Asian Chemical Connections

India's Economic Problems Further Exposed

2013-06-18T03:16:55Z

By John Richardson

CHEMICALS company executives are going on the record to say that the outlook for growth in China has become exceptionally uncertain.

This echoes comments first made by the blog 18 months ago.

At that time, the consensus view amongst analysts seemed to be that China was definitely heading for a Supercycle, when it would power global petrochemicals consumption, more than compensating for any continued weakness in the West.

And now doubts are increasing over another great hope for the petrochemicals industry - India.

(See the above table for forecast Indian demand growth rates for polyolefins, which were made public at the Asia Petrochemical Industry Conference in Taipei, Taiwan, last month. We will be revisiting these estimates.)

The evidence that India's growth model was built on shaky ground has also been around for a long time.

As fellow blogger Paul Hodges points out in this post, it has always been a fallacy to argue that India will quickly turn into a Western-style middle-class country.

Why? Because:

* India remains one of the world's poorest countries.

*As we again warned in chapter 6 of Boom, Gloom and the New Normal, most analysts have wrongly interpreted high levels of income growth to mean India will rapidly become a Western middle class country.

*Most analysts reached this conclusion because India's average per capita income had been growing fast, in percentage terms, as economic reforms took place. It was up 12% in 2012 after 14% growth in 2011.

*But, and this the crucial issue, average per capita income is still only Rs 57k/year ($1040).

What is wrong with India is that far too much wealth is concentrated in the hands of far too few people.

Plus, flawed politics (what country doesn't have flawed politics?) make it difficult for India to achieve the social and economic reforms essential to adequately even-out the benefits of growth.

A huge issue has for a long time been weak foreign investor confidence. Foreign investment is vital for solving India's infrastructure impasse.

India's economic weaknesses have been further exposed by the recent acceleration in foreign capital flight.

Part of the reason for this increased outflow is indications from Ben Bernanke that the US quantitative easing programme could soon be curtailed. There has been a retreat from emerging market equity markets in general.

"From 20 May up until last week, around $10bn poured out of the country, partly thanks to Ben Bernanke's comments," said a Mumbai-based chemicals trader.

But he believed that the speeding-up of capital flight was also been driven by "India's people and policies being at a crossroads. Nobody knows what direction we should take.

"The overseas investment community had already been scared-off by mindless policy decisions on taxation - for example, the Vodafone case."

Last week, the value of the Rupee fell to an all-time low against the US dollar.

"The Reserve Bank of India (RBI) has been under pressure from the entire business community to lower interest rates and was expected to respond positively in June or July," the trader continued.

"But now, because of the risk of a further outflow of dollars and the impact that this would have on inflation and the current account deficit, the RBI will find it a lot harder to lower interest rates.

"This is likely to mean no respite for Indian corporations that are paying a Benchmark Prime Lending Rate (BPLR) of 15%, even in a downturn.''

More Great News On China

2013-06-17T04:08:21Z

Pollution over eastern China

Source of picture: Wikimedia

By John Richardson

IT wasn't the kind of news that China's polyethylene (PE) traders wanted to reflect on over the weekend.

On Friday, China's cabinet - the State Council - announced that it had adopted 10 measures designed to improve air quality.

"Many of the measures had previously been enacted by some cities, or were the subject of national experiments that had not yet received the imprimatur of the State Council, wrote the New York Times in this article.

The measures, according to Reuters, include:

*Accelerating the installation of pollution control equipment on small, coal-fuelled refineries.

*Curbing the growth of high-energy-consuming industries like steel, cement, aluminium, and glass.

*Reducing emissions per unit of GDP in key industries by at least 30% by the end of 2017.

What the traders would instead have preferred to hear would have been initiatives to boost GDP growth, via the old and now fatally flawed economic growth model.

Anticipation has been high for several weeks now amongst the traders that bank lending will soon be boosted. This has led to more intra-trade deals and is probably the main reason, we now think, why pricing had edged up over the last three weeks (another factor has been the perception of tighter supply). For the week ending 14 June, China's PE prices rose by a further $10-20/tonne, according to ICIS.

But PE and all other chemicals and polymer traders are whistling in the dark. The kind of news that was released on Friday, of more rather than less economic rebalancing, will be the dominant theme for the rest of this year and beyond.

