There seems to be a conspiracy of complacency about India. Read The Economist's dire warnings. To be fair, the naysayers have been warning of an India collapse for years, But the longer that these imbalances are allowed to build, the greater might the collapse be when it happens
Fed up with receiving those obscenely large bills from trendy management consultants populated by wet-behind-the-ears Harvard graduates? Ever thought that a great deal of commonsense is all you need to run a business rather than theoretical nonsense? These guys, as the Financial Times reveals in its article about the Japanese mob, have restructured without the need for a six-figure consultancy bill. Perhaps the yazuki will themselves to turn management consultancy, minus the gobbledegook jargon, the flash suits and the annoying chit-chat about yachts, apartments in Monaco and flying everywhere First Class when your company shoves you in cattle class. But if the Japanese mob ever do go into consultancy, please don't let your accounts department sit on the invoices.
Please read this excellent piece from my colleague Nigel Davis, who is editor of the Insight section of ICIS news.Some further thoughts: if 46% of existing and 45% of future ethylene production is taken offline by flooding, just think of the impact on food pricing and distribution and the resulting social and economic chaos due to the shortage of food--packaging material. These estimates maybe wrong, but if Lehman Brothers are only halfway right God help us, and I don't just mean the chemicals industry. On a more immediate bottomline level, how many banks, consultants and project proponents are factoring in the increased risks of flooding into feasibility studies? Or does anyone really care enough to look beyond their next promotion or their imminent retirement? If you won't be around in 10 years' time, why bother asking awkward and potentially career-threatening questions?
Rex Tillerson, chief executive of ExxonMobil, displayed a careful balance between supporting the oil industry and expressing concern over climate change in a recent speech.Does this indicate a shift in direction at Exxon post Lee Raymond, or merely a more cuddly and warm way of presenting unchanged policy?
The reason why we are still dependent on hydrocarbons is because insufficient investment has been made into alternatives. When the US Gulf Coast refineries and petrochemical plants are under six feet of water thanks to rising sea levels, it will be too late to make the investments.
Japan's fourth quarter GPD growth of 4.8%, which was released today, exceeded economists' expectations. However, although consumer spending rose by 1.1% on an annualised basis, this merely compensated for the 1.1% decline in Q3.
In addition, wages rose by only 0.2% last year, barely up from a decade-long decline. Companies are preferring to pay down debt and invest in new machinery to raising salaries.
A further worry is the yen, which has been at a 20-year low in real terms. If the yen were to strengthen, exports would, of course, decline. In Q3 last year, the contribution of net exports to growth was 1.7%. Without these net exports, the economy would have shrunk by 0.9%.
Let's hope the Bank of Japan doesn't rush into an interest-rate rise on the back of the 4.8% rise in GDP, thereby snuffing out any hope of consumer-led growth.
Global leaders from the Group of Eight rich nations plus Brazil, China, India, Mexico and South Africa have agreed that developing countries will have to face targets for cutting emissions as well as developed countries.If these noble words are followed by action, prepare to be legislated against.
I wrote yesterday about Rex Tillerson and his belied that cutting hydrocarbons consumption could harm economies. Dr John Holdren, president of the American Association for the Advancement of Science, says "nonsense".
The Bank of Japan has decided to raise interest rates - from 0.25 to 0.5%. This could weaken the yen, thereby damaging the country's export-led recovery. For the petrochemical players, the benefits of a 21-year low yen have been offset by the increased cost of importing naphtha.
The bank is also banking on last summer's consumer spending slump being only temporary, meaning that it can afford a rate rise needed to both strengthen the yen and slow what's also to being also an industrial investment-led recovery (to provide all the products for booming exports).
But what if the consumer spending slump is long term? If so, a rate rise is hardly the right medicine.
The optimism seems infectious: Reliance's market capitalisation breached the RS3 trillion level today, placing the giant in an elite group of only three Indian companies.And the petrochemicals major is predicting 12.59m tonnes of polymer demand in India in 2011-12 with local supply at slightly below 8m tonnes/year.
The forecast big deficit is based on a very rosy view of the economy and therefore polymer demand growth. Its estimate for polymer consumption in 2006-07 is a mere 5.49m tonnes.
Reliance might be using these bullish demand-growth numbers ahead of firming up a cracker project in India, which was first announced several years ago. The project is due on stream after 2010. Next year, the Indian major will commission 900,000 tonnes/year of polypropylene at Jamnagar.
Are Reliance and its investors guilty of irrational exuberance?
The petrochemicals industry generally gets a bad press, but producers are unlikely to ever be charged with depriving the public of food. In fact, plastic packaging could go a long way to solving problems such as India's - where 40% of food rots before it can be delivered.
Biofuels producers, however, although they have ostensibly stronger greener credentials, are locked in a row over food versus fuel. Visit Simon Robinson's biofuels blog for some thought-provoking comments on this and other challenges facing this big boom industry.
The famous "Skeptical" environmentalist (unfortunately, the American spelling and therefore the wrong spelling), Bjorn Lomborg argues against the Kyoto Protocol in this article from the special green edition of our magazine, ICIS Chemical Business.He says, in short, that all the fuss about Kyoto is a waste of time and effort. Even if it is fully implemented, Lomborg agues that the rate of global warming will be set back by a mere five years.
And so he contends we should instead spend the huge cost of Kyoto - $150bn a year - on tackling HIV, malaria and other nasty diseases.
He is also in favour of an R&D tax equivalent to 0.5% of each country's GDP to develop renewable chemical, fuel and other technologies. Read more about Mr Lomborg's iconoclastic theories.
His approach would bring the sceptics and the greenies together, as the sceptics cannot deny that in terms of Peak Oil and energy security alone, dependence on the filthy black stuff has to be broken.
I can just about remember when Indonesia was talked about in the same breath as China - huge latent demand, lots of foreign direct investment and great natural resources.
Then came the Asian financial crisis and economic ruin. But now, as this article from the Economist indicates, the government had paid off its debt to the IMF, the stockmarket has been booming and the rupiah is strong.
True, the recent floods have hit growth. But the potential is perhaps closer to being realised than at any time since 1997, provided the government spends its money wisely on much-needed new infrastructure and there is more private sector investment.
This is a country with a huge population with per capita polymer consumption at only 17.5kg and an already proven case for more petrochemical investment: Indonesia still only has one cracker and has big monomer deficits.
But perceptions are hard to shake off, even if the government has balanced its budget and is dealing with corruption.
A guest blog - see Vanishing Post Boxes on this great blog by the authors of the book Freakonomics put me in mind of all those demand and supply forecasts that are invariably wrong.
Yes, I know I've written about this ad nauseum - see my last article on this subject.But surely, there has to be a better way of reaching investment decisions, a method that doesn't just cover your backside by using a consultant as a convenient whipping post.
An interesting question, and one that Def Poet Tommy Buttons, the rap artist with a difference (he has a brain) might want to address.
Click on this highly amusing link and listen to how he compares the life of a drugs dealer with that of a Nasdeq trader. Substitute Nasdeq trader for a petrochemicals trader and again the skills measure up and so, perhaps, we could tap into a new stream of talent which could benefit petchems and also improve our image. We could be seen as caring and sharing, helping to alleviate the ills of society, rather than just those nasty people who poison babies by pumping out pollution. Makes you feel good, doesn't it?
Indonesia before 1997 had three cracker projects and huge demand growth. It was mentioned in the same breath as China. And, of course, then came the crisis.
But this year GDP growth could be the highest since the crisis with the government in sound financial condition.
The case for petrochemical investment is obvious as monomers and polymers are in big deficits. Will anyone take the plunge, though, and build one of the two new crackers that are needed by 2010-11, based on industry association estimates of deficit levels during those years?
The new boss at Titan, the Malaysian buyer of PE producer Peni, says he is interested in a cracker. Let's hope that the cautious optimism over Indonesia is justified.
This article from Reuters highlights the danger of overpaying for assets in the current India M&A frenzy.Perhaps its point about the overall of over-confidence is valid, especially given that previous deals were small scale. Other Indian companies, following Tata Steel's lead, are starting to bid the big league. Integrating small acquisitions to add value is one thing, but multi-billion purchases are another. Just ask Dow Chemical that ended up destroying value after buying Union Carbide.
And on the subject of Dow, will they won't they? The deluge of stories about Reliance and Dow continues with the latest suggestion that the pair are heading for an alliance rather than Reliace buying DowPlus, as you can see from the first Reuters link, Reliance are being linked with a stake in Carrefour.
Is this an unsustainable M&A bubble that could all go horribly wrong if purchase prices are too high? We are still in a global economic upcycle despite recent stock market collapses. What happens when the real slump does arrive and companies are left with assets purchased during oone of the strongest economic upcycles in history, coinciding with a period of exceptionally cheap credit?
We heard about this rumour last year, but it's emerged again - Reliance is now said to be in advanced discussions for acquiring Nova Chemicals. Nova's Alberta-based cracker and PE production might be attractive because of pretty competitive, locked-in gas prices, but would Reliance really want its styrenics business - the asset that's officially on the block?
And surely, a tie-up with Dow would be a much better proposition.
At the rate that things are going, India, the Middle, and possibly China, could own nearly all the western petrochemical majors in 10 years time.
No point obviously. As this report from Deutsche Bank Download file notes, the global skills shortage is not just in the west.
In the engineering sector, and perhaps this applies to petrochemicals, Deutsche Bank claims that the huge outpouring of Indian and Chinese graduates is grossly exaggerated; and it adds that the quality of graduates from both India and China can be pretty poor, meaning a great opportunity for western Europe - particularly Germany.
It's other conclusion, that the service industry boom cannot be sustained in India because of the skills shortage, is interesting. The route that India must therefore take, it says, is lots more manufacturing.
This is potentially tremendous news for petrochemical demand, again provided there are enough workers to run the plants.
But if India does embark on a huge build-up in manufacturing capacity, God help the environment.
I am already advising my 11-week-old son to buy a house on high ground. Soon I might need to suggest the Himalayas.
A boring topic to harp on about again I know, but this article from my colleague Nigel Davis from the Insight section of ICIS news supports what I have been saying for the past two years.
The industry has overbuilt, and despite all the optimism engendered by project delays and probably cancellations in Iran of No 11 Olefins and beyond, this is still, as Nigel says, an unprecedented wave of new capacity.
The reasons for this overbuilding are the easy liquidity that Paul Hodges of international eChem talks about in our commentary section, the optimism over sustained strong global growth and a continuing demand boom in China and India.
Nigel's report came out on the same day that Ben Bernanke's remarks sent stockmarkets into decline.
Imagine this: a combination of an unprecented wave of Middle East capacity, greater self sufficiency in China due to the large amount of capacity being built there and a US housing sector-driven recession that Bernanke's comments were interpreted as pointing towards.
This could be a great opportunity to pick up some cheap petrochemical shares and bankrupt companies in 2009 and beyond.
The United Nations report on climate change, released last Friday, warned of 50 million made homeless as a result of global warming by as early as 2010.
Reports such as this will serve to pile even more pressure on the big polluters including, of course, China - the mothership of chemical demand growth.
Any investor who doesn't have a Plan B, factoring in a much harsher regulatory climate in China, is burying their heads in the sand.
China's government will have to introduce new legislation, and more effectively implement existing rules, because of rising international pressure.
This LA Times article provides a neat summary of the scale of the problem.
I was chatting to my good friend and contact Paul Hodges of International eChem yesterday.He believes we've entered globalisation part II, where the impact of higher raw material prices will trigger harmful inflation.
As Ben Bernanke has pointed out, oil prices are 40% higher than would otherwise have been the case without the recent boom in Chinese demand.
The upside of China's export boom has been staggeringly cheap prices of everything from low-end clothing to high-end electronics. This has to some extent offset the impact of job losses as manufacturing has migrated east.
But Paul points out that raw material costs are now a much bigger portion of finished goods prices with wage costs also on the rise in China.
The west could therefore be hit by a combination of higher fuel prices and higher consumer goods prices, while it continues to grapple with the decline of its manufacturing industries.
Cheerful stuff, eh?
The eternal optimists at Nova Chemicals presented a very bullish view of olefins and polyolefins markets at their recent results meeting.Aaron Yap, trader with Integra, was also equally bullish at the ICIS Asian Polymers Conference in Shanghai last week - see Download file
In short, Aaron believed that demand growth would hold up downstream while olefins supply would lengthen in 2008-12. This will mean much better margins for the PE and PP producers.
Needless to say, I think this is all nonsense. I will be buying truckloads of petchem company shares in 2009 when valuations crash. Any bankers who also want to join with me in a few cheap buyouts, you know my phone number.
The International Energy Agency has further brought forward its forecast on when China will become the world's biggest polluter to 2007 from 2010. Only three years ago, they were predicting not before 2025!
Coal-fired power stations are big cause of rising greenhouse gas emissions in China, says the IEA.
Will this result in a harder approvals process for not only coal-fired power stations, but also coal to chemicals?
And what about the international response to China's growing greenhouse gas threat? Will it become harder to invest in China?
Or do you care? Maybe not now, but you might in a few years' time when you either cannot build more ethylene and C2 derivatives to serve the China market, or have to find some new, cleaner ways of making C2s from renewables.
The former trader turned professor, Nassim Nicholas Taleb, in his new book The Black Swan: The Impact of the Highly Improbable warns against the danger of forecasting. Forecasting is, obviously, always based on what he know and not what we don't know. A Black Swan, by the way, is an earth-shattering event we didn't predict eg, 9/11 (until Australia was discovered everyone believed that only white swans existed).
On my way to work this morning, I heard an interview with Taleb on the BBC World Service where he said that 25 year forecasts, used to justify new projects in any industry sector, were worthless.
He added that the only forecasts of any value were those for 12 months because of a reduced chance of innacuracy.
And he added: "You can guarantee that the cost of a project will be far more than you've estimated."
So sack the consultants and trust in your judgement - provided, of course, you can convince the banks.
Quite possibly, yes, despite my instinctiive pessimism. Perhaps emerging markets such as China and India have reached such a critical mass that no matter how much capacity is brought on stream, it will be easily absorbed.
Or maybe some disaster lies just around the corner.
Who cares if you've made your money in the most extraordinary bull run in history and have already cashed in your chips.
After yesterday's optimism, yet more pessimism. I remember 1997. Don't underestimate the dange of contagion if China's stock market bubble does burst - as the likes of Alan Greenspan are predicting
You maybe relieved, on the day the Chinese government introduces measures to cool stock markets resulting in sharp fall in the Shanghai Exchange, that I am going on leave for a couple of weeks.
Perhaps I'll feel the sun on my back (unlikely as I'll be visiting Scotland), come back with renewed optimism and not worry about the impact of the pork shortage on the Chinese economy. Could this be the new SARS?
Oh, and my wife has just punched me for constantly talking down our investments.
Au Revoir.
"Hello, my name is John Richardson.
I had an accident, and I woke up in 1973.
Am I mad, in a coma, or back in time?
Whatever’s happened, it’s like I’ve landed on a different planet."
Before you think I've been at the methanol again, please follow this link to the fantastic BBC TV series, Life On Mars, where a UK police officer living in 2006 is in a road accident and is transported back in time to 1973. This is definitely not a waste of polycarbonate - buy the DVD.
Like Sam Tyler of the series, it felt like I was back in time this morning when reading of the IEA report on an oil-supply crunch in five years.
It was back in 1973, if you remember, that an oil crisis triggered the US recession of 1973-75.
William Poole, president of the Reserve Bank of St Loius, argues that high oil prices this time around haven't triggered a recession because of factors such as low inflation. This is largely the result of China and the rest of the developing world driving down costs.
But how long will this continue if the IEA is right? And how will the developing world reconcile itself to not having enough raw materials to sustain the huge boom in demand for the things made, ultimately, from oil? What will be the social, political and economic implications of the looming supply crunch on ever-more wealthy populations demanding the same mass-consumption lifestyles that westerners enjoy?
The industry we work either for or with is about as popular as George Bush Junior at I was about to say a wedding party in the Gaza Strip; but actually probably about as popular as George Bush at just about any wedding party in the world, even in some parts of Texas these days.
The point is we need some imaginative rebranding and advertising. A great example is this highly amusing ad from the agency BBH http://www.bartleboglehegarty.com/ for Smirnoff Raw Tea http://www.youtube.com/watch?v=PTU2He2BIc0
This is one of my familiar old themes, but if we can use this level of imagination in our marketing and job-recruitment efforts, we might start attracting more young people into the industry. We want the YouTube and My Space generation who might even - and let's be optimistic here as it's early in the morning my time - begin their careers wanting to make the world a better place through chemicals, Of course, they will inevitably end up bitter and twisted thanks to the corporate machine.
But still, we might end up with enough recruits to run the chemical plants and businesses of the future. We could also win the general public over, thereby reducing pressure for more nonsensical legislation like Reach.
Interested? Let's hold a "Marketing The Chemicals Industry" conference.
I think it's about time that the developing world stopped saying "you did it, so why can't we?" when the West raises concerns over rising pollution levels in China, India etc.
In the "good" old days my home country, the UK, had lots of dark, gritty and satanic mills, which were almost as ugly as our corporate headquarters. We used to make children work as chimney cleaners and down coal mines and generally life was pretty miserable.
But the point is that we, fortunately, didn't have the technologies to kill people in as greater a number as the Chinese have, and also we didn't have anywhere near as many people. Chemical and other plants are playing a large part in China's environmental tragedy - and it is no exaggeration to call this a a tragedy.
Expect more legislation from China's government, as a result of disturbing reports on China's environment such as this one by the OECD.
The legislation will make it harder and more expensive to build chemical and other plants. At the same time there are huge opportunities for those selling safer processes and for the water-treatment industry.
But will the legislation work? Probably not because it cannot be allowed to work as so much of China's growth is tied up in low quality, very cheap industrial capacity.
The end result is that China will choke a large number of its people, and its economy, to death.
Petrochemical markets are being badly ruffled by two recent Chinese government decisions.
In late June, there was the decision to change the VAT export rebate system for yuan-priced product.
And then this week there was a widening of the deposit rules governing import duty and VAT rebates on petchem imports priced in US dollars.
But beyond the immediate disruptions to imports and domestic sales, the long term implications could require a major strategic shift by chemical companies.
See below for detailed anaylsis. But in short here, as China phases out its low-quality manufacturing through these and quite possibly other further measures, chemical suppliers will have to move up the value chain with their customers.
Continue reading "China attempts to move up the value chain" »
As everyone focuses on when the next downturn might arrive, macro issues such as the implications of a likely US withdrawal from Iraq are rarely publicly discussed.
But if I were on the board of any company making investment decisions, I'd be worried.
