Asian Chemical Connections

Today is a day for celebration, as it marks the day that the average Western BabyBoomer, born in 1958, will join the New Old 55+ generation! This is a truly remarkable moment. Even 100 years ago, as the chart above shows, this generation simply didn't exist.

Western life expectancy (green column) was just 46 years in 1900, and in in developing countries (red) it was only 26 years; the global average (blue) was only 31 years.
Today it is ~80 years in the West, and ~70 years in developing countries.

The chemicals industry-inspired developments that are largely responsible for these historic advances. As Life magazine declared in 1997, "the filtration of drinking water plus the use of chlorine is probably the most significant public health advancement of the millennium".

Plus there have been vaccines and medicines, plastics to protect food, improved seeds to boost crop yields and many others.

Today's ageing population poses real challenges for companies looking to sustain future growth. Key is the fact that longer life expectancy means slower GDP growth.

The New Old are already a record 29% of the Western population and are the only growth sector, with their numbers forecast to rise 34% to 364 million by 2030.

Older people spend less because they mainly buy replacement products. Such purchases can easily be postponed or not purchased at all if money gets tight.

The younger generation is 16% smaller, so cannot compensate for their parents' slowdown.
Household consumption is 60% of Western GDP, so today's L-shaped economic recovery will likely continue for many years.

But it would be entirely wrong to describe this outcome as representing 'lost decades'. No Boomer, faced with the wonderful bonus of extra life, would dream of describing it this way.

International e-chem, the UK-based chemicals company headed by fellow blogger Paul Hodges, publishes a research note today on the subject. This includes a case study describing how a new mindset, focused on the future, could start to reinvigorate today's struggling retail sector and improve the quality of life in local communities.

Any company selling into the consumer market either directly or indirectly will hopefully find the note helpful. Please click here to download a free copy.

Source of picture: Rex Features

By John Richardson

PETROCHEMICALS companies have traditionally concentrated primarily on feedstock advantage, cost efficiencies and location in order to achieve success because demand during the Supercycle largely took care of itself. This is no longer good enough.

In the first of a series of blog posts on ways that companies can create their own sustainable sources of demand, we look at healthcare.

"More than 100 years after the first heart surgery, less than 10% of the world's population can afford it. India requires over 2 million heart surgeries a year, but all its heart hospitals put together perform operations on fewer than 110,000 people," writes Devi Shetty, the Indian philanthropist and cardiac surgeon, in The Economist's 'The World in 2013' supplement.

"It is thought that less than 10% of the world's population can afford any major intervention on the heart, brain, kidney joints," adds.

He blames this on a lack of innovation in financing healthcare as a result of too much focus on developing "a magic pill, a new vaccine or a faster scanner rather than delivering what is already available".

In the developed world, health funding was devised when people retired at 60 and died at 65. But now, as we discussed yesterday, they are retiring at 60 and are living into their eighties, thanks to a health explosion.

"With the rise in life expectancy in emerging economies as well as developed ones (thanks to better living conditions, technology and social-support systems), taxpayers' money will no longer be enough," he continues.

In India, 450 million people do not pay taxes and so have no state healthcare cover. Only 50 million in India have state healthcare cover.

His solution is micro-financing through mobile phones.

"India has over 925 million mobile-phone subscribers, who spend about 150 rupees ($2.80) a month just to speak on a mobile phone," he says.

"If every mobile-phone subscriber had to pay 20 rupees a month towards health insurance, the money collected would be two-thirds of the government's total budget for healthcare."

India has a tremendous opportunity to introduce universal health care through such innovations because it has the largest number of doctors, nurses and medical institutions in the world, he adds.

Petrochemicals companies also have a huge opportunity to work with governments, with NGOs and with companies in other industrial sectors in order to help solve the health financing crisis.

Just imagine if your company introduced a successful micro-financing scheme in India.

It would be helping to create demand for its products by ensuring that many more people lived healthy and therefore economically successful lives.

And such a company would be generating tremendous goodwill for its business while doing something immensely worthwhile.

By John Richardson

CHINA'S polyethylene (PE) market sentiment rebounded in mid-December on greater confidence that the country's new leaders meant business on economic reform.

And since then, commodity prices in general, including those for iron ore  have rebounded thanks to a slew of data that indicates a recovery in growth.

Some of the renewed confidence in China's PE market was generated by the belief that China's new leaders were serious about tackling corruption.

Investigations into low level officials, allegedly caught with their fingers in the till, is likely to have added to this confidence, especially given that those who exposed the apparent wrongdoing were not being arrested or otherwise harassed. Wang Qishan (see below), the new head of the central agency tasked with dealing with misconduct among party members, certainly seems to mean business.

But in late December, the government announced new rules requiring internet users to provide their real names to service providers, while assigning internet companies greater responsibility for deleting forbidden postings and reporting them to the authorities. Does this still support the notion that the government is willing to implement root-and-branch reforms?

Aside from the issue of corruption, can China, without a vibrant online culture, escape the "middle income trap?" Can such a culture thrive under the new rules?

And as for the slew of positive economic data we mentioned at the beginning of this post, delve into the numbers and the outlook still looks very uncertain.

By John Richardson

A LOT of stock market excitement, and perhaps a recovery in petrochemicals prices (more next week when everyone is back in action), has greeted the release of China's purchasing managers' indices for December. The official PMI held steady at 50.6%, while the final HSBC PMI came in at 51.5%, the highest reading in 19 months.

(Note, the stock market frenzy was also, of course, stirred up by the US fiscal fudge that, as Nouriel Roubini points out, has solved nothing).

As we discussed last month, the devil is in the detail. A closer look at the official December PMI reveals a mixed picture (see the above chart).

"The data points seem to support our view that it is not a strong upswing. We view these data as signs that the Chinese economy is nearing the end of the early expansion phase in the cycle," writes Societe General's Wei Yao in a research note.

"Production eased moderately but remained well above 50. Total new orders were flat at 51.2, while new export orders slipped to 50 in December from 50.2 in November. The two inventory sub-indices - input and output inventory - continued to point to slow restocking.

"However, employment and imports both improved but still remained below the 50 boom-bust line. The biggest increase was recorded in the input price index (our comment - petrochemical prices on the rise?), which recovered to 53.3 from 50.1 in the previous month.

"The data points seem to support our view that it is not a strong upswing. However, we think there is still some upside for the PMI data, albeit less than in the previous cycle, during which this series usually went north of 55 before losing momentum. Policies, especially regarding infrastructure and housing (our italics and emphasis), remain the key."

The same old same old then: China risks more bad debts from further infrastructure spending and increased social divisions if it re-inflates the property bubble.

But in a persistently weak export environment, the old approach might be seen as short-term political necessity at the expense of rebalancing.