As a result, more measures to restrict economically, environmentally and socially harmful new industrial investments are likely. And there will be no relaxation of tighter bank-lending conditions, or a cut in interest rates, we think, as this would only worsen China's over-reliance on investment-led growth.

In the longer term, Friday's announcement underlines how it is becoming much harder to win approval for new chemicals projects.

We continue to wonder what this might mean for growth of the coal-to-olefins industry. China has to balance developing the under-developed West against its ever-strengthening environmental lobby.

In general, across the whole of China's chemicals industry, the approvals process appears to have become a lot more problematic.

"Corporate leaders say that the Chinese public has rapidly become more prone to question the wisdom of big investment projects, particularly in the chemicals industry," wrote the New York Times in the same article that we linked to above.

" 'This is quite fast, how this reaction has stepped up, particularly in China,' Martin Brudermüller, the vice chairman of the German chemicals giant BASF, said in a meeting with reporters in Hong Kong on June 4."

"With the protests, he later added, 'China becomes a little bit more like the West.' "

For anyone who cares about the long-term prosperity of China, this is fantastic news, indeed - and a great way to start the week.

A Delicate Balancing Act

2013-06-14T01:59:36Z

XI Jinping (see picture), the country's new president, is being described either as a nationalist, who has set China on an overly aggressive course or as someone who will skilfully and harmoniously guide the nation through major domestic and international reforms.

According to Robert Lawrence Kuhn , an international investment banker and author, Xi's nationalism, or perhaps more accurately his patriotism, is not at odds with his obvious passion for reform.

Kuhn, in this New York Times article, writes that there are reasons why there is no contradiction between the two aspects of his leadership. The reasons include:

• The need to consolidate power. Xi was not selected by Deng Xiaoping, the architect of reform, as were his predecessors (Jiang Zemin and Hu Jintao), and he was not elected by the people. Conventional wisdom had it that Xi would be a weak leader. In order to realise his Chinese Dream, Xi needs to assert strength and assure control. So far, he has exceeded expectations.

• The need to enable reform. Xi and Premier Li Keqiang are determined to enact far-reaching economic reforms, the most extensive in 15 years, but there is stiff resistance from those whose dominance would be diminished and benefits cut (such as state-owned enterprises with ties to party power). This resistance can no longer be couched credibly in terms of ideology, so it appeals to nationalistic aspirations by accusing reformers of "worshipping Western ways," "glorifying Western models" or "caving in to Western pressures." Xi's proactive nationalism is a strategy of "offence is the best defence" -- an inoculation, as it were, against the political virus of being labelled "soft" or "pro-Western."

• Maintain stability through unity. China faces numerous internal tensions, especially a class-divided populace (rich-poor, urban-rural, coastal-inland) that have erupted within one generation. Moreover, an increasingly complex society can fracture along multiple fault lines. Pollution, corruption, healthcare, housing, migrant workers, workers' wages, social cynicism, changing values, among other raging issues, threaten to fragment society -- and all are exacerbated by an energetic social media. Only nationalism, which resonates intrinsically and passionately across Chinese society, can provide sufficiently strong social glue.

Kuhn, therefore, concludes that American policymakers need to understand that an apparent contradiction isn't a contradiction at all.

According to some people in the chemicals industry, it is absolutely inevitable that Xi, and others in the Chinese government, will succeed in this delicate balancing act. Hence, there is a great deal of enthusiasm at the moment to build new capacity to serve Chinese growth.

We really, really hope that success is achieved - and actually think that it will be achieved. We think Xi shows all the signs of being a great leader.

But a debate about the numerous alternative scenarios must still take place.

The 10th ICIS Innovation Awards

2013-06-13T06:52:15Z

The deadline of 3 July is closing in fast for entries to the 10th ICIS Innovation Awards, designed to reward innovation, environmental advances and sustainability in the global chemical industry. If you want a chance to win extensive coverage in ICIS Chemical Business and receive industry-wide recognition for your hard-won innovations as they enter the marketplace, now is the time to act.

Full details and an online entry form can be accessed at www.icis.com/awards, which also contains details of all winners from the past nine years.

How well does your innovation match up?

This year we are pleased that Roland Berger Strategy Consulting has stepped up to take the overall sponsorship of the ICIS Innovation Awards. It will award to prize to the overall winner this year, as well as sponsoring the Best Product Innovation category.

