September Will Be A Cruel Month



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.

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