Asian Chemical Connections

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 Source: FT Beyondbrics

By John Richardson

A fascinating article by the academic Anil K Gupta and consultant Haiyan Wang offers further support to our long-running argument that the future will not necessarily be the same as the future, when it comes to China.

The blog continues to be alarmed by the degree of complacency over the world's most-important chemicals market.

Everyone, just about, now appears to accept that 2011 and 2012 were write-offs, but some company executives and market observers seem to be still clinging to the notion that the world will soon return to normal.

The article includes the following arguments:

In China's new era of slower growth, big infrastructure projects won't play as important a role in the economy. Fixed-asset investment in China grew from 34 percent of GDP in 2000 to over 44 percent in 2011--an average annual growth of 12.7 percent, relative to a 10.4 percent rate of growth in GDP during this period. In 2012, however, there probably won't be any growth, with fixed-asset investment likely to be the same as last year's. Looking ahead, we predict not more than a mid-single-digit growth rate for this decade and beyond.

Even if China were to remain extremely competitive or become even more competitive, a big increase in export share could happen only via far greater shipments to the world's big economies such as the U.S., Europe, Japan, Brazil, and India. It is hard to believe that leaders of any of these big economies will choose to commit economic suicide. Even on political grounds, we thus deem it impossible for China to increase its market share much beyond the current level. In short, we should expect China's exports to grow at half the pace of that in the last decade.

By John Richardson

CHINA'S polyethylene (PE) market, along with probably most of the rest of petrochemicals, continues to disappoint as the above chart illustrates. Overall demand in 2012 (red column) was up by just 1 percent in January-August 2012 compared with the same period in 2010.

One, or perhaps a combination of both of the following factors, as fellow-blogger Paul Hodges pointed out yesterday, explains why PE growth is so much below the expansion in overall GDP:

*The official GDP numbers greatly underestimate the extent of the slowdown.

Inventories continue to clog-up up the system from resins all the way down to finished goods after the great speculative binge of 2008-2010.

Meanwhile, in a further indication of economic weakness, the official Chinese manufacturing purchasing managers' index came at 49.8 for September, missing economists' expectations of a recovery to 50.1 from 49.2 in August.

By John Richardson

RISING labour costs will impact the viability of US petrochemicals projects as a result of the surge in overall hydrocarbons construction activity, an industry source told the blog.

"Unless companies lock-in their labour costs fairly quickly, before the big surge in activity ahead of numerous cracker and derivatives start-ups planned for 216-2017, they are going to have major problems," he warned.

"Pipe layers are already commanding six-figure salaries and plant operators in remote locations are earning $200,000 a year. Companies are being forced to build retention payments into contracts."

But despite the expectation that ethane prices will increase as a result of gas-supply companies rationalising production to recover profitability, the source believes that the ratio of gas to oil prices will still remain very healthy over the long term.

"The gas companies are already making adjustments to production following the decline in pricing earlier this year to a record-low of below $2.00 mBTU," he added.

"However, crude isn't going to fall much below $90 a barrel - the minimum price that Gulf-region countries such as Saudi Arabia need to cover social costs, such as job-creation schemes. As a result, I don't believe there will be any big recovery in the viability of liquids cracking."

Nevertheless, given rising labour costs, and all the uncertainties over demand, the source believes that only around two of the numerous ethylene expansions being planned in the US are certain to go ahead.

Any bets on which of the above projects will eventually see the light of day?

By John Richardson

THE big hope is that once China returns from its National Holidays (1-7 October), petrochemicals markets will enjoy a big and sustainable recovery.

It is not going to happen.

Throughout this year, the hope has been that the recovery is just around the corner. People have argued that deteriorating economic data has been a good thing, in that it has given the central government a stronger motive to re-stimulate the economy.

But these views fail to adequately take into account that China is going through "secular" changes in its economy that will take several years to play out.

There is a real possibility, as one recent report has suggested, that China's real GDP growth will range between 4-5 percent per annum in 2013-2016.

We also have to worry about consistent reports of enormous inventories of manufactured goods, resulting from overproduction and overcapacity across many Chinese industries. These stock levels could take several years to work-off.

Plus, of course, there are all the uncertainties over the leadership transition. 

And there can be no return to the "Supercycle" era, when growth was supported by excessive credit availability and favourable demographics in the West that ensured a ready market for China's exports of finished goods.

The new China is going to involve a painful and long adjustment for the global chemicals industry, where "solutions" will matter more than simply shifting as many plastic pellets as possible to China to be processed and re-exported.