We are also delighted to welcome back US Chemicals as a category sponsor and to welcome two new category sponsors: Versalis and Nexeo Solutions.

The Complexities Of Benzene

2013-06-13T00:18:36Z

By John Richardson

SOMETIMES petrochemicals markets defy reality, on the occasions when pricing moves out-of-synchronicity with the underlying nature of demand.

This is the case with benzene today (see the above pricing chart) as my ICIS colleague Truong Mellor describes, in this excellent Insight article.

He says that:

*European Benzene pricing has been bullish, as a result of the adoption by cracker operators of cheaper ethane feedstock and liquefied petroleum gas (LPG), both of which yield less pyrolisis gasoline than naphtha.

*This trend is likely to continue globally as supplies of paraffinic crude grades, such as Eagle Ford and Bakken in the US, which yield less aromatics through the refining process, grow.

*Benzene supply in Asia this year is being diverted towards derivative units in China as numerous phenol and bisphenol A (BPA) plants come on stream. Asia has traditionally been a key exporter to the US.

*Coal-based benzene production output has also been reduced since the downturn in the Chinese steel industry from 2008. Coal-derived benzene accounts for approximately 20% of Chinese production.

And, of course, oil prices have remained far-too high, thanks to speculation. The cost of oil, which underpins the price of benzene, does not reflect the real nature of the global economy.

Earlier, one could argue that long-term supply was constrained and that China would continue to voraciously consume the limited availability.

But shale oil has contributed to a major shift in the supply outlook and China is slowing down. The prospects for other emerging markets also appear weaker.

Perhaps some good news for crude pricing might be the perception of a stronger using economy, prompting the Fed to do more than just hint about reining back its bond-buying problem.

This would strengthen the dollar and thus lower the value of oil as a "store of value". The prospect, or reality, of higher interest rates would also make gambling on crude more expensive.

And/or demand destruction, resulting from the real state of the global economy, will continue to erode crude pricing - along with much-longer supply.

As far as benzene supply goes, Truong adds: "Combined with a largely pessimistic outlook for chemicals demand in the near to mid-term, it seems that benzene availability and pricing will continue to plague the downstream.

"Unless there is a determined effort from the market to arrange for further extraction capacities, the only path to redressing the global balance of benzene is [also] through demand destruction."

These are incredibly difficult and complex times for petrochemicals, even if, right now at least, the benzene spread over naphtha (see chart below) remains very good.

Demographics And Shale Gas

2013-06-12T01:18:29Z

By John Richardson

GLOBAL shale resources are large enough to cover more than a decade of oil consumption, writes the FT in this article, quoting the US Department of Energy.

And as my colleague Nigel Davis writes in this, as usual, excellent Insight article, the US Energy Information Administration (EIA) has upwardly revised its estimate of worldwide recoverable shale oil and shale gas (see the above map showing the EIA's latest estimates).

"Estimated volumes of technically recoverable shale gas have been revised upwards by 10%, the EIA said on Monday," adds Nigel.

"That may not seem a lot but the addition of these sometimes wet gas resources, largely unrecognised until only a few years ago, lifts the global gas reserves total by 47%, or 7,299 trillion cubic feet (tcf). An energy bonus writ large.

"The agency has also revised upwards its US shale oil and tight oil reserves estimates, taking the international total to 345bn barrels.

" 'Globally, 32% of the total estimated natural gas resources are in shale formations, while 10% of estimated oil resources are in shale or tight formations,' " the EIA says.

"The agency's data show how tight oil and shale gas have revolutionised the US energy picture, accounting for 29% of total national crude oil production and 40% of US natural gas production in 2012.

"The big question over time will be how other nations, principally those with the largest deposits, but also some relatively smaller players, will facilitate cost and environmentally effective shale gas and oil development."

This last point, we think, is the key to the future.

For example, Germany might face a choice between preserving its ancient beer industry and fracking, if the alarm-mongers are to be believed.

"German brewers have warned Chancellor Angela Merkel's government that any law allowing the controversial drilling technique known as fracking could damage the country's cherished beer industry," writes Reuters in this story.

"The Brauer-Bund beer association is worried that fracking for shale gas, which involves pumping water and chemicals at high pressure into the ground, could pollute water used for brewing and break a 500-year-old industry rule on water purity."