If the US withdrawal from Iraq is well managed then fears such as those expressed in this article will come to nought. Sadly, "Iraq" "the US" and "well managed" are words and phrases that rarely share the same sentence and so the future looks a little shaky to say the least.
The collective sigh of relief was almost audible late last week when the Fed cut its discount rate - the rate banks charge each other for lending.
Action from other central banks, including the European Central Bank, could follow this week. Analysts also rate the likelihood of the Fed cutting its formal interest rate at its meeting next month at 50 per cent or more. This is the rate charged to companies and other non-bank borrowers.
But still, this credit crisis is not going to away that easily. See more detailed analysis below, but in short here, the implications could be:
*A weaker Chinese economy. Roughly one-third of China's GDP is dependent on exports and if the US goes into recession, this is serious. Many overseas chemical projects have been justified by estimates of persistently strong demand from China for imported chemicals that will be re-exported as finished goods. Sales of locally made chemicals would, of course, also suffer
*Unfunded projects backed by smaller private companies being shelved.
But a lot of capacity in the Middle East and China is too far advanced to be cancelled. In the Middle East, many of the projects already under construction might come on stream bang on time because the producers there can make money in any market conditions. Projects under construction in China start up on schedule because the government wants to gain greater independence from imports.
Let's hope this crisis goes away, but if it doesn't why on earth didn't the supposedly smart people who run the global financial system realise the dangers? Joseph Stiglitz, a genuinely smart guy, has been warning for years about the risks, which he outlines in this excellent article
Continue reading "The global credit crisis is going to last" »
Last night I was feeling a little mellow after consuming far too much ethanol (the French variety - a very reasonable bottle of Cotes du Rhone) when the idiots on CNBC began to rant on about this being 2007, which explained why were in the midst of potentially a global financial meltdown.
There was the global financial disaster of 1987 when the Dow Jones Industrial Average fell by 22.5% in just one day.
And, of course, everyone remembers 1997 - the year of the Asian financial crisis.
It occurred to me, in my ethanol-induced haze, that we should sack all the mathematicians, scrap all the complex computer models, drown all the analysts along with the economists, and my mother-in-law because she is an awful cook, for failing to spot something as obvious as the fact that bad luck always comes in threes and this is a third year with a seven in it - hence, the crisis could have been predicted. I could have not bought that bloody house in Australia and not listened to that financial adviser who told me to park my money in equities.
I am sober this morning, but I still think widespread sackings and drownings are in order.
What about the supposedly smart people at Goldman Sachs who fed numbers through their computers and estimated that the likelihood of this crisis occurring was once in 100 millennia? First off the short plank, I'd say, minus their bonuses.
Oh, and the by the way, as sevens are clearly worth avoiding like The Plague, here are some tips if you are a chemicals or oil trader:
*Do not buy naphtha as it's going to fall in price (ICIS pricing placed second-half October contracts at $664-667.50/tonne CFR this morning).
*Brent crude might be worth a punt as it has fallen below the evil $70.33/bbl to $69.49.
*Benzene - go short as it's $960-970/tonne FOB Korea
*And whatever you do, get out of toluene now as it's double trouble - $775/tonne FOB Korea
Now where's my rabbit's foot gone?
As Paul Hodges notes in his Chemicals and the Economy blog http://www.icis.com/blogs/chemicals%2Dand%2Dthe%2Deconomy/, China's Finance Minister quit this morning - either over his role in a sex scandal or because inflation and the stock markets are out of control.
Petrochemical demand growth has been booming in China because, as a bureaucrat put it shortly after WTO entry, "China is like an elephant riding a bicycle".
By that comment he meant that China had to achieve growth of at least 10 per cent year (peddle hard) to avoid a heavyweight crash. High growth has been viewed as essential to maintain social stability through creating sufficient new jobs to replace those lost by WTO accession and the constant drift of migrant workers from the impoverished countryside to the towns and cities.
But perhaps now, with inflation rising alarmingly and the stock market in the midst of an enormous bubble, the government really does want to cool the economy down instead of just paying lip service to this objective - it's current approach. Perhaps the calculation is that high inflation and the potential for a stock market collapse represent a bigger risk to social stability than a moderation of growth.
But if policies are introduced that cut growth by too much, every industry from petrochemicals to the overseas retail and auto giants that have staked so much on China will find their profits trimmed. Make sure you steer well clear of any passing bikes with elephants on board, therefore, the next time you are driving through Beijing.
All should become clearer in six weeks when the Communist Party Congress, which only takes place every five years, is held.
Alan Greenspan refused to categorise conditions in the US housing market as a bubble when he was chairman of the Fed.
But now he's retired and while plugging his memoirs, he admitted in a TV interview the other day that lots of froth in different parts of the US made up what was, in reality, one giant bubble - similar to the one that went pop in 2001 with the collapse of the dot com shares.
Take a look at this article from The Economist which suggests that there are six countries - Belgium, Britain, Denmark, Greece and Spain - where a housing market crash is even more likely than in the US. In these countries, the article suggests, average house price inflation is 47% above what is justified by fundamentals.
And then look at Asia. In Singapore, property prices have doubled - even tripled in some cases - over the last two years. Speculation reached fever pitch until an increase in government taxes and the global credit crunch brought sanity to the market a few weeks ago. Now there is talk is of another property price collapse similar to the 1997 meltdown.
Then there are the property booms in India and China.
You can argue, as the Asian Development Bank does, that Asian fundamentals are so strong that the continent can ride out a US credit-crunch driven recession.
But what goes up has to eventually, surely, come down and bubbles have historically always gone pop.
And so from this calculate how many polymers and chemicals go into the construction industry - from PVC to formaldehyde - and think of a worst-case scenario for your business. This could be the froth being taken out of the market - meaning property prices falling back to where they should be based on the fundamentals. But as is often the case when sentiment turns bearish, prices could collapse below their real value. Fantastic news for bargain hunters with nerves of steel, but not much use if you're operating a PVC plant.
The global property bubble could pop as early as next year, if the Fed 50 basis point cut and any future measures fail to bring the credit crisis under control.
......how long will it last is the inevitable question. Demand growth has been so strong so far this year with very little new production coming onstream that while crude oil and the price of monomers have set a floor for pricing, they no longer appear to be the main drivers behind fluctuations and increases; in other words, supply is so tight that it is the demand pull rather than the cost push that's the dominant factor behind pricing this year. The attached slides from Chow Bee Lin, Senior Editor at ICIS pricing, illustrate this point - Download file
But Chinese inflation is rising. This has led to negative real interest rates on savings, leading to money being poured into ever-more frothy (remember, lots of froth makes one giant bubble) local equity and real estate markets.
Inflation everywhere could be back with avengeance - made worse by the US interest rate cut that has led to more hot money flowing out of the US into China, India and other developing countries.
Plus there are the long term implications of the global credit crisis beyond. A lot of the polymers being shipped to China and elsewhere are for re-export to the US and Europe as finished goods.
And, of course, the second half of next year marks the beginning up the big new capacity upsurge.
But the doommongers, including myself, have been calling time on the industry upcycle for three years now.
Maybe the super-cycle, as it is now lovingly called, will continue if demand growth in Asia continues to accelerate.
Hopefully, completely empty if you happen to live in China and can only afford to drink tap water.
However, it's not the environment that this is this week being viewed as the biggest threat to the economy, but rather inflation as this article from ICIS news explains.
Maybe I've been to too many conferences this year, and indeed over the last decade, and have seen too many forecasts go wrong.
Call me cynical, or plain wrong, but...........
Asian industry leaders are playing lip service to the environmental crisis the world confronts .
George Monbiot, the excellent author and journalist, argues that what the West needs is a recession to give the planet a breather.Asia also needs a substantial economic slowdown to give policymakers and technology developers more time.
Now, please be patient - the sting is in the tail. This could have great relevance to your business…..
The industry in which I work - the media - has been decimated by the Internet with billions of dollars of earnings and hundreds of thousands of livelihoods sucked out of traditional publishing by online advertising.
And now the threat comes from the democratisation of content through Web 2.0, where the traditional “top down” approach to content is being removed by a huge army of amateur content providers.
Two books, The Cult of the Amateur by Andrew Keen and The Long Tail by Chris Anderson, present opposite extremes of opinion over the merits of Web 2.0
Keen, with his Luddite hammer firmly in his grip, paints a nightmare Web 2.0 world of hopelessly inept amateurs dessiminating inaccurate garbage which becomes the accepted wisdom because of the power of the Internet.
He attacks Wikipedia, for example, on the grounds that the intellectually challenged are given as much weight as those with expertise and experience.
The Long Tail, on the other hand, argues that while at the micro level mistakes abound in the free online encyclopaedia, the Wisdom of Crowds theory guarantees that it is more or less as accurate as the paid-for Encyclopaedia Britannica. And the beauty of Wikipedia is that you can correct mistakes immediately they are spotted rather than wait for a reprint of Encyclopaedia Britannica or any other paid-for work of reference edited by committees of professional experts, Anderson adds.
I sometimes like to believe Keen’s hope for the future will be realised, which is outlined in the last chapter of his book. This involves a consumer backlash against the rubbish being generated by all the useless amateurs out there who are destroying the media - and also the music and film - industries.
I sometimes prefer Keen’s vision of the future because it would involve the value being retained in the “old media skills” I have spent years acquiring; change is never easy, especially if it comes at the expense of your livelihood.
But if Anderson proves to be more right than Keen (with the truth, as always, likely to be somewhere between the two extremes) what could this mean for the chemicals industry?
Your research departments are already flooded with free news from paid-for services, either legally or illegally acquired.
Why on earth pay for BASF’s financial results when they will appear on Google half an hour after they are released, unless time is such a factor for your business that you need the numbers immediately they are released? If so, then subscribe to a wire service.
The value in paying for exclusive news - and also in-depth and informed analysis written by experienced old hands - remains, provided, of course, the content cannnot be copied or stolen and you are short on ethics.
Equally, revenue is willingly and often freely spent on reports produced by in-house research departments and consultants.
But what if Anderson is more right than he is wrong?
In the future, the Wiki approach could lead to a free way of for, example, predicting when a plant will start up. If the Wisdom of Crowds theory is valid, collective knowledge might prove as accurate as the persistent digging of an experienced old hack.
Supply and demand and also price forecasting could also go the same way. Why pay for a grey hair with years of industry experience to pass down pearls of expensive wisdom from his intellectual mountain top, when, to more or less quote Mulder, the truth is already out there?
It is certainly worth further discussion, and maybe even an experiment. Watch this space…..
At least the US is on board, but the pact to reduce emissions by 25-40 per cent by 2020 might well not be sufficient to prevent the 1.5 centigrade rise in global temperatures that will be disastrous for the planet.
In another excellent article from George Monbiot of The Guardian, he argues that we need to "decarbonise our society" in order to achieve reductions of 95.9 percent in the UK and 98.3 per cent in the US by 2050.
Impossible? Maybe, but as the effects of climate change become more evident, pressure on the chemicals industry will mount. A great deal more investment in new technologies to reduce emissions will surely be necessary - to put more substance behind some of the right noises industry leaders are making.
According to this article from The Economist, total China exports account for less than 10% of China's GDP when "value add" is stripped out - much less than the headline 40% figure for 2007, which includes imported and domestic inputs.
Good news as we enter the New Year, given that a US recession now appears almost certain.
But what about Singapore and the other more export-dependent economies in Asia?
I sincerely hope not, but all the signs are there because of:
*A financial crisis which nobody again saw coming, this time with global implications
*What could prove to be too much spending on new equipment and capacity. This time high equity prices have paid for these investments rather than US dollar-denominated bank loans, as was the case in 1997.
The fundamentals are still strong, as today's article from ICIS news on share-price collapses points out. Asian demand is at much higher levels now than 11 years ago.
But the power of sentiment should not be underestimated.
It's too early to read the long-term effect on petrochemical pricing. More volatility seems certain with sentiment driving shifts in pricing on every piece of negative or positive economic and stock market news.
Lower feedstock costs on cheaper oil will also play a role, but as the extended article below points out, the impact on the real economy will take time to assess. It is this impact that will set the long-term direction and determine whether we the downturn has, finally, arrived.
I could easily be accused of ceaseless pessimism, but growth in China is moderating - regardless of what your view is of the extended article below on the impact of the bad-weather crisis.
Slowing exports were already eating into estimates of GDP growth, and these estimates surely what companies can expect in chemical export volumes to China, before the arrival of the worst snow storms in 50 years.
.......I had heard a company saying it was moving up the value chain (or rather a Euro or a British pound these days), I wouldn't be writing this blog entry while smelling the wonderful aroma of pork sausages being cooked for my tea. Brown sauce and mash as well, of course.
Can Dow Chemical make a success of this often-mentioned strategy? See below for extended analysis.
If it cannot, the prospects for the US producer could be bleak in the long run
Continue reading "If I had a dollar for every time........." »
The mood at the recent NPRA International Petrochemical Conference in San Antonio, Texas, was mixed, despite all the economic gloom.
Some producers said they were still making money - especially those selling into manufacturing sectors benefiting from a rise in exports due to the weak dollar.
What's certain, of course, though is that things will get worse regardless of the health of the global economy. The down cycle is just around the corner.
But we could quite easily see, as this extended article below speculates, another period of under-investment following all the over-investment that markets will need to absorb over the next 3-4 years.
Plus ca change, plus c'est la meme chose.
I am beginning to come to the view that something has to give in the medium-term. There is no way that the global economy can support crude prices at current levels, and you can argue, as Lehman Bros does, that speculation is behind a fair slice of the recent rallies.
They also make the case (read more on ICIS news next week) that the supply outlook is not as bad as the bulls on crude pricing - who make up the majority - are making out.
But the problem is that every bit of bad news on crude gets played up by the media, and ends up inflating the crude price, because the majority opinion is that prices have much further to rise.
The Lehman analysis doesn't add the very obvious point that chemical producers and industries all the way down to finished goods will be cutting back production on high oil prices. This will, in itself, serve as a correcting mechanism.
Governments in Asia are also cutting back on fuel subsidies which could moderate consumption growth in emerging markets - the main factor behind the demand surge.
Perfect subject if you've got the post-weekend blues....
A very irate and tired and emotional chemicals trader was moaning last week about the imposition of a new knowledge-management system by his company.
"Our bosses never listen to us and they assume that if they come with a new software solution that we have had no role in developing we will just do as we are told and use it. The system just doesn't work - it's totally inappropriate for our business. It makes people less likely to share rather than more likely. It takes time away from our core job roles, is inefficient and is slow but nobody can say anything because it was the top boss's idea who sold it the board. His career is riding on it."
Let me know if your boss listens to you - in confidence, of course, in this world of precarious job security.
David spent 30 years working high tech industries and is now an independent knowledge educator and coach.
Great that my entry yesterday Work can be the death of you produced a response.
But I think the commentator missed the point.
Working long hours is not an issue for staff who are properly managed and motivated. The "presenteeism" of some work cultures, though, is surely a major source of concern for the welfare of employees.
Sure the "business furniture" of free workplace food, slides and dressing down needs to be supported by a management approach that goes deeper.
I would suggest that at least in the case of Google creativity is not just a surface PR image.
A conducive workplace environment can also be an indicator of a deeper respect for employees.Otherwise, we mightaswell go back to the "executive canteen".
Regular readers of my blog might have seen last week's post linking through to the New Scientist article about research into new ways of assessing how markets behave. Prompted by the irrationally steep falls triggered by the credit crisis (or maybe they were reverse - the previous high valuations were based on irrationality, leading to a return to 'fair value'), the research looks at herd behaviour. Researchers are trying to quantify the influence of rumours over privately held views and verified and publicly available information.
Companies in years to come might be able to install hidden MRI devices that can map the feelings - and therefore the likely buying or selling positions - of suppliers, customers and competitors.
Imagine waking up in the morning, ringing up your ethylene customer and saying "My offer price is $1,150 FOB Korea only to be told "I know already and I know this is irrational and not based on your real cost position. Did you have an argument with your wife last night?
The failure, and quite possibly the death, of the Doha round of trade negotiations earlier this week could create a very confusing and erratic regulatory landscape for the chemicals industry.
As Fred points out, John McCain, if elected, has made it clear that he won't accepted emissions caps if China and India do not follow suit.
Obama. however, is prepared to let the US take the lead ahead of the Asian giants. He warns, though, that if they don't agree to fall in line at some point, import tariffs could be imposed equivalent to the energy content of finished goods.
The European Union is also understood to be considering the same safeguards as it looks to extend its cap-and-trade system. Industry, including at least one of the oil-to-chemicals majors, is lobbying hard for safeguard provisions of taxes on imports if no global agreement is reached.
Chemicals and other producers would obviously shut up shop in the EU and move to countries where there was no price set on emissions or if there was no effective import-tax system or some other kind of economic disincentive.
Despite the few remaining climate-change scepticis - quite rightly derided in the same New Scientist blog - climate change as a result of human acitvity is accepted by most scientists and governments as a reality.
A global agreement on a price mechanism for carbon - whether its a cap-and-trade system and/or a tax - would be the best outcome for the chemicals industry. It would enable producers everywhere to accurately assess the cost of investment in better processes and new technologies.
They could also make reliable and predictable income through trading credits globally and from operating and licensing new technologies.
Piecemeal legislation wouldn't provide the same degree of clarity, leading to equally piecemeal strategies from company to company and region to region.
The lawyers might also make a lot of money out of disputes over carbon import taxes.
And, of course, companies might still look to move their investments elsewhere by searching for loopholes in US and EU carbon import-tariff rules.
As the effects of climate change accelerate, you could also see knee-jerk nonsensical regulations introduced by governments out of sheer panic. This could make life very difficult, if not impossible, for chemical producers in certain countries.
So let's hope the Doha round can be rescued - and that it serves as a confidence builder towards the much bigger job of a new global agreement on emissions.
Continuing my environmental theme, I've been musing over building a new training course around helping companies help their employees to think outside the box. This is a tough task in certain companies and cultures.
As Benjamin Franklin so wisely said, "insanity is doing the same things over and over, and expecting a different result."
So employees at every level in every chemicals company need to keep up-to-date with
the rapidly shifting environmental agenda from product development to legislation.
But navigating the mountain of information - and of course sorting the truth from the fiction - requires a special set of skills.
You then need to put this knowledge into practice by proactively redefining your job role to take advantage of the green revolution.
Whether you are a chemicals engineer, a sales and marketing, an IT or an admin expert- whatever - every aspect of every business will be reshaped by the environmental crisis. There is career-progression to be achieved by making yourself more useful.
And if you are a CEO you need to manage this knowledge effectively - e.g. by making sure it doesn't fly to the door when your top staff get headhunted.
You, of course, also need to have the right leadership qualities to make sure strategy is both developed and implemented. Victor Newman - the knowledge activist - gives some interesting ideas on these themes.