(Please note again: There is a suggestion that China's official PMI was manipulated downwards by the government in order to conserve some more good news for January, perhaps as a tactic to help China's new leaders consolidate their popularity)

By John Richardson

Our argument ument that demographics drive demand is gaining greater traction.

Demographic challenges apply both to developed markets, where populations are rapidly ageing, and to emerging markets such as China, which confronts ithe consequences of its disastrous one-child policy.

The slide above shows rising life expectancy - just one of the challenges.

We keep scrambling around for other explanations as to why the world economy has yet to return to where it was before the global financial crisis, such as "central banks haven't done enough - all we need is more economic stimulus", or "the entire answer for the US is more investment in domestic oil and gas resources, combined with more momentum behind reshoring".

But in a new video, MoneyWeek editor-in-Chief Merryn Somerset Webb says that demographics are "one of the key bits of information that you need to understand what's going on in the West today.

"It doesn't matter how much monetary stimulus you put in, how much fiscal stimulus you put in, you can't turn back the demographic tide.

"There will be a point in the future when people will look back on the way we are behaving now, trying to regain the growth of the past when we don't have the demographics of the past, and think we were completely mad.

"What do we do about it? That's a tricky one. But recognising it, recognising the change, is surely the first step towards being able to deal with it!"

Please click here to see the full video.

.....For Now 

By John Richardson

RELATIVE to most of 2012 - when China's polyolefins market was in dire straits - November, December and early January have been excellent for traders who took the right positions. At least one producer has also reporting a strong recovery in sales.

"I thought there would be a mini-rebound in early November, and I was correct," said a Singapore-based trader.

"Prices then retreated slightly before a stronger rally began in late November (see chart below)."

The latest recovery is being driven by:

*Shutdowns in the GCC. The estimated production loss as a result of the confirmed plant turnarounds is 118,000 tonnes of linear-low density polyethylene (LLDPE), 353,000 tonnes of high-density PE (HDPE) and 238,000 tonnes of polypropylene (PP), according to ICIS.

*Outages at the PetroRabigh and Daqing petrochemical complexes in Saudi Arabia and China, respectively. The Daqing outage is expected to last until around February and includes the company's 300,000 tonnes/year HDPE/LLDPE swing plant and its 250,000 tonnes/year HDPE facility. The PetroRabigh complex is expected to restart in late January. Offline at the moment are the producer's 600,000 tonnes/year LLDPE plant, its 300,000 tonnes/year HDPE unit and its 700,000 tonnes/year PP facility.

*Reports that Northeast and Southeast Asian cracker operators have cut capacity utilisation from more than 90% in November to around 85% in December/January. But, as we have just said, these are just reports, and there are suspicions that some South Koreans are continuing to run hard.

*Confidence amongst converters that China's new leaders mean business on economic reform.

*Low stocks amongst the converters, especially those who need to fulfil orders before the Chinese New Year, which falls on 10 February.

*The fiscal-cliff fudge. This has caused a rally in stock markets, in oil (Brent crude was up by $3 a barrel last week) and commodity prices in general. Iron ore, for instance, is now more than $153 a tonne. "Prices are up by around 70% over the last four months, and the rally gained extra momentum in December. This is mainly the result of misplaced confidence in a sustainable Chinese recovery," said a Perth-based investment analyst.

"Is there a real improvement in polyolefins demand or is this the result of short-term tight supply and an improvement in sentiment?" queried the Singapore trader.

"Quite frankly, I don't really care as I've made good money since November and can now afford to play very cautiously over the next couple of months, without worrying about missing out on anything further."

Reasons to be cautious about the sustainability of the recovery include:

*The end of turnarounds in the GCC in February-April and the resumption of production at PetroRabigh and Daqing.

*Substantial amounts of new capacity. ExxonMobil is expected to ramp up production at its two 650,000 tonnes/year metallocene LLDPE plants and its 450,000 tonnes/year PP facility in Singapore, now that its 1m tonnes/year cracker is being commissioned. China is also set to bring on-stream significant amounts of polyolefins capacity this year, including Sinopec Wuhan Petrochemical Co at Wuhan in Hubei. "We have heard that the complex's 300,000 tonnes/year LLDPE plant and its 400,000 tonne/year PP plant will start-up in early Q2," the trader added.

*The fact that stock and commodity markets also rallied in 2009, 2010, 2011 and 2012, only for the rallies to peter out.

A key question for the blog is: When will stock and commodity markets start worrying about the likelihood of a bitter and prolonged fight between Republicans and Democrats over the need to raise the US debt ceiling?

The fiscal-cliff fudge has left the two political parties even further apart, with the Republicans also blighted by deep internal divisions.

By late February or early March, the Treasury Department will run out of options to cover US debt and could begin defaulting on government loans unless Congress raises the legal borrowing limit - the debt ceiling. Economists warn that a default could trigger a global recession.

As far as China's new leaders go, the blog feels they will attempt a "steady as she goes" policy over the next few months, possibly even the rest of this year, as they try to shore up their support.

Modest stimulus, along with more of the right noises about economic reform, might well be the desired approach. This doesn't necessarily mean that genuine reform will be sufficient to put China on the right economic path.

If the external environment weakens substantially, however, (for example because of a US debt default or a new crisis in Europe), Beijing may be forced into a big new stimulus package - adding to concerns about inefficient investments and bad debts.

More immediately, factor in a possible bounce in confidence when the official purchasing managers' index for January is announced in early February, as the December PMI is said to have been manipulated downwards in order to store up some more good news.

Returning to polyolefins, a source with a global producer told us: "From late February/early March, when the Chinese New Year is over, plants have returned from turnarounds and new capacities start to come on-stream and the debt ceiling issue has come to a head, we should get a real idea about the strength of demand."

Note that markets in China are expected to quieten down from 15 January, ahead of the New Year, until late February.

So far so good...lack of arbitrage in 2012

By John Richardson

Despite a strong recovery in China's polyethylene (PE) prices and sales over the last month-and-a-half, producers are viewing the coming year with great trepidation.

One of the wild cards is how the US producers behave in 2013, as we also discussed in November.

Faced with weak demand in their own market as a result of a failure to negotiate an increase in the debt ceiling, will US producers seek to export their way of out of difficulties?

While the Middle East sharply increased PE exports to China in January-October on new start-ups and more stable production at plants brought on-stream in 2010-2011, North American Free Trade Agreement exports declined by 42% on US production losses and a stronger home market.

"That pretty much saved us. I am worried about this year, though, as, of course, US producers have a big feedstock advantage," said a Singapore-based source with a global producer. 

My colleague Nigel Davis, in this ICIS news Insight article, neatly summarised the US outlook when he wrote "Olefins prices in the US rose towards the 2012 year end on a series on unplanned cracker outages.

"And planned maintenance shutdowns in the first months of 2013 are expected to underpin the higher prices.

"(But) North America's ethylene producers are planning significant new capacity additions to take full advantage of increased ethane supplies from shale gas extraction and a mood of optimism prevails in the sector.