It will be about providing chemicals and polymers to solve China's environmental crisis - for example, water shortages - for those companies who are not to the extreme left of the cost curve.

Meanwhile, the Middle East will continue to take the lion's share of commodity exports, as China also raises its commodity petrochemicals self-sufficiency through, for example, 10m tonnes/year of new coal-to-olefins capacity.

Source: http://www.engadget.com/2012/09/23/foxconn-taiyuan-riot/

By John Richardson

THE riots and a strike at Foxconn factories in China point to demographic changes that have major implications for the country's economy.

China's one-child policy means that it can no longer depend on a constant flow of compliant workers from the countryside prepared to accept exhausting and monotonous working conditions, says David Pilling, in The Financial Times.

According to the Asian Development Bank, between 1975 and 2005 China's working-age population nearly doubled from 407 million to 786 million between 1975 and 2005, according to the Asian Development Bank.

"The actual leap in productive workers was greater still, since the population surge closely coincided with Deng Xiaoping's economic reforms, which released tens of millions from the countryside to work in urban factories," adds Pilling.

"That turned people who had been surplus labour on inefficient farms into productive members of the global workforce.

"The good news is that this massive increase in labour input goes a long way to explaining China's remarkable 30-year growth record.

"The bad news is it's over. China's population has been ageing since 2000, according to UN definitions. From 2015, when the working-age population will start to shrink, the demographic dividend China has enjoyed for so long will crank into rapid reverse.

"This is all happening much quicker than in other countries that trod a similar development path. Yolanda Fernandez Lommen, in a 2010 ADB working paper, calculates that China started ageing when its real per capita income was $4000. That compares with $14,900 in Japan and $16,200 in South Korea."

As China ages before it becomes rich, the horrors of selective-selective abortion have created another workforce problem (Dudley Poston, a sociologist at Texas A&M University, says that 160 boys are born for every 100 girls. The natural gender balance at birth is 105 boys for every 100 girls).

"A sea change is rippling through many Chinese factories. A workforce once dominated by women is now increasingly male," writes the author of The China Price, Alexandra Harney in this Bloomberg article.

"China's one-child policy chips away daily at its competitive advantage in manufacturing for export, first by choking the supply of labour of both sexes, then by restricting the flow of women into factory jobs. The result is a more restive male workforce, frustrated by crude management," adds Harney.

"Chinese parents, wealthier today than a decade ago and wiser about the risks of sending a teenage girl alone across the country to work, are less inclined to steer their children into factory jobs.

"I have met young Chinese women in countryside towns - where a decade ago most girls would have done at least one turn in a coastal factory - who say that 'our generation doesn't work in factories.'

"Nor are their parents as impressed by a prospective husband for their daughter if he works in what many see as a dead-end factory job. Professor Poston estimates that 40 million Chinese men may never find a wife. Less-educated, lower-income men struggle the most."

These men, wired to the outside world and therefore acutely aware of their relative poverty, are becoming restive - hence, the Foxconn protects and their willingness to take to the streets during the recent protests against Japan.

China's new leadership, when it is eventually in place, must tackle the corruption and nepotism that is a further source of resentment in the country's factories - i.e. that promotion is based on "who you know, rather than "what you know".

And if China is to avoid major social unrest, and escape the middle-income trap, more money and effort needs to be devoted to training workers so they can progress to higher-skilled and more rewarding work.

But can this happen, given that "vested interests" might well result in the forces of conservatism winning the current leadership struggle?

By John Richardson

AN interesting new report from Morgan Stanley underlines what we have been hearing about Chinese chemicals demand.

The investment bank writes:

"We returned to China and offer a revised message versus our trip last year. Instead of a 'pause" in growth', we now see a structural slowdown. China is in the midst of a transition from basic chemicals blighted by overcapacity to an increased focus on R&D and innovation to grow in speciality chemicals.

"We met with 18 companies and associations in China. Underlying chemical industry growth is under pressure as the Chinese chemical industry rebalances following a number of years of stimulus-driven growth in basic chemicals that has led to overcapacity and low levels of profitability.

"There is a deteriorating growth outlook across the Chinese chemical industry. The CPCIF (the China Petroleum and Chemical Industry Federation) highlighted chemical industry growth of 12.5 percent in 1H12, which deteriorated to just 3.6 percent growth year-on-year in June and slowed further to 1.0 percent in July (the lowest monthly growth rate in five years).