Ultimately - and I really feel there is no turning back - it might be a case of innovate or lose your job. The old ways of doing things won't keep companies in business for much longer.
Anybody in their late 40s or older might not need to worry as retirement, or a nice fat redundancy pay-off, could arrive before the unmentionable finally hits the revolving air-cooling device.
But for those who are younger, dramatic changes in legislation - and in the way the climate is behaving - seem inevitable during their working lives.
There is also the problem of depleting oil and gas reserves and rapidly rising and competiing sources of demand. An article from Joe Kamalick highlights these issues when he examines shale gas in the US.
Watch this space for more discussion on this new training programme - and on what companies are already doing to fill the environmnental knowledge and expertise void.
It is very easy assume that Asia ex-Japan will eventually catch up with the West and become as good at "solution" chemicals as the West. I am excluding Japan because it has long been a major speciality player.
All the money that China, for example, is pouring into its state-run research institutes would seem to suggest that eventually, the country will produce a BASF - or at least a collection of companies that come close to matching the German giant's innovation.
But this report from Deutsche Bank - in a theme I will be touching on a lot over the next few weeks - points out that despite the great drift east, Europe has has held its own.World_chemicals_market_Asia_gaining_ground.pdf">
I've created a new category "Analysts' Reports" which you will hopefully find useful.
The Deutsche Bank report concludes that the West has a great opportunity - and has already made an excellent start - in the green chemistry race.
"In 2007, Europe accounted for 31% of global chemicals turnover; in 1997 the share was 32%." write its authors.
Here's another important statistic from the study: BASF's turnover in 2007 was Euro60bn - the same as the entire Indian chemicals industry.
Knowledge retention, which I talked about yesterday, will be crucial for the West if it is to maintain this lead.
Constant innovation through a willingness to fail many times before succeeding might also be important. As Winston Churchill said: "Sucess is the ability to go from failure to failure without losing your enthusiasm."
It's going to be fascinating to see how the new Dow and Rohm & Haas entity raises its game to meet the challenge of responding to the need for clever new products that must also be sustainable.
Finally, here are a couple of examples of Western innovation, the credibility of which I cannot vouch for.
Ford claims to have developed a way of sequestering VOCs from paints for conversion into fuel for fuel cells.
These serve to illustrate one of the other points I made yesterday - the need to navigate all the information out there to keep up-to-speed with a rapidly changing chemicals world.
I'm bewildered. I don't know about you
Now this is old but not widely publicised - Jurgen Hambrecht's comments during the BASF Segment Day Chemicals event which took place in London on 8 July.
Navigate down, click on the webcast, and listen to the Q&A session after Dr Hambrecht's presentation.
You can listen yourself, of course, but here is a summary:
The first question is about BASF's search for alternative basic chemical production.
"We are not only looking at crackers but also syngas leading to olefins," he says. This would give BASF the flexibility to use oil, gas, coal and natural products - i.e. biomass - as raw materials.
The chairman and CEO talks about how the Engelhard acquisition was partly driven by how an increase in catalyst capabilities would give BASF more options on basic chemicals production.
"Catalysts are crucial for the future of the industry," says Hambrecht, adding that they will reduce energy barriers that have hithertoo blocked alternative routes to making olefins and other upstream chemicals.
And in a remarkably strong statement, he states: "This will be very substantial, it will be decisive."
A lot can happen between R&D and commercialisation, but should we read into this that BASF is set to make a breakthrough that will be challenge the dominance of the Middle East in feedstocks?
What's the timescale? "Certainly five years out," says Hambrecht.
A blink of an eye in the great scheme of this things.
But what will happen if the oil price collapses to this research project and others like it?
I couldn't let today pass without including a picture of the Olympic Stadium in Beijing where the opening ceremony is about to take place.
The purpose of this redefined blog is not to look at the short term, though. For expert commentaey on the effects of the Olympics and other macroeconomic factors on the world's chemicals industry over the next 12-18 months, see Paul Hodges' Chemicals & The Economy blog.
Instead I am going to be looking at what chemical companies have to worry about beyond the next 18 months.
In the case of China, the debate is whether the country can remain the main driver of the world economy and the chemicals industry.
The government is clearly dedicated to rebalancing the economy away from export-led growth towards higher domestic consumption.
The China Economic Quarterly believes the government will be successful - leading to lower but more sustainable GDP growth of 9% per year over the long term.
They accept inflation will be higher than in the past, but argue that it can be contained at around 5% per year.
Jurgen Hambrecht, chairman and chief executive officer of BASF, also believes in the long term strength of China - but also a major location for export-based manufacturing.
Hambrecht said that increased transportation costs were a global problem and that the effect of recent cuts in subsidies to oil-product prices had yet to become entirely clear. But he pointed out that as car ownership was low in China, the cuts might not be that big a deal. A great deal of the country's energy needs are also met by coal.
Manufacturing investment was already drifting to the west, he added, and he cited Sichuan as a "great location".
Labour costs in the west are a great deal lower, but logistics costs could be an awful lot higher to get goods to western markets.
And the bigger issue that Hambrecht and the CEQ did not address is that China might not have enough natural resources to sustain growth anywhere close to levels we have become used to.
Take the water crisis as an example and this link through to the economatters blog.
I could have included thousands of similar links, but here's one more - to good or bad old Wikepedia, depending on your view.
Back in the 1980s, before Japan's "Lost Decade" of stagnant growth, management gurus lined up to praise the country's collective spirit as the basis of a sustainable economic miracle.
Since then, of course, the West has been consistently espoused as the best.
He thinks outside the box, acts decisely, is not scared of telling people what he thinks and has been successful even though he has always sat outside political factions within his company.
And in June, Shima (see picture above) truly broke the mould when he was promoted to shacho (president) of his company at the tender age of just 60 - very young by Japanese standards.
There is one slight problem: he is a manga or cartoon character.
"Shima is influential - business people want to be like him but can't," says Yuko Kawamoto, management professor at Waseda Uniiversity in Tokyo.
"Maybe there is hope for Japanese society. We want to change, but do not have the courage."
The grim reality for the average salaryman, according to The Economist, remains a life of drudgery and of stifled opinions because of the dreaded fear of causing a superior to lose face. As a result, bad decisions go unchallenged and become ingrained policy.
Japan's chemical companies have often broken the mould through innovative technologies - and were talkiing about and acting on energy efficiency long before the current oil and environmental crises.
Sumitomo Chemical is also about to start-up a huge petrochemical complex in Saudi Arabia - along with Saudi Aramco - and is talking about a major second wave of investment at the same site. This also involves breaking the mould as it's the first occasion that a Japanese chemicals company has invested on its own in a big overseas cracker project.
But the perception remains, fair or otherwise, that the chemicals industry could and should have undergone more restructuring.
Fair or unfair?
A consultant once told me a wonderful story - so wonderful I don't even care whether it's true or not - about how the monthly European benzene price in the 1950s was calculated based on the US price once the latest issue of Chemical Market Reporter had arrived in Rotterdam by boat.
Are we now wasting time and money on dealing with market volatility that's the result of how we gather and process information?
The furious linking between one site and the next, the feeling of never knowing enough, of never being entirely up-to-date, might have turned us into what the playwright Richard Foreman calls "pancake people". In other words we have a broad range of knowledge thanks to all that surfing - but have an inability to read more than a couple of pages of text at any one time and to take a break from information-trawling long enough to consider what we have read. We have, as a result, lost our intellectual depth.
As our attention spans ever-shorten with the volume of information and information-solutions out there, are we making energy and chemical markets more volatile?
Are we no longer able to take a deep breath and stand back and contemplate what is really going on?
The financial players and the physical traders contribute to erratic price movements because they have an interest in volatility, but to what extent?
Could it be that the way we gather and process information plays a bigger role in erratic price movements than the speculators?
Fundamentals still play the biggest role. For example, oil supply is so stretched that the slightest disruption to production - or even only rumours of a disruption - can have a big effect on pricing.
But the speed with which information is flashed around the globe and how we react to that information might be increasing volatility in tight markets such as crude.
Quantifying the impact of the way the Internet is shaping the way pricing markets behave could be a job for the nueroeconomists who I wrote about earlier this month.
Perhaps the good old days were better, when CMR arrived by boat and a few wise old men with leather patches on their jackets puffed on their pipes and came up with a benzene price that was more stable and less damaging to both buyers and sellers. Or is this just rose-tinted and ill-informed nonsense?
James Burke (see picture above) has so far been proved wrong about the information technology revolution giving us the ability to be free, to create our own realities and to not be dictated to by governments, companies or other institutions.
This is the great democratisation of knowledge written about by Chris Anderson in The Long Tail.
Sadly, the reverse has happened. We have become a slave to our machines - from our mobile phones, to our Blackberries to our PCs - and a slave to markets that we are nowhere close to predicting or controlling.
But give Mr Burke a break. His programme was broadcast in the 1970s, was way ahead of its time and perhaps so far ahead that one day his prophesies will come true.
For us lesser mortals further down the slippery career pole, it is easy to stare up with envy and contempt at the CEOs of our own companies and other companies.
Many us at times feel (myself included) that we could do a great deal better than our bosses.
I plan to develop a CEO board game with online and "hard copy" versions complete with chance cards such as "You get caught price-fixing at a major industry event. Do not pass Go and do not collect $2,000. Go straight to jail". The reference to Monopoly wasn't meant to be a dreadful pun.
We could then put our supposed superior skills into practice and prove whether we are really cut out for life at the top. And maybe if the game was accurate enough, it could be used to help assess real applicants for the top jobs. Watch this space for a prototype.
In the meantime, management consultants, as you well know, make a fortune from offering all kinds of advice to companies and their CEOs about how to make it big.
This is not always money well spent, according to Victor Newman - former chief learning officer at Pfizer - who is now what he calls an independent Knowledge Activist.
In his excellent video, 4 Faces of CEO, he talks of how one particular consultancy charged several million dollars for 3-4 months work, only to produce findings that he says could have been reached in a couple of hours through internal discussion.
I digress. This is not meant to be a dig at management consultants whose work I admire and whose salaries I envy almost as much as my CEO's.
It must be lonely and tough at the top, although a massive salary and the guarantee of a huge pay-off even if you turn out to be a load of rubbish are considerable compensations.
Newman's video is the opening to a CEO workshop where he tries to tackle the loneliness attached to making big decisions.
He highlights something we can all relate to no matter what our rank: the feeling of powerlessness to achieve what we want to achieve because we lack the necessary skills, resources or simply the time to get to the "ideal world" (in my case, a CEO board game developed within the next six months which becomes a huge commercial success enabling me to retire, save the world and ban caravans from the roads).
He has developed a diagnostic approach where business leaders identify where they want to get to and measure this against how far away they are from their objectives. Results of these evaluations are then shared in what he admits can be a painful exercise, followed with discussion on how each of the CEOs can get closer to their ideals.
Sounds great stuf not only for CEOs but for anybody who cares about progressing in their job.
And what's fascinating is the reason for the 4 Faces of a CEO title of his video.
These four faces are:
*Creators who don't care about money because they are "intrinsically motivated". In other words there is no point in just waving the big salary cheque, the luxury new car and country club membership at these people. The buzz they get is from new ideas and only new ideas. They find implementing ideas boring because they want to move on to the next thing
*Stabilisers who are loathed by the creators. These are the nerdy spreadsheet and process people who love setting up systems and would rather not take risks than risk failure
*Implementers. They can dress in jeans and bizzarely designed T-shirts - just like the creators - and share with these space cases thoughts about the intellectual beauty and complexity of this world. They are just as comfortable mixing with the stabilisers as they can be equally passionate about the latest delivery of paper clips.
*Newton says that only recently he identified a fourth category of business leader - navigators. These are the people who ask all the right questions of the three types of CEO listed above, can pull these types together, are great communicators both internally and externally and can see the big picture.
Other than having no interest in bizarre T-shirts (my sales manager more than compensates for me in this crucial aspect of innovation) I am too much of a creator. I hate loathe, detest and despise process (but begrudgingly now admit it's occassionally useful), which has got me into a lot of trouble over the years.
The ideal CEO might well be the navigator - the person with the great people skills, the zest for entrepeneurship, the huge capacity for detail and the ability to make processes work for people rather than the other way round.
And so - using these above categorie -, let's all indulge in the spectator sport of assessing how chemical CEOS fit in with Newman's categories.
Watch this space!
Only in America, surely.
If I had made this up you wouldn't have believed me. Rocky Twyman (see picture above), Founder of the Pray For The Pump Movement, and his pals have been touring the US asking the big guy in the sky to intervene and bring down the price of gasoline.
What's quite clearly needed is for some divine intervention, Old Testament Style, involving perhaps a little smiting of carbon molecules, to speed up the process of creating new and easily accessible crude oil reserves - by several hundred millions of years.
Maybe Mr Twyman is right and all that there is left for us to do is pray.
Either that or stop driving disgustingly huge gas-guzzling cars, cut back on the gargantuam-portioned meals that further waste precious hydrocarbon resources (and result in very large Americans who need those bigger cars and bigger clothes - again using yet more hydrocarbons).
Heaven forbid that Americans should change their lifestyles. It's far better, surely, to tell the developing that they can't have the things that America's got and continue believing that cheap and abundant gasoline in the States is a God-given right.
Grrrrrrrrrrrr..................
Believing what you want to believe (or pretending to believe in something because it's in your commercial interests) has always been a problem.
But the stakes have never been higher than in the case of climate change. To yet again refer to the excellent New Scientist magazine, their editorial from the 13 August issue says that predictions are for a modest cooling of the atmosphere over the next ten years because of natural oceanic oscillations.
Robert Watson, former head of the Intergovernmental Panel on Climate Change, observed earlier this year: "Let's say there wasn't much of a warming for the next ten years. How will the public and politicians play this out?"
He was right to worry that evidence of cooling would lead to a backlash against global warming. I did a quick Google news search today and found this link.
I am not a scientist but from what I've read and studied (and, of course, I might be believing what I want to believe!) I think global warming is a reality.
Regardless of who is right or wrong it would do no harm for the chemicals industry to plan for a future shaped by either the reality of significant man-made climate change or the perception that it will happen.
As I have said before further legislation on emissions, recycling etc seems inevitable whether its country-by-country, through big multilateral agreements or a combination of both.
In the history of the planet, ten years of cooling would be an immeasuraby small fraction of a second.
And in the history of oil, the last few weeks amount to almost as small a passage of time. Still, this hasn't stopped a groundswell of opinion developing that recent price falls have also exposed another bogus theory - that the fundamentals of oil supply and demand point to tight markets for at least the next five years.
I'll be blogging on this in more detail over the next few days (as I write, prices have actually rebounded to above $119 a barrel on the East-West crisis), but the comparision with global warming is worth making here: companies might stop making the necessary investments to secure their long-term future.
In the case of oil, this might result in less interest in accessing harder-to-get-at reserves and in renewable energy.
I much prefer the Hendrix version. As I get older, Dylan's voice just gets more and more grating - although a wonderful song writer. Ben Bernanke has brought cheer to the world by claiming that inflationary pressures are easing as a result of the fall oil and other commodity prices. I suppose any good news in the current climate is better than another kick in the teeth, but the big questions are: how far can crude fall and what's the long-term price of oil that can be afforded chemical producers with no access to advantaged feedstock? Some of the froth has been taken out of the speculation in commodities as a result of the stronger dollar and a fall in demand for the filthy black stuff in the West. For example, Goldman Sachs estimates that developed countries will use 500,000 fewer barrels a day this year than in 2007. But emerging market demand will grow by 1.3m barrels a day in 2008 with a 5% increase in consumption in China, the same bank adds. This has led Goldman Sachs to conclude that crude prices will rebound to $149/bbl by the end of the year. Demand destruction in the West might be occurring. For example, the US could have as many as 12 million fewer motorists by 2015 as those earning $25,000 a year or less get by on one rather than two cars per family. But for every American that is forced to make do with only one set of wheels there will be hundreds of people in developing countries earning enough to buy their first car. On a global basis it's therefore more accurate to talk about demand relocation rather than demand destruction. During the heady days of 2006 everybody in the chemicals industry was making money, even those who are seriously feedstock-impaired. Profitability remained strong for the better-integrated liquids-based producers up until Q4 of last year. The last couple of quarters have been so dismal that it's understandable that the recent fall in crude has raised expectations the worst might be over. But you will be hard-pressed to find many energy experts willing to take a punt on prices returning to their levels of a couple of years. The fundamentals of tight supply haven't changed over the last few weeks as oil prices have retreated - just as much of developing world demand growth will more than compensate for less consumptiion in West. Rising capital costs mean a lack of sufficient investment in new supply. Whether or not you believe that Peak Oil is upon is almost irrelevant for the next few years because the lack of investment - also the result of increased resource nationalism - means that the reserves that do exist are not being adequately tapped. And the irony of the slightly lower oil prices of the last few weeks is that exploiting tar sands and other marginal oil reserves, which require very high capital costs and great technical skills, will seem less attractive. Perhaps this is what the Middle East wants..... If you don't an advantaged feedstock, either through a position in the Middle East and/or being very smart at refinery/petrochemical integration, you've got big problems. Maybe there is no way out of here....
....said the joker to the thief..
This article, by David Strahan, author of The Last Oil Shock, says that it would take three million coconuts to power one flight from London to Amsterdam on 100% biofuels.
Some of the comments posted at the end of this excellent article, first published in the New Scientists, agree with Strahan that we have reached "Peak Aviation" - no matter what the developments in second-generation biofuels.
The first generation nonsense of corn-based ethanol (as Andrew Liveris pointed in my post yesterday) and palm-based biodiesel have been thoroughly discredited.
But what the Strahan research also contends is that even the much-touted next wave of technologies will never realistically be able to 100% replace hydrocarbon-based fuels for aviation, transportation and power generation. The argument can also easily be extended to the chemicals industry, which, of course, is so tied into the production of transportation fuels.
Strahan supports this view with another startling calculation: an area bigger than China (10 million kilometres squared) would be needed to provide enough biomass to completely replace the world's current demand for fossil fuels for all forms of transportation.
Then you need to contemplate the likelihood that we have reached, or are very close to reaching, Peak Oil. The huge growth in crude demand from developing countries is pushing us much closer to Peak Oil, if it hasn't already arrived.
In The Last Oil Shock, Strahan quotes Dick Cheney in 2001 as characterising Republican energy policy thus: "Conservation may be a sign of personal virtue, but it cannot be the basis of sound energy policy."
But just a few years later, shortly after hurricanes Rita and Katrina had exposed the fine balance between crude supply, refinery capacity and demand, President Bush said: "We can all pitch in by being better conservers of energy."
