By John Richardson
WHEN you’ve finished renegotiating with your lenders, your shareholders and your bondholders about what the collapse of oil prices means for your chemicals company, you will, hopefully, have a strategy to come through this crisis more or less in one piece.
The next stage is, of course, the implementation of the new agreements you have reached with your creditors. These agreements will be designed to compensate for heavy inventory losses and the turnover of your company being down to, say, $20 billion from $50 billion.
This will, no doubt, involve several rounds of cost cutting, including redundancies.
If you are a US company you will also have to scrap ethane-based cracker projects that only ever made sense in terms of theoretical future margins. These projects have never added up based on any reasonable assessment of demand.
And the next phase is to then get to grips with what the collapse in oil prices really means for the global economy over the long term.
What is happening in crude markets today is a demand shock every bit as big, if not bigger, than the supply-side shock which occurred in 1973. This point is very-well made by fellow blogger Paul Hodges, in this post. We have entered an era of global deflation, driven by demographics.
Phase three is to then devise a whole new strategy for growth.
Developing markets should remain central this strategy, as this is where the biggest opportunity still lies.
In Indonesia, for example, there is an $83.8bn opportunity up for grabs in helping the country reduce extreme poverty.
Seizing opportunities such as this will involve helping the developing world improve sanitation, healthcare, education and infrastructure.
Talking of infrastructure, here are some sobering facts from The Economist about electricity supply in Africa:
- Lack of generating capacity means that the whole of sub-Saharan Africa, with a population of 910 million, consumes only 145 terawatt hours of electricity a year—less than the 4.8 million people who live in the state of Alabama. That is the equivalent of one incandescent light bulb per person for three hours a day.
- In the absence of electricity, the usual fallback is paraffin (kerosene). Lighting and cooking with that costs poor people the world over $23 billion a year, of which $10 billion is spent in Africa. Poor households are buying lighting at the equivalent of $100 per kilowatt hour, more than a hundred times the amount people in rich countries pay.
- And kerosene is expensive as well as dangerous. Stoves and lamps catch fire, maiming and killing. Indoor fumes cause 600,000 preventable deaths a year in Africa alone. But candles or open fires are even worse—and so is darkness, which hurts productivity and encourages crime.
Portable solar-powered devices might be one of the technological solutions to Africa’s electricity crisis – and, of course, these devices are made from chemicals and polymers.
“Sales of devices approved by the International Finance Corp/World Bank’s Lighting Africa programme are nearly doubling annually, bringing solar power to a cumulative total of 28.5m Africans. In 2009 just 1% of unelectrified sub-Saharan Africans used solar lighting. Now it is nearly 5%,” added The Economist in the same article.
And as hundreds millions more people are provided with the basic necessities of a good life, they will end up earning more money. As they earn more money they will buy lots more consumer goods, which are again made from chemicals and polymers.
The above chart details the scale of the lost opportunity in just one polymer, polypropylene (PP):
- Africa has a population of 1.1bn people and yet its consumption is expected to only reach around 2.8m tonnes by 2025, based on current rates of development.
- Vietnam has a population of only 93 million today, and yet by 2025 it is expected to be consuming approximately 1.4m tonnes of PP.
- Thailand looks set to do even better. It has a population of only 67 million and yet by 2025, it is expected to be consuming around 2 million tonnes of PP.
With Africa’s population forecast to nearly double by 2040, just do the maths on what it could mean if the chemicals industry helps lay the foundations for much-stronger growth.