"In 2013 more than 2bn pounds (more than 900,000 tonnes/year) of ethylene capacity will be added to the US total (a significant proportion of which could be turned into PE).

"This 3.3% increase in the US ethylene capacity total is expected to help stabilise prices which fluctuated wildly in 2012, as the impact of numerous scheduled maintenance shutdowns was amplified by a string of unplanned outages.

"Cracker operators are keen to take full advantage of North America's ethane advantage which has put the region second only to the Middle East in terms of feedstock cost competitiveness.

"Capitalising on that advantage, however, is causing disruption in a low demand-growth environment.

"US cracker operating rates have been estimated at 85% in 2012 compared to closer to 92% in 2011 but rates could push back up to above 90% this year with fewer turnarounds putting some downward pressure on prices."

If the US does export bigger quantities of PE to China, the losers will, of course, be the higher-cost naphtha cracker operators in Northeast and Southeast Asia.

By John Richardson

SAUDI ARABIA'S National Petrochemical Industrial Co (NATPET) has gone public over an issue that has worried Gulf Co-operation Council (GCC) petrochemical producers for several years now: The erosion of the GCC's competitive advantage over the US.

"There has been a migration of investment to the US that is a very clear threat to the growth of the [GCC] petrochemical industry," Jamal Malaikah, chief operating office and president of NATPET (see picture) told the UAE's National newspaper. NATPET is a Yanbu-based polypropylene (PP) producer.

And in what might be a hint that the long-delayed rumoured increase in Saudi gas costs could still happen, he added: ""We believe this is the wrong time to do that because of the shale gas. We still have an advantage in Saudi Arabia but we believe that advantage will be affected by the sheer volume of shale gas in the United States."

Gas costs were, reportedly, supposed to be increased early last year in the Kingdom.

Ethane costs just $.075c/mmBTU in Saudi Arabia.

In the case of propane, which is relevant to NATPET, Saudi Arabia provides discounts  on propane costs to local consumers of around 28% off prevailing CFR Japan naphtha prices, as naphtha is viewed as a comparable market to that of liquefied petroleum gas (LPG).

(NATPET operates a propane dehydrogenation (PDH) plant and a 400,000 tonnes/year polypropylene (PP) unit, and plans to raise its PP capacity to close to 1m tonnes/year by 2015.)

The motive behind the reported plans to raise gas prices in Saudi Arabia is the well-documented overall gas shortage, driven by soaring power-generation demand.

Interestingly, when it comes the new generation of mixed-feed crackers in Saudi Arabia that came on-stream in 2010-2011, an industry source believes that existing propane price arrangements have already significantly shifted the competitive position.

"These crackers are making use of a much-bigger percentage of propane versus ethane feedstock than is the case with the previous generation crackers," he said.

But, as we discussed last month, Saudi Arabia could find much-bigger volumes of ethane supply in the future, thanks to the heavy focus by Saudi Aramco on gas exploration.

If the shale-gas revolution has taught us anything, it is to anticipate constant change in feedstock advantages between different regions.

By John Richardson

SICK and tired of wracking your brains trying to figure out where the China polyolefins market is going?

Are you weary of the Eurozone debt crisis and the threat that US Congress will fail to raise the debt ceiling?

Then take a break from hardscrabble petrochemicals markets to take part in our ICIS Holiday Quiz (apologies to our readers - we should have let you now before, as the closing date is 15 January. Our only excuse is gross incompetence).

There is £100 worth of shopping vouchers to be won, or the equivalent in local currencies.

Good luck!

By John Richardson

SOME 1.5m tonnes of new polyethylene (PE) supply will arrive in the Asian market during 2013 at a time of very uncertain and fragile demand, a source with a global producer has told the blog.

A large amount of new polypropylene (PP) supply is also expected to enter the market.

"Even if there is a moderate recovery in demand, the challenge will be for the market to absorb all of this capacity," said the source.

"It is quite likely we will see continued downward pressure on pricing unless there is significant restocking in China, which I worry will not happen, and there are a substantial number of technical problems with start-ups."

As the blog reported earlier this week, and last month, sentiment has improved in China. Traders appear to have made good money, with at least one producer reporting strong Q4 2012 sales.

But much of the recovery is due to temporary short supply that will ease significantly when the current Middle East turnaround season comes to an end.

And, in addition to the new capacities we listed earlier this week, here are some more PP plants scheduled to start-up in 2013, based on our ICIS Plants & Projects data base (We will provide more information as events develop):

* Coal Shaanxi Yulin Energy & Chemical at Shannxi in China - 300,000 tonnes/year.

* Pucheng Clean Energy Company Pucheng at Weinan in Shaanxi - 400,000 tonnes/year.

*Guangzhou Petrochemical General Works, Guangzhou, Guangdong - 200,000 tonnes/year.

New supply of both PE and PP is expected to start disrupting the market from Q2.

It wasn't supposed to be like this. Demand was supposed to strong-enough to absorb all the new capacities as he headed towards the next peak in petrochemicals demand and margins.

By John Richardson

PARTICIPANTS in commodity and financial markets sometimes appear to have very short attention spans.

But they are merely doing their jobs by seeking to stretch out rallies as long as possible through claiming everything that was being discussed a few months, weeks or even days ago is suddenly invalid. (see the above ICIS Petrochemical Index for December, which illustrates the broad-based rise in petrochemical prices, using in this case Northeast Asia an example)

Just occasionally, though, and off-the-record of course, you get moments of honesty such as the polyolefins trader who said last week: "Is there a real improvement in polyolefins demand or is this the result of short-term tight supply and an improvement in sentiment?

"Quite frankly, I don't really care as I've made good money since November and can now afford to play very cautiously over the next couple of months, without worrying about missing out on anything further."

Nothing has changed in China, just the mood music.

Still, at the moment it can seem as if:

*China no longer needs to worry about economic rebalancing, inefficient investments and bad debts.

*The West is fine and so China's exports are once again in long-term boom territory, following the unexpectedly strong growth in December exports.

In Australia, febrile excitement grips the commodities business as 2013 forecasts are revised upwards.

For instance, the Business Spectator writes in this article: "In its third quarter presentation to analysts Alcoa saw growth of 4% to 7% in China's automotive production for 2012, an 18% to 21% fall in heavy truck and trailer production and mid-single-digit growth in commercial building and construction sales and beverage can packaging.

"For 2013 it is now forecasting 7% to 10% growth in automotive, 12% to 19% growth in heavy trucks and trailers, 8% to 12% growth in beverage can packaging and 8% to 10% growth in commercial building and construction."

But hold on, weren't many people talking about overcapacity across many industries in China just a few weeks ago? Might not all this extra production end up, unsold again, in inventories if consumption remains weak?