Winston Churchill saved Britain, and the world, from the Nazis. He was, though, widely viewed as mad - even by many prominent Americans such as Joseph Kennedy - for sticking it out during the dark days of the Blitz.
The parellel here is that we need politicians and business leaders with the courage not just to react to temporary crises, as Bush did by telling people to conserve after the 2005 hurricanes.
We need the next president of the US to persuade the public to accept one-car ownership, greater use of public transport and recycling. A visionary leader has to emerge who will, in the long term, be willing to dismantle the whole structure of our current consumer economy through persuasion backed up by tough legislation.
The short election cycles in the US - when as soon as you are elected, virtually, you need to start worrying about the mid-terms and then your own re-election bid - might prevent any such leader emerging.
Equally, oil and chemical company CEOs don't last that long. Even the current generation of leaders might be well into comfortable retirement by the time our modern way of life collapses as energy runs out.
There's a marvellous line in Ian McEwan's great novel, Saturday, where the main character enjoys a shower after a game of squash and reflects that his could be last generation to enjoy luxuries such as limitless hot water.
Our supposed betters, the politicians and the business leaders, need to have the courage to tell us, to make us, consume less - and American has to take the lead (as it eventually did, albeit a little belatedly, in the Second World War). Only if America takes the lead on conversion, and on climate change, will the result of the world follow.
We need the CEO of a plastics company to, for example, to come out and say "please use less of our products, for the good of humanity". You can just imagine the reaction of his or her fellow Board members, however,
In this era of short attention spans fed by soundbites, spin, Google and YouTube - leading to erratic voters and equally erratic and fickle investors - visionaries of this nature are unlikely to emerge.
We are living on borrowed time
The good news on the radio as I came into work this morning was that Hurricane Gustav had weakened in intensity with forecasts that it might make landfall in the US with wind speeds of less than had been earlier feared.
But this is not the point. The point, as Jeffrey Rubin of CIBC World Capital Markets makes in his report - Supply Crunch - is that just as the US has come to rely more on US Gulf oil and gas production, the frequency of high grade storms (class 3 to 5) in the region has increased.
"With both crude and total oil production inventories running significantly lower than they were when either Katrina or Rital sidelined Gulf oil production, both oil and gasoline prices are more exposed to potential storm-related disruptions than they were three years ago," he writes.
This blog isn't about the short term. But the the short term tension in crude and crude-product markets created by this latest hurricane scare is the result of tightly balanced supply and demand that has long-term implications for the global economy and for our hydrocarbon-dependent way of life.
The Gulf region - now so much more important to US supply because of production problems elsewhere - has itself suffered from delays to new capacity coming on stream. The BP Thunder Horse project, for example, is behind schedule - meaning that new production has grown at a fraction of earlier predictions for the Gulf. This has compounded the crisis caused by depletion of offshore fields as existing oil wells run dry. For example "some one-and-a-quarter million barrels per day from Mexico is likely to vanish (over the next five years) as its giant Cantarell field continues to deplete at a 30% annual rate", Rubin adds in his report.
Without getting into the argument over whether the increased frequency of severe storms in the Gulf is the result of global warming (or whether a long-term pattern of more dangerous weather has established itself - a view dismissed by some in the three years since Katrina and Rita because the region has so far escaped major hurricanes), there seems to me no dispute that supply is very stretched in the Gulf and globally.
Talk of demand destruction in the US benefiting crude pricing over the long term was earlier dismissed by Rubin. He estimated that by 2010 there will be 12 million less motorists on the road in the US. The problem is that ten new motorists in countries such as Brazil and India are buying cars for the first time for every one that leaves the roads in the States, he said.
High oil prices might slow down the pace at which people in emerging markets switch from push bikes to motorcycles and from mortorcycles to cars.
But without a global recession of a severity we have never seen before, it's hard to see how the slowdown will be enough to result in a net reduction in global oil consumption sufficient to end the crude crisis.
Chemical prices have gone through the roof this year on higher feedstock costs, causing greater recycling, greater conservation and a slowdown in the rate of substitution of petroleum-based products for natural materials in emerging markets.
If Gustav causes severe damage to oil and gas production and any further severe hurricanes hit the region this year (Tropical Storm Hana is brewing off the coast of the US as I write this post), the chemicals industry could lose even more ground.
I am afraid I do when it comes to climate change and, as a result, don't always switch off lights when I leave rooms, don't always say no to unnecesssary plastic bags when I buy anything and will happily (and this could be the worst damage of all) jet anywhere in the world either for business or pleasure.
I am feeling guilty today for accepting a 20 minute speaking engagement in Hong Kong which won't generate any direct revenue for our training business.
Of course it might create that intangible benefit of goodwill plus I can also do some other meetings while I am there.
But is this the kind of marginal trip that businesses should cut back on and if this happens, what will be the effect on bottom lines as building goodwill is so important?
Equally important in Asia are all those face-to-face meetings. Relationships can have more value than sometimes even the quality of the product you provide.
How do you decide as a company, therefore, what is essential and what is unncessary travel?
And as an individual, what about those flights at the weekend for short breaks? I've often jetted off to Phuket in Thailand because I've been tired from travelling too much for work!
I was glad to discover I am not alone about my sense of the enormity of it all, for feeling that turning the odd light bulb off is not going to make a jot of difference in the great scheme of things - and for feeling trapped by the corporate machine that so voraciously consumes carbon.
This was thanks to yet another excellent article in the New Scientist on a meeting of the American Psychological Association which took place in Boston, Massachusetts, last month.
"It's easy to feel overwhelmed and think: 'What can little me do?' ", said David Uzzel at the University of Surrey in the UK during the meeting.
Paul Stern of the US National Research Council said a key deterrent was a lack of guidance on which actions would have the greatest impact, and feeling paralysed by the size of the task.
His research paper on this subject provides more detail - and to my great relief tells me that switching light bulbs off when you leave the room doesn't do that much good.
Some impractical suggestions he quotes from the Live Earth Global Warming Handbook include composting household waste, building a bat house or if all else fails, buying a camel.
I can just imagine the reaction of my neighbours, and I am sure the authorities, if I attempted these measures in Singapore. And anyway, my balcony isn't quite big enough to accommodate a camel - although my 20-month-old son would enjoy the rides around the condo.
Enough of the fatalism. I am going to get off my backside and do something practical.
The long-contemplated attempt to build integrated petchem hubs in India, complete with shared utilities and strong investment incentives - aka China and Singapore - now seems even more of a hopeless pipe dream.
At stake are Reliance's retail ambitions - and here goes, the government's plans for petroleum, chemicals and petrochemicals investment regions (PCPIRs). How Asians love their acronyms.
I remember back in 2000 I had a meeting at the first APIC conference in Yokohama, Japan, with representatives from the Indian government who were very keen on establishing these hubs.
There has been almost no progress since and the land dispute at West Bengal is further evidence of just how difficult life can be in a thriving and open democracy where there are more vested interests than servings of yellow dahl.
China occasionally lifts the lid off the proverbial pot to release a little pressure - for example, the government's decision earlier this year to give into protests over plans for a paraxylene plant at Xiamen in Fujian province.
But if protests seriously threatened China's economic growth model, individual business interests with sufficiently good connections or China's international image, the perpetrators would be marched straight off to re-education camps. You only have to look at the Olympics as an example.
So it looks likely to remain a do-it-yourself game in India when it comes to maximising integration and site-efficiency with Reliance the dominant practitioners.
From a national perspective also, maybe no PCPIRs in India would be a good thing.
"I spoke to the Indian government about these suggested sites at length," said an industry source a few months ago.
"They at first talked about supplying the local market but when I produced numbers to point out that the scale of what was being planned was far too big for India, they conceded that a lot of the volume would be for export. Where's the competitive advantage given India's comparatively high logistics and feedstock costs?"
Click here for some positive thinking - Energy%20Carta%20Conference%20Executive%20Summary_general%20150808.pdf
The Asian Energy Youth Summit - organised by the non-profit organisation Energy Carta - is an example of doing something about the climate-change challenge.
Speakers at the event which takes place in Singapore on 30-31 October (please click the link at the top of this post for the full PDF) include Shai Agassi of Project Better Place and Stefan Mueller, Asia Pacific managing director of Conergy.
What's heartening is that a chemicals engineering undergraduate at the National University of Singapore is one of the founders of Energy Carta. The chemicals industry is part of the problem and can hugely reshape its image for the better by being part of the solution.
....You might have to be to be able to afford this lot in a few years time (at least in some inflation-battered and collapsed local currency)
Thanks to Mark Berggren of MMSA for pointing out this wonderful quote: "Foreign aid might be defined as a transfer of money from poor people in rich countries to rich people in poor countries"
Douglas Casey, Classmate of Bill Clinton at Georgetown University
The tremendous economic boom of 2000-2007 in emerging markets might have also left millions more behind than had been previously thought as increased wealth from local prosperity - rather than from stealing foreign aid - has ended up in the hands of the middle classes.
For example, the ADB believes that there are 20.1% more people in poverty in Indonesia and 15.9% more poor people in the Phillipines than it had previously thought.
The great petrochemical hope in the sky has been India, but how can a country with terrible infrastructure, poor irrigation and very low literacy rates ever give the majority of its people the joyous pleasure of buying plastic bags? The World Bank estimates that 455 million people have to get by in India on $1.35 or less a day.
The point here is that inflation will eat into all the rosy forecasts for petrochemical demand growth that were around as recently as the first quarter of this year.
How long-lasting will the damage be to growth? The answer could be how long oil prices remain elevated which comes back to your view on supply and demand.
Surging oil prices on the well-documented supply problems are big factor behind rising food costs. This is either directly through higher transportation and fertiliser bills or indirectly through the nonsense of first-generation biofuels industry in the West taking away land from food production. Plus you have the problem of all those newly middle class people in countries such as India eating more meat.
I don't think the recent fall in crude prices changes anything. This is just a temporary correction based on weaker demand growth. When there's an economic recovery, the supply shortage could quickly result in another downturn - hence, constant volatility above a high price floor.
I wish had bought shares in agrochemical companies a few years ago.
The cost of shipping a standard 40-foot container has tripled since 2000 and labour cost increases have risen by average of 19% per year in China compared with just 3% in the US.
The consultancy makes the point that you have to do very thorough input-by-input calculations for each product and grade of product before making any decisions. And, of course, you need some reliable forecasts of where the economics of offshoring versus onshoring are heading - including predictions on crude-oil prices. Predicting crude, as I discussed earlier on today, is where I fall short.
You also need to take a view on the direction of environmental legislation - i.e. will there by carbon taxes and/or cap and trade systems introduced globally that penalise producers for extended global supply chains?
If history is anything to go by, McKinsey has worked out that manufacturing a "midrange" product in Asia will cost you an extra $16 today compared with the US when all landed costs are included. In 2003, Asia had a $46 advantage.
Add to this the likelihood that more petrochemical feedstock will become available in the US thanks to declining gasoline demand and perhaps, as again I talked about last week, the industry in the states might be set for a revival. It has been comparatively higher feedstock costs and the drift of downstrean customers overseas that has caused so much damage to the US industry.
For anyone who subscribes to ICIS news, you might find this artice of interest. Allen Kirkley of Shell discusses some of the new emerging feedstock options and converging economics between the West and the Middle East.
A drowning man will grab hold of any floating debris - even a plastic bag made from standard-grade Chinese polyethylene (PE).
The president of Sinopec Corp, the Hong Kong-listed arm of the Chinese refining and petrochemical giant, was quoted in press reports as saying that projects that had already been postponed would be suspended indefinitely (taken as a face-saving euphemism for cancellations). He also reportedly said that the pace of other projects would be adjusted.
"Fantastic. At last we are seeing some commonsense," said a Singapore-based executive with a Western polylefins producer.
Sadly, though, only a few days later, Tianpu amplified his statement by saying that 2008 petrochemical expenditure would be cut by only $675m - amounting to much less than the cost of one cracker.
The excitement that greeted his first statement was the result of concerns over just how bad conditions could become over the next few years.
The hope was that a much bigger budget cut might take place - affecting the timing, or even the continued existence, of projects slated for commissioning in 2009 and beyond.
ICIS Plants & Projects estimates that 21 per cent of global ethylene capacity additions in 2008-12 will be accounted for by China.
The Middle East will be responsible for a further 36%, resulting in worldwide C2 capacity increasing to 156.3m tonne/year from 135.5m tonne/year.
China has every strategic reason to push ahead with more petrochemical capacity, even if growth looks precarious on the back of the likely frequent boom-and-bust cycles created by tight crude markets.
And we all know about the Middle East advantage, even if it might be eroding a little on tighter feedstock supply and higher capital costs.
"The knowledge society will strike back - eventually. Energy efficiency and renewable energy will be rewarding projects," says Norbert Walker, Chief Economist at Deutsche Bank in his Asia Trip Report 2008.
So if you are not in the Middle East and not in China, are not moving up the innovation curve or don't have good refinery-petrochemical integration (ideally, you will have a combination of all the above) you are in big trouble.
You're only option is to sell your business to some gullible fool during the next up cycle -but you'll have to be quick as the recovery is unlikely to last for long!
Apparently it's a fallacy - ostriches don't stick their heads in the sand.
Investment bankers frequently do, though, especially all the greedy ones who only cared about their end-of-year bonuses when they knew perfectly well that the credit crisis was on its way.
I am sitting here sipping a beer and thinking "Oh my goodness, this really could be as bad as the Great Depression" now that Lehman Bros has been forced to file for bankruptcy.
But the danger is that we'll all forget about the even bigger threat to the global economy which is yes, you've guessed it, Peak Oil and climate change.
We'll all be so grateful when the credit crisis is over that we'll rush out and buy more garbage we don't need, jet around the world once again, talk excitedly about emerging-market growth, and bang - the price of crude will be close to or above $150 a barrel again (not that current levels in the historical context are anything to cheer about).
Read the last chapter of David Strahan's The Last Oil Shock to put the credit crisis in perspective (read the whole book, but the last chapter provides some practical ideas).
The survivors of the energy crisis over the next 20 years will be those who are the most energy efficient. So start growing your own vegetables, invest in energy saving in your home and for goodness sake, sell your SUV you self-indulgent idiot.
The value of your home, your shares and your pension might rebound once the credit crisis is over but in the long run, any investment in the conventional hydrocarbon-based economy seems to be fundamentally flawed.
Back in the heady days of 2006, I asked a group of five like-minded nerds what their favourite business book was.
They unanimously voted for The World Is Flat: A Brief History of the 21st Century by Thomas Friedman.
I rushed out and bought a copy. It has sold by the truck load and was quoted by Mohamed Al-Mady of SABIC during his speech at the Asia Petrochemical Industry Conference in Thailand in 2006.
Back then everybody was talking about a new paradigm of growth, driven by the relentless rise of emerging market consumption. Nobody mentioned that other book, The Limits To Growth, published in 1972 by the Club of Rome, during those heady days of the economic boom.
I ploughed my way through most of The World Is Flat (it is overwritten - all the points worth making could have been made in considerably less than 488 pages) and was profoundly irritated by Friedman's relentless enthusiasm for globalisation.
At that time I must confess I hadn't heard of the Club of Rome book, nor did I give any consideration to the idea that Friedman might be dead wrong for any reason other than a gut reaction to his seemingly boundless optimism.
Now he has woken up to the fact, 36 years after The Limits To Growth was published, that indeed this might be the case with his new book Hot, Flat And Crowded.
In a review in the Financial Times, Rahul Jacob makes the point that we should have all seen the weaknesses behind Friedman's flat earth theory.
Friedman was entranced in his earlier tome by the rise of India, particularly the booming IT hub of Bangalore.
"I have lost count of the times friends or relatives in India have forwarded by email Mr Friedman's comment that, while his parents told him to finish his dinner because there were people starving in India and China, he told his daughters to finish their homework because there were people there eager and willing to take their jobs," writes Jacob in his review.
As Jacob points out, the very roads that Friedman travelled along to get to the headquarters of the IT giants point to the limits to India's particular form of middle class, elitist growth; they are pockmarked and hugely congested with ancient patched-up vehicles pumping all sorts of foul fumes into the air.
India suffers from a self-inflicted limit to how far it can grow without creating unsustainable social and environment pressures - because of a political system that has created virtual development paralysis.
How can a country with terrible infrastructure, poor irrigation and very low literacy rates ever hope to create sustainable economic growth?
According to the CIA Factbook, India's female literacy rate was only 47.8% in 2001. This compares with 86.5% in China, based on the country's 2000 census, adds the Factbook.
The speed limit on Indian and, of course, also global growth is resources - so presciently highlighted by the Club of Rome back in the 1970s.
I've only just woken up to this reality. Back in the dim and distant 2006, all I cared about was riding the global property and share boom while consuming immense amounts of carbon in pursuit of my career. This involved writing my own much-shorter tomes that encouraged others to do likewise.
Many of us became so enamoured by globalisation that we ignored the fact that there are simply not enough resources available to allow all of us to consume as much as the typical Texan, or more latterly a middle class Indian in Mumbai.
Friedman gets excited in his new book, according to Jacob, about China's potential to lead the way in solving the environment crisis.
I agree that China has potential, but some huge challenges lie ahead.
Idealistic enthusiasm (the ungenerous might use the phrase "gormless enthusiasm", which has applied to many of us over the last few years) might have its place in generating the individual energy to make a difference: Each of us need to find new ways of individual and corporate behaviour if we are to prosper in a world threatened by Peak Oil and catastrophic climate change.
This type of enthusiasm needs to result in more than just further consumption of trees through higher book sales (and when do we have the time to read books like The World is Flat? When we're flying, that well-known environmentally friendly form of travel).
We need to radically change the way we lead our lives.
![c1[1].JPG](http://www.icis.com/blogs/asian-chemical-connections/c1%5B1%5D.JPG)
It is September 2025 and the financial system has imploded due to the collapse in value of collaterised green obligations (CGOs).
So how did we end up in this sorry state? Here is a guide to how the crisis developed:
Governments (often sovereign wealth funds that had made a fortune from selling oil and gas), investment bankers, pension-fund managers and hedge funds began transferring cash from traditional hydrocarbon-based investments when Peak Oil arrived in 2015.
A further motive for the enormous capital transfer - amounting to trillions of dollars - was the gradual evolution of the global carbon tax and cap-and-trade system.
Companies that had failed to innovate (including many in the chemicals sector) went under - as did even some of the stock exchanges that had failed to evolve.
But because of woefully bad funding of and interest in science teaching (far too many undergraduates were still taking degrees in media studies), there was a widespread inability to separate the good from the bad new-technology prospects.
The global shortage of science and engineering graduates, which stretches back to the early years of this century, has therefore continued.
Ignorance about good science extended from senior government levels down to the public who poured their money into the new "green" bourses.