"Although the CPCIF stands by its industry growth target of 10 percent for 2012, few companies we met with predicted a meaningful improvement in activity to year-end.

"We do not expect (further) major stimulus. With the basic chemicals industry in China suffering overcapacity in certain products, there is a need to see closures.

"No company we met with thought the new leadership would announce 2009-scale stimulus packages. Further, chemical state-owned entities were actively against stimulus, arguing that capacity surpluses need to be addressed without government support.

"A high position on the cost curve, coupled with existing overcapacity, could trigger a reappraisal of China's expansion plans in petrochemicals.

"We expect an increasing focus on R&D, innovation, and development of its speciality chemicals activities to improve chemical industry returns in China.

"However, the industry has to get through a multi-year transitional phase, which is likely to present growth opportunities for Western speciality players that already have coveted technologies."

By John Richardson

OUR e-book, Boom Gloom & The New Normal, is a set of ideas meant to challenge conventional wisdom.

Some of our ideas will need to be adapted and discarded.

But our essential point is that the New Normal represents a way of thinking as much as a set of ideas, because the world has changed irrevocably. All the evidence indicates that we will continue to inhabit a VUCA world.

The New Normal is collaborative effort, open to challenge and adaptation as there is, of course, no such thing as a "know it all" (and everyone hates anybody who pretends to be a "know it all").

Still, though, at the risk of appearing smug, we were right on China. In late 2011, we began to warn that there was likely to be litte, or no, recovery in the country's chemicals demand growth this year. We wish we had been wrong.

A good example of how ideas need to keep evolving, one of many that we plan to add to the debate over the coming weeks and months, is this Financial Times article from Martin Wolf.

Wolf, quoting a paper by Robert Gordon of Northwestern University, raises the question of whether economic growth in the West might be coming to an end.

The article argues that for most of history, next to no measurable growth in output per person occurred. The growth that did happen was the result of rising populations.

Then, from the middle of the 18th century, output per head, first in the UK and next the US, began to accelerate. Growth in productivity reached a peak in the two-and-a-half decades after the Second World War.

Thereafter, growth began to decline again despite a blip between 1996-2004 (we believe this blip was partly the result of the Babyboomer-driven Supercycle). In 2011, according to the US Conference Board's data base, US output per hour was a third lower than it would have been if the 1950-1972 trend had continued.

Why? Professor Gordon's explanation is based on the belief that growth is driven by the discovery and subsequent exploitation of technologies, particularly what he calls "general purpose technologies".

In the 19th century, for instance, the development of the internal combustion engine, domestic running water and sewerage, communications (radio and the telephone), chemicals and petroleum led to the mid-20th century productivity explosion.

Today, we are living in the age of information technology. But the professor contends that while IT is, of course, important through providing everyone with much wider access to information (which is different from knowledge!), previous waves of innovation were far more significant.

For example, running water and sewerage treatment saved countless lives and electric appliances revolutionised communications, entertainment and domestic labour.

Life expectancy soared (see above chart). Professor Gordon writes: "Little known is the fact that the annual rate of improvement in life expectancy in the first half of the 20th century was twice as fast as in the last half".

He makes the point that running water etc were "one-off" innovations in terms of their impact on Western growth. Everybody, just about, in the Western world has running water, for example, and no longer has to worry about cholera. As Wolf points out, if you had a choice, would you rather give up Facebook or running water?

In the developing world, there is obviously still huge potential for further economic growth from, for instance, connecting villages to electricity and water.

But we would add that there are two other issues to consider here:

*The relative poverty of the developing world needs to be taken into account in order to qualify the broad-brush, crude description of the "rise of the middle classes" in countries such as China and India.

*The developing world needs to rapidly develop a new growth model, based on domestic consumption, to compensate for weakness in exports to Western economies. Western economies are weak as a result of both the innovation slowdown described by Professor Gordon, and because of ageing populations.

In addition, the developed world has to find a new source of prosperity, based on creating products and services for the over-55s.

Source of picture: Indiaagrifarms

By John Richardson

Saudi Arabia continues to pursue its vision of adding social value to its hydrocarbon reserves by creating jobs. This involves going further downstream from basic petrochemicals.

"The Ministry of Petroleum has said, 'we want an end to polymer tourism' - i.e. plastic pellets leaving the Kingdom and returning as finished goods," said an industry observer.

"As a result, the $20bn Sadara petrochemicals project has a $2bn downstream Sadara Value Park, where there will be plastic processing plants.