In autos, for example, the People's Daily, the government-controlled paper, was warning as recently as last September of the dangers of overcapacity. Domestic demand growth for autos had last year fallen off a cliff compared with 2009-2010.

The recovery we have seen in commodities markets, including petrochemicals, might well have been driven by politics, both in China and the US.

In China, between May and September last year bank lending jumped 15% compared with 2011 as $1.1 trillion was disbursed from state-owned banks for infrastructure investments. This seems to have been designed to shore-up popular support ahead of the leadership handover.

And in the US, Barrons, the investment newsletter, suggests that the increase in US Q3 real GDP growth to 2% from 1.3% in the second quarter might have been the result of increased federal government spending,mostly on defence, ahead of the Presidential election.

The essential point, of course, is that commodity and financial markets may well be getting excited about what is historic data. This extra government money is likely to have still been benefiting the China and US economies in November and December, economic data from which has helped drive the current recoveries.

In the case of China, now that the leadership handover is over, official bank lending is on the decline.

"Loans were 454.3 billion yuan ($73 billion) (in December), according to People's Bank of China data, compared with the median estimate of 550 billion yuan in a Bloomberg News survey of 37 analysts and last year's 640.5 billion yuan," wrote the wire service last week.

This supports the argument that China's new Politburo is now withdrawing stimulus as it pursues a new economic model.

Fellow blogger Paul Hodges, for example, wrote last week that China is returning to earlier priorities, crystallised in this statement of intent from the China Academy of Sciences: "A completely new policy approach is emerging. It's about giving farmers a bigger share from land deals, it's about changing local governments' reliance on revenues from land, and it's ultimately about a fairer system of sharing China's economic growth."

And, as far as the West goes, given the problems in Europe and the row over raising the US debt ceiling, how could anyone be anything but cautious over China's export-growth outlook for 2013?

Picture: HAP/Quirky China News/Rex Features

By John Richardson

THE toxic smog that enveloped Beijing over the weekend is another example of why China's new leaders simply have to change the economic growth model.

At its worst point on Saturday night, the level of harmful particulates in the air reached as much as 36 times that which is recommended as safe by the World Health Organisation.

"China has strict environmental and emission laws, but also has the worst environmental pollution on earth thanks to lack of enforcement and subordination of environmental concerns to the imperative for officials to register economic growth," wrote the Financial Times, in this article.

At one hospital on the edge of Beijing, a nurse told the FT that a respiratory ward was overflowing at the weekend, even though the unit was doubled in size last year.

Some 300,000 people die every year from outdoor pollution alone in China.

China's environmental protection ministry published a report in November 2010 which showed that about a third of 113 cities surveyed failed to meet national air standards last year.

According to the World Bank 16 of the world's 20 cities with the worst air are in China. According to Chinese government sources, about a fifth of urban Chinese breath heavily polluted air. Only a third of the 340 Chinese cities that are monitored meet China's own pollution standards.

Government policy towards environmental problems in general has been to suppress public dissent, while seeking to cover up the extent of the damage caused by China's economic growth model, claim many criticis.

For example, in July 2009, as the New York Times points out, a Chinese Foreign Ministry official told US diplomats to halt a Twitter feed from the US embassy in Beijing, which highlighted the atrocious air quality.

The official told US diplomats that the Twitter feed was "not only confusing but also insulting," according to a State Department cable obtained by WikiLeaks.

But the good news is that the Chinese government now includes fine particles called PM2.5, considered to be especially harmful to human health, in its measurements of pollution. Further, the recording of air quality 36 times worse than the WHO limit was made by the government.

State newspapers have also run highly critical articles saying more needs to be done to tackle the problem at its source, said The Guardian newspaper.

"How can we get out of this suffocating siege of pollution?" the People's Daily, the official Communist party newspaper, asked in a front-page editorial.

"Let us clearly view managing environmental pollution with a sense of urgency."

China's new Politburo, as we discussed yesterday, have made it clear that the old growth model - where the focus was entirely on growth rather than the quality of growth - has to change.

In the case of the environment, if there is no change:

*The number and the intensity of public protests could escalate to the point where they become socially and politically destabilising.

*Healthcare costs, already rising because of the one-child policy, may become unsustainable.

*Expat workers, especially those with young children, will increasingly refuse to be relocated to China's big cities, slowing down the technology and expertise-transfer process as China attempts to escape the middle-income trap.

The great news is that China's new leaders recognise the problem by allowing state-run media to join the debate in favour of reform.

And for the chemicals industry, the opportunity is huge to help China clean up its environment.

By John Richardson

THE latest Northeast Asian high-density polyethylene (HDPE) chart from ICIS (see above) hardly suggests a tremendous increase in profitability, despite the improvement in sales volumes and sentiment in China that we first highlighted in December, and provided more details on last week.

At least the Northeast Asian producers have moved into slightly positive territory, though, and so they should probably be grateful for small mercies.

What might have limited their gains are reports that US PE producers shifted more export material in November and December in an effort to push through domestic January price increases.

We continue to worry that US PE capacity creep in 2013 might exert further pressure on the higher cost Northeast Asians as the year progresses, particularly, of course, if the China demand recovery proves to be short lived.

The overall increase in PE capacity, and also polypropylene (PP), capacity is another concern.

By John Richardson

FINANCIAL speculators began to play an increasing role in crude-oil markets following liberalisation of financial trading rules, signed into law by Bill Clinton in 2000, as we argued in chapter 3 of our e-book, Boom Gloom & The New Normal.

The disconnect between real supply and demand for crude and the influence of the financial community on pricing, enabled by this liberalisation, became much greater with the arrival of huge amounts of central bank liquidity four years ago.

"Crude oil and the major commodity markets have been a 'fool's paradise' in the past four years, created by the arrival of the central banks' massive liquidity programmes," wrote fellow blogger Paul Hodges in this post yesterday.

"Pension funds rushed to buy, in the belief they would be a 'store of value'. Hedge funds followed them as a momentum play, encouraged by analyst reports of supply shortages and soaring demand in emerging markets."

"But nothing lasts forever. Financial players have sustained oil prices at record levels for the past two years. But high prices destroy demand, and so buyers of futures contracts have largely lost money over the past 18 months. Plus, of course, there have never been any real shortages in the market to justify today's high prices. So finally, they are leaving the markets to the physical players once more."

He points out that Saudi Arabia has had to cut production by 1 million barrels a day due to lack of demand, but that other producers don't have that luxury as they have to attempt to meet the cost of new investments in crude production.

The chart above shows that:

• US natural gas prices (purple) have dropped to the equivalent of $30/bbl. (Power stations thus continue to prioritise gas over fuel oil).
• This puts pressure on WTI (green), which remains $20/bbl below Brent.
• In turn, Western Canada Select (blue), is under real pressure at $60/bbl.

On the supply side, a major factor behind this dramatic change is US shale oil production.