Not meaning to sound flippant, but could part of the resistance in Germany come from the fact that it has an ageing population? If you are near retirement, or already retired, you might prefer to spend your time sipping good beer in a street side café, overlooking beautiful scenery, rather than feel it necessary to buy overseas, mass-produced beer as you stare at an ugly oil or gas rig.

But if you are younger, and are perhaps therefore more willing to accept change, you might be more willing to accept compromises on the environment - if such compromises are really necessary in order for fracking to work economically.

Of course, though, Germany has long had a very strong environment lobby, which has often been inspired and driven by young people.

Europe's petrochemicals industry, as it rapidly loses competitiveness, needs to find a way through such complex debates if it is to secure its long-term future.

And all of this serves to underline how we live in an ever-more complex world, where demographics will play a huge role in shaping not only demand, but the future behaviour of many societies.

Social mores will evolve as populations grow older in the West.

Older people are more conservative in both how they spend their money and how they behave.

But also, as the proportion of younger people declines, this will affect their behaviour in ways that we have yet to fully understand.

As they face declining employment prospects, for instance, they may become more politically radical, more prepared to take to the streets and thus bring governments down.

And/or they may simply emigrate, which would obviously accelerate the ageing of the countries that they leave.

This is incredibly difficult and so the temptation is to give up before we even start.

We cannot afford to give up. Demographics are just too important.

China's Leaders Stay The Course (So Far.....)

2013-06-11T02:53:55Z

By John Richardson

Everything is still going to plan. As the chart above shows, China's official bank lending is down by 16% in the year to date as the government rations credit to the big state-owned enterprises. The last thing that China needs right now is even more unneeded industrial capacity and infrastructure.

But, of course, those with a short term trading perspective, as we discussed yesterday and have discussed many times before, always seek to ignore the long term fundamentals for the sake of quick gains.

And so the view is gathering momentum that China might cut interest rates in H2, following the slowdown in lending and the release of a raft other "disappointing" economic indicators at the weekend.

Fortunately, though, Xi Jinping, during his weekend meeting with President Obama and Li Keqiang, in a speech to provincial leaders on 8 June, indicated that they were determined to stay the course.

Lu Ting, head of Greater China economics at Bank of America Corp in Hong Kong, told Bloomberg that he expects "no new stimulus measures" and no interest-rate cuts, though authorities may speed up allocation of project funding. Let's hope he is right.

For those in the chemicals and polymer industries with a longer-term perspective, the slide below might be useful. It shows areas of focus under China's 12th Five-Year-Plan (2011-2015) that present enormous opportunities as China moves towards more sustainable growth.

China PE Recovery Lacks Firm Foundation

2013-06-09T14:27:29Z

By John Richardson

DESPITE a slight pick-up in China's polyethylene (PE) prices over the last two weeks (see above chart), producers and traders remain gloomy about the immediate outlook.

"What has driven prices up is that new supply hasn't hit the June market in volumes that people expected," said a source with a global producer.

"Converters had held back from the market in May, expecting bigger volumes to arrive, and, as a result, have been left a little short of material. This has led to a mild flurry in buying."

On 30 May, ExxonMobil reportedly announced that it had started production at its new 1m tonnes/year cracker at Jurong Island in Singapore, which will feed two 650,000 tonnes/year linear low-density polyethylene (LLDPE) plants at the same site.

"The problem is that the market had expected the cracker and the downstream plants to be on-stream in April," the source added.

A Singapore-based trader agreed, adding that output from the ExxonMobil plants and Wuhan Petrochemical in China could soon substantially lengthen the market. Trial runs are expected to be conducted in June at Wuhan's high density PE (HDPE) and LLDPE plants, the capacities of which are each 300,000 tonnes/year.

"Downstream demand in China also remains essentially very poor. People are on the whole still buying hand-to-mouth" said the source with the producer.

And the Singapore trader described 2013 to date as a "pretty much of a disaster for the trading community. We built up stocks before the Chinese New Year, expecting a recovery after the holidays that didn't happen. Volumes have remained much below what most of us budgeted for."

The problem is, of course, the "unexpected" slowdown in China's economy. Back in February, many people had been betting on stronger rather than weaker economic growth.

