The Risks Of Being An Outlier



By John Richardson

THE blog has been mystified throughout this year over why senior industry executives appear to remain “in denial” over the weakness of global petrochemicals markets.

Time and again we have heard the comment that the falls in demand were only the result of de-stocking.

The public mood of the industry has soured a little of late, but still seems to be predicting a reasonably strong 2012 and a guaranteed “business as usual” future beyond next year.

In private, though, everybody the blog met at last week’s Gulf Petrochemicals and Chemicals Association conference in Dubai was talking about a very difficult year ahead.

But even during these private discussions, confidence was expressed that European leaders would finally get their act together and resolve the Eurozone crisis. This was perhaps because nobody was in the mood so close to the holiday season to contemplate the unthinkable – the collapse of the Euro. As the great poet TS Eliot wrote, “Humankind cannot bear very much reality”.

What of this public face of the industry? Why has it remained so stubbornly optimistic, despite many petrochemical markets showing signs of persistent weakness since March as a result of deep-seated, structural economic problems, such as those we have tracked in China?

One observer, who shares many of our concerns over 2012 and beyond, offered a rather cynical explanation.

“Nobody wants to be the first chemicals company in any particular sector of the industry to issue a profit warning, as history has shown that the first company to cut earnings forecasts suffers the sharpest decline in its share price,” he said.

“It is better to wait until somebody else takes the plunge and then when everything turns bad, the best strategy is to blame forces beyond your control – i.e. “we didn’t see this one coming”. Investors tend to be reasonably forgiving if they think that a particular company, or sector of chemicals, is suffering from forces beyond its control.”

The constant focus on quarter-on-quarter results and share prices also make it difficult for companies to develop a longer-term perspective, added a second industry observer.

“The reason is that investors often have a very short-term perspective, particularly in the US and Asia, but less so in Europe. They don’t care about the longer-term outlook, provided they can make money over a quarter or two,” he said.

Chemicals analyst also tend to avoid taking the risk of being the first to warn of sector-wide declines, added our first industry observer.

“It is a very risk strategy to be an ‘outlier” and warn about a sector-wide decline. The reason is that chemicals stocks tend to be very volatile on the upside – e.g. a bout of mild restocking can easily drive stocks as much as 40 percent higher.

“And so, again, if a chemicals analyst is right about the fundamentals but misses any of these rallies, she or he can be out of a job.

“It is better to stick with the pack, with consensus optimism. That way if everything goes wrong, everybody suffers and you can once again say ‘none of us saw this coming.’ “

Over the last decade, a short-term focus has been fine because of “pent-up demand”. Every time economies have struggled, central banks have cut interest, or otherwise stimulated growth, and we have been back to the races.

But now, because of the once-in-a-generation changes taking place in the global economy which we outline in our e-book Boom, Gloom & the New Normal, companies have to start outlining plans for the next 5-10 years.

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