"By 2014, the US. will import just 6 million barrels of crude oil per day, or roughly a third of what it uses, according to a recent forecast from the federal Energy Information Administration. That's less than half the amount of 2006, when imports accounted for 60% of total US oil consumption," wrote Bloomberg in this article.

At the moment, the financial community and some chemicals companies think we are back to the races. Chinese demand has recovered, the Eurozone at least hasn't imploded and the US has avoided the fiscal cliff.

But prepare for the much-greater risk of a big re-pricing in crude. It would only take one major macroeconomic shock to result in a sharp retreat in oil prices, given the length of supply.

By John Richardson

AN important study by the Boston Consulting Group (BCG) underlines most of the views we put forward in our e-book, Boom Gloom & The New Normal.

"The developed world's Ponzi scheme is caused by record-high levels of public and private debt. And it is exacerbated by huge unfunded liabilities that will be impossible to pay off owing to long-term changes in developed-world demographics," write the authors.

"Since the Second World War, debt levels in the developed economies have continually risen, with a notable increase since 1980.

"According to a study by the Bank for International Settlements (BIS), the combined debt of governments, private households, and nonfinancial companies in the 18 core countries of the OECD rose from 160% of GDP in 1980 to 321% in 2010. In real terms, after inflation is taken into account, governments have more than four times, private households more than six times, and nonfinancial companies more than three times the debt they had in 1980."

The vast majority of this debt has not been used to increase future income, but has instead been employed to speculate on stocks and real estate, and to pay interest on previous debt, continues the study.

"One indication of this trend: During the 1960s, each additional dollar of new credit in the US led to 59 cents in new GDP; by the first decade of the new century, that same dollar of credit was producing just 18 cents in new GDP," says BCG.

"These rapidly rising debt-to-GDP levels are a sign of the growing share of what the late economist Hyman Minsky termed 'Ponzi financing' in the global economy."

The threshold for sustainable government debt in the developed world is a debt-to-GDP ratio of roughly 60%, continue the autors.

"Applying that threshold to nonfinancial corporate debt and private-household debt as well gives an overall sustainable debt-to-GDP ratio of 180%. Currently, the amount of debt above that level is approximately $11 trillion for the US and €7.4 trillion for the Eurozone."

"Although it is nearly five years since the onset of the financial crisis, we are still just beginning to unwind these massive sums."

But debt is only part of the problem, as the developed world's crisis has been greatly exacerbated by the hidden liabilities of governments and companies, especially in the case of health-care related spending.

The problem is that life expectancy has doubled and fertility rates have declined by more than half in the developed world.

Meanwhile, the retirement age has been lowered significantly - so much so that the number of retirees supported by the working population has grown precipitously.

"The financial implications of this growing welfare burden are dramatic. According to another BIS study, even in a benign scenario in which current deficits were reduced to pre-crisis levels and age-related spending was frozen at current levels of GDP, public debt would continue growing at a significant rate," says the study. 

"Only Germany and Italy would be able to stabilise their debt levels in such a scenario (see chart at the beginning of this post). Nor are states and local governments immune. In the US, for example, one estimate puts the unfunded liabilities for city and state employees in the neighbourhood of $3 trillion to $4 trillion.

Other problems identified by BCG include:

*Private households have relied too long on rising home-asset prices and the promises of politicians and corporate managers instead of putting aside dedicated funds for retirement.

*A shrinking workforce. A critical problem in the decades to come will be labour scarcity. According to projections by the United Nations, between 2012 and 2050, the working-age population between the ages of 15 and 64 in Western Europe will shrink by about 13% (to 15.8 million people). In Japan, it will drop by 30% (to 23.8 million people). China will suffer the same problem.

*Slower productivity growth. There are signs that the rate of improvement in productivity is in decline.

*Diminishing returns from innovation. The space for truly fundamental innovations that result in step-change improvements in living standards is getting smaller and smaller.

*Deteriorating Education Systems. The deteriorating quality of education in most advanced countries also undermines future growth potential.

*Systemic underinvestment in the asset base. Despite record-high profit margins, businesses in the developed economies have significantly reduced their investment in new machinery and equipment. A recent Goldman Sachs report argues that Europe has witnessed a decade of underinvestment, starting before the financial crisis and intensifying since then.

*Intensifying international competition and rising inequality. Globalisation has brought the promise of economic prosperity to billions of people around the world. But it has also contributed to tougher international competition and the creation of new inequalities of wealth and income in the developed world. 

Next week we will look at some of the solutions proposed by BCG.

Chinese job seekers at a recruitment fair

Imaginechina/Rex Features

By John Richardson

As petrochemicals markets begin to slow down ahead of the Chinese New Year, which this year falls on 10 February, a lot of attention is, as always, being focused on the likely strength of demand after the holidays.

The hope is that a recovering US economy, a Eurozone that looks a little more stable and stronger domestic growth in China will combine to result in another surge in buying activity.

But to what extent might shortages in labour supply once again limit the ability of petrochemicals end-users to ramp-up production post-Chinese New Year?

Last year, we were told by a polyolefins industry source that what he had been anticipating for three years finally came true: Labour markets going beyond the tipping point as tens of thousands of migrant workers failed to return to their jobs in the big export-focused manufacturing plants in eastern and southern China. This was the result of a long-running central government policy of narrowing the income gap between rural and urban China.

Numerous statements have been made by China's new leadership about the need for more balanced economic growth, including boosting rural incomes. 

Even if new measures haven't already been put in place to further narrow the income gap between China's country and its big cities and towns, the perception amongst migrant workers and their families must surely have strengthened that things are about to change for the better.

As holidays are a time for reflection, the migrant workers who do return to their jobs in the export-focused factories might also carry back with them demands for better pay and working conditions, as they know that supply and demand is on their side.

In 2012, the number of working-age people in China decreased by 3.45 million to 937.27 million, Ma Jiantang, director of the National Bureau of Statistics (NBS) said last week.

The decline in China's "demographic dividend" - the growth in its working-age population - is the result of the country's one-child policy.

Government policy has already greatly improved pay and conditions in eastern and southern coastal factories, perhaps adding to the sense of entitlement.

For example:

*"Pay and benefits for the average Chinese factory worker rose by 10% a year between 2000 and 2005 and speeded up to 19% a year between 2005 and 2010, according to the Boston Consulting Group," writes The Economist in this article.

*"A new labour law introduced in 2008 brought in more protection for workers, including the right to a permanent contract after a year of employment.

The workers who do return from the countryside might be even more prepared to down tools.

"Strikes are becoming more frequent, and when they happen, says one executive, the government often tells the plant manager to meet workers' demands immediately," adds The Economist.

"Following labour unrest, wages at some factories have gone up steeply. Honda, a Japanese carmaker, gave its Chinese workers a 47% pay rise after strikes in 2010," adds the magazine. 