"Stretch-film producers in China are, for example, suffering particularly badly because of the lack of demand for packaging material from the electronics sector," continued the source from the PE producer.

"Export orders for computers, TVs etc seem to be way down on 2012 because of the state of the global economy."

This wasn't the impression created by the overall value of April export orders, which year-on-year surged by 14.7%.

But for several months now, customs data has been questioned because of claims of over-invoicing. Traders have been over-invoicing, mainly via Hong Kong, in order to smuggle hot money into China for speculation on property, say some economists.

On Saturday 9 June, what is likely to be the real state of state exports was revealed. May export orders were reported to have risen, year-on-year again, by just 1% - the slowest growth for 10 months. This follows a crackdown on over-invoicing by China's General Administration of Customs.

Other disappointing macro-economic figures were also released over the weekend.

"China's consumer inflation slowed to 2.1% [in May], the lowest in three months, while producer prices fell 2.9%, the lowest since September," wrote Reuters in this article.

"A Reuters poll had put inflation at 2.5% and factory-gate prices down 2.5%.

" 'The inflation data showed China's economic growth continued to slow down. Q2 growth is probably even slower than Q1,' said Jianguang Shen, chief China economist at Mizuho Securities Asia in Hong Kong.

"Separate central bank data showed that Chinese banks lent 667.4 billion Yuan in new loans in May, missing market expectations of 850 billion Yuan and lower than April's 792.9 billion Yuan."

Weaker-than-expected inflation might lead to an interest rate cut later this year, speculated Reuters.

But a rate cut wouldn't fit with Beijing's firm commitment to economic rebalancing, and so we don't think it is likely.

Even if the cost of borrowing is lowered, this won't necessarily be good news for the economy. The risk at this stage of the economic reform process is that easier lending conditions will result in more misallocation of capital to property-market speculators and inefficient state-owned enterprises.

China's Auto Sales Challenge

2013-06-07T00:38:59Z

By John Richardson

THE assumption behind big investments in auto capacity in China - and in butadiene, synthetic rubber, polypropylene (PP) and other chemicals and polymer capacities linked to the auto industry - is that, eventually, Western levels of car ownership will be achieved.

But Hou Yankun, head of China Equity Research and head of Asia Autos at UBS Securities, told the China Daily in this article that 2013 will witness the "last wave" of sales surges in China's auto industry.

The China Daily wrote: Theoretically speaking, if car affordability continues to follow the examples of Japan and South Korea, sales could maintain rapid growth for at least 10 years in China.

But Hou said the ability of the country's roads to cope with that level of growth is already being stretched.

Data show that there are about 550 cars for every kilometre in Beijing, compared to 300 even in packed Hong Kong.

The average annual mileage of cars in the mainland is five times that of Hong Kong, added Hou.

"It will be a challenge for the government to raise the speed of road construction, to keep pace with the acceleration of auto ownership," he said.

Mega-cities including Beijing and Guangzhou have already introduced car-purchasing restrictions, and people in Shanghai have to enter an auction for car licenses because of massive demand.

Statistics show cities such as Fuzhou, Tianjin, and Nanjing are all suffering from low average driving speeds caused by chronic traffic congestion, which may force the local governments to consider purchasing restrictions, Hou said.

This serves to underline how China's growth story is becoming ever-more complex and ever-more nuanced.

Africa's Potential

2013-06-05T14:39:23Z

By John Richardson

AFRICA was described as "one of the last frontiers for the chemicals industry" by a delegate during last week's 2nd World ICIS Polyolefins Conference in Berlin.

The opportunity is certainly there with a population of around one billion people, and with six countries in the world's top ten fastest-growth countries (See GDP chart below).

But the continent's polyethylene (PE) and polypropylene (PP) consumption amounted to a total of just 4.2m tonnes in 2012. This compares with last year's PP consumption of more than 16m tonnes in China, with linear-low density PE (LLDPE) alone amounting to above 6m tonnes, according to ICIS Consulting.

Of course, though, there is a vast difference between a relatively politically, economically and socially unified China and Africa, said Hasan Alikhan, divisional manager of global chemicals and polymers distributor Emeraude, in a presentation during the conference.

Plus, China's economic development has been staggering over the last two decades, whereas Africa has struggled.