Charlatans made fortunes from government funding and ridiculously overpriced initial public offerings by making spurious claims about the commercial viability of their inventions.
But there were some tremendous successes, notably big breakthroughs in carbon capture and storage and a second-generation biofuel made from animal and human nose hairs.
Then, as we all know, the "Green Equities Bubble" went pop in 2018. Wall Street's Renewable Energy Index lost 1,000 points on December 3 of that year alone when investors realised that many of the new-tech companies would fail.
The Federal Reserve, desperate to prevent a recession, aggressively cut interest rates.
This forced lenders to seek higher returns through developing ever-more complex financial instruments, including the now widely discredited CGOs.
But the good news was that homeowners and companies had made a packet in 2015-2018 from trading carbon credits earned by adopting proven energy-saving measures that had been around for decades.
Energy bills were also substantially reduced and most importantly of all, we had capped atmospheric greenhouse gases at 450 parts per million.
The surge in the value of "green homes" continued post-2018 - thanks to the money left in the economy from these carbon-credit earnings and low interest rates.
A new breed of mortgage brokers emerged after the green equities bull-run ended. They made huge commissions from selling mortgages with incredibly low "teaser" interest rates to lenders who initially had to show proof of a strong carbon-credit history.
But by 2021, the greedy brokers were only asking for carbon credit self-certification.
Homeowners who had made false claims on their forms were able to afford to service their mortgages and still have spare cash to spend in the shopping malls. This was because low interest rates and surging green property values more than compensated for high energy bills and the cost of buying carbon credits.
Easy lending conditions gave them even more money to spend as they were able to refinance their homes on rising notional property values.
Mortgages lent to these unsound customers were repackaged with good lending into the now discredited CGOs.
The ratings agencies had no idea of how to value these secondary debt-instruments and so - erring on the side of their customers - gave them all triple As.
As we all know, August 2024 marked the end of the free lunch as the US property market collapsed and the inter-bank lending market gummed up on the realisation that nobody knew the real value of the CGOs.
The price of oil also rose to more than $350/bbl last December - the result of the failure to carry out proper carbon due diligence when mortgages were issued.
Energy profligate homeowners in the US, and more recently in the UK, are being hit by falling property values, higher interest rates introduced to tackle runaway inflation and tougher carbon disclosure and trading regulations.
The boom in emerging market growth has also helped to drive up the price of oil. A lot of this growth was based on exports of supposedly green products to the West.
But in the rush to cash-in on the consumer boom, lax life cycle analysis has led to many of these products being carbon inefficient.
The huge profits earned from the Western consumer bull-run has more than compensated for the need to buy carbon credits to accommodate for wasteful product-chain practices.
There have also been allegations of government officials being bribed to turn a blind eye to carbon efficiency abuses, thereby enabling companies to avoid having to buy extra credits.
Growth has also boomed in the emerging market economies themselves, where energy efficiency standards have also suffered.
Greenhouse gas emissions are on the rise again and last year hit 600 parts per million, according the majority of independent scientific research.
However, the drive to reinforce legislation is being blunted by the work of some scientific institutions. They claim that emissions are in fact falling, but a scandal erupted last year when it was discovered that many of the institutions are funded by companies with questionable carbon practices.
The economic crisis has now become global with developing nations under threat from collapsing stock markets, a lack of credit as financial institutions fail and runaway inflation. The decoupling theory has been thoroughly discredited.
Sound familiar? History repeats itself repeatedly.
But to be more accurate - and to quote the guy who first coined the phrase before I paraphrased it - Clarence Darrow (pictured above), a Defence Attorney in the US between 1857-1938, is credited as saying: "History repeats itself. That's one of the things wrong with history."
I just hope I can get in and get out at the right time and make my family's future financially secure.
The smarty pants at BASF seem to have got it right again with their $6.1bn bid for Ciba Specialty Chemicals and rumours that they might also be after Clariant.
Talking about counter-cyclical investment is one thing, but doing it is quite another. You need to have built up the cash reserves to execute the obvious - and, of course, need the right product portfolio already in place to earn the money in the first instance.
BASF has made and continues to make a packet from its oil and gas business. It's oft-repeated focus on integration and on getting out of the more cyclical commodities is also paying dividends. It was walking the talk about reducing exposure to such commodities long before a certain US-headquartered company jumped on the bandwagon.
Talking about stating the obvious of buying low and selling high, McKinsey does this - but with some useful numbers - in its report, M&A Strategies In A Down Market. Again this is from the consultancy's excellent monthly newsletter, which is free once you have signed up.
The report's authors have also written a book, The Granularity of Growth. It includes a database of 200 global companies that decomposes the most important sources of growth (market momentum, mergers and share gains). Sectors that suffered big upturns or downturns were then analysed in order to rank the importance of these growth sources - with the study also extending to individual companies strategies.
"Two sets of results stuck out," write the authors.
"First, (I wish consultants would learn to write shorter sentences - my comments in italics) of the potential strategic moves companies can take to grow in a downturn - divest acquire, invest to gain a share - an effective acquisition strategy (defined as growth through M&A at a rate higher than 75 percent of a company's pears) created significant value for shareholders (you can pause for breath now).
"During an upturn, on the other hand (surprise, surpirse), divestments created slightly more value that acquisitions did (this presupposes you can find some mug to buy your business at some ridiculously inflated price on the belief that the economic boom will last forever).
"Second, companies often behave in counterproductive ways. Fewer than half as many companies in the segments we studied made acquisitions in downturns rather than in periods of economic growth. Significantly more divested businesses in those market segments in downturns than in upturns."
The global credit crisis and volatility in stock markets "could temporarily disrupt M&A activity and add risk to existing deals," said Scott Anderson, senior economist at Wells Fargo - the US financial services company. He was speaking at the ICIS Chemical Purchasing Summit, which is taking place in Boston, Massachussets.
He added, however, that conditions were right for further consolidation in the chemicals industry as manufacturing customers become larger.
The Middle East has the cash, of course - as do the Chinese if they can be bothered. Sovereign wealth funds could be the vehicles, as well as the petrochemical companies themselves, for a wholesale shake-up of industry ownership.
And as I've already said, those clever people at BASF look likely to be involved. Being right and having senior executives with brains the size of a small planets is very annoying for those of less able (especially if they are also nice to children and animals, actively care about the environment, give a large proportion of their incomes to charity and are good at football when World Cups come round).
As oil prices keep on falling, it might be tempting to forget the big picture. I had another frustrating conversation yesterday with a contact who believes that there's nothing to worry about on crude (it was all downs to speculators, he said) and so we could carry on as normal once the economic crisis is over.
Nonsense. If his views are prevalent in his company, his company will eventually be out of business.
Just as an example of how the nature of demand could change, see this article from the Economist about green buildings.
Formaldehyde demand could fall as could demand for the chemicals used in sealants ad adhesives.
But opportunities for increased sales of plastics could exist in "vacuum" windows.
A sustained spell of low oil prices might damage the push towards a sensible energy future.
The crisis will also make it harder to find the money for research and development of new products to provide for this future.
I can just picture the scene in the Paulson household, poor old Hank's wife having to get up early to prepare his "snap tin" so he could off to work shifts at the weekend.
He would then take his lunch, walk out of his door, "through the mansions of fate and the mansions of pain" and walk "through those factory gates in the rain". Might seem corny to some or not "trendy" enough, but Springsteen is always passionate, sincere and the antithesis of the materialistic empty heads who make up a sizeable percentage of the music and showbiz communities.
The US Treasury Secretary and the rest of that other materalistic "community" (what an ironic word to use given the circumstances) - the financial one - bear a huge responsibilty for the almighty mess the world finds itself in.
The good news (and we knew this already, didn't we?) is that the supposed bastian of capitalism is not pure capitalist at all (is there such a country and would we ever want such a country?) - but an economy that's occasionally managed, but mainly only as a knee-jerk reaction to the failures of capitalism.
Long term market-distorting management does occur in some area when there are votes at stake - for example, the corn-based ethanol, auto and airline industries, resulting in very little if any benefit for the common national and global good.
Wouldn't it be better to have a properly regulated economy to avoid catastrophes like this in the first place? Or this impossible because of the US political system which is so heavily shaped by the lobbyists?
The old-style Labour Party in Britain used to believe in the Marxist doctrine of "nationalising the commanding heights of the economy", which in those days meant the mining (see the picture above - UK miners with their "snap" or lunch tins), utility and steel industries.
In America's case it's the banks and the housing markets that represent the commanding heights of its economy, and so what's the difference? Risk has been well and truly socialised and the potential for huge moral hazard created so the greedy can get away with it.
And the main point - hence my sarcasm at the beginning - is that Paulson and his like will be financially fine regardless of what happens. The people who will suffer are the rest of us who stand to lose our jobs, or worse could be pushed into severe poverty in many parts of the world if his rescue plan fails.
For the first time, quite probably, since the Chinese economy opened some producers are predicting that polyolefin demand growth could be flat or even negative this year. In the case of PE, reports are emerging of sales declines above 20% over the last two months.
This compares with 8 per cent growth for PP and 5-6% growth for PE in 2007.
This blog focuses on the long term and there is a long term danger here.
The depth of the economic problems in the West is the main cause of the fall in polyolefin volumes due to the the collapse of the re-export of finished goods.
Let's hope this only a temporary problem and the global recovery arrives fairly quickly. But it seems likely that we haven't even reached the bottom of the current crisis and there is a danger of a deep global recession, or even depression, lasting several years.
The fact that Chinese growth has taken such an historic blow from the collapse of finished-goods exports exposes the corporate flannel about tremendous domestic market growth as being exactly that - corporate flannel of the worst kind designed to hoodwink dumb investors and lazy journalists.
In the short term, as described, the re-export sector remains hugely important for the Chinese economy.
There is also a shift by the government away from an export and fixed asset investment-led growth model. This means a lot less growth from the re-export sector over the long term for anyone shipping basic commmodity chemicals to China.
Volatility in crude is a problem that might last for a while, given the fundamentals of tight supply and the potential for the re-emergence of strong demand growth.
In the case of polyolefins, this is leading to sudden surges in resin buying when converters think crude will continue to rise and running down of inventories when the reverse occurs.
This might, to some extent, have masked the depth of fundamental weaknesses in the market up until mid-June. If you recall, oil was on a bull run until then.
The last few days have, of course, seen crude enter one of its most volatile periods in history - making it even harder to read the direction of oil and therefore naphtha, olefins and polyolefins pricing.
Who'd want to be a purchasing manager for a plastic processing company in this current climate?
The reach of the credit crisis is such that liquidity is even becoming hard to come by in the hugely wealthy Middle East, according to this report.
With so few petrochemical projects officially announced for the region post-2012 (although I am hearing rumours of numerous plans kept from public view, but feedstock is the issue for all of them in the GCC), could we see a big slowdown in the growth of the region's industry?
The irony, of course, is that many of the Middle East and emerging market countries have huge government surpluses and high individual savings rates.
When I was trying to cheer up a downbeat member of staff today, I said that the financial rescue package being proposed by the deadly duo of Paulson and Bernanke might get overseas support from these solvent administrations.
"It's in everyone's interests to keep the US afloat because it is so crucial to the global economy. If this had been 10 or 15 years from now, the Chinese might have done the economic equvalent of flipping the states fhe finger because by then they will be the biggest economy. But the US has got off the hook because of the timing of this crisis."
I sounded so optimistic I almost believed this flannel myself.
More evidence is also emerging of project delay, including the Aramco/Dow Ras Tanura mega-investment. The sheer scale of the thing seems to be the issue here.
The old saying "there's no such thing as a free lunch" has at last been proved true with the virtual collapse of the global financial system - and with it, quite possibly, the world's economy.
But for the last decade or more, the chemicals industry, like every other industry, gorged itself on an easy credit-fuelled property boom that's swept the globe.
In Singapore until very recently, real estate was red hot. Surprise, surprise, oversupply beckons, the market is flat and a pricing collapse cannot be ruled out.
Property bubbles come and go and so cyclical downturns were inevitable in Singapore, Thailand, India, China and Australia.
But perhaps the long-term fallout of the crisis - a much more prudently managed banking sector - might have negative implications for chemical demand-growth multiples over GDP.
As the problem rests mainly with US lenders, though, it's hard to say whether credit will also become much harder to obtain for good in Asia and other emerging markets.
But the appetite to lend money to average and below-average earners at high multiples of annual incomes - and with incredibly low "teaser" interest rates - will at the very least take a few years to recover.
Mohamed El-Erian, co-CEO and co-chief investment officer for Pimco, analyses the implications of this tighter credit climate in today's Financial Times.
It is worth asking your friendly neighbourhood consultant or in-house researcher whether any of their growth scenarios take into account the possibility of much tighter lending conditions for many years to come.
As the American Chemistry Council points out, $16,000 of chemicals are consumed when an average home is built in the states.
On a global basis, this alone means an awful lot of demand without counting consumption by real estate in other countries.
As delegates gather for this year's European Petrochemical Association meeting in the unreal world of Monaco (unreal for the 99.9 per cent recurring of us who don't own Ferraris), I thought it was worth summarising some of the issues discussed on this blog over the last few months.
We've dealt with:
*Oil-price volatility and the likelihood that high and volatile crude is here to stay. Crude at or around $100 a barrel seems to be a new long-term level with the strong possibility that geopolitical shocks could send costs much higher. Supply and demand balances remain tight and as soon as global economic growth recovers we will see much higher prices - meaning that the recovery could be nipped in the bud. Are we heading for a new economic climate where recoveries are constantly set back by rising energy costs? For every one barrel we are discovering, we are consuming three.
*The new credit environment that might well emerge from tougher banking regulations. No longer will it be possible for a truck driver from Iowa earning $20,000 a year to borrow at ridiculous multiples of his salary and at "teaser" interest rates. How these regulations will effect emerging markets his harder to read as Asian governments and consumers are in far better financial shape than those in the West. Many of the banks in Asia have been more prudent. But the events in the US will surely lower the appetite for risk globally - and there is no guarantee that the financial-rescue package will work. Ask your consultants or inhouse researchers you use whether their demand-growth predictions factor in the possiblility of lower growth because consumers no longer have access to as much credit.
*Innovation will be the key as the environment becomes a bigger and bigger issue for the chemicals industry. You need right technologies and the right kind of staff. As there is a possibility of a global carbon tax or carbon cap-and-trade system, do estimates of what this might cost need to be factored into feasibility studies? How feasible will it therefore be - given both high energy costs and the possibility of a price on emissions - to continue building plants long distances from major consumption markets?
*One of the big areas of innovation will be attempts to break the link between the refinery and petrochemical industries. BASF is claiming it could be as little as five years away from breakthroughs in catalyst technology that could change the industry forever, enabling highly competitive petchems to be produced from biogass, natural gas or coal.
And finally, other theme I haven't blogged on yet but will do are plant and energy efficiency. Some very interesting research projects are taking place at the National University of Singapore chemical engineering department into monitoring the exact output of plants in differennt climate conditions and a model that might enable producers to much more accurately predict changes in yields from switching feedstocks. Much more later...
Meanwhile, have a great meeting - and let's hope the economic conditions improve.
I grew up in a small town called Bingley in West Yorkshire in the UK, where there are two major employers - the head offices of a building society (or what was once a building society, but became a failed bank - see picture above) and a clothing business.
My late parents worked most of their working lives for the B&B and I worked there during the summer when I was student, to pay off debts built up through excessive drinking (I was an arts student, thank goodness - none of this obsessive "grow old too young" nonsense of MBAs and other business degrees that are serving very little purpose at the moment. You'd be better staying at home and writing poetry).
In the financial maelstrom, you might have noticed that the B&B has been partially nationalised by the British government.
This used to be a dull but worthy lender that became more aggressive and, like most of the rest of us, didn't believe that there was a down as well an upside when we were all caught up in the economic supercycle.
Before the nationalisation occurred 370 jobs were axed last week - which will greatly affect Bingley's economy, from the direct job losses, of course, to the shops and the restaurants. More jobs are at risk among the remaining 3,000 employees.
My dad worked down a coal mine, fought in the Second World War in North Africa and Italy in an artillery regiment, returned from the war to work on the railways and then spent the rest of his working life as a caretaker (or a janitor as the Americans have it) at the building society. If he had been still around, he could have been out of work - but exactly what portion of the blame for the crisis would you have apportioned to him, Mr Paulson?
Multiply the impact of job losses around the world as other banks and businesses fail and this means much less chemicals demand - from the plastic packaging used in restaurants to cancelled bigger ticket purchases such as automobiles and TVs. Again, we need to be looking hard at demand-growth numbers in an attempt to contemplate what this will mean for all our businesses - whether we work directly in the chemicals industry or as service providers.
But the bigger tragedy is that real people, not those with fantastic salaries and parachute payments who are responsible for this financial mess, will suffer greatly.
These are real people who deserve protecting because they had no idea, and had no chance of gaining any kind of idea, of the potential scale of the crisis we are now confronting.
I've just returned from a wonderful few days in Perth, Western Australia, where the motorists don't as a rule try to kill you (unlike in most of Asia) and if you are a tourist at least, you can come away with the false impression that the cork-hatted people have got the balance between work and other things that matter more sorted out.
Anyway, to the point after that ridiculously long sentence. I failed the Koala Bear test in the gift shop in Yanchep National Park .
On sale was a stuffed Koala Bear toy made in Australia at $11.80 in Australian dollars. You could also opt for an "Inspired in Australia" version (I tried to establish what this meant with the shopkeeper, but she hadn't a clue. What Koala Bear is not inspired by the Antipodese, for goodness sake?) at $5.50.
Or you could for the Chinese version at a staggeringly cheap - and no doubt nasty in some horribly chemically polluting and toxic way - $2.50.
We all might want to save the planet by lessening our carbon footprint (blah, blah, blah) but in these straitened times with my investments plummeting in value, I went for the Chinese version on the grounds that my 21-month-old son would very quicky lose the thing anyway (sorry, another long sentence).
Ten minutes out of the shop Mr Koala Bear ended up face down in a puddle.
This was the wisest investment decision I've made for the last two years.
Globalisation is an attitude of mind as what might now be a slightly descredited economic doctrine.
Many companies are international but few - from talking to friends and contacts - are truly global in the sense that they recruit senior managers from all regions (not just the country in which their head office is located) and display a consistent bottom-up sensitivity to cultural differences.
I mean by this a recognition that business practices vary hugely country by country and culture by culture.
At every level of a company from administration support right up to the CEO, there should be an awareness that "one size fits all" approaches don't always work.
As the world economy implodes, addressing such issues for companies that have fallen behind in efforts to become truly global will be of far less immediate importance than survlval.
Survival might only be possible for those companies that already genuinely think and act globally.
