Managing European Volatility

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By John Richardson

THE blog was in Amsterdam this week for an ICIS training event involving delegates who were European chemicals and polymer buyers.

They had one overriding question for us: “How on earth do we manage the extreme volatility in our raw-material costs?”

The answer we gave was to not confuse oil-price driven temporary surges in demand as a genuine improvement in economic fundamentals.

As we discussed yesterday, this is far easier said than done. The blog is grateful that it is not a purchasing manager.

We provided some market intelligence on where we thought “real demand” was heading, primarily, of course in China.

And we pointed delegates to chapter 6 of  our e-book, Boom, Gloom & The New Normal, published last November, where we raised the importance of good people on the ground, able to spot the shifts in final consumer markets that can often be masked by the extreme volatility of crude. As economies weaken, we think it would be a mistake to cut back on this cost.

We also quoted a Hong Kong-based polyolefins industry executive, who last month told us: “The key to success is to stay on top of developments in the economy, society and politics and constantly think how these are changing and how you need to reposition your business.

“You need lots of good people on the ground who can detect micro changes at the level of your customers that can become major economic and social trends.”

And we hinted that the delegates should disregard the nonsense talked by financial markets – for example, after the August bond-buying decision by the European Central Bank. At that time, the view being peddled by investment banks was that the new ECB policy would give Europe more time to solve its problems.

But as this week’s events in Spain have illustrated, the underlying social, political and therefore economic problems that are at the root of the European crisis haven’t gone away.

Perhaps we should have also offered the delegates one other piece of advice: Lobby politicians in an effort to force through better regulation of oil and other commodity markets.

This week came the good news that Germany is planning to impose new legislation on high-frequency trading.

An example of extreme volatility in chemicals markets has been provided by events in European polypropylene (PP). As my colleague Linda Naylor wrote in this excellent article:

*European PP buyers paid increases of at least 9 percent in September, but are now waiting for lower October offers.

* PP volatility has been mainly down to movements in the naphtha market. During the week ending 22 June, naphtha slumped to a low of $683/tonne but it peaked at $1,005/tonne during the week ending 14 September. Its high point in 2012 was in the week ending 2 March when it reached $1,083/tonne.

*”I am seeing my suppliers next week,” said one PP buyer, “but it’s not to talk about pricing, it’s to talk about volatility. We just can’t manage like this.”

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