"The Saudi government has made it quite clear that approval for plain vanilla petrochemicals projects, such as commodity grades of polyethylene (PE) and mono-ethylene glycol (MEG), will no longer ben given.

"The first 25 years of petrochemicals strategy were about making cash out of gas and the next 25 years will be about adding value downstream."

"If you visit one of these proposed plastic parks, right now you see nothing more than sand, but there is a real will to make this work.

"The cynicism is still there, but there is a growing determination to make this work, and, I think, more commitment from investors.

"It is also about getting the right incentives to make this work - for example, low-cost financing, free land, free electricity and tax incentives.

"This is a multi-pronged approach by the Saudi government. It recognises that it is not just about incentives for investors - it is also about changing the entire education system to encourage people to work behind hot and sweaty processing plants. There can only be so many 'knowledge-based workers' sitting nice, air-conditioned offices."

But with a population of only 28 million, Saudi Arabia will still face the same problem that has confronted basic petrochemicals, if it ends up creating a big plastic processing industry: The need for substantial volumes of exports.

The problem for any exporter is that it can no longer depend on China to soak up imports of basic raw materials, and components of finished goods, that are then re-exported to the West.

Thus, it will be about very careful market segmentation. Companies selling to China, and emerging markets in general, will need to focus on the megatrends that will drive growth in the future. For example, PE resin and plastic pipes for better irrigation systems.

Source of picture: Wikipedia

By John Richardson

THE eurozone hasn't been rescued by the programme of sovereign bond purchases, announced a month ago by Mario Draghi.

Wolfgang Munchau, in this excellent article in the Financial Times, explains why. This article is worth printing out and pinning on your office wall as a reminder that we are in the midst of major upheavals in the global economy that will take many years to resolve.

In summary, he writes that Germany will not after all allow Spain to dump the risk of its banks on to the European Stability Mechanism (ESM) - the eurozone's rescue fund.

That seems to contradict the June 29 eurozone leaders' summit statement, which said it was "imperative to break the vicious circle between banks and sovereigns". It was also not how the Spanish interpreted the deal.

This is how the Germans actually saw the deal:

*First, we do not really want a banking union, but if we have to have it, we would like to limit the remit of the pan-European supervisor to a few large cross-border banks.

*Second, ideally the supervisor should not be the European Central Bank (ECB); if it has to be the ECB, there must be safeguards, stronger than those proposed, to ensure that monetary policy remains independent from the banking supervisor.

*Third, there shall be no joint deposit insurance.

*Fourth, the banking union shall not deal with any legacy risk, only problems that arise in the future. The Spanish bank programme remains a Spanish bank programme.

*Fifth, the ESM should not be able to undertake direct bank recapitalisations until a banking union is fully implemented. This will take many years.

The problem in Germany is politics. Munchau adds: "Germany is not ready for a banking union. Ms Merkel never made a political case for a banking union in Germany.

"All she did was play down the implications. I would counsel readers against falling into the trap of thinking that next year's German elections will miraculously clear all the hurdles. All the various probable outcomes favour a continuation of the present policy."

So much for the hope that all that had to happen for the crisis to be resolved was for Spain and/or Greece to ask for a bailout.

Next week we will look at why eurozone austerity policies don't work.

Meanwhile, realism about the crisis seems to have been reflected in the European Petrochemical Association (EPCA) meeting in Budapest, which finished on Tuesday.

"The mood was very subdued," said one attendee, which, as my colleague Linda Naylor points out, is hardly surprising given extremely weak demand and extreme oil-price driven price volatility,

By John Richardson

THE collapse in Japanese auto sales in China, a result of the East China Island dispute, is just the first phase in what could be a very damaging economic war, the blog understands.

Phase two could be the imposition of trade barriers against Japan by an increasingly hard line Chinese leadership eager to divert attention from economic problems at home.

"China may make Japan an economic victim by keeping the Yen high. It has warned in the press that it might inflict another 20 years of economic hardship on Japan," said a chemicals industry source.

China has always sought primacy in the region, the blog understands. Its refusal to devalue the Yuan from 1994 onwards, when everyone was pressing for a devaluation, was meant to dethrone Japan.

And as long as the dispute continues, the risk of military conflict remains.

There is a further very worrying consequence: Hardliners in China are thought to be using the dispute to cement their position ahead of the upcoming Politburo leadership transition.

Hardliners are more than likely to be conservatives, anxious to prevent economic reform.

If economic reforms fail, the prospects for long-term growth do not look good.