I'll give you an example. One European-located trading company launched a major polymer additives sales push in Indonesia the week before Hari Raya Aidilfitri. Pouring money down the drain in this fashion is the last thing anyone can afford to do in the current climate.
Talking the walk is one thing which Lenova clearly does in this article from The Economist where the Chinese computer manufacturer makes all the right noises about being genuinely global.
Any Lenovo employees out there who would like to comment about how genuine these comments are?
And what about other companies?
Yes, I know this blog has gone very quiet - but as the world has imploded, a few more pressing issues have come to the fore.
On a business trip last week the extent of the crisis became apparent when a Middle East producer told me that travel and entertainment budgets are being ferociously cut for 2009 (many companies are busy at the moment preparing their budgets for next year with deadlines for submission due n November).
Everyone asks "how bad is it going to get?" with the hope that someone will offer at least some degree of optimism that will - just for a few fleeting seconds perhaps - relieve the anxiety.
But despite yesterday's stock market bounce, the real economy seems likely to get much worse before it gets better, even if most of the bad news from the financial sector is out of the way.
The trouble is I keep hearing that much more bad news might yet emerge - for example, the enormous size of credit-default swap commitments.
The Middle East producers face:
*Much lower oil prices than just about anyone had forecast, meaning lower margins between their fixed feedstock prices costs current global petrochemical prices, which are set by the oil-based players
*Plants coming on stream in 2008-11 with far higher capital costs than during the last building spree. This is due to soaring raw material, equipment and labour costs and much more complicated project configurations due to diversification downstream away from basic ethylene derivatives
*The decimation of demand. Polyethylene and polypropylene demand could be zero or even negative in China this year. I talked to one industry source who also expects the same for polyester As recently as July, he was forecasting growth of 12% with the market expanding by 17.2% last year
How long will it be before the Middle East producers begin to cut capital expenditure programmes and how will this influence the fate of projects yet to reach the financing stage?
Of course, everything is relative and although the Middle East players may be earning far more thann they anticipated, they have huge cash reserves.
Wouldn't these reserves be better employed buying existing capacity rather than adding new plants?
There will surely be no shortage of suitors, especially those with high leverage who expanded through acquisitions at the wrong time.
Yes, indeed, with all the talk of the collapse of capitalism and with liberal economists running for cover, dear old Karl might once again be the flavour of the month.
Oh how I remember those dewy-eyed days, standing on the picket lines in the pouring rain during the 1984-1985 Miner's Strike in the UK, believing passionately in the noble cause of the downtrodden working man as he (and she, of course - sorry sisters for putting you second) fought against the evil forces of Thatcherism.
Oh how I remember on one such occasion, a miner asking me what I did, to which I replied "a student in English Literature", to which he replied "what do you produce? Essays? You useless............(followed by two unmentionably rude words).
And how I remember when the forces of Thatcherism won and the miners were forced to march back to work I waited for some noble and great workers' song as they marched, some stirring ditty speaking of the struggle against the oppressor and the honour and dignity of honest toil as opposed to the grubby and slimy pursuit of evil money.
Instead all I heard coming out of the TV during the Look North programme was a rendition of that great brain-dead football chant, "here we go, here we go, here we go".
How our illusions can be shattered and how the illusion that pure capitalism works is also now in ruins.
This is still not The End of History as history never ends.
So why not a sensible compromise between socialism and capitalism - a workable system of regulations versus freedom to innovate? How about the Japanese model, may be, or that which is pursued in Singapore?
Unbelievable, incredible - what prehistoric planet do these people live on?
Please see below for a rant from a-soon-to-be-extinct species of business leader - the US chemicals executive against Barack Obama.
I have my doubts about Obama, but at least he has a brain bigger than a shrivelled pea (unlike certain other holders of the most important job in the world) - and he gets it.
The point is it's not business as usual, it's not regulation (Democrat) versus anti-regulation (Republican).
The world has changed forever, and this happened long before the financial crisis.
I don't know about you, but I want to be able to tell my son that I did something in the battle to save the world from the energy and environmental crises - even if it's just the odd small thing like recycling my plastic bags annd vicariously (I can't vote in the US election, of course) supporting politicians such as Obama who get it.
03 November 2008 21:04 [Source: ICIS news]
WASHINGTON (ICIS news)--The US appears poised to elect what one chemical industry leader on Monday termed "the most anti-business federal government" in recent history and one that is likely to raise tax and regulatory burdens.
On the eve of the US national elections being held on Tuesday, a wide range of public opinion polls give the Democratic presidential candidate, Senator Barack Obama of Illinois, a perhaps decisive edge over his Republican opponent, Senator John McCain of Arizona.
Perhaps more significantly, according to industry and business observers, the outcome of Tuesday's congressional elections is likely to give Democrats even greater majority control in both the US House of Representatives and the Senate.
Democrats are expected to gain as many as 30 seats in the House, which would boost their grip on that chamber to a 60% majority with 263 Democrats against 172 Republicans in the 435-member body.
More critical, say business sources, is the real prospect that Democrats could secure 60 seats in the 100-member US Senate where they have held only a slim 51-seat majority since the 2006 mid-term elections.
If the Democrats hold a 60-seat majority in the Senate, they would be able to override minority attempts to block legislation and even force some bills into law despite a presidential veto.
"I think we are looking at what will be the most anti-business federal government in many years," said Chris Jahn, president of the National Association of Chemical Distributors (NACD).
Jahn, who served as a senior staff advisor in the US Senate before returning to the private sector, said his gloomy view of the elections likely outcome is not partisan.
"Whether Obama or McCain wins the White House, I think federal policies over the next several years will be very anti-business," he said, "because there will be a much larger, anti-business majority in Congress and no one at 1600 Pennsylvania Avenue [the White House] to act as a check on the pent-up ambitions in Congress."
Jahn expects that a stronger Democratic majority in Congress beginning next year will mean passage of more stringent anti-terrorism chemical security legislation that will include a federal mandate for inherently safer technology (IST) as a security requirement.
In environmental matters, he worries that the new Congress will take the opportunity to reshape the 30-year-old US chemicals regulatory law, the Toxic Substances Control Act (TSCA), as a US version of Reach, the EU's programme for registration, evaluation and authorisation of chemicals.
"Certainly there will be far more regulations coming across the board," Jahn said of what is expected to be a more Democrat-controlled Congress.
In addition, he expects higher taxes on businesses and greater energy costs if, as seems likely, Congress and the new president move to implement a cap-and-trade climate control law.
"If you want to paint a picture of gloom," Jahn said, "put increased regulations and higher taxes on top of an economy that is already struggling."
In anticipation of a new Congress more willing to impose regulations and taxes on business, Jahn said NACD is going to beef-up its advocacy team and work to raise more grass-roots involvement in federal policymaking by the association's member companies.
To discuss issues facing the chemical industry go to ICIS connect
By: Joe Kamalick
+1 713 525 2653
Chemicals demand still exists, believe it or not, but the new economic order -one that could last as long as six years - requires new approaches.
Purchasing managers need to start acting locally as well as globally.
Who would want to be a financial controller if you work for a big company or the jack-of-all-trades managing directors of a small or medium-sized enterprise? Every purchase order and every invoice, literally every single transaction, needs to be reviewed by whoever understands overall credit availability.
One small step out of line, one tiny error by an over-enthusiastic purchasing manager or sales executive and bang, you've exceeded your credit limit. Even if you have a sound business model, your bank might have no option but to say "sorry, but that's it - we are withdrawing all your credit". But is there really such a thing as a sound business model these days?
This new economic order could have major implications for how chemical pricing behaves. Old understandings on how to read the direction of markets might need to be revised.
"There have always been two kinds of demand in the confectionary industry - long and short term," said a plastics-wrapping manufacturer on the sidelines of the ICIS World Polymers Conference, which took place in Bangkok, Thailand, earlier this week.
For the next few paragraphs, the confectionary industry and upstream to polyolefins will be used as an example of how purchasing managers need to act differently. The same rules could also apply to other product chains.
"Nothing has changed when it comes to your big 1b bar of chocolates. You can still ship large volumes of packaging material economically from, say, China to the US as these slow-moving items will sit on the shelf for months," the manufacturer added.
But for your fast-moving confectionary - for example, discounted big bags of miniature chocolate bars placed in toddler-reach on shelves near supermarket checkouts - shipping wrapping material from China no longer makes sense.
"A big percentage of a confectionary manufacturers' revenue comes from fast-moving and short-term promotional offers. The trouble is that these promotional offers are no longer as fast-moving because consumers are cutting back on spending."
Much smaller quantities of wrapping material are needed and so for logistics reasons, buying locally adds up. If you make chocolate in a developed markets, these small suppliers might have previously been ruled out because of their high labour costs and low capacity.
"It's not economic to half-fill a container and ship it all the way from China. Local suppliers can also much more quickly respond to small day-by-day changes in demand," the manufacturer added.
There are other reasons to buy in small quantities (and therefore locally).
Oil prices move in an almost perfect relationship with equity markets these days. Stock markets rebound as investors clutch on to some fleeting good news and crude rallies by a few dollars a barrel, only for the reverse to occur the following day.
So nobody at any point in any product chain wants to sell or buy big in case they end up on the wrong side of a shift in highly erratic energy prices. For example, why buy a big quantity of resin today only to see the WTI price tumble the next?
Your equally hard-pressed customers, even the ones you've worked with for years, will not be able to do you any favours if you plead that you made a mistake on crude.
Shortage of credit is a further reason to keep orders at a minimum.
"My MD is signing off every purchase order. You need to make your credit stretch. The other problem is that you need to very carefully monitor the credit situation of your suppliers and your customers. Make sure you have enough of each in every region where you operate in case some of them go bust," said the manufacturer.
Buying locally also extends up this chain to polyolefins.
"Polyethylene (PE) and polypropylene (PP) exports from the States have declined because of the weaker dollar and the collapse in pricing that closed-off arbitrage," said a polyolefins producer on the sidelines of the same conference.
"Another factor is that end-users prefer to buy local because retailers are placing smaller orders."
A further reason to keep inventories low is the huge economic uncertainty out there. Nobody knows how deep this recession will be and how long-lasting.
"We keep looking further and further back into history for parallels," said Matthew Sullivan, Director of Energy Structuring and Origination for Standard Chartered Bank, in a speech during the conference.
First it was the dot-com bubble crash of 2001, then the Asian financial crisis and next the global economy downturn of 1980-82. Now all the talk is of the Great Depression.
"Vehicle sales in the US, on a population-adjusted basis, have fallen to their lowest level since World War II," he added.
"I hate to give you the bad news, but I think it could take 5-6 years to get through this. Most of the iceberg is still beneath the water."
The dreaded consumer confidence feedback mechanism may have only just begun.
Banks might, theoretically, be in a better position to lend thanks to all the rescue packages - but at ground level in the chemicals industry trade finance remains desperately hard to obtain.
Inventory write downs are huge because of raw materials bought before the crash in demand and pricing. This will affect financial results in Q1 next year.
This will in turn lead to more job cuts in chemical and other companies. When you are worried about losing your job, if you haven't lost is already, you don't spend; and as Japan found out during the 1990s, consumers are even less likely to spend if they think that prices will be lower tomorrow.
As consumers make even deeper cuts into their spending, this leads to even worse corporate results, more business failures and more job losses and so on and so on....
"People are reviewing their retirement plans (because of the collapse in equity markets). They feel a lot poorer, which is another disincentive to spend - and they will have to add 5-6 years to their working horizons," Sullivan added.
The next big banking scare just around the corner might be further write downs on credit-card losses
In the midst of economic calamity and the resulting shift in buying patterns, what does this mean for how chemical pricing will behave?
Chinese buyers used to periodically withdraw from markets en-masse, in the case of polyolefins.
This would lead to big price declines because the volume of lost trade was big.
The guessing game would then begin over inventory levels and demand - meaning when they would need to re-stock.
When they did return, of course, volumes on the positive side were equally big, resulting in big price rallies.
Bu increments are these days as low as $20 or $30 a tonne a time because of small-volume sales. Prices then quickly fall back.
When prices retreat, even more ground can be lost than had been gained because of worsening economic news.
Nobody can be sure when chemical-pricing markets will bottom out for good in this current cycle - just as nobody has any clue when the economic recovery will arrive.
Yes, that's my target for the truck above, which is actually for 4-11 year olds and my son is only 22 months - but what the hell, don't we all deserve a second or, in my case probably a tenth or perpetual, childhood? And I am trying to teach him the value of recycling (the above picture is of a recycling truck) - even more bad news for the conventional chemicals industry.
The truck was S$249 (Singapore dollars) two weeks ago, has fallen to S$199 and surely has much further to go as the deflationary spiral begins to bite. My target is S$100, provided, of course, it hits this level before Santa sets off with his reindeer and his elves etc (poor old reindeer - less carrots this year, and I imagine Santa will be laying off some of his little helpers and moving those he retains to flexible short-term contracts with less healthcare and other benefits. Do the elves have a union, though? Not sure...answers, please).
But the serious point is that the deflationary vicious spiral - delayed purchases and higher savings rates leading to worsening corporate results, more unemployment and further delayed purchases - may have only just begun.
I remember reading an article in The Economist a few months ago which concluded that the US would not suffer a Japan-style decade-long slump because it had inflation. Not now.
Down every product chain, in the case of lego from crude oil to the plastic (acrylonitrile butadiene styrene) to the finished goods, inventory has been manufactured using high- cost raw materials. Remember when crude was above US$100/bbl? It seems almost a distant memory.
So this means everyone - from the retailer in Singapore selling my boy's truck right up to the ABS producer and the cracker, aromatics and refinery operators - will have to endure lots of hair cuts in this first circle of the deflationay spiral.
Volker Trautz of LyondellBasell is right to say that destocking of this nature is a big cause of weak demand at the moment - and that the true nature of underlying demand might not emerge until Q1 next year (see below for interview).
But by the time the first quarter comes around, we could be into the second loop of a deflationary spiral that might push is into something as bad as the Great Depression, or a global version of Japan's long and painful economic paralysis.
What's your strategy to survive this?
18 November 2008 17:45 [Source: ICIS news]
HOUSTON (ICIS news)--Petrochemical customers have cut purchases as they expect prices to continue falling - a trend that has masked the true level of demand during the global economic slowdown, the CEO of LyondellBasell said on Tuesday.
Starting in the third quarter, customers reduced purchases on the expectations that prices would fall in upcoming weeks, said Volker Trautz, LyondellBasell CEO, during a conference call.
Such destocking accelerated in the fourth quarter, Trautz said.
At the same time, demand has dropped because of the global economic slowdown, he said. "The economy has clearly slowed."
LyondellBasell will not have a clear picture of underlying demand until the first quarter, he said.
As it is, LyondellBasell has idled an olefins plant and reduced operating rates as a result of the slowdown, Trautz said. The company has also shut down polymer plants.
The company has reduced its 2009 capital expenditures programme to $800m (€632m), the minimum deemed necessary to meet safety and environmental standards, Trautz said. LyondellBasell has also adopted a cost-cutting programme.
In the upcoming months, LyondellBasell may consider selling off noncore assets, such as real estate, the company said.
In all, the company should generate cash in the fourth quarter, which should allow it to reduce its net debt, Trautz said.
In other news, LyondellBasell expects to remain in compliance with its covenants in the fourth quarter and in 2009, the company said.
($1 = €0.79)
By: Al Greenwood
+1 713 525 2653
We need great leaders in the current crisis.
Below is the kind of speech I'd like to hear from my CEO - delivered in person - if I worked for a chemicals company.
Everything that now follows is fiction and any resemblance to an industry leader, either living or dead, might sadly be purely coincidental:
"Things are really bad - there is no disguising it, and they will get a great deal worse. This is at least the worst global economic crisis since 1980-1982. Conditions are a lot worse than during the Asian financial crisis of 1997-98 when markets fairly quickly recovered.
"The financial security of hundreds of families depends on our company. Many of the main breadwinners of these families work for us.
"I have been through this myself - I was made redundant. It's not just the money that counts, it's the loss of self-esteem - because work for many of us goes to the core of how we define ourselves, of who we are, of what we mean to ourselves and others."
"I will do my very upmost to avoid having to tell anyone to leave for economic reasons. The only reason I will willingly let anyone go is if they make a careless mistake.
"We are all in this together, we must watch each others backs, support each other, encourage each other - and try not to make any mistakes.
"I would rather see volumes go down substantially than for us to acquire raw material from suppliers or sell product to customers in difficult financial positions.
"We need excellent market intelligence on the viability of all our suppliers and customers. How strong are their business models and credit positions? This knowledge needs to be constantly revised.
"I am not asking you to take any risks out of anxiety to achieve unrealistic sales targets. I will be revising those targets down, and will revise them and down even further if necessary - regardless of the initial impact on our share price.
"I believe that caution over business conditions will earn us the long-term support of our banks and our shareholders. I really don't care about my share options in the short term - all that matters is that we survive this together. And anyway my share options - and those of the fellow directors - will be worthless if we go bust.
"We cannot afford to make the mistakes of overbuying raw materials or over committing on sales because of our own credit position, the extreme energy-price volatility and the uncertainty over what is 'fundamental' demand'.
"Inventories have been run down because the industry was living in chemicals 'parallel universe', as Paul Hodges of International e-Chem so rightly pointed. Stocks were built-up earlier this year as crude prices soared on anticipation of further price rises up and down the product chains.
"This flew in the face of clear signals that the economic crisis was deepening. These signals included the collapse of Bear Stearns and the US government rescue of Freddie Mac and Fannie Mae. We were also guilty of this and I take the responsibility for following the herd.
"Once bitten twice shy and so everyone is as a result keeping stocks low. And as I've already mentioned, energy-price volatility and the uncertainty over demand is depressing buying and selling activity. Inventories are also being kept to a minimum due to the financial year-end.
"This means that I do not see our raw-material costs and finished-product prices moving up by anymore $20-30/tonne until at least the New Year and so there are no substantial gains to be made out there. But pricing hasn't necessarily hit the bottom and so declines could be much bigger than any temporary and slight increases - so the danger of taking a risk for the potential of a very small gain is the risk of a huge loss!
"But I am telling my sales team to be prepared for sharp upward price corrections at some point - possibly as early as January 2009. Demand is still out there, if only at very-much reduced levels, and once the end-user demand re-emerges, our prices could literally double overnight from very low levels.
"This creates an even greater risk for us and so the policy will remain the same: be cautious, don't take risks and if you miss targets and there is good justification for doing so, you will not be penalised. I would rather lose the odd upside deal when prices start rising and falling in large amounts than run the risk of a disastrous mistiming of raw-material buying and an increase in our operating rates.
"And finally, let's forget about the crisis for the rest of this evening. DINNER'S ON ME - LET'S GO AND GET DRUNK."