"Foxconn Technology Group, a subsidiary of Hon Hai Precision Industries, a Taiwanese firm that does a lot of manufacturing for Apple and other big technology firms, doubled pay at its factory complex in Shenzhen after a series of suicides. Its labour troubles are still continuing.

"One consultant jokes that it is getting as hard to fire people in China as in France."

If labour costs go up post-Chinese New Year, more coastal factories could close down, increasing the pace of migration of low-value manufacturing to inland China, or to other countries such as Vietnam and Bangladesh.

Quality issues, resulting from the tight labour markets, might further damage of the viability of China's coastal manufacturers.

"China's labour market is so overstretched that all the high-quality labour has been exhausted, you have to hire people with lesser qualifications, and then quality becomes a problem," Alain Deurwaerder, who until recently ran a factory in Thailand for Ducati, an Italian motorbike-maker, told The Economist in the same article

Another European chief executive complained about the long-running problem of the flightiness of his Chinese workforce, the magazine added.

"If someone on the other side of the road offers 5% more pay, they go," said the chief executive.

By John Richardson

LAST week we highlighted how a Boston Consulting Group study has reached many of the same conclusions as our e-book, Boom, Gloom & The New Normal, on the fault lines in the global economy.

Similarly, many of the ten solutions suggested in the study are in line with what we think needs to be done.

The problem is short-termism from companies which are only concerned about the next few quarterly financial reports.

Politicians are in a similar dilemma as Jean-Claude Juncker, prime minister of Luxembourg and president of the Euro Group highlighted in November, when he said: "We all know what to do, we just don't know how to get re-elected after we have done it."

But as we go over the edge of the demographic cliff, a new consensus must emerge if we are to avoid a repeat of the 1930s social and political environment in Europe.

Right, now, though we are in limbo because of increased policy uncertainty, illustrated by the above BCG slide. Uncertainty over policy reflects a wider uncertainty among all of us over whether we are on the right path to recovery, which feeds through to greater volatility in oil and petrochemicals pricing.

The BCG study recommends that we need to:

1. Deal with the debt overhang. The critical starting point is to accept the fact that many of today's debts will never be repaid and to embrace debt restructuring and defaults. Current policies, designed to avoid that outcome, only postpone the ultimate resolution of the crisis and will result in even bigger losses down the road. Better to move quickly and act now, despite the likelihood of considerable near-term pain.

2. Reduce unfunded liabilities. Once debt restructuring is under way and the broader public sees that wealthy owners of financial assets are contributing to the necessary cleanup, it should be easier for politicians to take another painful step: addressing openly and directly the trillions in unfunded liabilities, including OECD pensions, that are weighing down budgets and balance sheets across the developed world. It will require a combination of several measures to bring these unfunded liabilities under control. This will require raising the retirement age, reducing social-insurance payments and making healthcare provision more efficient.

3. Increase the efficiency of government. A smaller government sector does not necessarily mean a weaker government. By defining the right "rules of the road" for society and business, governments can set the tone and priorities for development in a more effective as well as a more efficient way.

4. Prepare for labour scarcity. People will have to work longer, the elderly will need to become a bigger component of the labour force, participation of women in the workforce will have to increase and birth rates in developed economies must be increased.

5. Develop smart immigration policy. With the oldest native population and an immigrant population close to zero, Japan faces the most severe challenge. But Germany also struggles to attract well-educated immigrants because of the language barrier. US immigration policy has become far more regressive post 9/11, but there is now a growing consensus that reform is needed.

6. Invest in education. Education has to play a significant role in the future growth potential of the developed economies. Quality education will be the decisive factor in protecting and increasing GDP per capita. It is also the foundation of social mobility and a precondition to fully utilising the innovative capabilities and entrepreneurial talent of a society's members. For both reasons, it needs to be another key target of social investment.

7. Reinvest in the asset base. For more than a decade, the developed economies have reduced investments in public infrastructure and productive assets. World-class infrastructure is an important precondition for economic development and national competitiveness. Over the past few decades, Western multinationals have used their free cash flow mainly to invest in developing economies. Now that these investments are paying off, it is time for them to reinvest in the efficiency of production sites in their home markets and work off the investment backlog. Governments need to encourage private investment.

8. Increase raw-material efficiency. Pursue alternative-energy technologies. Although almost half of new power capacity added worldwide in 2011 was in renewables, fossil fuels still contribute around 80% to the total power generated.55 And with the discovery of new techniques for exploiting fossil fuels--take, for example, the shale-gas boom, which may turn the US into a net exporter of energy--it will be tempting to slow the transition to renewables. But such solutions will only be temporary.

9. Cooperate on a global basis. There is a risk of descending into vicious circle of beggar-thy-neighbour economic policies leading to much lower growth and slower improvement of living conditions worldwide.

This will involve supporting economic restructuring in the developed world. The creditors have to help the debtors pay back their debts. This will require the deficit countries to run a trade surplus and the former surplus countries to run a deficit. The emerging economies need to adjust their business model, focusing less on export-based growth and more on domestic consumption. These countries might also support economic adjustment in the developed economies by participating in efforts to reduce the debt overhang in an orderly way through restructurings and redemption funds.

10. Boost innovation. It must be made easier for a growing and highly productive workforce and for engineers and technologists to innovate, and for entrepreneurs to start new businesses.

A woman wearing a mask looks across the Pudong on 16 January this year

Source of picure: Zuma/Rex Features

By John Richardson

A DISPUTE between state-owned refiners Sinopec and PetroChina and environmental regulators serves as a good example of the difficulties China faces in reforming its growth model.

The debate about the environment is at the top of the political and economic agenda as a result of Beijing's smog crisis.

China's new leaders have to get this right.

"Heavily regulated fuel prices have discouraged Chinese refiners from producing cleaner diesel, as the higher costs can't be passed on to consumers," writes the Wall Street Journal.

"Meanwhile, trucks account for almost one quarter of China's vehicles but contribute a disproportionate share, almost 80%, of vehicle particulate matter.

"In one example, the Finance Ministry and Chinese refiners are deadlocked in negotiations over subsidies to help offset the higher costs of upgrading and operating refineries that produce cleaner diesel fuel, according to Gong Huiming, transportation director at the Energy Foundation, a nonprofit that focuses on U.S.-China energy issues."

If fuel prices were completely liberalised, thus motivating Sinopec and PetroChina to produce cleaner diesel, any reduction in public anger over the environment could be wiped out by increasing protests over more expensive fuel.

The majority of Chinese citizens earn less than $10 a day and when you are poor, you spend a higher proportion of your income on fuel and food then when you are rich.

And so, while China might make its middle class netizens a great deal happier if it tackles environmental problems, it could anger its much bigger constituency of low income earners if fuel costs increase.

Also, can Beijing successfully force the state-owned enterprises (SOEs) in general to clean up their environmental act? (it is unfair to just single out the refiners. They strong argue, by the way, that they have spent a lot of money upgrading their refineries to meet higher fuel standards.)