Next month's World Aromatics conference is a must-attend event for anyone involved with the industry.

It features an impressive line-up of major players, including Saudi Aramco, the world's largest oil company, as well as Dow, Shell and the International Energy Agency. Jointly organised with ICIS, it takes place on 13 - 14 November:

Saudi Aramco aim to become 'the world's leading petrochemical company'. In Berlin, Ted Randall - Global Business Manager - will for the first time set out their plans for the aromatics business.

Dow are already a major player in the market, and are now finalising the $20bn Sadara petrochemicals complex with Aramco in Saudi Arabia. Craig Barry - Global Business Director - will update on their view of the market.

Shell, of course, have also been a major player for decades. Stephen Kinder - New Business Development Manager - will focus on the C6 and C8 value chains. He will outline their views on how companies can best position their products for future growth.

The International Energy Agency are the world's most authoritative energy agency. Capella Festa - Senior Energy Analyst - will present their insight on energy trends, with a particular focus on how these will impact aromatics.

Please click here to see the full Conference agenda and registration details.

Canton Trade Fair. Source of picture: http://www.vatti-china.com/News/83.htm

By John Richardson

IT would be nice to believe that the improved mood at this week's Canton Trade Fair represents a long-term turnaround in China's economic direction.

This reflects a 9.9% increase in overall exports in September, much higher than the 5.5% median estimate in a Bloomberg Survey.

But as Bloomberg writes: "In the first nine months, the (China-US trade) surplus widened about 38%t from a year earlier to $148.3 billion, customs data show. That may provide ammunition to Republican presidential candidate Mitt Romney, who pledges to designate the nation a currency manipulator if elected, a step the US government hasn't taken since 1994."

Ideal election fodder, obviously, but Romney or Obama will face a far bigger problem once in office: The US fiscal cliff. This is likely to end the recovery in China's exports to the States.

Further, exports to the European Union fell by 10.7% in September. The Eurozone crisis is going to take a long time to resolve.

Attendees at the trade fair also commented on how domestic demand remains weak.

This reflects deep structural changes in China's economy, and the hangover from the investment-led growth model, that will lead to several years of much-lower GDP (gross domestic product) growth.

An excellent September report from the UK-based consultancy, Simon Hunt Strategic Services, concurs with our view, and says on the GDP outlook:

"Officially reported GDP will probably come in at 7.8-8.0% this year. However, we focus on nominal growth and discount that number by an estimated GDP deflator.

"We are confident in our historical data for the deflator but have to estimate the quarter on quarter numbers for this year. Last year, the GDP deflator was 7.6%. We guess that it is now running at between 5.0- 5.5% but likely to increase in the fourth quarter.

"Our forecast for real GDP growth this year is between 5.2-5.7%."

Real GDP growth will range between 4-5% in 2013-2020, adds the consultancy.

"This is a humongous change for the new leadership to manage and will lead to intense debates and internal fights with vested interests and with local governments," continues the report.

"Global business models of multinationals are going to have to be changed and changed sharply. Some are already doing this looking to relocate capacity out of China and back into the US."

By John Richardson

A SURGE in polyethylene (PE) shipments to China has exerted further stress on a market that continues to perform exceptionally badly.

Total PE imports in August (the latest figures availabe) rose to 817,277 tonnes from 681,100 tonnes in July. Low-density PE (LDPE) shipments rose by 27%, high-density (HDPE) by 21% and linear low-density PE (LLDPE) by 15%.

"Traders have speculated on a strong recovery in demand from the second quarter of next year, when China's new leadership is firmly in place. Once they are in place, they will be able to introduce more accommodative growth policies," said an industry source.

"Meanwhile, current demand is very weak with the negative sentiment made worse by the fact that the surge in imports has gone into inventory. Local distributor stocks are very high. Demand growth for 2012 will be flat."

Asian pricing for the week ending 12 October fell by $5-45/tonne, according to ICIS pricing.

The blog thinks it is a big risk to assume that there will be a smooth transition of power once next month's selection of new Politburo members is out of the way. China will also still confront deep structural problems in 2013 and beyond that even the most competent, and reform-minded, set of new leaders would struggle to deal with. 

 By John Richardson

THE Japanese economy is at great risk from the East China Sea  dispute which, if  unresolved, could result in a long and bitter trade war with China, said several chemicals industry sources.

Japanese electronics and auto companies could even be forced to leave China, they warned.