"
Yes, a great story in The Daily Telegraph describes how bankers are being written into Christmas pantomimes in the UK as villains. Their reputation has fallen almost as low as that of marketing executives.
But the few bankers that are still around are still shamelessly peddling their wares, including hedging mechanisms for the poor old chemicals industry. The other route to wealth for monsters of leverage is buying plants from bankrupt companies and leasing them out to operators with sufficient cost control to meet whatever feeble demand remains over the next few years.
On naphtha, the more immediate problem is a seriously weird market. As of Friday last week, naphtha was trading $257.50-258.50/tonne CFR Japan for first-half January delivery, according to ICIS pricing.
West Texas Intermediate crude was meanwhile at $53.50/bbl, meaning a multiple of crude to naphtha of less than five times compared with the usual eight or nine times.
In the normal world you would expect refiners to make big run cuts in response to abysmal petrochemical demand for naphtha and the collapse in gasoline consumption. This would restore multiples close to their historic norm.
But as everyone knows, we are not living in a normal world.
The heating oil season, though, is beginning in the northern hemisphere, creating the risk that naphtha might increase.
Would it be wise to lock in cheap prices now through either hedging or stocking up on physical cargoes, just in case naphtha returns to its usual relationship with crude?
At some point, petrochemical demand has to improve, no matter how anaemic. In such an event, prices might literally double overnight from their historic low levels - meaning good returns for anyone who has locked in their feedstock costs.
For many years, many an Asian country has wanted a petrochemical industry as much as car or a textile industry.
Some of those countries have pursued investment even though their competitive advantages in petrochemicals have been somewhat dubious.
Singapore can argue that - because of its very efficient ports and corrupt-free politics - it is a good location for petrochemicals.
Shared and efficient utilities and feedstock advantages tied to mixed-feed cracker technologies by ExxonMobil, and soon Shell Chemicals, add to the argument. In the past, the case has been won by very strong profitability.
But what kind of growth will lift the West out of recession? Will it be the new-energy New Deal proposed by Obama?
Is this the only kind of growth possible, given that US and the UK consumers are leveraged up to their eyeballs and bankers will remain exceptionally cautious in lending?
In other words, no matter how many tax breaks are thrown at consumers, they might well be unable or unwilling to rush out and buy yet more junk that they do not need - made from petrochemicals shipped from Singapore to China to be manufactured into finished goods for re-export to the West.
The other danger, if the International Energy Authority is right, is that we run the risk of another crude-oil price surge if growth in the conventional economy returns to previous levels.
It seems unlikely, therefore, that we will see further crackers in the foreseeable future (beyond those already under construction) in an Asian country without a home market for petrochemicals big enough to result in only marginal export volumes.
Paul Hodges, my good friend and colleague in his excellent Chemicals & The Economy blog describes the "Minsky moment" for the global economy, when deleveraging accelerates. Hyman Minsky, the famous old economist, described how long periods of stability were followed exactly what we were seeing at the moment.
One former investment banker once said of my articles, "if you predict the end of the world for long enough, it will eventually happen".
In a petrochemicals context, though, I've been worried that the more that things went up - including pricing and a flood of investment predicated on a very simplistic view of growth - the greater the fall. At last May's APIC, somebody very senior in the industry was virtually saying that down cycles were no more. His company is now sitting on a huge inventory loss and depressed local and export demand as it prepares to bring on stream a huge slug of new capacity.
Let's hope that the same irrational idiocy doesn't take hold of the industry ever again.
As business slows down everywhere and we have more time to brood, frustrations will build at imagined or real inefficiencies - and at the sometimes remote people at the top who hold our lives in their hands.
The grass will increasingly seem greener in the other field with, of course, little opportunity to hop over the fence because of downsizing and other vile euphamisms for wrecking the security of families needed to compensate for the naked and unregulated greed of the evil bankers.
So there will be time to dream of the perfect company (life can look very different on the inside of these compared with the public images that they portray, again of course).
One such dream employer could be Virgin Blue, if a recent interview with their chief executive officer, Brett Godfrey, in the Australian Financial Review magazine is anything to go by.
Unfortunately, I can't give you a free link to the article because it's behind a subscriber wall and I doubt very much whether my boss would sign-off the Aus$1,038 annual fee in the current financial circumstances.
But here are a few highlights from a hard copy of the magazine I found abandoned an a seat in Perth airport (yes, in these straitened times why pay for newspapers and magazines?)
"As a result of the JP Morgan furore (a highly critical and inaccurate analysts' report), Godfrey pencilled in his diary a series of 30 roadshows designed to reassure staff about the future. Over the past four months, with chief operations officer Andrew David in tow, he talked to 1600 of the company's 5000 staff in Sydney, Melbourne, Adelaide, Auckland and Christchurch."
And even better, continues the author of the article, Fiona Carruthers: "Employees are guaranteed a response to their bright ideas within seven days, unless he is travelling" (a note from an anonymous reader of my blog to his business-division director: "Dear....I sent you an email three years ago with some restructuring ideas and I am still waiting for an acknowledgement. Happy to see that some of those ideas have been successfully implemented by a colleague, though, who as you know has been subsequently promoted. But I'm not bitter about this." His redundancy cheque is in the post)
Godfrey, rather than laying new staff off, also sent them on a free holiday paid for by Virgin (although this was unpaid leave) when a strike at Boeing delayed a new service.
This is the stuff that dreams are made of.....
I was working with a chemicals consultant last month in India who gave me this priceless description of the true nature of a company:
"A company is a collection self-interested individuals who just occasionally -- and purely randomly - carry out actions that are for the benefit of the company as a whole".
Sounds like a comment, or a moan for those who actually care about who they work for, worth submitting to Lucy Kellaway, the corporate agony aunt, at the Financial Times.
In these straitened and grim times, the potential for office politics and such pontificating on the nature of the corporate world - as people sit around twiddling their thumbs and waiting for the bankruptcy administrator - must be huge.
Everyone will be looking for someone to blame. I blame Eric Cantona for leaving Leeds.
The dinosaurs are back......
The new "green team" appointed by president-elect Barack Obama might, after all, turn out to be a dream team for the US chemicals industry. This is despite what some of the old disonaurs within the industry seem to think.
A US energy policy needs to place a genuine long-term cost on gasoline, thereby encouraging, belatedly, the kind of innovation that might just save the domestic auto industry and provide a huge boost to chemicals. Higher gasoline taxes need not be political suicide if they are accompanied by explanations of potential tax cuts, or even credits, for energy-positive steps such as, for example, installing solar panels.
Greater conservation - one that's not just driven by the economic crisis - might reduce a huge defence bill that's created global political instability, increased terrorism and created an untold number of deaths and misery for millions. A lower defence bill would mean huge tax savings.
It would be good if some of those in the oil and gas industry could move away from their long-term obsession with drilling. The obsession reached it's trivial low-point with Sarah Palin's campaign slogan, "Drill bay,drill".
Drilling alone will do little to reduce the US dependence on imported oil unless it goes along with greater conservation.
And anyway, you can make a strong argument that wrecking the Alaskan Wildlife Refuge will make very little long term difference to US energy vulnerablity, while creating a legacy of the loss of yet another beautiful wilderness for future generations.
There also needs to be a gradual movement away from conventional hydrocarbons to unconventional ones (provided the environnmental impact can be neutralised through heavy investment in carbon capture and storage, which will probably need big initial government backing to get the economics off the ground ) and to renewables.
Trendwatching.com, an Amsterdam-based consumer trends analysing service, has included something called Econcierge in its outlook for 2009.
This involves a new breed of less conspicuous consumers, straitened by the credit crisis or maybe feeling guilty for the wallops of cash that they made during the boom, who will now be searching for value - and for a conscience-salve in everything that they buy.
What will this mean for chemicals next year? People taking a closer look on the claims on the proverbial tin, expecting whatever they buy to last longer, to be cheaper, and to be made from recycled material - or from chemicals that are proven to be les harmful to the environment, perhaps.
This might be more of a phenomena in the developed rather than the developing world, where wealth affords the luxury of greater concern about the future.
How on earth do you measure this in losses per tonne of sales of good-old bulk commodity chemicals - assuming that these trendspotters are correct?
Do you have a plan, assuming you think you need one?
As if you needed to reminded, be aware of the conmen who might try and sell you something you don't need in 2009 as everyone tries to find a way through the crisis.
There could be more contradictory methods to manage volatility and financial problems out there than unsold tonnes of benzene.
And perhaps something akin to a Ponzi - or maybe what should from now on be called a Madoff Scheme - will emerge.
...why not forgive debts as Nail Ferguson suggested in his article in the Financial Times last Friday.
His suggestion about giving those in mortgage arrears a break by converting their loans to longer term durations with fixed interest rates is backed up economist Nouriel Roubini. We've let the bankers off so why not Joe Public?
Without debt forgiveness for the like of you and I, the danger is that the dreaded downward spiral in chemicals demand will continue.
The housing crisis could get a great deal worse before it gets better - and might become a global rather than just a western problem. In Singapore, for example, 10,450 homes could be returned to developers after being purchased under a deferred payment scheme.
To quote Woody Allen, "More than any time in history mankind faces a crossroads. One path leads to despair and utter hopelessness, the other to total extinction. Let us pray that we have the wisdom to choose correctly."
It's refreshing that this was written by an American, given the widely held perception that most of the nation's citizens lack a sense of irony.
As we enter the New Year, gallows humour seems very appropriate as the bad news multiplies from the cancellation of the K-Dow deal to the possibility of LyondellBasell filing for Chapter 11.
My good friend and colleague Paul Hodges makes the following comment on his blog, Chemicals & the Economy: "Petrochemicals has always been a highly cyclical industry. A typical seven-year cycle involves two years of stunning profitability as demand recovers after a downturn, three years of average returns as supply and demand rebalance and two years of horrendous losses."
If you take the start of the upswing as 2003 therefore, the Lyondell and Basell merger in December 2007 was a big risk. Perhaps those who negotiated the $20bn deal believed that cyclicality was dead.
What has, of course, made highly leveraged companies very vulnerable in this downturn is the severity of the credit crisis.
The way forward? Bring in the restructuring consultants, cut, cut and make more cuts and focus on making chemicals as cheaply as possible. The difficulty will be balancing this need with retaining sufficient R&D investment to cope with the inevitable increase in environmental legislation.
It's all about hoarding cash over the next few years, but survival might not even be possible for even the best managed of companies if Martin Wolf's worst-case scenario comes true. The Financial Times columnist writes of the unravelling of globalisation into the protectionism that characterised the Great Depression years if the Obama stimulus package fails.
There is a good chance it will fail, fears the Federal Reserve in the notes released from its December meeting.
At a chemicals company level, leverage is obviously out and the private equity model thoroughly discredited - perhaps for good.
You can argue that the biggest mistake of the biggest casualty so far, LyondellBasell, was timing as the acquisition of Lyondell Chemicals took place in December 2007. Asset prices were then at their peak with many believing that the boom would continue forever, despite the already rapidly deflating US housing bubble. As recently as March last year, The Economist was talking of Asia's decoupling as the potential saviour of the global economy.
But leverage is itself the problem because of how the extraordinary multiples over tangibe, realisable assets were generated through the shadow banking system, creating the climate for deals such as the Basell takeover of Lyondell to occur. It is this badly regulated, free-for-all system that's brought the global economy down.
Maybe we will never again see the break up chemical companies for sale to private, or public, companies burdened by enormous amounts of debt.
Perhaps the well-integrated chemicals company with sufficient diversification to provide compensating cash flows when a particular subsidiary is struggling is the way forward. Is this yet another case of back to the future?
In an even better position are the state-owned giants in the Middle East and China. They are in the enviable position of cash in hand, and government ownership structures that guarantee funding if that cash was to ever run scarce. These are the only companies I can see able to make the acquisitions the industry now needs.
I am reading Charles R Morris's The Triillion Dollar Meltdown at the moment, having also recently cheered myself up with Paul Krugman's update of his classic, The Return Of Depression Economics.
As the private equity model implodes, Morris's following words ring so wonderfully true:
"The leveraged-buyout business, after a highbrow restyling as private equity, came roaring back. A typical deal: Put up $1 billion, borrow $4 billiion more, snap up a healthy company for $5 billion (after making a rich deal with its executives), vote yourselves a "special dividend" of $1 billion, all the while taking no risk. 'People talk about a wall of money,' one banker said. Private equity funds didn't have to raise capital; it was chasing them."
I am sure, of course, that such unscrupulous and whollly dishonourable practices have never, ever applied to any private equity deal involving our great and wonderful, wise and so superbly well-run chemicals industry that has always taken a long term and measured view of how to run its operations in the most financially-optimal way and for the benefit of humanity as a whole in its caring and compassionate pursuit of higher and principled ideas for a sustainable, warm and cuddly future where everyone sits around the campfire and sings "Well be coming round the mountain" (enough waffle, stop - please!).
As a very wise man once said, everything goes in and out of fashion like long skirts and short skirts.
Hence, my very capable colleague Malini Hariharan has offered some analysis of South Korea. Its companies, having being brutally hammered by the West post Asian Financial Crisis (which I had pointed out at the time ignored their strengths) are now at the front of the proverbial cat walk because they have low levels of debt.
Of course they have significant competitive disadvantages, but they might at least survive the crisis.
OK, this blog is supposed to focus on the long term, but in line with just about everybody else, all I can think about is the immediate and my collapsing share portfolio and the value of my home.
As a bit of light relief (and also, by the way, because it's my job) I've been taking a 
close look at polyoefins markets over the past week. More to follow on aromatics later.
It does appear as if current price levels are unsustainable, that buyers know it and that some modest further price gains are possible.
Some modest re-stocking was inevitable after the inventory-loss disaster of H2.
And the world economy hasn't completely stopped. Maybe we are only (?!) talking about 10-20% of lost demand into mainly consumer durables.
Perhaps also crude can't fall that much further, providing a floor for polyolefin pricing.
But the question now is how long pricing will remain around this new level, fluctuating by small increments with buyers maintaining an incredibly cautious approach.
If quarters turn into years, who will be left to pick up the pieces when the economy finally recovers?
At the moment, a shell-shocked chemicals industry is still recovering from the impact of destocking following the huge inventory write downs in Q4.
The next step will be to measure the state of genuine, end-user demand and how this compares with the fantastic growth we saw in 2003 right through until the end of H1 2008.
Comparisons will inevitably look bad, even if, as some hope, recovery arrives in the second half of this year. This is bound to have a pyschologically dampening effect on markets.
Plus, chemicals and plastics markets are about to be roiled by large amounts of new capacity.
Recent price rises in the aromatics and olefins chains might, therefore, be reversed.
And so cost will remain King in the second of 2009, and perhaps for several more years.
The rise of private equity in chemicals, which I examined in a previous post, resulted in claims that the sector's more efficient management techniques would result in money being made "even at the bottom of the cycle".
But key to survival may no be longer innovative financial engineering and cutting costs social and bureaucracy costs incurred by previously much bigger, listed companies.
It might instead be all about chemical engineers getting every last cent of value out of production processes through optimising "every pipe and every valve," says my colleague Nigel Davis - editor of the Insight section of ICIS news.
It will be fascinating to watch how this plays out - and what becomes of chief financial officers.
It's easy to take pot shots at the boss, and everyone of course feels they have been underpromoted and could do the job better themselves. Andrew Liveris is just the latest in a long line of CEOs to experience both envy - and at the moment perhaps a little pleasure at their failures. The gloating reaches extroardinary heights in the comments posted on this Wall Street Journal blog entry.
Sure, he should have seen the crisis coming and not agreed to pay such a high price for Rohm & Haas.
And sure, a man being paid such massive sums of money perhaps should have had sources inside Kuwait who would have forewarned him that the commodities merger was going to collapse.
Perhaps we should also expect him to secure world peace, reverse global warming and prevent Manchester Utd from ever winning a Premiership championship again.
Herein begins an occasional series where I offer advice on how to make a little cash.
By the way, is it me or do I get the sense that a lot companies haven't woken up to the severity of the crisis we are in? A recovery this, and I think quite probably next year, is out of the question. We need to find new sources of growth to replace the US consumer who isn't going to start spending money again in the same volumes as before for a good many years.
Anyway, here is my handy tip: purely by coincidence discover one day that quite fortuitously you have priced your local product so high - way above international levels - that this has attracted competitively priced imports. Take advantage of this wonderful, joyouous happenstance, this glorious instance of serendipity and lodge an antidumping petition.
A recent briefing by The Economist Intelligence Unit warned that because of the mess the West has made of the world economy, managers in Asia might face unrealistic targets.
Does this sound familiar? All answers will be treated in the strictest of confidence.
It looks like olefins and aromatics prices are on the retreat in Asia as I predicted earlier this month.
I only feel slightly smug because it seems obvious that naphtha was a big driver - and that markets were being talked up by producers desperate to recover monumental Q4 losses.
There will be lots more mini bubbles like this before the crisis is over.
In the depths of the Asian financial crisis an American industry executive said, "I don't know why Korea has a petrochemical industry. It should be just shut down."
There were also widespread complaints over "soft" government-directed loans that supported Asian companies through the difficult times of 1997-98.
How the tables have turned, according to another senior executive of a Western company who spoke recently about the current crisis.
"The bedrock of the US economy has been oil, natural gas, refining and petrochemicals," he said.
"A lot of industry people think that if you allow plastics and petrochemicals to go you might as well also let the big automakers collapse."
So could these attitudes be sufficient to win government support for some of the distressed chemicals companies in the US?
Will this impede restructuring that should take in place in order to make assets and businesses globally efficient?
Or will global efficiency matter as much as it used to if trade barriers rise - and if the need to buy locally to preserve cash becomes an entrenched way of doing business?
High leverage is out - surely for many years. When new projects are again being seriously assessed, more equity and less debt will be needed.
What will this mean for the private equity model? Some argue that low asset valuations will lead to a resurgence of private equity. But access to complicated lending markets will likely no longer be an option as these markets have virtually ceased to exist.
The smart chief financial officer with good connections to the finance industry might become of less value than the day-to-day operations managers - including clever chemicals engineers who can maximise the efficient running of plants.
"We also need new ways of assessing demand growth. We will continue to confront the problem of timing capacity additions, but we have to adopt fresh thinking, including a wider range of scenarios to stress-test our assumptions," the second executive added.
"These approaches should involve methods of more effectively anticipating macro-economic shocks."
These are the big issues you can ruminate over while enjoying a beer in the evening. More pressing, though, is how to get through this crisis.
Speciality chemicals players and other end-users of commodity chemicals are in strong purchasing positions after years of being squeezed by tight upstream supply and demand balances.
They are beefing up their business analyst teams to more effectively monitor markets, according to several sources in downstream companies.