The SOEs are powerful political constituency because of their overarching role in the economy.

Thus, what they say will continue to count and they are likely to strongly resist implementation of better environmental standards.

"Handling China's state-owned companies big and small will be a challenge to any effort by the new Chinese leadership under Xi Jinping to reform the economy," continues the Wall Street Journal.

"While they compete for capital and resources with the private sector, they are also major employers with politically connected leaders and often function as an instrument of Beijing's policy goals, giving them tremendous political sway."

By John Richardson

The end of the eight-week long bull-run in China's purified terephthalic acid (PTA) pricing might well indicate a wider problem about to beset other petrochemicals: Reality undermining the positive sentiment of the early part of this year.

"PTA prices surged by 10% from early November to early January, mainly led by a strong uptrend in PTA futures (futures contracts on China's Zhengzhou Commodity Exchange)," wrote Becky Zhang, senior ICIS pricing PTA and mono-ethylene (MEG) editor for Asia, in her 18 January report.

"The downward correction in PTA futures that began on 8 January has dampened market sentiment and discussion prices in the physical market," added Becky.

One of the reasons for the dip in the market is buyers retreating to the sidelines ahead of the Chinese New Year, which falls on 10 February.

But the recovery in PTA, in petrochemicals prices in general, in oil prices and in stock markets, has largely been driven by historic economic data: Better purchasing managers' indices, exports and GDP growth etc for China and the US for December and Q4 2012.

The retreat to the sidelines in PTA could, therefore, also reflect:

*Concerns about tighter labour supply and higher wages post-CNY that might well further squeeze the margins of China's textiles and garments manufacturers, resulting in more factory closures.

*Higher environmental compliance costs, and again factory closures, as China's new leaders respond to rising anger over pollution.

*Worries over the strength of textile and garment exports to the West, as a result of economic problems in the US and the Euorozone.

*A problem specific to the polyester chain: Greater substiution of cotton for polyester due to cheaper cotton. Cotton prices fell by 20% in 2012, but have recently recovered as a result of the mini commodities bull run. However, the recovery is not expected to last because of record-high stockpiles.

*The imminent start-up of large amounts of new PTA capacity in China, which was built on the assumption that the future would largely be the same as the past. "Asia's PTA capacity is expected to increase by 12m tonnes/year in 2013, which will outstrip expected polyester expansion of around 8.7m tonnes/year," added Becky, in this ICB article. "Overall PTA operating rates are likely to fall further to 69% in 2013 with the 24% increase of capacity, despite 8% demand growth from the polyester sector. China will see five projects and 10m tonne/year of PTA capacity addition in 2013, increasing its total capacity to 38m tonnes/year by the end of 2013."

In the past, the Chinese government prioritised job creation in low-value manufacturing plants in the country's southern and eastern provinces. This was absolutely essential for social stability because of the demographic dividend of a rapidly increasing working population.

But now the working population is in decline because of the one-child policy.

Tight labour markets mean that the government doesn't have to worry if low-value factories close down because displaced migrant workers will easily find jobs elsewhere, often back home in the countryside.( As part of the effort to narrow the gap between the rich and poor, more government money is being on rural communities.)

China's priority is, instead, to promote higher-value manufacturing as it tries to escape the middle-income trap.

The focus is therefore on energy efficient, environmentally compliant manufacturers making, for example, higher-value technical textiles and fashion garments, rather than producers of cheap shirts and blouses etc.

Even if lost demand for PTA and polyester in China eventually re-appears in inland China, and in other countries such as Vietnam and Bangladesh, where labour costs are lower, sales will decline in the short term.

By John Richardson

THE overall HSBC flash purchasing managers' index for January, which was released yesterday, was at a two-year high (see the above chart), with the sub-index of production at a 22-month high.

This is great news for equity values and commodity prices, including petrochemicals. We might well see a rally in petrochemicals prices at the end of this week as more traders take a punt.

But this very thought provoking article from Business Insider, by Dr John Lee, associate professor at the Centre for International Security Studies at Sydney University, underlines once again that official government data is politics in China.

Could it be that manufacturers are ramping-up production on the basis of flawed official data?

Dr Lee argues that GDP growth numbers are collected in such a hurry in China that accuracy is all but impossible, and that the data from each province is then centralised and "revised" by politicians.

"County-level officials have massive career and personal incentives to tell Beijing what it wants to hear as regards hitting central targets - whether this be higher growth, an 'engineered' slowdown, or the drivers of growth such as fixed investment or consumption. It is the basis for their praise and promotion," he writes.

"While the upside for dishonesty is obvious, there is usually little downside, as it's unlikely they will be caught, let alone punished, for fudging figures.

"Bear in mind that Beijing also has strong political incentives for wanting to spread some optimism around at the moment. The new leadership under incoming President Xi Jinping and incoming Premier Li Keqiang will not be formally confirmed until March. The interregnum period until then is not the time to release bad news.

"The point is that we cannot know whether China really arrested seven consecutive quarters of declining growth, just as we cannot know whether the figures for the last seven quarters really were. No one has done any substantive and independent investigation of it."

He also argues that the "recovery" has been driven by increased fixed-asset investment, which makes the task of economic rebalancing even harder.

But what about all the evidence of stronger retail sales, including a recovery in auto sales?

"We are told that car sales improved on the September 2012 quarter and grew 6.9% in the December quarter," continues Lee.

"The problem is that a significant part of the sub-data used by the National Bureau of Statistics considers an item to be purchased (consumed) when it enters the showroom, not when it is driven away by a customer.

"China's dealerships had 2.2 million unsold cars in their showrooms in June 2012, rising from 900,000 in December 2011. The figure of unsold cars in showrooms could now be as high as 2.5 million.

"Yet, manufacturing capacity is rising, suggesting that car manufacturers are jumping into the Chinese market with their eyes closed.

"According to KPMG's Global Automotive Executive Survey 2012, China had an estimated 6 million units of unused manufacturing capacity, more than twice the size of the entire car market in Germany. This figure is expected to rise to 9 million units of unused manufacturing capacity by 2016.

"Some of these unsold cars are counted as having been consumed. The same problem applies to many other retail items. Although we cannot know the true figure, it is highly unlikely that domestic consumption exceeded fixed-investment [as has been claimed] as the major driver of GDP growth in the December quarter."

By John Richardson

INDIAN polyvinyl chloride (PVC) demand is expected to increase by 13-14% in the financial year ending 31 March 2013 compared with just 3% growth in 2011-2012.

This is further evidence that, just perhaps, the decline in the country's overall macro-economic environment has bottomed out.

"In volume terms, consumption will reach around 2.25m tonnes at the end of this financial year compared with 1.98m tonnes in 2011-2012," said a source with an Indian producer.

