardship and long-term struggle. This will be difficult, given that voters have become used to having all their wants met via quick 'fixes' of increased debt.

We could instead decide to ignore all of this potential unpleasantness.

But doing nothing is not a solution. It will mean we miss the opportunity to create a new wave of global growth from the megatrends. And we will instead end up with even more uncomfortable outcomes.

Free Download Options for Chapter 4:

Click here for a two-page summary

Click here two download the full chapter

Click here for a video interview with co-author of the book, Paul Hodges 

By Malini Hariharan

The Chinese government's efforts to control inflation are showing no signs of yielding results.

The National Development and Reform Commission (NDRC) admitted yesterday that the government was finding it difficult to achieve its full-year inflation target of below 4%. It cited high global commodity prices as a major factor driving up local production costs.

This added to earlier official warnings that the annual inflation target would likely be missed.

Consumer price inflation in July hit a 3-year high of 6.5% while the producer price index jumped 7.5%. Food costs soared 14.6% as the price of pork, a staple food, increased by nearly 57%.

Although some analysts expect a slight easing in inflation from August the government does not seem to share these expectations.

Late last week the People's Bank of China reportedly took fresh measures to tighten liquidity, asking banks to include their margin deposits (collateral deposited in banks against LCs and letters of guarantee) in the reserves required to be kept at the central bank. Analysts expected this move to reduce liquidity by about Yuan 800-900bn ($125-141bn).

This could further hamper chemicals trade. As we have discussed before on the blog, chemicals traders have struggled since late last year to source credit.

New reserve requirements would also put more pressure on small and medium-sized enterprises (SMEs) which make up the bulk of China's chemicals and polymer buyers.

The deputy director of the China Association of Small and Medium Enterprises warned in this interview that if inflation and power shortages continue, 40% of SMEs in Zhenjiang would go bankrupt next year.

This places the government in a difficult position. On the one hand liquidity controls have become a must to tackle inflation and on the other hand SMEs, the lifeline of the country, need to be supported.

Some economists think that the government may take measures to ease credit to SMEs, as has been rumoured in chemicals markets for several weeks.

But any such measures would have to be carefully targeted and well-policed, a sales and marketing executive with a global polyolefins producer told the blog in July.

It is often the case in China that lending intended for one purpose gets diverted elsewhere. For example, LCs opened to ostensibly buy polyethylene (PE) are being used to complete property deals because of restrictions on lending to the property sector, the senior source added.

Deutsche Bank's economist believes that the government may start loosening monetary policy in the fourth quarter as growth in the US and Europe slows and global commodity prices start easing.

But not everyone is convinced and recent developments suggest that a loosening of the country's monetary policy is unlikely to take place soon.

By John Richardson

SEPTEMBER is going to be a cruel month when the West returns from the summer holiday period and the extent of damage to chemicals and polymer demand becomes more apparent.

In Asia, temporary supply constraints in polyolefins, paraxylene (PX) and styrene monomer (SM) have disguised the damage. These constraints will at some point ease, leading to a clearer picture of where the industry stands.

Gone will be the SuperCycle theory, for good we feel, and gone will be some if the projects announced to take advantage of this cycle (more diplomatically, they will be "shelved" but in reality investments will be cancelled).

Companies will then begin to deal with the New Normal, which we discuss in Chapter 4 of our e-book.

For the last three years, ever since the Lehman Bros crisis, we have been living on borrowed time.

The US Fed's quantitative easing programmes created lots of liquidity and the illusion that the global economy was back to normal. But as we discussed in Chapter 3 of our book, most of the Fed money was wasted at it ended up in the hands of speculators in oil and other commodities.

Ironically, the Fed's policies have caused further long-term damage to the economy by driving crude prices to unsustainable levels. This has placed additional pressure on hard-pressed Western consumers as they struggle with depressed employment prospects, high debt levels and reduced support from governments as sovereign debt is reduced.

In emerging markets, the Fed policy has contributed to inflation and interest rate hikes.

China's enormous economic stimulus package - introduced in late 2008 - is another reason why we have been living on borrowed time.

Hindsight is a wonderful thing, but it now seems obvious that the 53% increase in polyethylene (PE) demand in China in 2008-2010 had to be unsustainable.

A fall in demand growth was inevitable, but what few of us predicted (including the blog) was that PE growth would turn negative this year. The same is likely to apply to lots of other chemicals and polymers.

The reason for growth turning negative is the damage caused by China's stimulus package.

As with the Fed policy, China's economic stimulus has contributed to inflation through, for example, higher property prices.

The pace of new lending was so rapid in 2008-2010 that misallocation of capital would have been inevitable in any economic system. In China's system, bad lending is likely to have been on a scale that threatens its long-term financial stability - as a result of corruption and the cosy relationship between the state-owned banks and state-owned enterprises (SOEs).

Beijing is involved in a multi-year effort to redress the damage caused by government spending.

China's banks were under a lot of central government pressure to accelerate lending during 2008-2010. The easiest way to deal with this was for the banks to lend to their mates in the SOEs which then used the money to invest in lots of new industrial capacity (local government officials will have been motivated to support these investments as a means of achieving GDP growth targets set by Beijing).

Electricity consumption reached a new record high in July, according to fellow blogger Paul Hodges.

This suggests that industrial capacity continues to be commissioned as global demand weakens. The danger is that China will seek to export these surpluses at very competitive prices, resulting in a global trade war.