Senior executives are also being asked to monitor pricing markets in an effort to spot short-term money-saving opportunities.
All purchasing decisions are going through top people as part of the struggle to preserve credit.
So if you are selling basic chemicals you too need to beef up your business analysis capabilities in order to counter much better customer intelligence. This is no easy task with budgets under so much pressure.
Your sales and marketing teams will also need to have exceptionally convincing stories to tell - as they could be talking to the very-wise who have heard it all before.
Scrambling for every extra dollar will be crucial for the highly leveraged commodity chemicals companies as they struggle to stave-off debt defaults.
This scramble for cash is not being helped by a faltering petrochemical-price recovery. Ethylene, propylene and aromatics prices were on the retreat in Asia during the week ending 20 February, according to ICIS pricing.
Those with new plants in the Middle East will not have any problems in servicing debt. "Even if ethylene fell to $200/tonne they would still make money," said a consultant.
But the Middle East players are facing tough times as new plants on a stand-alone basis will be generating a great deal less earnings than had been forecast.
Higher capital costs and different feedstock mixes were always going to make this round of building less competitive than the last. A further dent to profitability is the collapse in oil prices, eroding the advantage over naphtha-based producers.
The western petrochemicals-only players face an added problem.
Those back-integrated to refiners might have to repeatedly sell petrochemical and polymer inventories at very competitive prices in order to keep big complexes balanced.
The greater your integration the more chances you have of generating decent overall returns.
A bigger percentage of gasoline and diesel consumption is less discretionary than many of the petrochemicals that go into durable goods - hence, one of the advantages of also being in the refinery business.
Lower gasoline prices have also prompted a slight demand recovery in developed markets. Asian demand growth is also likely to remain positive this year.
Distressed sales of petrochemicals and plastics have always happened but could now occur more frequently because of the difficulty in reading markets.
Preserving value in innovation is a further challenge for the solution providers.
"It's about explaining that cheap doesn't always equal value for money. One possibility is that there could be a flight to quality if we can make the right case," the second executive added.
But will premium grades always carry the premiums needed to keep some of the heavy betters on innovation going?
A lot of sophisticated chemicals and polymers - supported by value-added customer service - go into end-use sectors such as electronics and autos.
Here is another big question to ponder over a beer: Will rising protectionism make it easier for Western chemical producers to preserve their share of domestic markets?
The downside is that trade barriers, whether formal or informal, could make it harder to further outsource - and to move whole operations to emerging markets - in the battle to reduce costs and capitalise on stronger growth.
It's incredibly tough out there for those trying to hit sales targets - even if they are being constantly reduced to meet the worsening business environment.
The danger is that if senior people spend too much time focusing on sales and cost targets, strategies to deal with the big issues will never be drawn up or put to adequate test.
This could result in gains from smart short-term management being lost during the next cycle.
India has launched a petition for PP anti-dumping action against Saudi Arabia, Singapore and Oman. This is the first case of this type in India.
Producers, as we predicted on this blog earlier on, will be increasingly attempting to protect their home markets as everyone searches farther and farther afield to place distressed volumes.
Expect also that countries such as India - which much more lower applied than bound tariff rates under its WTO agreement,- will seek to raise tariffs to maximum levels predicted by the international trade body.
,
Anecdotal evidence from ICIS pricing, and analysis by JP Morgan Asset Management and the China Economic Quarterly supports this view.
Comparatively stronger exports to China, as my fellow blogger Paul Hodges points out on his Chemicals & Economy blog, is also evidence that this is happening.
This is understandable given that by some estimates as many as 30m migrant workers have lost their jobs.
But there is a threat of deflation being exported if all these finished goods end up flooding overseas markets. In such an event, petrochemical pricing can surely only head in one direction.
It is time to think hard about your business, plan for the worst and hope for something slightly better.
This excellent article from The Economist about vertical integration got me thinking that if, say, auto makers start buying up parts suppliers in developed markets (in developing markets the plastics processing industry is too fragmented) we could end up facing a whole new set of industry dynamics.
Buying up your supplier, or at least offering them strategic advice and financing in the way that Toyota does, could end the days of the poor and relatively small converter squeezed between the big petrochemical producers and the giant finished-goods manufacturers. Resin producers might suddenly find themselves facing heavy rather than lightweight opponents.
There are reports, confirmed by one consultant, of a flood of US polyolefin exports from the US to Asia, China in particular.
Staggering polyolefin import figures for China in January-February show big percentage increases both year-on-year and month-on-month. The March data is due out shortly.
The big worry remains how much of this is going into inventories because of the easy credit in China, which, according to some unconfirmed reports will not last much longer. Others, however, predict that the lending binge will support China's economy for the rest of this year.
Alot of the froth in the China market could also be the result of a big up-tick in activity on the Dalian Commodity Exchange.
But to go back to the main point of this blog entry, there are predictions that US ethane versus naphtha costs could remain very competitive for the next two years because of the fall in natural-gas demand.
And with Brazil also rumoured to be an increasingly important polyolefin exporter to Asia, US/Americas-Asia trade flows may be about to enjoy one last hurrah before the Middle East and growing China self-sufficiency slam the door shut - perhaps for good.
Another thought: Could the recent apparent rise in US-Asia exports be the result of producers making hay while an anaemic sun shines (comparatively higher prices in Asia compared with the West) ahead of a possible General Motors bankruptcy?
That's the beauty of blogging - you can raise the questions and ask others to provide the answers!
Good news, bad or indifferent? It was hard to gauge a clear picture from the Q1 macroeconomic numbers for China.
While retail sales grew at 14.7% in March compared with 11.5% in February, exports fell 20% during the first quarter.
GDP (gross domestic product) growth was 6.1% for the whole quarter, less than half of the pace at which the economy was expanding in md-2007.
Prime Minister Wen Jiabao has warned against "blind optimism" over the speed of the recovery, according to the New York Times. He cited weak overseas demand, overcapacity in some industriess, job losses and low investment in the private sector as the reasons why the foundations for recovery were not solid.
Export trade won't recover until the Western consumer starts spending again close to pre-crisis levels. Without such spending it might be reasonable to assume that China will struggle to post any further years of double-digit growth.
Overcapacity in some industries includes petrochemicals, although markets have been kept tight temporarily for reasons we've already covered in this blog.
China's petrochemical self-sufficiency ambitions could force all but the Middle East and a few other low cost producers out of being able to export some products to China.
I noticed in this Economist article that industrial production was sharply up in March by 8.3% and I read elsewhere that factory gate prices slipped by 6% - again in March - from 4.5% the previous month.
I've picked up anecdotal reports - again mentioned earlier on this blog - that factories are running hard in the textiles and garments sector to keep people in jobs, aided up soft banks. This conjures up an image of rows of warehouses stacked high with shirts that nobody wants to buy.
Is there a danger that in H2 China will export deflation to relieve some of its finished-goods inventory pressures? If so, what would this mean for the business of chemicals?
A sure way of telling might be a survey of purchasing managers in the West, asking whether they have been offered unusually large quantities of very cheap Chinese goods.
Jun Ma, Deutsche Bank's Chief Economist for Greater China issued a note this morning about the possibility of restrictions on the growth in loans because of poor lending practices.
This followed a warning against credit risks by Liu Mingkang, chairman of the China Banking Regulatory Commission, which this Wall Street Journal article has also picked up.
There are widespread anecdotal reports of commodity chemicals prices being over-inflated because easy lending has made it easier to speculate.
This speculation is across chemicals and polymers, futures exchanges for chemicals and polymers such as the Dalian Commodity Exchange and prroperty and stock markets. The same trader can often be dabbling in all the above.
One of my good contacts and friends had a "Joe Kennedy" moment last week (this refers to the famous story where the father of John F Kennedy was advised to invest in stocks by a shoe shine boy. He promptly went out and sold his shares just in time to avoid the Wall Street Crash).
The trader's moment came when he was asked by a Bangladeshi customer for ten full container loads of polyethylene (PE).
"I knew something was very wrong because there is no way demand in Bangladesh would justify this size of shipment. It was obvious this was for speculation," he said.
This followed a call from a Chinese chemicals trader who had never traded in polyolefins before asking for a cargo on behalf of a friend of a friend. "It was obvious he knew nothing about melt indices, the product or its applications. I could hear the sound of the herd stampeding towards the edge of the cliff."
So the trader liquidated all his positions late last week ahead of what he thought would be sharp price falls in polyolefins in China. It will be interesting to see if he was right.
In the longer term, as the Economist article also points out, better infrastructure - a major feature of the stimulus package - will help boost domestic growth and reduce reliance on exports.
If the government also manages to introduce a good nationwide health and social security system, domestic growth could really accelerate. I would bet that China has a much better chance of success than the US.
But China is China and if there is a way of making money out of a crisis, the famously savvy Chinese traders will find a way.
The danger is that this sends misleading signals about the true state of demand to outsiders - and at the moment, we are all desperate for any bit of good news. Has this made us a little more gullible than normal?
Speculative bubbles in property and construction - brought to an end by credit restrictions- was the start of the country's economic decline, The Economist adds.
Government policy was wrong.
If factories at the end of some chemical product chains are being kept running at high operating rates for social rather than demand reasons, this could turn out to be another flawed policy.
Referring to the famous story about how Joseph Kennedy sold his shares on the eve of the Wall Street Crash after being given investment tips by a shoe-shine boy, my answer to the above is a definitive YES.
Over the course of rest of this week I am going to detail why I think reports of China's economic recovery have been greatly exaggerated.
Petrochemical producers talk about a significant and perhaps sustainable demand recovery, but I am even more firmly of the view now - having read some more worrying economic analysis - that we are in the middle of a mini commodity-price bubble (this applies to crude as well as chemicals) that's not supported by the fundamentals.
Chinese domestic polypropylene (PP) and polyethylene (PE) prices slipped slightly last week by around CNY400-500/tonne, but import prices remained unchanged.
The sentiment, though, seems to have become more bearish on the feeling that prices have gone up by too much too quickly.
Trading volume in linear-low density PE (LLDPE) on the Dalian Commodity Exchange continues to post staggering increases.
If you take the number of contracts traded to date in April and multiply this by the size of each contract (5 tonnes), 48.65m tonnes have been traded. This about twice the annual global demand for the polyolefin.
This compares with just 166,330 tonnes during the same period last year, representing at 29,157% increase.
What's interesting to note is that the year-to-date increase over the same four-and-a-bit months in 2008 is far less dramatic: to 149.85m tonnes from 132.5m tonnes - a modest 13.06% rise.
Have the shoe-shine boys started punting on the exchange in a commodity that they don't have a clue about?
Could the chemicals industry be in danger of wanting to believe something so much that ignores overwhelming evidence to the contrary?
The widespread perception is that China's economy has reached a turning point.
"The worst of the crisis is over and the world is entering the time when things will gradually get better," wrote former US presidential adviser John Rutledge in an article on the Chinese news service, Xinhua.
According to The Economist, it wasn't the collapse in exports that triggered slower growth in China.
It traces the origins of the downturn to tightening of credit in 2007 that led to a collapse in property prices in China's first-tier cities and a decline in construction.
"If the collapse in domestic demand led China's economy down, it can also help lead it up again. Not only is China's fiscal stimulus one of the biggest in the world this year, but the government's ability to 'ask' state-owned banks to spend and state banks to lend more means that the government's measures are being implemented more rapidly than elsewhere," writes the magazine.
The huge spending on infrastructure will hugely benefit rural communities as two-fifths of villages lack a paved road to the nearest market, it adds.
A large increase bank lending also appears to be behind a 36% rise in housing sales by value in the year to March after sharp falls in 2008.
If construction picks up this should help reduce unemployment as half the job losses among migrant workers have been in the building industry, the magazine continues.
But The Economist concedes that a misallocation of capital is a concern.
However, the article continues: "China is one of the few countries in the world where bank credit has fallen relative to GDP over the past five years. Banks have an average loan-to-deposit ratio of only 67%, low by international standards, and less than 5% of banks' loans are non-performing, down from 40% in 1998."
So in other words because the Chinese banks are awash with cash a major Western-style financial crisis seems unlikely, no matter how much money is wasted.
But if money is being misallocated, the boost to growth might be less than some people are forecasting.
There are strong rumours that easy bank loans have fuelled speculation.
"When we are selling to a trader in China they have no interest in our letters of credit because they can borrow so cheaply and so easily from their local banks. They are even prepared to pay 20% up front by telegraphic transfer," said a Singapore-based polyolefins trader.
"I used to sell 80% to end-users and 20% to other traders in China, but now those percentages have been reversed.
"I think a lot of traders in China have taken risky long positions because lending terms were so easy."
Money has even been borrowed and then made or lost on domestic stock markets, some sources claim.
The same might apply to the Dalian Commodity Exchange, which has seen a huge increase in trading in linear-low density polyethylene (LLDPE) over the last few weeks.
Large of inventories of steel, aluminium and concrete are being built as a result of speculation and perhaps an anticipation that demand will get better in H2. The same might apply to chemicals and polymers.
But Michael Pettis, a professor at Peking University's Guanghau School of Management, makes some worrying observations about the economy in his blog.
It is worth reading the lengthy posts for 20 April and 13 April.
In summary, he talks about:
*Private companies - the main engine of economic growth - struggling to get financing as the state-owned enterprises receive a flood of loans
*A poor return on money spent versus jobs creation - for example, CNY1trillion which is being spent in Henan province to create 650,000 jobs. He has calculated that if this same sum had been spent on giving workers salaries of CNY3,000 a month (more than twice the average salary of migrant workers) this would have been enough to pay the wages of 650,000 people for 43 years
*A boost in industrial production, "leaving the unresolved question of who is going to absorb the excess capacity if the US is no longer willing to play the role"
*Signs that China is trying to export its way out of oversupply. The trade surplus was $62.6bbn in Q1 this year, up from $41.7bn for the same period in 2008. "Although lower than the astonishing heights of January and late last year, the trade surplus is still much higher than this time last year. That means China's export of overcapacity is increasing," he writes
*A much larger vulnerability of GDP (gross domestic product) to exports than some economists have calculated. He quotes a Wall Street Journal article, quoting a working paper prepared for the International Monetary Fund. The paper estimates that for every 10% fall in exports, GDP will decline by 2.5%. Exports fell by 20% in the first quarter
*Government subsidies and tax distorting demand - for example, state-owned enterprises bringing forward vehicle purchases which was of the major reasons why auto sales rose by 10% in March. JD Power, the car consultancy, is forecasting flat Chinese passenger car sales in 2009
My current favourite blogger is Michael Pettis, professor at Peking University's Guanghua School of Management, who, in his latest post, makes a very worrying point below.
As an aside, and without wanting to take the 1930s analogy too far, this debate in China is a little like the split in the 1930s between the internationalists in the US who favored hard money (incorrectly, I think) and a rapid liquidation of overcapacity (painful but probably correct), and who vehemently opposed measures, including tariffs and competitive devaluations, to boost employment via boosting the export of overcapacity, versus the large and powerful constituencies, dominated by local congressmen, miners, farmers and many industrialists, who stressed immediate moves to weaken the currency, boost production, and resolve US unemployment even at the expense of the global system. In part because the 1929 stock market collapse thoroughly discredited bankers and economists, and in part because politicians are always more likely to be influenced by large domestic constituencies than by internationalists, the latter group pretty resoundingly won the debate, at least in the early part of the crisis, and clearly not to the US's obvious benefit.
Economic stimululs packages the world over seem to be attempting to turn the clock back to 2007 - thus adding to the imbalances that caused the crisis in the first place.
In the case of China, short-term political expediency might be causing more damage to the global economy as the country tries overproduce its way to higher growth.
Overproduction in China might be the reason why polyolefin prices continue to defy reason.
Despite a fall in naphtha prices on what we earlier predicted on this blog - a big increase in naphtha supply in Asia - polyolefin prices continued rising last week.
Naphtha had fallen by $13/tonne to $437.25-438.25/tonne CFR Japan while polyethylene prices rose by $20-70/tonne in Northeast and Southeast Asia and polypropylene by $30-60/tonne.
......all the right reasons than to be wrong altogether?
Sounds a dumb question, perhaps - unless you take particular pride in being one of those know-it-alls.
The point I am trying to make (and assuming that chemicals pricing doesn't collapse beforehand on a broader retreat in crude and equites on maybe panic over swine flu or the realisation that a global economic recovery is a long way off) is that I have thought for a while that the fundamentals point to a major price correction from June-July onwards because of:
*New supply from the Middle East. Surely, yes surely, there will be more capacity hitting the market in H2 as PetroRabigh ramps up output - even if YanSab, Sharq and perhaps even the new cracker in Qatar - are effectively pushed into next year
*A lot of new supply in China. My colleagues at CBI Research & Consulting are working on an update of the subtantial amount of additional capacity due on stream in H2, including Fujian Petrochemical & Refining (the latest world on the start-up of which is July)
*The end of the May-June petrochemical turnaround season in Asia
*An increase in naphtha supply (as much as 20-30% in Asia, according to Purvin & Gertz) as a result of higher production from two new condensate splittlers in the Middle East and greater naphtha exports from India
*A I said, my belief that everyone will have to wake up to the fact that the global economy, including China, will not enter recovery in 2009 or perhaps even in 2010. I remain worried about the quality of China's growth (is it too production rather consumption-driven?), how much stimulus-package money has been wasted on speculation, including in building chemicals inventory, and the possiblity that China - directly or indirectly - might start exporting deflation
But today I spoke to some goods contacts and friends at a leading petrochemicals trading company who gave the following additional reasons for their long-held view that prices would tank in July:
*US and European producers upping operating rates in response to strong arbitrage opportunities. The Europeans have already raised rates, apparently, and the US more recently. In the case of propylene, though, stronger demand for refinery-based C3s from several derivative producers might, perhaps, make further US PP shipments unworkable
*Strong interest in shipping petrochemicals from the US and Europe to Asia for arrival after May (all May business was concluded around 20 April). Cargoes could be at sea and uncommitted just as the shift in fundamentals listed earlier starts to take effect. Big quantities have already been shipped from the West to East during Q1, including very large amounts of BTX and polyolefins. Around 200,000 tonnes of US and European benzene is heading for Asia for March and April arrival, according to DeWitt & Co. China imported 114,000 tonnes of benzene in March alone, which compares with just 328,000 tonnes for the whole of 2008 - an average of 2,733 tonnes per month. The surge in toluene shipments from the West to China is equally dramatic: China received 66,000 tonnes in January, 77,000 tonnes in February and 94,000 tonnes in March compared with a 2008 total of 273,000 tonnes.
Inventory pressures in the West have been relieved and some of the big losses suffered in Q4 have been recouped (and some of the traders seem to have done very well indeed).
So batten down the hatches once again.