"And we expect the improvement to continue as we are predicting that consumption will reach 2.5m tonnes by the end of 2013-2014."

He attributed the rebound in growth during 2012-2013 to a slight improvement in business confidence over the last few months of the calendar year as the overall economy showed signs of picking up.

Another more important factor behind the rebound was heavier than usual monsoon rains 2011-2012.

This shaved some 100,000 tonnes off demand because of lower agricultural production, the source added. Seventy percent of Indian PVC demand is derived from pipe sales into the agricultural sector.

Last year's monsoon, however, although it began very badly due to lack of rainfall, was good overall.

The monsoon season occurs between June-September.

A further reason behind the rebound was improved affordability. In 2011-2012, end-users struggled to afford PVC, priced in rupees, as a result of the decline in the value of the local currency versus the US dollar.

"This resulted in more fillers being mixed with virgin resin," the source added.

PVC imports will likely total 950,000-1m tonnes in 2012-2013 compared with 750,000 tonnes in 2011-2012, he said.

"There were no domestic capacity expansions during 2012-2013 and so extra demand was largely met by greater imports," he continued.

But by end-2013, Reliance Industries will bring on-stream an additional 100,000 tonnes/year of capacity at Dahej, in the state of Gujarat.

DCW Ltd and Chemplast, two other Indian PVC producers, are also planning expansions during 2013.

"This should mean that incremental demand growth in 2013-2014 will be met by local capacity rather than by imports," said the source.

Further good news on the demand front is that polyethylene (PE) and polypropylene (PP) demand also grew very strongly last year, despite weaker than expected GDP (gross domestic product) growth. GDP is expected to expand by only 5.5% in 2012-2013, well below the government's target of 8% plus growth.

And what might bode well for all petrochemicals and polymer demand in India during 2013-2014 is an expected recovery in GDP growth. For instance, the median of 30 estimates in a Bloomberg News survey is for 6.5% growth during the next financial year.

"As I said, there has been a modest improvement in business sentiment, but the long-term problems are still there," added the source with the PVC producer.

"Until our infrastructure improves, inflationary pressures will always remain a threat to growth. The economy has hit a kind of speed limit because of inadequate ports, road and electricity supply etc."

While inflation fell to a three-year low in December of 7.18%, this was still the highest among all the big emerging economies.

And so if GDP growth does pick up, the concern is that inflation will also rise again, forcing the Reserve Bank of India to increase interest rates.

But earlier this month, Indian stocks hit a two-year high on greater confidence that the central government will press ahead with reforms.

Since last September, Prime Minister Manmohan Singh has set up a panel to speed-up infrastructure spending, has delayed tax increases that threatened to slow foreign direct investment and has opened up industries such as aviation to greater overseas investment.

"We think that India is going to be a success story this year. The government means business on reforms on this occasion and so we think that growth will surprise on the upside," said a Bangkok-based chemicals analyst.

The government has also introduced a cash transfer system in an effort to raise the incomes of India's poor.

The system involves depositing pension and scholarship payments directly into the bank accounts of about 245,000 people in 20 districts in India, with plans for a huge expansion of the scheme, according to the New York Times article.

Worries remain, though, that India's political system will once again derail efforts to liberalise foreign investment and boost infrastructure spend.

And the key to the success of the cash transfer initiative will be whether it can be extended to India's subsidy system, the NYT added.

India spends an estimated an estimated $14bn per year on a food and fuel subsidy system that is widely viewed as being poorly managed.

For instance, grains pass through numerous middle-men who divert supplies for their own profit and substitute good for poor quality grains before the food reaches the people who need it, said the NYT article.

The pressure is on for a more equitable distribution of Indian growth, as 68.7% of Indians live on less than $2 a day, according to the World Bank.

Unlocking some of this potential might help India begin draw closer to China in terms of polymers consumption.

At the moment, the gap is huge. In the case of PVC, again, for example, the 2.25m tonnes of Indian consumption estimated tor 2012-1013 compares with an ICIS Consulting figure of 13.68m tonnes for China in the calendar year 2011.

China graduates at a job fair in Chongqing in November 2012

Source of picture: HAP/Quirky China News/Rex Features

By John Richardson

CHINA sometimes seems like several different countries from the super-rich elite to the middle classes whose average annual disposable income is less than the cost of one square metre of an apartment in Beijing to the villagers in Hubei province, who were recently visited by president-to-be, Xi Jinping. These villagers, who live just 300 kilometres from the super-rich in Beijing, earn just Rmb 1,0000 ($160) a year.

And then there are the millions of college graduates in China, many of whom are reluctant to take factory floor jobs because of a cultural tradition that has persuaded them that they deserve white-collar employment.

But many of these graduates have taken vague business and economics degrees or very niche qualifications, such as three-year associate degrees in the design of offices and trade show booths, that make it tough for them to find white collar work.

"There is a structural mismatch - on the one hand, the factories cannot find skilled labour, and, on the other hand, the universities produce students who do not want the jobs available," Ye Zhihong, a deputy secretary general of China's Education Ministry, told the New York Times.

At the same time, China is producing hundreds thousands of brilliant science and engineering graduates that are great national resource.

Working out what such variables might mean for chemicals demand growth is mightily difficult.

Ignoring a task because it is difficult is, however, hardly a good idea.

By John Richardson

CHEMICALS and polymer markets have enjoyed a very strong recovery in Asia since November/December, according to many of the traders we have spoken to.

"We are getting $150-200/tonne more for benzene and toluene in January compared with early November. There has been a strong recovery in confidences," said a Dubai-based trader.

But a second Dubai-based trader, in this case in polyolefins, cautioned that the recovery was at least in part a relief rally.

"People were so sick of feeling depressed that all the good economic news has given them an excuse to feel good again," he told us.

"I am far from convinced that it will last."

The psychology of commodity markets is fascinating, but potentially very toxic for those who get taken in by the hype - either on the downside or the upside. For instance, earlier this month iron prices had more than doubled compared with early September. None of the commodity analysts the blog has spoken to in Perth, Australia, believe that the rally is justified and therefore sustainable.

But the optimism is so intense right now that chemicals analysts, referring to the cracker-polyolefins side of petrochemicals, are saying that the current recovery will at the very least be sustained throughout this year.

"I don't believe that product spreads will weaken much during the rest of 2013, despite all the new capacity due on-stream in polyethylene (PE) and polypropylene (PP) from March-April, but they probably won't improve," one analyst told us.

"The reason is that demand will be good enough to absorb supply."

He added that we are in a "news sweet spot" resulting from the Republicans agreeing to kick the US budget deficit crisis down the road and all the positive data emerging from China.

But what the blog cannot fathom is why, if the recovery is strong, why high-density variable cost margins in both Northeast Asia and Southeast Asia (see above chart) were so weak up until the second week of January.

Something is amiss...

Be careful out there.