In addition, Africa has 54 different countries, many different cultures, many different languages, and a wide variety of customs procedures, import tariffs, business cultures, political and country risks and infrastructure challenges, added Hasan.

And the problem for any distributor, caught in the middle of the supply chain, is that producers obviously want constant sales, whereas converters in Africa often shut down and start-up based on fluctuations in local demand, he said.

But still, any chemicals and polymer company with a truly long-term perspective has to plan for if and when Africa becomes a major consumer.

And right now, with China undergoing an economic slowdown, and with the rest of the global economy struggling, Africa might well become a battleground for surplus volumes.

For reference, see Africa's polyolefins capacities below.

China's SMEs Continue To Struggle

2013-06-05T00:16:46Z

By John Richardson

ONE of the reasons why China's polyethylene (PE) demand growth has been below the increase in overall GDP for most of the years since 2006 has been the relatively weak performance of the country's small and medium-sized enterprises (SMEs). As the state has advanced, the private sector has retreated because most of the benefits of economic growth have ended up in the hands of the better-financed and better politically connected state-owned enterprises (SOE).

A key task of China's new leaders is to reverse this trend, as the SMEs are a crucial driver of innovation. They must play a bigger role in the economy if China is to escape the middle-income trap. They also account for the bulk of employment and make up most of China's chemicals and polymer buyers.

And so it is worrying that the official Purchasing Managers' (PMI) index for smaller companies fell to 47.3% from 47.6% in May. The overall index rose to 50.8% from 50.6%, but this should not necessarily be taken as good news because it could well be evidence of further misallocation of capital. The overfunded and inefficient SOEs, which are responsible for much of the overcapacity across many industries in China, are the main cause of the country's bad-debt crisis and so need to play a smaller, not greater, role in the economy.

The May index supports the view that China's leaders face a long and hard battle against the "vested interests" who want to maintain the current economic system. If President Xi Jinping and Prime Minister Li Zeqiang fail, so will China's economy.

The final HSBC/Markit Economics PMI for May offers further evidence that the SMEs are struggling. A preliminary reading for May, released last month, was 49.6, but the final reading has been revised-down to 49.2. The HSBC/Markit index primarily measures SMEs.

Turkish Escape Valve Under Threat

2013-06-04T01:30:13Z

By John Richardson

TURKEY has long been a useful barometer of the overall health of the global polymers industry, especially polyolefins, because of its heavy dependence on imports (see the slide below, courtesy of Ali Murat Ayar - managing director of Say Polymers, the Amsterdam-headquartered global polyolefins trader and distributor with operations in Turkey).

If external markets are weak, global producers seek compensation in Turkey, resulting in very competitive domestic pricing, as has been the case for most of this year, largely because of events in China. And, of course, the reverse occurs when the overall supply and demand balance is good.

But now the worry is that domestic demand in Turkey itself will take a hit as a result of political unrest - and thus will become less of a useful sink, or escape valve, for excess volumes.

As the second slide below shows, which is again from Say Polymers, what is at stake is very stable and consistent demand growth over the last 11 years.

"The Turkish economy depends a lot on external finance and capital flow," said Emre Deliveli, an economist and columnist for Istanbul's Hurriyet Daily News, in this International Business Times article.

"If the hedge funds get spooked and they get out of Turkey, the economy is going to crash."

This FT Beyondbrics blog post provides some useful further detail.

The summer tourist season, crucial for the Turkish economy, is also almost upon us. Tourism generates more than $20bn in revenues.

Perhaps it is, therefore, good news that Prime Minister Recep Tayyip Erdogan is out of the country, given that some of his recent comments have been somewhat inflammatory.

Southeast Asia's Export Dependency

2013-06-02T15:17:06Z

Source: Petroleum Institute of Thailand

By John Richardson

THERE is a lot of excitement about the self-sustaining nature of Southeast Asia's (SEA) economy thanks to, for example, nine consecutive quarters of GDP growth of more than 6% in Indonesia and rising domestic consumption across the region.

But, as we discuss in this Insight article for ICIS news:

*THE SEA polyolefins industry is heavily dependent on exports (see the above chart, showing Thai polyproplyene exports, as an example). A big percentage of those exports are to China, which, of course, will see slower growth for next 2-5 years as its economy is rebalanced.