"If the Chinese kick Japanese companies out of China, which I think could well happen, the Japanese cannot take their land, their equipment, and, most importantly, their technology with them," said one source.

"China has been very clever. It has learnt technology and sales and marketing skills from Japan, and so if the Japanese companies were forced to leave, China could easily replicate their capabilities.

"The Japanese decision to nationalise the islands, which triggered the dispute, was therefore very unwise. China has the upper hand in this relationship.

"Japanese chemicals and polymer companies would suffer very badly in the event of a trade war as they are the preferred suppliers to many of the Japanese electronics and auto producers. "

The country's auto manufacturers are attempting to compensate for a decline in China sales through boosting volumes in India.

But India is very different market with a very different set of sales and distribution challenges. In addition, the size of the Indian market is dwarfed by that of China.

Meanwhile, concerns remain over the danger that the dispute could escalate into a military conflict.

If a war does break out, some industry sources forecast that oil prices would quickly jump to $120-150 a barrel and petrochemicals prices would go up in response, before retreating on further damage to already weak demand.

This may all sound a little sensationalist, but you can trust us that this is an accurate account of one of the many worries for 2013.

By John Richardson

AN assumption is that economic reformers will win control of China's Politburo after the once-in-a-decade leadership transition is out of the way (China's new set of leaders are set to be announced during the 18th Party Congress, which begins on 8 November).

The blog believes that this assumption needs to be rigorously challenged, as this article from the New York Times (NYT) about the politician, Wang Qishan, indicates.

The "cagey" former banker has a "reputation for forcing difficult decisions through recalcitrant bureaucracies," writes the newspaper.

He is credited with helping to dismantle thousands of state-owned enterprises (SOEs) in 1998-2003, while opening the way for a boom in private enterprise.

But Communist Party insiders say that his prospects of being appointed to a top job with responsibility for vitally needed economic reforms are dwindling by the day.

Economic policy is instead expected to be left in the hands of Li Keqiang, who is due to replace Wen Jiabao as prime minister next year.

"Li is a highly educated official with an almost professorial style who is said to read voluminous economic policy reports in often minute detail," says the NYT.

China's "Princelings" have made a fortune from their close connections with the SOEs, which, despite the 1998-2003 reforms, remain a drag on the economy. For example, in February this year the Hurun Report, the magazine which publishes China's "rich list", estimated that the wealthiest 70 members of China's legislature added almost $90bn to their bank accounts in 2011.

The NYT adds that "a broad consensus exists at senior levels of the Chinese government in favour of shifting the economy toward a more sustainable trajectory.

"That trajectory could rely more on domestic demand than exports, more on consumption than investment spending, more on small and medium-size private companies than SOEs and more on creditworthiness than political connections to allocate loans from the state-owned banking system."

But someone who is cerebral doesn't seem to be the right kind of character to take on the "vested interests".

Tough decisions need to be taken and the anti-reformers sidelined if China is to escape the middle-income trap and avoid the bleak scenario portrayed by the World Bank in its February 2012 report (see above).

By John Richardson

OUR blogs are awarding themselves a pat on the back today. The reason is that investment bank Goldman Sachs, the largest player in commodity markets, has completely reversed its analysis of oil markets. They now accept our view, and that of the blog we work with very closely with, Chemicals & The Economy, that there is no fundamental reason for oil prices to be at today's high level.

The issue was discussed at length in a January 2011 ICIS White Paper, Budgeting for Uncertainty, and we have supported this view ever since. It has sometimes been a lonely position, as Goldman's voice is very strong in the markets. However, on Thursday of last week, Goldman revealed they had changed their mind, when they announced:

"The US shale oil boom, which saw the country's oil production rising to multi-decade highs, caught many industry watchers and specialists by surprise and has dramatically reshaped the global oil flows over the past few years."

By coincidence, Paul Hodges has published another article on the subject in ICIS Chemical Business, which includes the sentence:

"In oil markets, there have been no major shortages of product on the scale of the 1979 OPEC embargo, or similar, to cause prices to rise. And production has actually been rising. US output, for example, has reversed years of decline, and is now back at 1996 levels. Similarly, inventories in the US and elsewhere have often been at near-record levels."

We have attempted to keep our readers ahead of the game, including our prediction of a China slowdown which we first made in April 2010  and followed up with numerous other warnings, including this post in January 2011.

We further flagged up the risks in chapter 6 of our book, Boom, Gloom & The New Normal, published in October last year. 