*Indirectly, the SEA petrochemicals industry feeds into local economies that are heavily dependent on exports and it is not only China that faces economic challenges. Eurozone growth remains very weak. To give one example of this dependence, The US Central Intelligence Agency's (CIA) World Factbook valued Malaysia's exports at $239.8bn in 2012 out of total GDP of $307.2bn.

*Some of the SEA economies are in the midst of credit bubbles, leading to rapid and perhaps unsustainable increases in property prices. Comparisons have been drawn to the build-up to the 1997-1998 Asian Financial Crisis.

And, as we discussed earlier on the blog, several SEA countries face the longer-term challenge of escaping the middle-income trap.

In this ever-more complex and interconnected world, taking for granted sustained strong growth in any of the emerging markets is a very risky approach.

European Processors Bemoan Volatility

2013-05-30T04:35:52Z

By John Richardson

THE blog listened to an interesting discussion yesterday, on the first day of the 2nd ICIS World Polyolefins Conference in Berlin, during which plastics processors tackled the perennial issue of volatility.

They complained that:

*Trying to build long-term relationships with producers is difficult because polymer sales guys only stay in their jobs 10 months on average. Thus, because of the constant turnover, a new guy will arrive, have something to prove to his boss and, as a result, will only care about pushing for the maximum price. If someone has been in a post for 2-3 years, say, he or she will have built up more equity with their boss and so is more able to be flexible on pricing in order to build long-term relationships.

*The producers are also investing less in sales teams on the ground because there is no point in chasing market share when the overall market is declining.

Europe, of course, also faces a petrochemicals feedstock disadvantage versus the US, and electricity costs that can be 3-4 times higher.

Where will the investment come from to upgrade European crackers, or will future growth be met by imports? The consensus view of the conference was that imports would become a more a significant factor.

Plus there is the unresolved Eurozone economic crisis, one of the root causes of which we maintain is demographics.

One converter, however, said that European petrochemicals players, with their excellent technical skills, are able to quickly and effectively switch grades in order to adapt to constantly shifting downstream markets. The converters are always seeking niche production areas, through heavy investment in R&D and customer research, he added.

A second converter, a carpets producer, said that the petchems producers can establish long-term relationships with their customers through providing technical support that enables innovation.

But, as a source with one producer pointed out: "That's all well and good, but converters are not always willing or able to award us for technical support.

"If you're not careful you provide it and, after a while, its cost ends up disappearing into standard, commodity-grade pricing."

The blog will be travelling tomorrow and so there will be no post on Friday, but we will return next week.

Germany's Skills Shortage

2013-05-28T21:35:00Z

By John Richardson

GERMANY'S engineering and chemicals companies are the envy of the world as a result of their ability to find perfect niches in the global value chain. The sophisticated machinery and chemicals needed by China to fulfil its role as the cheap workshop of the world are often provided by Germany, for example.

But there is a huge challenge to the Germany success story: An ageing population.

Demographics in general will shape the global economy over the coming decades, and is a subject that policymakers seem to largely ignore as they stumble around for a solution to the lingering economic crisis.

"The Association of German Engineers, or VDI, is desperate. It needs 70,000 engineers, and quickly. It takes an average of 114 days to fill an engineering post, according to the VDI," writes Judy Dempsey, editor in chief of Strategic Europe at Carnegie Europe, in this New York Times article.

"According to the Cologne Institute for Economic Research, there is already a shortage of 210,000 MINT graduates (the German acronym for mathematics, engineers, scientists and IT specialists)."

The reason is Germany is that by 2060, the number of people between 20 and 65 will fall to 33 million from 50 million today, according to the German Federal Statistics Office.

And the above chart, from the Wall Street Journal, illustrates the scale of the problem, particularly in what was East Germany. For example, the population in the state of Thuringia in the east is forecast to plunge more than 40% to 1.3 million residents by 2060.

Dempsey adds that during the 1990s, when millions of Russians and ethnic Germans moved from Russia, the German government missed the opportunity of recognising their university degrees.

And successive German governments have also failed to provide the three million residents of Turkish descent the education that they need, she claims.

Thus, a major overhaul of immigration policies and a long-term integration strategy for the immigrants already living in Germany is required.

The blog is in Berlin for the 2nd ICIS World Polyolefins Conference and so we shall look at other challenges facing Germany, and the rest of Europe, later this week.