By John Richardson

ONE of the golden rules of petrochemicals is "always run hard if you have the feedstock advantage". As a result, the US is said to have been a little frustrated by a series of operating problems that have constrained their average capacity utilisation to around 80% in 2012.

"If they had been able to they would have run at close to 100% and exported their downstream polyethylene (PE) surpluses to first of all South America and then Asia," said a source with a global polyolefin producer.

"This would have been at the expense of the South Koreans who have increasingly targeted South America in order to compensate for a very weak China."

Next year, therefore, the source worries about the US running flat out because of the huge shale gas-derived feedstock advantage. The States is the second most competitive region in the world behind the Middle East.

Add this to estimates that the US will add around 1m tonne/year of ethylene, and with it derivatives, through capacity creep by 2014 and you have a very bleak outlook for the Northeast Asians, given that the prospects for China remain bearish. As the slide above shows, the US is scheduled to eventually add 10m tonnes/year of ethylene.

"My customers in China have absolutely no confidence about 2013. They are predicting GDP (gross domestic product) growth of just 5-7%," added the source, mirroring comments made by another industry player last week.

"I think there might be a recovery in H2 of next year, depending on the politics, but I've pretty much written-off the first half."

Dupont's Ellen Kullman

By John Richardson

Dow Chemical's decision to cut 2,400 jobs, as it posted a 32% drop in earnings per share, was the result of what CEO Andrew Liveris said was difficult conditions that "may have extended staying power, as the new reality is that we are operating in a slow-growth and volatile world."

DuPont is to shed 1,500 jobs. CEO Ellen Kullman said: "Current uncertainties in the global economic outlook, softer demand in certain markets and strength in others require realigning business resources to match current growth opportunities and increase responsiveness to rapidly changing market realities."

The blog thinks that more redundancies across the chemicals industry are likely as companies respond to the New Normal, which involves a VUCA world. 

The good news is that, as Kullman points out, there are rapidly changing market realities that represent tremendous opportunities for chemicals companies.

Mr Bernanke, please take note

By John Richardson

The recovery is always six months away and so while most people have written-off the first half of next year, the hope is that by H2 everything will be back to normal.

But as fellow blogger Paul Hodges points out in this video, which he further underlines in his 2013 Budget Oultlook blog post:

*Oil prices have been at record-high levels in 2012 and threaten to cause demand destruction.

*Central bankers, who have helped drive oil prices up, have failed to turn the global economy aorund because they haven't recognised that demographics drive demand.

Thus, in 2013 the chemicals industry will be lucky to hold on to average global operating rates of 80%. Low-cost producers will run harder, potentially driving the higher-cost players into bankruptcy. The world is heading for an L-shaped recovery.

It doesn't have to be like this. The two huge opportunities for chemicals companies remain the record number of over-55s and the hundreds of millions of people emerging from poverty in the developing world.

Making products ands services for these two key groups can generate fantastic revenues, but merely waiting for central bankers to return the world to normal will ultimately end in disaster.

By John Richardson

BANK lending is once again surging in China as politicians try to shore up their support ahead of the leadership transition.

"The central government has approved up to 7 trillion yuan ($1.2bn) for infrastructure investments since May to spur growth," wrote the China Daily. This represents 15% of GDP.

Real-estate loans in Q3 rose by 29% over the second quarter.

But this is likely to do absolutely nothing to rebalance the economy away from investment and towards domestic consumption. In fact, it will probably make the problem worse.

A lot of the infrastructure money will surely have been allocated to local governments for more unneeded sports stadiums, railway stations and bridges, and for further real-estate investment.

The state-owned enterprises (SOEs) are also likely to have benefited from the rise in bank lending.

State-owned banks have for years supplied the SOEs with large volumes of cheap loans, especially during the 2008-2010 economic stimulus programme.

This benefits the politicians and SOE officials, who are said to have invested privately in "hot" sectors such as real estate.

Domestic savings rates have been kept below the rate of inflation in order to provide all this low-cost financing,

This penalises the vast majority of Chinese, who are forced to save rather than spend in order to compensate for low savings rates and inadequate state healthcare, education and pension coverage. They also need to pay for real estate, the cost of which has been driven-up by the state-backed speculators.

"On a recent weekday at the Henan Street flea market, crowds sifted through stacks of clothes that included $3 T-shirts with images of Minnie Mouse and $5 imitation Nike sports jerseys," said the New York Times.

"Just a few yards away, an authentic Nike store selling the real thing for $35 had nary a shopper. Because consumers have so little spending power, many global-brand companies do not even bother to open stores in cities like Jilin."

China's consumer spending is just 35% of GDP, the lowest of any of the big economies, and has fallen from 45% a decade ago. In the US, consumer spending makes up 70% of the economy.

The rise in bank lending might lead to a rebound in petrochemical prices before the end of the year on the belief that the economy has bottomed-out.

But the "recovery" will make rebalancing harder for China's new set of political leaders, assuming, that is, that they are reformers.

By John Richardson

THE above chart, from a new Research Note released by fellow blogger Paul Hodges, exposes the fallacy that BRICS and emerging-market growth can by themselves rescue the global economy.

And, as we have highlighted before on this blog, there are no long-term guarantees that China, the big driver of BRICS growth, will continue to prosper.

Even if China and the other BRICS countries continue to boom, it will decades, not years, for them to catch up with the West.

The painful reality is that the West faces a demographic crisis that has to be addressed. If not, we face political and social - as well as, of course, economic - disaster. This is no exaggeration.

As the Research Note points out:

The G7 countries alone saw births rise 15% between 1946-70, compared to the previous 25 years. They added 33 million babies to their population - the equivalent of another Canada, itself a G7 member, and whose $1.7tn economy is a similar size to India's.

As these babies grew up, and the Western economy prospered, it therefore became almost inevitable that they would spark a growth SuperCycle on reaching the Wealth Creator 25- 54 age group, typically the period of peak consumption. They were, after all, the largest and richest generation that the world has ever seen.

But now, the Boomers are ageing fast. The oldest Boomers began to join the New Old 55+ generation in 2001, and it now contains 272 million Westerners. They are 29% of the population, and their numbers are rising all the time.

Growth will inevitably be very much slower than in the 1982-2007 SuperCycle years.

The reasons are:

* When people are young, they need to buy new things.

*And the Western BabyBoomers had lots of money to spend, particularly during the credit boom.

*But now the kids have left home, and the Boomers don't need many new things.

*Instead, they mainly buy replacement products, and only when these wear out.

Demographics are not only a problem - they are a huge opportunity. Chemicals and other companies need to focus on manufacturing the products of the future that will serve the 55+ generation.

By John Richardson

"Have you noticed that your parents spend less money than you do?" asks Merryn Somerset Webb in this Financial Times article. She agrees with us that the answer is, of course, "Yes".

This very neatly brings the issue down to a personal level, one that all of us can relate to, and underlines the need for a touch of commonsense in judging the economic future.

The chart above provides statistical evidence to back up the FT's touch of crystal-clear commonsense: US official household expenditure data, categorised above, indicates that spending peaks by the age of 55, and then falls always quite sharply as people age.

This is important because household consumption is between 60-70% of GDP in most Western countries. Thus, US consumers alone are 16% of the global economy. Western consumers in total are 40% of global GDP, equalling the entire GDP of the emerging economies. It is impossible for these countries to replace the spending that is now being lost.

Thus, don't believe the financial sector when it tells you that we can return to the economic Supercycle, or central bankers who think that more economic stimulus will somehow, miraculously, compensate for ageing populations in the West. You cannot, in the long term, stimulate demand that simply isn't there.

This is a lot easier said than done, and to illustrate this point, the blog has a confession to make: it wasn't until early last year, during a long beach-side run, that all of this clicked into place.

Before we ran ten kilometres, and so needed something to take our minds off how unfit we were (and still are), we thought that every recovery in oil prices or rebound in stock markets, and thus a change in the mood of the financial press, was a challenge to the New Normal arguments.

But we now realise that this is all just surface activity, driven by the financial sector and central bank stimulus that has contributed to the volatility in equity and commodity markets.

Chemicals companies need a long term perspective in order to prosper in this new environment in order to see beyond these shor-term fluctuations. 

They will need to learn new tools with which to sustain growth. Business model innovation will be essential in order to meet the needs of those market sectors with future growth potential. One example of these is the opportunity to develop new products and services to meet the needs of the New Old 55+ generation.

Technical innovation will also be essential, as the successful products of the future are likely to be based on 'needs', rather than 'wants'. Affordability, rather than premium pricing, will be key, as markets re-segment themselves into a large 'value' sector and a small 'luxury' segment, with little middle ground in between. This will be quite unlike the SuperCycle.

The new IeC Research Note summarises the rationale for the launch of our ICIS/IeC New Normal strategy workshops for company boards and senior executives. These have now been held on four continents, highlighting the global implications of ageing for future business success.